-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VVLxxCiQ+MMrvkxnVYjIQQ253EuBMGBfj5Q0Zp6zG7pdIWfg9KsIOA5b62wZ45V8 doUhHF1UpbZPgXhCopa2ng== 0000950129-97-001073.txt : 19970319 0000950129-97-001073.hdr.sgml : 19970319 ACCESSION NUMBER: 0000950129-97-001073 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINE DRILLING COMPANIES INC CENTRAL INDEX KEY: 0000860521 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 742558926 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18309 FILM NUMBER: 97558210 BUSINESS ADDRESS: STREET 1: ONE SUGAR CREEK CENTER BLVD CITY: SUGAR LAND STATE: TX ZIP: 77478-3435 BUSINESS PHONE: 7132433000 FORMER COMPANY: FORMER CONFORMED NAME: MARINE HOLDING CO DATE OF NAME CHANGE: 19910707 10-K405 1 MARINE DRILLING COMPANIES, INC. - 12/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 1996 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. (No Fee Required) FOR THE TRANSITION PERIOD FROM TO . ---------------- ---------------- COMMISSION FILE NUMBER: 0-18309 MARINE DRILLING COMPANIES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2558926 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 243-3000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- COMMON STOCK, $.01 PAR VALUE NASDAQ STOCK MARKET
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NONAFFILIATES ON MARCH 14, 1997 - $820,984,643. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON MARCH 14, 1997 - 51,346,081. DOCUMENTS INCORPORATED BY REFERENCE (1) Proxy Statement for Annual Meeting of Shareholders to be held May 8, 1997 - Part III ================================================================================ 2 MARINE DRILLING COMPANIES, INC. FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . . . . . . . . . . . . 10 Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 13 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 40 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 40 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 PART IV Item 14. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
(i) 3 PART I ITEM 1. BUSINESS GENERAL Marine Drilling Companies, Inc. (collectively with its subsidiaries, the "Company") was incorporated in Texas in January 1990. Since 1966, the Company or its predecessors has been engaged in offshore contract drilling of oil and gas wells for independent and major oil and gas companies. The Company owns and operates a fleet of 15 mobile offshore drilling rigs, consisting of five independent leg jack-up units, three of which have a cantilever feature, nine mat supported jack-up units, four of which have a cantilever feature and one second generation semi-submersible unit. The Company's jack-up rigs are currently capable of drilling to depths of 20,000 to 30,000 feet in maximum water depths ranging from 200 to 300 feet. As of the date hereof, eleven of the Company's rigs are under contract in the U.S. Gulf of Mexico, one rig is under contract off the east coast of India, one is operating offshore Indonesia, one rig is under repair in the U.S. Gulf of Mexico and one rig is being refurbished and upgraded in the Middle East. The Company believes that its primary strengths are its: (i) significant presence in the Gulf of Mexico market, (ii) low cost structure, (iii) long standing reputation for quality service and safety and (iv) conservative capital structure. While the Company remains committed to maintaining a strong presence in the Gulf of Mexico, one of the Company's primary objectives is to expand its business into the deep water and international markets. This expansion should allow the Company to diversify the source of its revenues to include a balanced mix of short-term and long-term contracts. Long-term contracts are typically available in most deep water and international jack-up markets. The Company believes that a more diversified revenue base will reduce the impact of industry volatility on the Company. Pursuant to this strategy, the Company purchased the MARINE 305 in 1996, a 300-foot independent leg, slot rig, for a total consideration of $8 million. The Company has commenced a program to refurbish and significantly upgrade the rig's operational capabilities at an expected investment of approximately $31 million. The Company recently signed a one-year contract with a major oil company for this rig to work in Southeast Asia. The contract will begin in the third quarter of 1997 and is expected to generate total revenues of approximately $28,000,000. Additionally, in December 1996, the Company acquired the MARINE 500 (formerly known as the CHRIS CHENERY), a second generation semi-submersible rig for $38 million. The MARINE 500 will enable the Company to enter the deep water drilling sector and, in furtherance of its strategy, enhance its ability to obtain longer term contracts. The rig was built in 1975 and is capable of operating in water depths of up to 600 feet. The Company is currently evaluating upgrades to the capabilities of this rig. These upgrades would involve enhancement of the rig to increase its variable deck load and to increase its water depth capability to a range of 3,500 to 5,000 feet. The Company will make a decision as to the upgrades for this rig based upon the timing, availability and pricing of long-term contracts for the rig. Beginning in late 1995, the Company experienced a significant increase in its earnings and net cash flow from operations, primarily as a result of improvements in utilization and day rates in the U.S. Gulf of Mexico. Earnings for the year ended December 31, 1996 improved to $20.7 million compared to a net loss of $4.0 million for the comparable period in 1995, while net cash flow from operations improved to $39.3 million compared to $3.7 million for the comparable period in 1995. MARKET OVERVIEW Activity in the offshore contract drilling industry has increased significantly over the last two years. Improved commodity prices combined with improved exploration and production technology have significantly increased demand for offshore drilling services. This increased demand combined with a continuing decline in the number of marketable rigs has led to increasing day rates. As a result, the worldwide market for jack-up rigs has improved recently with most major offshore markets showing increasing demand. The total supply of jack-up rigs has been reduced from a peak of 455 in November 1985, to 378 on March 11, 1997 and, 1 4 worldwide jack-up utilization as of such date was 88%. The utilization rate of working jack-up rigs in the U.S. Gulf of Mexico as of March 11, 1997 was 90%, as compared with an average rate of 87% for 1996 and 75% for 1995. The deep water market for semi-submersible rigs has also experienced improved demand and higher day rates during the past year, due in part to the increasing impact of technological advances that have broadened opportunities for offshore exploration and development. Most semi-submersible markets experienced increased utilization and significantly higher day rates in 1995 and 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 utilization of semi-submersible rigs worldwide as of March 11, 1997 was 82% (119 rigs working out of a supply of 145 rigs), as compared with an average rate of 79% for 1996 and 70% for 1995. The Company's marketed rig utilization and average day rates in the U.S. Gulf of Mexico as of March 11, 1997 were 100% and approximately $33,500, respectively, as compared to an average of 93% and $24,343 for 1996 and 69% and $19,289 for 1995. The Company conducts most of its operations through wholly-owned subsidiaries. The principal subsidiaries are Marine Drilling Management Company, which owns 12 rigs, and Marine 300 Series, Inc. (formerly Keyes Holding Corporation), which owns the remaining three rigs. RECENT DEVELOPMENTS In late November 1996 the MARINE 15, a 250' mat supported slot jack-up rig, was damaged as a result of a fire. All personnel on the rig were safely evacuated. The Company believes that only four people sustained injuries, most of which were relatively minor, and that no pollution occurred as a result of the accident or rescue efforts. Initial reviews indicate that repairs to the rig will be substantially covered by insurance and should be completed during April 1997. The Company does not currently believe this accident will have material adverse effect on the Company's results of operations due to the coverage available under the Company's business interruption insurance. In January 1997, the Company entered into a one year contract to operate the MARINE 305 in Southeast Asia for a major oil company. This contract is currently expected to generate revenues of approximately $28,000,000 and will commence upon the completion of the rig's upgrade and refurbishment activities in the third quarter of 1997. On March 7, 1997, the Company entered into a $100,000,000 credit facility with a group of banks led by Bankers Trust Company ("BTCo") and Christiania Bank og Kreditkasse ("CBK"). The credit facility includes a revolving loan feature available through December 31, 1999, which may thereafter be converted to a four year term loan. In order to consummate the new credit facility, the Company repaid and terminated its existing facility with a U.S. financial institution in February 1997. See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition. BUSINESS STRATEGY The key elements of Company's strategy are to: o Maintain Significant Presence in Gulf of Mexico. With 12 of its 14 jack-up rigs located in the Gulf of Mexico, Marine is well positioned to benefit from the currently strong Gulf of Mexico market and from any further improvement in that market. o Grow Through Acquisitions and Upgrades. The Company is actively seeking attractive opportunities for acquisitions to increase the size and capabilities of its fleet. The Company also has an ongoing program to upgrade and refurbish its fleet in order to enhance its 2 5 operational capabilities and competitiveness. The acquisition of the MARINE 305 and the MARINE 500 reflect the Company's strategy to purchase and upgrade rigs for redeployment on a long-term contractual basis. o Build a Diversified Revenue Base. To complement its position in the Gulf of Mexico, the Company's strategy is to build upon and diversify its revenue base by seeking an appropriate balance of long-term and short-term contracts. The Company intends to pursue this strategy through increased exposure to international markets and entrance into the deep water drilling sector as follows: Diversify Internationally. The Company intends to expand into selected international markets that typically offer longer term contracts. Currently, the Company has chartered the MARINE 201 rig under a one year, renewable contract to operate off the eastern coast of India. In addition, the MARINE 305 is currently located in the Middle East, and upon completion of its upgrade, has a one year contract with extension options in Southeast Asia. The Company intends to continue diversifying internationally through acquisitions. Enter Deep Water Drilling Sector. The Company intends to enter the deep water drilling sector through its acquisition of the MARINE 500, a second generation semi-submersible, and expects to expand in this sector through additional acquisitions of deep water assets. Although the Company has a minimal history of operations in the deep water drilling sector, the Company has recently hired several key employees who have significant experience in this area. o Maintain a Low Cost Structure. The Company's low cost structure is an essential element in realizing its goal of maximizing its profit margins and return on assets. The Company's incentive plans are designed to maintain a strong employee and management focus upon this objective. o Maintain Reputation for Quality Service and Safety. The Company continually strives to maintain and enhance its reputation for providing quality service. Crew quality is an important factor that customers consider when choosing a rig. The Company is focused on retaining trained and talented employees who are committed to the Company's high standards of quality service and safety. o Maintain Conservative Capital Structure. The offshore drilling business is subject to substantial fluctuations in demand, pricing and profitability. The Company believes that it is appropriate to maintain limited levels of debt and significant levels of liquidity to enable it to better withstand industry cyclicality. The Company recently entered into a new agreement with a money center bank for a $100 million credit facility to facilitate future rig acquisitions and upgrades. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Financial Condition -- Liquidity and Capital Resources." DRILLING OPERATIONS AND CUSTOMERS The Company's existing drilling contracts provide for compensation on a "daywork" basis. Under daywork contracts, the Company receives a fixed amount per day for providing drilling services using the rigs it operates. Under most daywork contracts, the customer also pays the cost of moving the rig and related equipment to the job site and the costs of drilling the well (other than the costs of operating the rig, which are borne by the drilling contractor). Daywork contracts may provide for lower rates during periods when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather or water conditions or other conditions beyond the control of the Company. Historically, the Company has not marketed its rigs under fixed price or turnkey contracts. 3 6 A daywork contract generally extends over a period of time covering either the drilling of a single well, a group of wells or a stated term. The customer may terminate the contract if the drilling rig is destroyed or lost, or if drilling operations are suspended for a specified period of time as a result of breakdown of major equipment or other specific events. The duration of drilling contracts is generally determined by market demand and competitive conditions. Historically, domestic drilling contracts have tended to be on a well-by-well basis, while contracts in the deep water and international jack-up markets typically have tended to be on a term basis. The Company's experience during recent years has been consistent with this general rule, with the Company's rigs operating in the Gulf of Mexico generally having been contracted on a well-to-well basis and its rig operating internationally operating under term contracts. As a result of the substantial improvement in the Gulf of Mexico drilling market, however, the Company has recently been able to obtain term contracts on its domestic rigs, although the terms have been of relatively short duration. To the extent available, the Company will continue to focus upon obtaining additional term contracts, both foreign and domestic, in the future. The Company obtains most of its contracts through competitive bidding against other contractors in response to oil and gas companies' solicitations of bids. The Company's current drilling contracts, both foreign and domestic, provide for payment in U.S. Dollars. The Company provides drilling services to a customer base which includes independent and major oil and gas companies. As is typical in the industry, the Company does business with a relatively small number of customers at any given time. During 1996, the Company performed services for approximately 35 different customers. For the year ended December 31, 1996, two customers accounted for approximately 19% and 16% of the Company's annual total consolidated revenues. The loss of any one of the Company's customers could, at least on a short-term basis, have a material adverse effect on the Company's profitability. Management believes, however, that at current levels of activity, the Company would have alternative customers for its services if it lost any single customer and that the loss of any one customer would not have a material adverse effect on the Company on a long-term basis. See Note 10 of audited Consolidated Financial Statements for further information regarding the Company's major customers. ENVIRONMENTAL MATTERS General The Company is subject to numerous domestic and foreign governmental regulations that relate directly or indirectly to its operations, including certain regulations (a) controlling the discharge of materials into the environment, (b) requiring removal and cleanup under certain circumstances, (c) requiring the proper handling and disposal of waste materials, or (d) otherwise relating to the protection of the environment. For example, the Company, as an operator of mobile offshore drilling rigs in waters of the United States and certain offshore areas, may be liable for damages and for the cost of removing oil spills for which it is held responsible, subject to certain limitations. Laws and regulations protecting the environment have become more stringent in recent years and may, in certain circumstances, impose "strict liability," rendering a company liable for environmental damage without regard to negligence or fault on the part of such company. Such laws and regulations may expose the Company to liability for the conduct of or conditions caused by others or for acts of the Company that were in compliance with all applicable laws at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on the Company. The Company believes that it has conducted its operations in substantial compliance with all applicable environmental laws and regulations. The Company has generally been able to obtain contractual indemnification in its drilling contracts against pollution and environmental damages that are not caused by the gross negligence or willful misconduct of the Company, but there can be no assurance that such indemnification will be enforceable in all instances, that the customer will be financially able in all cases to comply with its indemnity obligations, or that the Company will be able to obtain such indemnification agreements in the future. The Company maintains insurance coverage against certain environmental liabilities, but there can be no assurance that such insurance will continue to be available or carried by the Company or, if available and carried, will be adequate to cover the Company's liability in the event of a catastrophic occurrence. 4 7 U.S. Oil Pollution Act of 1990 The U.S. Oil Pollution Act of 1990 ("OPA '90") and regulations promulgated pursuant thereto impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills. A "responsible party" includes the owner or operator of an onshore facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA '90 assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a responsible party for an Outer Continental Shelf facility must pay all spill removal costs incurred by a federal, state or local government. OPA '90 establishes liability limits (subject to indexing) for mobile offshore drilling rigs. If functioning as an offshore facility, the mobile offshore drilling rigs are considered "tank vessels" for spills of oil on or above the water surface, with liability limits of the greater of $1,200 per gross ton or $10 million. To the extent damages and removal costs exceed this amount, the mobile offshore drilling rigs will be treated as an offshore facility and the offshore lessee will be responsible up to higher liability limits of all removal costs plus $75 million. A party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction, or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA '90. OPA '90 also imposes ongoing requirements on a responsible party. A failure to comply with ongoing requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement action. In short, OPA '90 places a burden on drilling rig owners or operators to conduct safe operations and take other measures to prevent oil spills. If a spill occurs, OPA '90 then imposes liability for resulting damages. The ongoing requirements of OPA '90 include proof of financial responsibility (to cover at least some costs in a potential spill), and preparation of an oil spill contingency plan. Vessel financial responsibility and contingency plan requirements have been promulgated by the United States Coast Guard. On August 23, 1993, the Minerals Management Service ("MMS") published an advance notice of its intention to adopt a rule under OPA '90 that would require responsible parties for offshore facilities to demonstrate $150,000,000 in financial responsibility, an amount set by the statute. This notice generated significant controversy and opposition throughout the oil and gas industry, and in May of 1995 the U.S. House of Representatives passed a bill that would lower the financial responsibility requirements applicable to offshore facilities to $35 million (the current requirement under the Outer Continental Shelf Lands Act). In November of 1995 the U.S. Senate adopted similar but slightly different legislation that must be reconciled with the House of Representatives bill before either bill can be presented to the President for approval. The President has indicated support for limited changes to the OPA '90 financial responsibility requirements and that changes in the House of Representatives bill may be too extensive. The potential for these legislative efforts to affect OPA '90 financial responsibility requirements applicable to the Company cannot be determined at this time, but the impact of any financial responsibility requirement ultimately imposed by the MMS should be no more burdensome on the Company than on similarly situated or less capitalized drilling contractors operating in U.S. waters. Outer Continental Shelf Lands Act (U.S.) The Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations of lease terms relating to environmental matters or regulations issued pursuant to the Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or citizen prosecution. 5 8 CERCLA and RCRA (U.S.) The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, currently exempts crude oil, and the Resource Conservation and Recovery Act ("RCRA"), as amended, currently exempts certain drilling materials, such as drilling fluids and produced water, from the definitions of hazardous substances and hazardous wastes for purposes of these statutes. The Company's operations, however, may involve the use or handling of other material that may be classified as environmentally hazardous substances or wastes. There can be no assurances that these exemptions will be preserved in future amendments of such acts, if any, or that more stringent federal or state laws and regulations protecting the environment will not be adopted. CERCLA assigns strict liability to each responsible party for all response and remediation costs, as well as natural resource damage. Few defenses exist to the liability imposed by CERCLA. GOVERNMENTAL REGULATION The Company's business is affected by political developments and by federal, state, foreign and local laws and regulations that relate directly to the oil and gas industry. The adoption of laws and regulations curtailing exploration and developmental drilling for oil and gas for economic, environmental or other policy reasons would and have adversely affected the operations of the Company by limiting available drilling opportunities for its customers and/or increasing the costs of such activities to the Company or its customers. The Company believes that it has conducted its operations in substantial compliance with applicable governmental laws and regulations. OPERATIONAL RISKS AND INSURANCE Contract drilling operations are subject to various risks including blowouts, cratering, fires and explosions, each of which could result in damage to or destruction of drilling rigs and oil and gas wells, damage to life and property, suspension of operations, and environmental damage through oil spillage and extensive uncontrolled fires. The Company insures its drilling rigs and plant assets for amounts approximating used equipment replacement cost and also insures against catastrophic losses resulting from employer's liability and other risks customary in the energy service industry. The Company currently maintains insurance coverage it believes to be customary in the industry against certain general and marine public liabilities, including liabilities for personal injuries. Except in limited circumstances, this insurance does not cover liability for pollution or environmental damage that originates below the water surface, although the Company is generally indemnified against such pollution and environmental liabilities by its customers. There is no assurance that such insurance or indemnification will be adequate to protect the Company against liability from all consequences of well disasters, extensive fire damage or damage to the environment. Recognizing these risks, the Company has programs that are designed to promote a safe environment for its personnel and equipment. EMPLOYEES As of March 14, 1997, the Company had approximately 800 employees. The number of employees varies throughout the year depending on the level of drilling activity. The Company considers relations with its employees to be good. None of the Company's employees is presently represented by labor unions. Crew quality is an important factor considered by the customer in selecting a rig. Accordingly, the Company seeks experienced personnel when selecting crews from among the available applicants and the Company maintains a safety and personal training program. Due to the recent increases in demand for drilling services in the U.S. Gulf of Mexico, there is currently a shortage of experienced, qualified personnel. The Company has been forced to raise its wage rates several times in recent months in order to attract qualified personnel. Thus far, however, these increases have not been material. 6 9 ITEM 2. PROPERTIES LEASED REAL PROPERTY The Company's principal executive offices are located in Sugar Land, Texas and occupy approximately 19,000 square feet of leased space. The Company also leases a warehouse, storage and repair facility, including approximately 31 acres of land and 60,000 square feet of buildings, in Rosharon, Texas (near Houston). DRILLING RIG FLEET Jack-up Rigs The Company owned 14 jack-up rigs and one semi-submersible rig as of March 11, 1997. Jack-up rigs are mobile self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the drilling platform. An offshore jack-up rig consists of a hull, which supports the drilling equipment, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. The rig legs may operate independently or have a lower hull or mat attached to the lower portion of the legs in order to provide a more stable foundation in soft bottom areas. Nine of the Company's rigs are mat supported rigs and five are of independent leg design. Five of the mat supported rigs and two of the independent leg rigs are of slot type design, which are configured for the drilling operations to take place through a slot in the hull. The Company's other four mat supported rigs and three of the independent leg rigs have a cantilever feature which allows the extension of the drilling equipment over a customer's platform to perform development drilling or workover operations. The Company's jack-up rigs are capable of drilling to depths of 20,000 to 30,000 feet in maximum water depths ranging from 200 to 300 feet. There are several factors that determine the type of rig most suitable for a particular job, the most significant of which include the water depth and bottom conditions at the proposed drilling location, whether the drilling is being done over a platform or other structure, and the intended well depth. Independent leg jack-up rigs typically have greater water depth capability and are advantageous in offshore areas where uneven bottom conditions or obstructions, such as pipelines, exist. Mat-supported rigs are advantageous in offshore areas with soft bottom conditions. A slot design is appropriate for drilling exploratory wells in the absence of any existing permanent structure, such as a production platform, although some slot design rigs are capable of drilling over production platforms. A cantilevered jack-up can extend its drill floor and derrick over an existing, fixed structure, thereby permitting the rig to drill or work over a well located on such a structure. Jack-up rigs with the cantilever feature historically have achieved higher utilization and day rates. The Company has top drive drilling systems installed on nine of its rigs and plans to install such systems on some of its other rigs. A top drive drilling system allows drilling with 90-foot lengths of drill pipe rather than 30- foot lengths, thus reducing the number of required connections. A top drive drilling system also permits rotation of the drill string while tripping in or out of the hole. These characteristics increase drilling speed, personnel safety and drilling efficiency and reduce the risk of the drill string sticking during operations. In addition, although the Company does not currently intend to move any of its jack-ups currently operating in the Gulf of Mexico to international markets, with the possible exception of the Bay of Campeche, the Company has five rigs which are suitable for operations in selected international waters and the Company's other rigs could, with certain modifications, work in other international markets. The Company's jack-ups, however, are not suitable for those areas that require hostile environment capabilities, such as the North Sea, or in deep waters in excess of 200 to 300 feet. 7 10 Semi-submersible Rig The Company acquired its first semi-submersible rig, the MARINE 500, in December 1996. Semi-submersibles operate in various market areas around the world usually in water depths where jack-up rigs are incapable of working. Semi-submersible rigs consist of an upper working and living deck resting on vertical columns connected to lower hull members. Such rigs operate in a "semi-submerged" position, remaining afloat, off bottom, in a position in which the lower hull is from about 55 to 90 feet below the water line and the upper deck protrudes well above the surface. The rig is typically anchored in position and remains stable for drilling in the semi-submerged floating position due in part to its wave transparency characteristics at the water line. The MARINE 500 is designed to work in water depths of up to 600 feet and can drill in many areas where the Company's jack-up rigs can also drill. However, semi-submersible rigs normally require water depth of at least 200 feet in order to conduct operations. Semi-submersible rigs are typically more expensive to construct and operate than jack-up rigs. The following table describes the Company's drilling rigs as of March 14, 1997:
YEAR OF CONSTRUCTION RATED RATED OR MAJOR WATER DRILLING NAME OF RIG MAKE/DESIGN TYPE REFURBISHMENT DEPTH DEPTH LOCATION ----------- ----------- ---- ------------- ----- -------- -------- Independent Leg Jack-up Rigs: MARINE 300 T(a)(b)(c) F&G*/L780 MOD II Cantilever 1981 250' 30,000' U.S. Gulf of Mexico MARINE 301 T F&G*/L780 MOD II Cantilever 1981 300' 25,000' U.S. Gulf of Mexico MARINE 303 T(c) F&G*/L780 MOD II Cantilever 1982 300' 30,000' U.S. Gulf of Mexico MARINE 304 T(c) MLT**/84S Slot 1993 (d) 300' 30,000' U.S. Gulf of Mexico MARINE 305 T(c)(e) Levingston III-S Slot 1975 300' 30,000' Middle East Mat Supported Jack-up Rigs: MARINE 3 Bethlehem/262 Slot 1974 262' 25,000' U.S. Gulf of Mexico MARINE 4 Bethlehem/250 Slot 1975 250' 25,000' U.S. Gulf of Mexico MARINE 15 T(f) Baker Marine/250 Slot 1996 (g) 250' 25,000' U.S. Gulf of Mexico MARINE 16 T Bethlehem/250 Slot 1995 (g) 250' 20,000' U.S. Gulf of Mexico MARINE 17 Bethlehem/200 Cantilever 1981 200' 20,000' U.S. Gulf of Mexico MARINE 18 Bethlehem/250 Cantilever 1982 250' 20,000' U.S. Gulf of Mexico MARINE 200 Bethlehem/200 Cantilever 1981 200' 20,000' U.S. Gulf of Mexico MARINE 201 T(c) Bethlehem/200 Cantilever 1995 (g) 200' 20,000' India MARINE 225 Bethlehem/225 Slot 1993 (h) 225' 20,000' U.S. Gulf of Mexico Semi-Submersible Rig: MARINE 500 T, SP(c) Offshore Co. Semi-Submersible 1975 600' 30,000' Southeast Asia
(a) Can be modified to provide for 300-foot water depth capacity (b) Designed to operate in environmentally sensitive areas such as Mobile Bay (c) Configured for international operations (d) Year of construction -- 1976 (e) Currently being upgraded with cantilever and top drive drilling systems (f) Currently being repaired for fire damage (g) Year of construction -- 1981 (h) Year of construction -- 1969 T Equipped with top drive drilling system. * Friede & Goldman. ** Marathon LeTourneau 8 11 [GRAPHIC] Independent Leg Jack-up Rig -- This type of rig consists of a floating hull with three independent elevated legs. After being towed to the drilling location, the legs are lowered until they penetrate the seabed and the hull is jacked to the desired elevation above sea level. The rig depicted in the diagram has a cantilever feature that permits the rig to operate over an existing, fixed platform or other structure. [GRAPHIC] Mat Supported Jack-up Rig -- This type of rig consists of a floating upper hull with three legs which are attached to a lower hull commonly referred to as a mat. After being towed to the drilling location, the legs are lowered until the mat contacts the seabed and the upper hull is jacked to the desired elevation above sea level. One advantage of mat supported rigs is the ability to operate in areas having soft seabed conditions where independent leg rigs are prone to have excessive penetration and subject to leg damage. The rig depicted is cantilevered. [GRAPHIC] Semi-submersible Rig -- This type of rig consists of an upper working and living deck resting on vertical columns connected to lower hull members. Such rigs operate in a "semi-submerged" position, remaining afloat, off bottom, in a position in which the lower hull is from about 55 to 90 feet below the water line and the upper deck protrudes well above the surface. The rig is typically anchored in position and remains stable for drilling in the semi-submerged floating position due in part to its wave transparency characteristics at the water line. 9 12 ITEM 3. LEGAL PROCEEDINGS Various claims have been filed against the Company and its subsidiaries in the ordinary course of business, particularly claims alleging personal injuries. Management believes that the Company has adequate insurance coverage and has established adequate reserves for any liabilities which may reasonably be expected to result from these claims. In the opinion of management, no pending claims, actions or proceedings against the Company or its subsidiaries are expected to have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock, par value $.01 per share (the "Common Stock") trades on the Nasdaq Stock Market under the symbol "MDCO." The following table sets forth the range of high and low sale prices per share of the Common Stock as reported by the Nasdaq Stock Market for the periods indicated.
HIGH LOW --------- --------- 1996 First Quarter . . . . . . . . . . . . . . . . . . $ 8 3/4 $ 4 7/8 Second Quarter . . . . . . . . . . . . . . . . . 10 11/16 7 7/8 Third Quarter . . . . . . . . . . . . . . . . . . 10 7/8 8 3/8 Fourth Quarter . . . . . . . . . . . . . . . . . 20 3/4 9 1/8 1995 First Quarter . . . . . . . . . . . . . . . . . . 3 1/4 2 1/2 Second Quarter . . . . . . . . . . . . . . . . . 4 1/2 3 3/8 Third Quarter . . . . . . . . . . . . . . . . . . 4 7/8 3 3/8 Fourth Quarter . . . . . . . . . . . . . . . . . 5 1/8 3 1/2
The last sale price of the Common Stock as reported by the Nasdaq Stock Market on March 14, 1997 was $16.1875 per share and there were approximately 500 holders of record. The Company has not paid cash dividends on its Common Stock in the past and does not intend to pay dividends on the Common Stock in the foreseeable future. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included in Item 8 of this report. 10 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company as of and for each of the periods indicated. The selected financial data for each of the five years in the period ended December 31, 1996 are derived from the Company's audited consolidated financial statements. The information presented below should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included in Item 8 of this report.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 1993(1) 1992(1) --------- --------- --------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Drilling revenues $ 110,329 $ 63,067 $ 70,597 $ 82,998 $ 31,621 Drilling expenses 59,770 55,091 50,575 45,330 29,189 Depreciation and amortization 11,576 9,377 7,733 5,312 12,315 General and administrative 7,498 5,460 4,376 8,999 6,903 Rig writedown - - - - 68,320 (2) Operating income (loss) 31,485 (6,861) 7,913 23,357 (85,106) Interest income (expense), net 366 639 1,280 (62) (9,628) Income (loss) before income taxes and extraordinary item 32,256 (6,102) 9,123 23,301 (91,327) Income tax expense (benefit) 11,586 (2,080) 3,193 8,278 40 Gains on early extinguishments of debt - - - - 104,523 (3) Net income (loss) $ 20,670 $ (4,022) $ 5,930 $ 15,023 $ 13,156 Weighted average common shares outstanding (4) 44,918 43,812 43,819 40,936 5,823 PER SHARE DATA: Income (loss) per common share before extraordinary item (5) $ 0.46 $ (0.09) $ 0.14 $ 0.37 $ (16.84) Extraordinary gains per common share (3) - - - - 17.95 Net income (loss) per common share (5) $ 0.46 $ (0.09) $ 0.14 $ 0.37 $ 1.11 BALANCE SHEET DATA: Cash and cash equivalents $ 69,761 $ 12,260 $ 18,872 $ 21,969 $ 9,173 Restricted cash 2,200 - - - - Short-term investments 9,990 - 18,137 - - Working capital (deficit) 96,671 23,316 48,529 32,089 (846) (6) Total assets 254,947 134,545 143,215 124,171 92,228 Long-term debt, non-current 9,000 9,000 15,000 - 5,123 (6) Deferred income taxes 13,729 6,144 8,365 5,376 - Shareholders' equity 221,733 107,572 112,731 106,417 60,695
(see notes on following page) 11 14 SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED) (1) During 1992 and the first quarter of 1993, the Company completed a series of related transactions that constituted a restructuring and recapitalization of the Company (the "Recapitalization"). Primarily as a result of the Recapitalization, between January 1, 1992 and early 1993, the Company eliminated preferred stock obligations of approximately $64,000,000 and indebtedness of $148,000,000. As a part of the Recapitalization, the Company adopted quasi-reorganization accounting procedures that allowed the Company to eliminate its accumulated deficit against paid-in capital and to revalue its assets and liabilities to estimated fair values. (2) In connection with the Recapitalization, during 1992 the Company recorded a rig writedown of $68,320,000 related to the transfer of seven rigs to the United States Maritime Administration, and the writedown of four other rigs to net realizable value. (3) In connection with some of the Recapitalization transactions occurring in 1992, the Company recorded total debt discharges and related early extinguishment gains of $117,967,000 and $104,523,000, respectively. (4) Income (loss) per common share is based on the weighted average number of common shares outstanding and common stock equivalents, if dilutive. Net income per common share for the years ended December 31, 1996, 1995, 1994 and 1993 do not include the effect of outstanding stock options as the potential dilution from their exercise is less than three percent. (5) For the year ended December 31, 1992, net income per common share includes $1.15 per share of common stock attributable to dividends on and discount accretion of preferred stock. On October 29, 1992, the Company's preferred stock was converted into 19,369,893 shares of common stock. (6) The working capital deficit as of December 31, 1992 included $16,157,000 representing the current portion of long-term debt. 12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Form 10-K, particularly the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts concerning, among other things, market conditions, the demand for offshore drilling services, future acquisitions and fleet expansion, future financings, future rig contracts, future capital expenditures including rig upgrades and refurbishments, and future results of operations. Actual results may differ materially from those included in the forward-looking statements, and no assurance can be given that the Company's expectations will be realized or achieved. Important factors and risks that could cause actual results to differ materially from those referred to in the forward looking statements include (i) a prolonged reduction in oil and gas prices; (ii) the inadequacy of insurance and indemnification to protect the Company against liability from all consequences of well disasters, fire damage or environmental damage; (iii) the inability of the Company to obtain insurance at reasonable rates; (iv) a decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of Mexico or for slot jack-up rigs; (v) the risks attendant with operations in foreign countries including actions that may be taken by foreign countries and actions that may be taken by the United States against foreign countries; (vi) the failure of the Company to succeed in its recent entry into the deep water drilling market; (vii) the failure of the Company to successfully compete with the Company's competitors that are larger and have a greater diversity of rigs and greater financial resources than the Company; (viii) a decrease in rig utilization resulting from reactivation of currently inactive non-marketed rigs or new construction of rigs; (ix) the risks of delay and cost overruns attendant to large construction projects such as the upgrade and refurbishment of certain of the Company's rigs, including shortages of material or skilled labor, engineering problems, latent defects or damage to current equipment, work stoppages, weather interference and inability to obtain requisite permits or approvals; (x) the return of market and other conditions similar to those in which the Company incurred net losses before extraordinary items for each of the years ended December 31, 1991, 1992 and 1995; (xi) the loss of key management personnel or the inability of the Company to attract and retain sufficient qualified personnel to operate its rigs; (xii) the risk that labor shortages could result in material wage increases; (xiii) the adoption of additional laws or regulations that limit or reduce drilling opportunities or that increase the cost of drilling or increase the potential liability of the Company; (xiv) the occurrence of risks attendant to contract drilling operations including blowouts, cratering, fires and explosions, capsizing, grounding or collision involving rigs while in operation, mobilization or otherwise or damage to rigs from weather, sea conditions or unsound location; (xv) adverse litigation results; and (xvi) an adverse outcome with respect to the Company's treatment of its net operating losses generated prior to 1993. INTRODUCTION The following is a discussion of the Company's financial condition, results of operations, financial resources and working capital. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. OVERVIEW Demand for offshore drilling services is primarily driven by the economics of oil and gas exploration, development and production, which, in turn, are closely linked to current and projected oil and gas prices. Since the mid-1980's, oil and gas prices have been volatile and generally lower than prices experienced during the early 1980's, resulting in volatile and generally reduced demand for offshore drilling services. In addition, during the early 1980's, the industry built a substantial number of new offshore drilling rigs. Since 1993, the worldwide jack-up market has shown general improvement compared to the 1986-1992 period. This improvement can be generally attributed to improved jack-up rig demand and a continuing reduction in jack-up rig supply. Although this period can be characterized as showing general improvement, certain significant jack-up markets have experienced short periods of reduced rig demand and/or excess rig supply. During those periods of low rig utilization, day rates were adversely impacted and drilling contractors competing in those markets suffered poorer financial results until rig demand improved or rigs left those markets for other markets. DRILLING MARKETS AND UTILIZATION General Most of the world's significant jack-up drilling markets have recently experienced improved rig utilization and day rates. According to Offshore Data Services, as of March 11, 1997, worldwide jack-up utilization was 88% (332 rigs working out of a supply of 378 rigs) compared to 86% average utilization (327 rigs working out of a supply of 382 rigs) experienced during 1996. Prior to 1996, the Company derived substantially all of its revenues from offshore drilling in the U.S. Gulf of Mexico and the Bay of Campeche (Mexico). Five of the Company's rigs, the MARINE 201, MARINE 300, MARINE 304, MARINE 305 and MARINE 500, are configured to work in international markets outside the Gulf of Mexico. In August 1995, the Company deployed the MARINE 201 to offshore India where it is working under a one year contract with extension options. The Company also recently obtained contracts for its newly acquired rigs, the MARINE 305 and MARINE 500, to operate in Southeast Asia. In addition, the Company has recently fabricated quarters for the MARINE 303 in order to facilitate that rig's use in certain international markets. These upgrades could be added to the rig in a relatively short time frame to allow that rig to obtain an international contract. The Company's other rigs could, if applicable modifications were made and certifications obtained, operate in certain areas outside of the Gulf of Mexico. The Company's rigs are not, however, suitable for areas, such as the North Sea, that require enhanced environmental operating capabilities. Due to the highly cyclical nature of the offshore drilling business, the Company seeks longer term contracts for the employment of its rigs, both domestically for deepwater assets and internationally for jack-ups. Such contracts help mitigate the volatility of the Company's results. Historically, most longer term contracts for jack-ups have been available primarily in international markets. Domestically, the Company has obtained ten intermediate term contracts for its U.S. Gulf of Mexico jack-up rigs with terms ranging from three months to one year. Most of these contracts include repricing mechanisms allowing the Company to periodically adjust day rates during the terms of the contracts. The Company also has one rig in India (the MARINE 201) which began operating in November 1995 under a one year contract with eight three-month extension options. The Company's customer has recently elected to exercise the first four options which will keep the rig employed in India at least through November 1997. The Company recently obtained short-term contracts for the MARINE 500 and a one year contract for the MARINE 305. Both of these contracts are in Southeast Asia. The MARINE 500 is currently working and the MARINE 305 will commence operations at the conclusion of its upgrade and refurbishment in the third quarter of 1997. 13 16 U.S. Gulf of Mexico The drilling market in the U.S. Gulf of Mexico is highly competitive. A significant number of offshore drilling companies have rigs in this market and, as a result, no one contractor is able to materially affect pricing levels. Day rates can and have fluctuated significantly on relatively small changes in the rig supply and demand situation in this market. Throughout the period from late 1992 through 1994, jack-up rig operations in the U.S. Gulf of Mexico were characterized by improving rig demand. In late 1994 and early 1995, however, the combination of reduced jack-up demand and increased rig supply had a depressing effect on U.S. Gulf of Mexico operations. During this period of reduced utilization, day rate levels fell and contractors experienced reduced levels of earnings. Since mid-1995, a combination of improved jack-up rig demand and rig mobilizations to other markets has resulted in improved jack-up utilization and day rates. Improved utilization of jack-up rigs in the U.S. Gulf of Mexico during the third and fourth quarters of 1995 continued into and throughout 1996. Utilization of jack-up rigs in this market as of March 11, 1997 was 90% (120 rigs working out of a supply of 134 rigs) as compared with an average of 87% (118 rigs working out of a supply of 136 rigs) for 1996. With 12 of its 15 rigs located in the U.S. Gulf of Mexico, the Company is well positioned to benefit from the improved rig demand in this market. Bay of Campeche During most of 1993 and early 1994, demand for jack-up rigs was strong in the Bay of Campeche, offshore Mexico in the southern Gulf of Mexico. The Bay of Campeche drilling market, however, generally deteriorated in late 1994 and early 1995. The Company contracted two of its rigs (the MARINE 301 and the MARINE 303) into this market in late 1992 and another (the MARINE 300) in mid-1993. The first two rigs completed their contracts in late 1993 and early 1994, respectively, and subsequently returned to the U.S. Gulf of Mexico. The third rig completed its contract and returned to the U.S. Gulf of Mexico in May 1995. The Company is continuing to actively market its fleet in this area. Demand for rigs in the Bay of Campeche dropped from a high of 23 rigs in 1993 to 7 rigs in 1995 and has increased to an average of 8 rigs for 1996. Jack-up utilization in the Bay of Campeche at the end of 1996 was approximately 80% (8 jack-ups working out of a supply of 10 rigs) compared to 100% (8 jack-ups working out of a supply of 8 rigs) as of March 11, 1997. India In August 1995, the Company entered into a one-year term contract for the MARINE 201 to operate off the east coast of India. That rig commenced operations under this contract in mid-November 1995. Under the contract, the customer has options to extend the contract for up to eight three-month periods, four of which have been exercised ensuring this rig's employment through November 1997. Annual demand for jack-ups in India has generally averaged between 20 to 26 rigs during the past few years. During this time, jack-up utilization has been stable in the range of 89% to 93%. The government of India recently approved investment in the oil and gas sector by non-Indian energy companies. As a result of these actions, jack-up rig demand has recently increased, and most industry analysts expect that demand could increase further in the near term. Southeast Asia In January 1997, the Company entered into a one-year contract with a major oil company for the MARINE 305 to begin work in Southeast Asia. The contract will begin in the third quarter of 1997 and is expected to generate total revenues of approximately $28,000,000. In December 1996, the Company acquired the MARINE 500, a second generation semi-submersible rig. The rig began operating in late February and is currently drilling offshore Indonesia on a short-term contract. The Company intends to continue to search for a long-term contract in this market. There are currently 23 jack-ups and 12 semi-submersibles in this market as of March 11, 1997 with working utilization at 65% for jack-ups and 83% for semi-submersibles. The contracted utilization rates are currently 97% for jack-ups and 100% for semi-submersibles, primarily due to rigs in the shipyard which have not yet started working under their respective contracts. Thus, utilization in this market is currently strong. 14 17 The following table sets forth certain industry and Company historical data for the periods indicated. Industry data includes many rigs that are dissimilar to the Company's rigs in terms of performance capabilities, age, operational criteria and environmental capabilities. Certain of the Company's competitors have fleets that include rigs other than jack-up rigs that can compete with jack-up rigs under certain circumstances.
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- INDUSTRY(1): U.S. Gulf of Mexico: Total jack-up rigs . . . . . . 135.9 140.1 135.8 116.5 120.9 Working jack-up rigs . . . . . 118.5 104.6 102.9 90.5 58.8 Utilization . . . . . . . . . 87% 75% 76% 78% 49% All other markets: Total jack-up rigs . . . . . . 246.0 246.7 255.5 276.6 277.1 Working jack-up rigs . . . . . 208.5 197.5 192.5 216.9 216.8 Utilization . . . . . . . . . 85% 80% 75% 78% 78% COMPANY(2): Total jack-up rigs . . . . . . 13.5 13.0 12.1 11.1 15.3 Working jack-up rigs . . . . . 12.6 8.9 9.8 9.9 6.3 Utilization . . . . . . . . . 93% 69% 81% 89% 41% Non-marketed rigs . . . . . . .9 3.0 .8 .9 6.7 Utilization of marketed rigs . 99% 89% 87% 97% 73% Average day rates(3) . . . . . $24,343 $19,289 $19,686 $23,019 $13,816
- ------------ (1) Average of weekly data published by Offshore Data Services. (2) The numbers included in the table represent the average number of rigs operated by the Company or the periods indicated. (3) "Average day rate" is determined by dividing the total gross revenue earned by the Company's rigs during a given period by the total number of days that the Company's rigs were under contract during that period. RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995 General During 1996, the number of utilized jack-up rigs increased as well as day rates due primarily to the greater demand for drilling rigs and increased level of drilling activity in the U.S. Gulf of Mexico arising from improved natural gas and oil prices. Revenues The Company's 1996 drilling revenues of $110,329,000 which represented an increase of $47,262,000 or 75% compared to 1995 drilling revenues of $63,067,000. The increase in revenues was the result of three factors: (i) a 26% increase in average day rates from $19,289 in 1995 to $24,343 in 1996, (ii) an increase in the number of marketed rigs from 10 in 1995 to 13 in 1996 and (iii) an increase in utilization of marketed rigs from 89% in 1995 to 99% in 1996. 15 18 Costs and Expenses Contract drilling expenses of $59,770,000 in 1996 represented an increase of $4,679,000 or 8% compared to contract drilling expenses of $55,091,000 in 1995. The increase was primarily the result of an increase in the number of working rigs from 9 in 1995 to 12 in 1996. Labor expense increased by $4,780,000 (18%) and was partially offset by decreases in other operating costs and decreases in employer's liability claims. Depreciation and amortization expense increased $2,199,000 or 23% from $9,377,000 in 1995 to $11,576,000 in 1996. The increase resulted primarily from the addition of top drives and equipment upgrades on the MARINE 15, MARINE 16 and MARINE 300, upgrades to the MARINE 201, purchases of drill string and other capital expenditures. General and administrative expenses in 1996 increased $2,038,000 or 37% from $5,460,000 in 1995 to $7,498,000 compared to 1996. The increase was attributed to an increase in labor due to additional personnel, an increase in professional services and other administrative expenses. Interest Expense Interest expense in 1996 was $895,000 and consisted of the following: (i) interest of $898,000 based on an average interest rate of 7.98% on an average borrowed balance of approximately $11,254,000, (ii) credit facility fees of $58,000, net of (iii) capitalized interest of approximately $61,000. The Company had interest expense of $855,000 during 1995. Interest Income Interest income decreased $233,000 or 16% from $1,494,000 in 1995 to $1,261,000 in 1996. The decrease was related primarily to decreased cash balances and slightly lower interest rates during 1996. Income Taxes Income tax expense of $11,586,000 for the year ended December 31, 1996 consisted of (i) current U.S. federal alternative minimum tax of $343,000, (ii) current foreign taxes of $296,000, (iii) the effect of tax benefits related to common stock issued pursuant to the Marine Drilling 1992 Long Term Incentive Plan ($2,528,000), (iv) the realization of pre-quasi-reorganization net operating loss carryforwards of $834,000 and (v) deferred U.S. federal income taxes of $7,585,000. RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994 General During 1995, the number of utilized jack-up rigs decreased as well as day rates due primarily from a general decline in U.S. Gulf of Mexico jack-up rig demand during the first five months of the year and reduced levels of drilling activity in Mexico's Bay of Campeche. Revenues During 1995, the Company generated drilling revenues of $63,067,000 which represented a decrease of $7,530,000 or 11% compared to 1994 drilling revenues of $70,597,000. The change in revenues reflected the net effect of the following factors: (i) a decrease in the number of marketed rigs from 11 during 1994 to 10 rigs during 1995 due to softer business conditions as previously discussed; (ii) an increase in utilization of marketed rigs from 87% during the 1994 period to 89% during 1995; and (iii) a 2% decrease in average day rates from $19,686 during the 1994 period to $19,289 in 1995. The decrease in average day rates and number of marketed rigs resulted primarily from the factors discussed above. 16 19 Costs and Expenses Contract drilling expenses of $55,091,000 in 1995 represented an increase of $4,516,000 or 9% compared to contract drilling expenses of $50,575,000 in 1994. The increase was primarily the result of costs of approximately $2,500,000 (reimbursed by its customer and included as drilling revenues) incurred to mobilize the MARINE 201 to India, the MARINE 225 returning to work in 1995 and the MARINE 300 returning to the U.S. Gulf of Mexico with a full crew compliment. The increase was partially offset by a reduction in the number of marketed rigs due to soft market conditions. Depreciation and amortization expense increased $1,644,000 or 21% from $7,733,000 in 1994 to $9,377,000 in 1995. The increase resulted primarily from the acquisition of the MARINE 3 in the fourth quarter of 1994, expenditures for the acquisition and refurbishment of the MARINE 201, expenditures to upgrade the MARINE 16 and the MARINE 303, purchases of drill string and amortization of deferred loan costs. General and administrative expenses in 1995 increased $1,084,000 or 25% from $4,376,000 in 1994 to $5,460,000 in 1995. The increase was primarily related to an increase in benefit-related expenses of $480,000 due to credits received in 1994 which were not received in 1995, an increase of $301,000 related to increased marketing activities and other general increased expenses. Interest Expense Interest expense in 1995 was $855,000 and consisted of the following: (i) interest of $920,000 based on an average interest rate of 8.5% on an average borrowed balance of approximately $10,800,000, (ii) credit facility fees of $61,000, net of (iii) capitalized interest of approximately $126,000. The Company had interest expense of $70,000 during 1994. Interest Income Interest income increased $144,000 or 11% from $1,350,000 in 1994 to $1,494,000 in 1995. The increase was related primarily to increased cash balances during 1995, as well as improved interest rates on invested balances during 1995. Income Taxes Income tax benefits of $2,080,000 for the year ended December 31, 1995 consisted of current state and federal income taxes of $56,000, tax benefits related to common stock issued pursuant to the Marine Drilling 1992 Long Term Incentive Plan of $85,000 and deferred federal income taxes of $2,221,000. THE RECAPITALIZATION During 1992 and the first quarter of 1993, the Company completed a series of related transactions that constituted a restructuring and recapitalization of the Company (the "Recapitalization"). Primarily as a result of the Recapitalization, between January 1, 1992 and early 1993, the Company eliminated preferred stock obligations of approximately $64,000,000 and indebtedness of approximately $148,000,000. As a part of the Recapitalization, the Company adopted quasi-reorganization accounting procedures which allowed the Company to eliminate its accumulated deficit against paid-in capital and to revalue its assets and liabilities to estimated fair values. The Company's rig fleet was also reduced from 21 rigs to 11 rigs. The Company has taken the position that the Recapitalization did not cause an ownership change under Section 382 of the Code based on the applicability of Section 382(l)(3)(C) and Regulation Section 1.382-2T(h)(4)(i)(B). Since neither the Internal Revenue Service nor the Department of Treasury has established any rules or guidance on Section 382(l)(3)(C), there can be no assurance that an ownership change will not be deemed to have occurred. If an ownership change were deemed to have occurred, the utilization of the Company's net operating losses and investment tax credit carryforwards, would be substantially limited. 17 20 Regardless of a change in ownership, the Recapitalization and certain transactions related thereto have resulted in substantial reductions of the Company's tax net operating loss carryforwards. Moreover, if the Company fails to prevail on certain of the tax positions it has taken with respect to the tax effects of those transactions, the Company's net operating loss carryforwards could be further reduced in a substantial manner. Appropriate valuation allowances for deferred tax assets have been established in the consolidated financial statements based on management's consideration of whether it is more likely than not that some portion or all of the net operating losses and investment tax credit carryforwards will not be realized. In late 1995 and early 1996, certain venture capital firms holding significant percentages of the Company's common stock sold or distributed their positions. These transactions triggered an ownership change pursuant to Section 382 in March 1996. As a result of this ownership change, the Company's use of its net operating loss, investment tax credit and general business credit carryforwards subsequent to that date will be limited to approximately $26,600,000 annually. FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources The Company had working capital at December 31, 1996 of $96,671,000 as compared to working capital of $23,316,000 at December 31, 1995. Net cash provided by operating activities was $39,280,000 for 1996 compared to $3,679,000 for 1995, an increase of $35,601,000 or 968%. Cash used in investing activities was $60,734,000 for 1996 resulting primarily from capital expenditures of $51,654,000 compared to cash used in investing activities of $2,819,000 for 1995. Capital expenditures for 1996 consisted of (i) drill pipe purchases, (ii) the addition of a top drive drilling system and other upgrades to the MARINE 15, (iii) the installation of a top drive drilling system and the fabrication of additional leg sections for the MARINE 300, (iv) the fabrication of international quarters for the MARINE 303, (v) the acquisition of the MARINE 305 and (vi) the acquisition of the MARINE 500. Net cash provided by financing activities was $78,955,000 consisting primarily of the proceeds from the exercise of common stock options and the proceeds from the sale of 5,584,700 common shares at a net price of $14.25. Other Activities On March 7, 1995, the Company announced that its Board of Directors had authorized the repurchase of up to 4,000,000 shares of the Company's Common Stock. The action reflected the Company's view that its shareholders would benefit from such repurchases. The repurchases may be effected, from time to time, in accordance with applicable securities laws, through solicited or unsolicited transactions in the market or in privately negotiated transactions. No limit was placed on the duration of the repurchase program. Subject to applicable securities laws, such repurchases shall be at such times and in such amounts as the Company deems appropriate. The Company currently intends to fund such repurchases from working capital. During 1995, the Company purchased 735,633 shares of its Common Stock at an average price of $3.61 per share (aggregate value $2,659,000) pursuant to the repurchase program. A portion of these shares (201,423 shares) were subsequently reissued (i) to fund the Company's contributions to its 401(k) plan, (ii) in connection with stock option exercises pursuant to its employees long term incentive plan and (iii) to remunerate certain non-employee directors pursuant to the Company's directors compensation plan. During 1996, no shares were repurchased by the Company; however, 534,210 shares were reissued to fund the Company's contributions to its 401(k) plan and in connection with stock option exercises pursuant to the employee long term incentive plan. The Company's Board of Directors recently reaffirmed the Company's authorization to repurchase up to 4,000,000 shares. In March 1997, the Company entered into a new credit agreement, the "New Loan Agreement," with Bankers Trust Company ("BTCo"), Christiania Bank og Kreditkasse ("CBK"), and certain other banks providing financing up to $100,000,000 to be used for rig acquisitions and upgrades. This agreement includes a revolving credit facility available through December 31, 1999 which can be converted into a four-year term loan. Interest and facility fees are generally payable quarterly during the terms of both facilities. Principal during the term loan facility is payable quarterly in equal installments beginning March 31, 2000. Interest accrues at (i) LIBOR plus a margin of .75% to 1.25% or (ii) prime plus a margin of 0% to .50%, with margins determined pursuant to a debt to capital calculation. The agreement is secured by all of the Company's current rig fleet as well as certain other collateral assignments. The Company has no borrowings outstanding under this agreement at March 11,1997. In connection with the consummation of the New Loan Agreement, the Company repaid and terminated its prior $35,000,000 credit facility with a U.S. financial institution. 18 21 Outlook The Company expects to spend approximately $39,000,000 in 1997 for capital expenditures, consisting primarily of expenditures of $29,500,000 to upgrade and refurbish the MARINE 305. The Company will continue to pursue direct or indirect acquisitions of additional drilling rigs and related equipment and/or businesses. Future acquisitions, if any, would likely be funded from the Company's working capital, the New Loan Agreement or through the issuance of debt and/or equity securities. The Company cannot predict whether it will be successful in acquiring additional rigs, and obtaining financing therefor, on acceptable terms. In addition, it is currently anticipated that the Company will continue the upgrading of rigs to enhance their capability to obtain longer term contracts including, among other things, water depth upgrades to the MARINE 500. The timing and actual amounts expended by the Company in connection with its plans to upgrade and refurbish selected rigs, as well as the type of rig modification comprising each program, is subject to the discretion of the Company and will depend on the Company's view of market conditions, the Company's cash flow, whether other acquisitions are made, and other factors. It is expected, however, that such programs will involve adding top drive drilling systems, converting power systems, increasing water-depth capabilities, adding a cantilever feature or making other modifications to selected rigs. With regard to fleet expansion, the Company believes that segments of the offshore drilling market are continuing to undergo consolidation and such consolidation may present acquisition opportunities. While the Company continues to explore acquisition opportunities, including opportunities in the deep water drilling sector, the Company currently has no agreement with respect to any acquisitions, and there can be no assurance as to the timing of any such acquisitions or that any acquisitions will be made. The Company believes that its available funds, together with cash generated from operations and amounts that may be borrowed under the New Loan Agreement will be sufficient to fund its required capital expenditures, working capital and debt service requirements for the foreseeable future. Future cash flows, however, are subject to a number of uncertainties, particularly the condition of the oil and gas industry. Accordingly, there can be no assurance that these resources will be sufficient to fund the Company's cash requirements. 19 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Marine Drilling Companies, Inc.: We have audited the consolidated financial statements of Marine Drilling Companies, Inc. and subsidiaries as listed in Item 14 on page 40. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Houston, Texas January 24, 1997 20 23 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------------------- 1996 1995 -------- -------- ASSETS Current Assets: Cash and cash equivalents $69,761 $12,260 Restricted cash 2,200 -- Short-term investments 9,990 -- Accounts receivable - trade and other, net 21,378 18,078 Inventory 897 1,272 Prepaid expenses and other 1,461 1,380 -------- -------- Total current assets 105,687 32,990 Property and Equipment 182,200 123,442 Less accumulated depreciation 33,463 22,090 -------- -------- Property and equipment, net 148,737 101,352 Other 523 203 -------- -------- $254,947 $134,545 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,000 $ 1,000 Accounts payable 3,249 5,721 Accrued expenses 4,284 1,927 Employer's liability claims, current 483 1,026 -------- -------- Total current liabilities 9,016 9,674 Long-term Debt 9,000 9,000 Employer's Liability Claims, non-current 1,469 2,155 Deferred Income Taxes 13,729 6,144 Shareholders' Equity: Common stock, par value $.01. Authorized 200,000,000 shares; issued and outstanding 51,262,519 shares as of December 31, 1996; issued 44,169,643 and outstanding 43,635,433 shares as of December 31, 1995 513 442 Common stock restricted (628) (505) Treasury stock, at cost (534,210 shares in 1995) -- (2,016) Additional paid-in capital 184,992 92,720 Retained earnings from January 1, 1993 36,856 16,931 -------- -------- Total shareholders' equity 221,733 107,572 -------- -------- Commitments and contingencies -- -- -------- -------- $254,947 $134,545 ======== ========
See notes to consolidated financial statements. 21 24 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Revenues $ 110,329 $ 63,067 $ 70,597 Costs and Expenses: Contract drilling 59,770 55,091 50,575 Depreciation and amortization 11,576 9,377 7,733 General and administrative 7,498 5,460 4,376 ------------ ------------ ------------ 78,844 69,928 62,684 ------------ ------------ ------------ Operating income (loss) 31,485 (6,861) 7,913 ------------ ------------ ------------ Other Income (Expense): Interest expense (895) (855) (70) Interest income 1,261 1,494 1,350 Other income (expense) 405 120 (70) ------------ ------------ ------------ 771 759 1,210 ------------ ------------ ------------ Income (loss) before income taxes 32,256 (6,102) 9,123 Income tax expense (benefit) 11,586 (2,080) 3,193 ------------ ------------ ------------ Net income (loss) $ 20,670 $ (4,022) $ 5,930 ============ ============ ============ Net income (loss) per common share $ 0.46 $ (0.09) $ 0.14 ============ ============ ============ Weighted average common shares outstanding 44,918,264 43,812,161 43,819,049 ============ ============ ============
See notes to consolidated financial statements. 22 25 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK --------------------------------------------------- ISSUED IN TREASURY ADDITIONAL ------------------------ ------------------------ PAID-IN RESTRICTED RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK EARNINGS ---------- ---------- ---------- ---------- ------------ ------------ ------------ Balances at December 31, 1993 43,682,668 $ 437 -- $ -- $ 91,801 $ (844) $ 15,023 Net income -- -- -- -- -- -- 5,930 Issuance of restricted common stock 83,000 1 -- -- 414 (415) -- Accrual of compensation expense -- -- -- -- -- 318 -- Forfeitures of restricted common stock (31,250) -- -- -- (137) 137 -- Common stock options exercised 10,000 -- -- -- 13 -- -- Issuance of common stock for 401(k) plan 173,348 1 -- -- 815 -- -- Tax benefits related to common stock issued pursuant to long term incentive plan -- -- -- -- 50 -- -- Other -- -- -- -- (813) -- -- ---------- ---------- ---------- ---------- ------------ ------------ ------------ Balances at December 31, 1994 43,917,766 439 -- -- 92,143 (804) 20,953 Net loss -- -- -- -- -- -- (4,022) Purchases of stock -- -- 735,633 (2,659) -- -- -- Issuance of restricted common stock 53,500 1 -- -- 147 (148) -- Accrual of compensation expense -- -- -- -- -- 333 -- Forfeitures of restricted common stock (20,000) -- -- -- (114) 114 -- Common stock options exercised 130,000 1 (20,000) 61 125 -- -- Issuance of common stock for 401(k) plan 88,377 1 (166,528) 531 325 -- -- Tax benefits related to common stock issued pursuant to long term incentive plan -- -- -- -- 85 -- -- Issuance of stock for Non-Employee Directors' Plan -- -- (14,895) 51 9 -- -- ---------- ---------- ---------- ---------- ------------ ------------ ------------ Balances at December 31, 1995 44,169,643 442 534,210 (2,016) 92,720 (505) 16,931 Net income -- -- -- -- -- -- 20,670 Issuance of stock for stock offering 5,584,700 56 -- -- 79,109 -- -- Issuance of stock for MARINE 305 882,352 9 -- -- 7,491 -- -- Issuance of restricted common stock 80,833 1 -- -- 560 (561) -- Accrual of compensation expense -- -- -- -- -- 438 -- Common stock options exercised 477,650 4 (484,120) 1,824 907 -- (745) Issuance of common stock for 401(k) plan 62,891 1 (50,090) 192 789 -- -- Pre-quasi-reorganization net operating loss carryforwards -- -- -- -- 834 -- -- Tax benefits related to common stock issued pursuant to long term incentive plan -- -- -- -- 2,528 -- -- Issuance of stock for Non-Employee Directors' Plan 4,450 -- -- -- 54 -- -- ---------- ---------- ---------- ---------- ------------ ------------ ------------ Balances at December 31, 1996 51,262,519 $ 513 -- $ -- $ 184,992 $ (628) $ 36,856 ========== ========== ========== ========== ============ ============ ============
See notes to consolidated financial statements. 23 26 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Cash Flows From Operating Activities: Net income (loss) $ 20,670 $ (4,022) $ 5,930 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 7,585 (2,221) 2,989 Pre-quasi-reorganization net operating loss carryforwards 834 -- -- Tax benefits related to common stock issued pursuant to long-term incentive plan 2,528 85 50 Depreciation and amortization 11,576 9,377 7,733 Gain on disposition of equipment (410) (153) (453) Accrual of compensation expense, net 438 333 318 Issuance of common stock to the employee retirement plan and the Non-Employee Directors' Plan 1,036 917 816 Amortization of interest income (261) (148) (273) (Increase) decrease in receivables (3,300) (2,725) 4,003 (Increase) decrease in prepaid expenses, other and inventory 294 (1,516) (191) Increase (decrease) in payables, accrued expenses and employer's liability claims (1,344) 3,710 (5,259) Other (366) 42 (1,078) -------- -------- -------- Net cash provided by operating activities 39,280 3,679 14,585 -------- -------- -------- Cash Flows From Investing Activities: Purchase of short-term investments (9,729) (10,465) (29,264) Maturity of short-term investments -- 28,750 11,400 Purchase of equipment (51,654) (21,418) (15,385) Proceeds from disposition of equipment 649 314 554 -------- -------- -------- Net cash used in investing activities (60,734) (2,819) (32,695) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from long-term debt 21,500 -- 15,000 Proceeds from sale of common stock 79,582 -- -- Proceeds from exercise of stock options 1,990 187 13 Issuance cost of sale of common stock (417) -- -- Payments of debt (21,500) (5,000) -- Purchase of treasury stock -- (2,659) -- Increase in restricted cash (2,200) -- -- -------- -------- -------- Net cash provided by (used in) financing activities 78,955 (7,472) 15,013 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 57,501 (6,612) (3,097) Cash and cash equivalents at beginning of period 12,260 18,872 21,969 -------- -------- -------- Cash and cash equivalents at end of period $ 69,761 $ 12,260 $ 18,872 ======== ======== ========
[Continued] See notes to consolidated financial statements. 24 27 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ------ ------ ------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest Paid $ 956 $ 981 $ 70 Income taxes paid $ 640 $ 55 $ 441 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 882,352 shares for MARINE 305 rig acquisition $7,500 $ -- $ -- Issuance of 80,833, 53,500 and 83,000 shares in 1996, 1995 and 1994 respectively, of restricted common stock $ 561 $ 148 $ 415 Forfeitures of 20,000 and 31,250 shares in 1995 and 1994, respectively, of restricted common stock $ -- $ (114) $ (137)
See notes to consolidated financial statements. 25 28 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS Basis of Presentation and Principles of Consolidation -- References herein to the "Company" refer to Marine Drilling Companies, Inc. ("Parent") and its wholly-owned subsidiaries, Marine Drilling Management Company ("MDMC"), Marine 300 Series, Inc. ("M300SI") formerly known as Keyes Holding Corporation and Marine Drilling International, Inc., unless the context otherwise requires a reference only to the Parent. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Description of Business -- The Company is engaged in the offshore contract drilling of oil and gas wells, primarily in the U.S. Gulf of Mexico, for independent and major oil and gas companies. The Company owns and operates one second generation semi-submersible, capable of operating in water depths of up to 600 feet, as well as a fleet of fourteen mobile offshore jack-up drilling rigs having water depth capabilities of 200' to 300', consisting of five independent leg units, three of which have a cantilever feature, and nine mat supported units, four of which have a cantilever feature. These rigs are currently capable of drilling to depths of 20,000 to 30,000 feet. As of the date of this report, eleven of the Company's fourteen jack-up rigs were located in the U.S. Gulf of Mexico, one was located offshore India, one was located in Southeast Asia, one rig is under repair in the U.S. Gulf of Mexico and another rig is being refurbished and upgraded in the Middle East. The Company currently derives substantially all of its revenues from offshore drilling in the U.S. Gulf of Mexico, India, and Southeast Asia. The Company's rigs could, with certain modifications, work in other areas, however, the Company's rigs are not suitable for those areas, such as the North Sea, that require hostile environment operating capabilities. Inventory -- Inventory consists of operating supplies primarily for the Company's international operations and is carried at the lower of cost or market. Property and Equipment -- Effective December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS 121"). This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes indicate the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no effect on the 1995 consolidated financial statements. Property and equipment are stated at historical cost or the cost assigned to the assets at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures. Depreciation is provided on the straight- line method over the estimated remaining useful lives of the assets which are as follows:
Years ----- Jack-up rigs (new) . . . . . . . . . . . . . . . . . . . . . . 20 to 25 Jack up rigs (used/refurbished) . . . . . . . . . . . . . . . . 5 to 15 Semi-submersible rigs (new) . . . . . . . . . . . . . . . . . . 25 Semi-submersible rigs (used) . . . . . . . . . . . . . . . . . 10 to 15 Drill string . . . . . . . . . . . . . . . . . . . . . . . . . 4 Other equipment . . . . . . . . . . . . . . . . . . . . . . . . 3 to 12
Maintenance and repairs amounted to $8,905, $8,219 and $8,600 in 1996, 1995 and 1994, respectively. Expenditures for major renewals and betterments are capitalized. Expenditures for normal maintenance and repairs are charged to expense as incurred. When property or equipment is retired, the related assets and accumulated depreciation are removed from the accounts and a gain or loss is reflected in other income (expense). The Company continues to depreciate idle drilling equipment using the same rates as while operating. The Company capitalizes interest expense related to certain capital expenditure projects. Capitalized interest was approximately $126 and $61 for 1995 and 1996, respectively. 26 29 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employer's Liability Claims -- Employer's liability claims, principally arising from actual or alleged personal injuries, are estimates of the Company's liabilities for such occurrences. These claims are classified as current or long-term based upon the periods in which such claims are expected to be funded. Deferred Financing Costs -- Deferred financing costs are amortized over the life of the related debt. Deferred financing costs, net of accumulated amortization were $231 and $183, respectively, at December 31, 1996 and 1995. Income Taxes -- Deferred tax assets and liabilities are recorded to reflect the future tax consequences of differences between the financial statement and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Revenue Recognition -- Drilling revenues are recorded pursuant to day rate contracts, under which the Company receives a fixed amount per day for providing drilling services using the rigs it operates. Revenues are recognized as earned. In connection with drilling contracts, the Company may receive lump sum fees for mobilization of equipment and personnel or for capital improvements to rigs. Significant mobilization reimbursements are deferred and amortized over the term of the contract. Capital upgrade fees received are deferred and recognized as revenue over the period of the drilling project. The actual cost incurred for the capital upgrade is depreciated over the estimated useful life of the asset. Rig Mobilization Costs - When significant costs are incurred in connection with mobilizing a drilling rig for a new contract, the Company defers and amortizes such costs over the term of the applicable drilling contract. There were no unamortized mobilization costs at December 31, 1996 and 1995. Mobilization costs incurred in connection with rig purchases are capitalized as part of the purchase price and are depreciated over the life of the rig. Stock-Based Compensation -- Statement of Financial Accounting Standards 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation costs for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principals Board Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount the employee must pay to acquire the stock. The disclosures required by SFAS 123, however, have been included in Note 7. Cash and Cash Equivalents -- The Company generally considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1996, $2,200 of the Company's cash on hand was restricted as a result of cash collateral requirements related to a credit facility used for issuing letters of credit to support the Company's international activities. As of December 31, 1996, letters of credit totalling $100 were outstanding. 27 30 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Short-Term Investments -- Short-term investments consist of corporate debt securities, mortgage-backed securities and corporate paper. The Company classifies its short-term investments as held-to-maturity securities. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life of the related held-to- maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. There were no short-term investments at December 31, 1995. The fair value of the short-term investments at December 31, 1996 was $9,990. Treasury Stock -- Treasury stock is acquired under the cost method and valued upon reissuance using the first- in, first-out method. During 1995, the Company purchased 735,633 shares of common stock at an aggregate cost of $2,659. In addition, during 1995, the Company reissued 201,423 shares at an aggregate cost of $643 for the employee and non- employee benefit plans. At December 31, 1996, the Company had remaining authorization under the stock purchase program to acquire up to 4,000,000 shares. Income (Loss) Per Common Share -- Income (loss) per common share is based on the weighted average number of common shares outstanding and common stock equivalents, if dilutive. Net income (loss) per common share for the years ended December 31, 1996, 1995 and 1994 does not include the effect of outstanding stock options since they are either antidilutive or the potential dilution from their exercise is less than three percent. Reclassification of Accounts -- Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform with the current presentation. Concentrations of Credit Risk - The market for the Company's services and products is the offshore oil and gas industry, and the Company's customers consist primarily of independent and major oil and gas companies. The Company performs ongoing credit evaluations of its customers and obtains collateral security as deemed prudent. The Company has established an adequate allowance for bad debts, and such losses have been within management's expectations (see Note 10). At December 31, 1996 and 1995, the Company had cash deposits concentrated in two major banks. In addition, the Company had mutual funds and commercial paper with a variety of companies and financial institutions with strong credit ratings, and such securities are held until maturity. The Company believes that credit and market risk in such instruments is minimal. Fair Values of Financial Instruments - The fair values of the Company's cash equivalents, trade receivables and trade payables approximated their carrying values due to the short-term maturities of these instruments. The estimated fair value of long-term debt is equivalent to its carrying value due to the floating interest rate (see Note 4). Use of Estimates -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 28 31 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost or the cost assigned to the assets at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures, and are summarized as follows:
DECEMBER 31, -------------------------- 1996 1995 ---------- ----------- Drilling rigs . . . . . . . . . . . . . . . . $ 160,073 $ 100,811 Drill string . . . . . . . . . . . . . . . . 6,282 4,725 Other equipment . . . . . . . . . . . . . . . 1,903 730 Construction in progress . . . . . . . . . . 13,942 17,176 ---------- ----------- $ 182,200 $ 123,442 ========== ===========
Depreciation expense was $11,530, $9,326 and $7,733 for the years ended December 31, 1996, 1995 and 1994, respectively. (3) ACCRUED EXPENSES Accrued expenses are summarized as follows:
DECEMBER 31, -------------------------- 1996 1995 ---------- ----------- Accrued payroll and related taxes . . . . . . $ 1,482 $ 884 Accrued health benefit plan claims . . . . . 550 462 Other accrued expenses . . . . . . . . . . . 2,252 581 ---------- ----------- $ 4,284 $ 1,927 ========== ===========
(4) LONG-TERM DEBT Long-term debt is summarized as follows:
DECEMBER 31, -------------------------- 1996 1995 ---------- ----------- M300SI note payable to lender due 1999 . . . $ 10,000 $ 10,000 Less: Current portion of long-term debt . . . 1,000 1,000 ---------- ----------- Long-term debt, non-current . . . . . . $ 9,000 $ 9,000 ========== ===========
M300SI - Note Payable to Lender -- On December 1, 1994 M300SI entered into a $35,000 revolving/term loan agreement (the "Loan") with a U.S. financial institution ("Lender"). This agreement included a revolving credit facility which was convertible on June 1, 1996 into a term loan. On May 31, 1996 the Loan was amended (i) to extend the revolving loan availability period by one year to June 1, 1997 at which time it could be converted to a term loan; (ii) to extend the term facility by two years; and (iii) to lower the amount of available borrowing during the loan availability period over four consecutive quarterly reductions of $1,750 on September 1, 1996; December 1, 1996; March 1, 1997 and June 1, 1997. If converted, the term loan will be due in sixty (60) equal monthly installments beginning July 1, 1997 and ending June 1, 2002. If M300SI elects to convert less than the minimum borrowing under the revolving credit facility which is $10,000, it will be required to pay a non-utilization fee equal to 1-1/2% of the excess of $10,000 over the amount converted. 29 32 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 31, 1996 the related debt outstanding was $10,000 and the amount of unused line of credit subject to the Loan was $21,500. Loan proceeds may be used to purchase additional drilling rigs or to make capital improvements to the Company's drilling rig fleet. The Company has guaranteed up to $7,875 of the borrowings under the Loan. Interest is due monthly on the outstanding principal balance at the London Interbank Offered Rate ("LIBOR") plus 2.5%. The interest rate as of December 31, 1996, 1995 and 1994 was 8.0%, 8.3% and 7.94%, respectively. A revolving loan fee is due quarterly during the revolving loan period based on the unused credit facility at .25%. The note is secured by a first preferred fleet mortgage on the MARINE 300, 301 and 303 drilling rigs. The three drilling rigs must be appraised on the term loan conversion date, June 1, 1997. The term loan will be limited to 50% of the appraised value of the rigs. The Company and M300SI are required to comply with various covenants, including, but not limited to, the maintenance of financial ratios related to (i) debt to total equity and (ii) working capital to fixed expenses and projected debt services. Interest payments on the loan amounted to $956, $981 and $70 for the years ended December 31, 1996, 1995 and 1994, including revolving loan fees of $58, $60 and $5, respectively. A facility fee of $175 was paid to the Lender during the fourth quarter 1994 and is being amortized over the life of the loan. During May 1996 a modification fee of $88 was paid to the Lender and is being amortized over the remaining life of the loan. The scheduled repayment of long-term debt as of December 31, 1996 is as follows:
1997 1998 1999 2000 2001 2002 TOTAL ------ ------ ------ ------ ------ ------ ------- Annual maturities $1,000 $2,000 $2,000 $2,000 $2,000 $1,000 $10,000 ====== ====== ====== ====== ====== ====== =======
(5) INCOME TAXES Income taxes consist of the following:
1996 1995 1994 --------- -------- -------- Current: U.S. federal . . . . . . . . . . . . . . . . $ 343 $ -- $ 153 State . . . . . . . . . . . . . . . . . . . . -- 1 1 Foreign . . . . . . . . . . . . . . . . . . . 296 55 -- --------- -------- -------- 639 56 154 --------- -------- -------- Other: U.S. federal - deferred . . . . . . . . . . . 7,585 (2,221) 2,989 Pre-quasi-reorganization net operating loss carryforwards . . . . . . . . . . . . . . . . 834 -- -- Tax benefits related to common stock issued pursuant to long-term incentive plan . . . . 2,528 85 50 --------- -------- -------- 10,947 (2,136) 3,039 --------- -------- -------- Total tax provision (benefit) . . . . . . . . . $ 11,586 $ (2,080) $ 3,193 ========= ======== ========
As a result of the adoption of quasi-reorganization accounting procedures on December 31, 1992, the tax effect of the realization of tax attributes generated prior thereto are recorded directly to shareholders' equity as an adjustment to additional paid-in capital and are not reflected as a reduction of income tax expense. 30 33 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For the years ended December 31, 1996, 1995 and 1994, the effective tax rates for financial reporting purposes of 36%, 34% and 35% approximates the U.S. federal statutory rates of 34% and 35%. The effective rate was higher than the statutory rate in 1996 due to the Company's treatment of foreign tax payments. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below.
DECEMBER 31, ------------------- 1996 1995 -------- -------- Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . $ 24,065 $ 31,361 Investment tax, general business and foreign tax credit carryforwards . . . . . . . . . . . . . . 4,862 11,356 Employer's liability claims . . . . . . . . . . . . . 683 1,113 Allowance for bad debts . . . . . . . . . . . . . . . 53 45 -------- -------- Total gross deferred tax assets . . . . . . . . . . . 29,663 43,875 Less valuation allowance . . . . . . . . . . . . . . (28,980) (36,738) -------- -------- Net deferred tax assets . . . . . . . . . . . . . . . 683 7,137 ======== ======== Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation . . . . . . . . . . . . . . . . . 13,344 11,896 Deferred intercompany gains and losses . . . . . . . 1,068 1,385 -------- -------- Total gross deferred tax liabilities . . . . . . . . 14,412 13,281 -------- -------- Net deferred tax liability . . . . . . . . . . . . . . $ 13,729 $ 6,144 ======== ========
The valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was $28,980 and $36,738, respectively. The net change in the total valuation allowance for the years ended December 31, 1996 and 1995 was a decrease of $7,758 and $1,911, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon projections for future taxable income over the periods which the deferred tax assets are deductible and the Section 382 limitation as discussed below, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1996. At December 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes of $68,758 which if not utilized, expire in years 2003 to 2010. The Company also had investment tax credit and general business credit carryforwards for federal income tax purposes of approximately $4,862 at December 31, 1996 which if not utilized, expire in years 1997 to 2000. In late 1995 and early 1996, certain venture capital firms holding significant percentages of the Company's common stock sold or distributed their positions. These transactions triggered an ownership change pursuant to Section 382 in March 1996. As a result of this ownership change, the Company's use of its net operating loss, investment tax credit and general business credit carryforwards subsequent to that date will be limited to approximately $26,600 annually. 31 34 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has taken the position that its recapitalization in 1992 (the "Recapitalization") did not cause an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended ("Code"). The Company's position is based on the applicability of Section 382(l)(3)(C) of the Code, which provides generally that any change in the proportionate ownership attributable solely to fluctuations in relative fair market value of different classes of stock are not to be taken into account for purposes of Section 382. To date, neither the Internal Revenue Service nor the United States Department of Treasury has established any rules or guidance as to how such Section will be interpreted or applied to situations similar to the Recapitalization. Accordingly, there can be no assurance that an ownership change for purposes of Section 382 will not be deemed to have occurred as a result of the Recapitalization. If an ownership change were deemed to have occurred, the utilization of the Company's net operating losses, against its future income, if any, would be limited annually to approximately $1,500. Since such limitation would be less than the Section 382 limitation (approximately $9,000) imposed as a result of the Company's 1989 ownership change and the Section 382 limitation imposed in connection with the ownership change that occurred in early 1996, the Section 382 limitation imposed in connection with the Recapitalization would apply to all net operating losses applicable to the period before the Recapitalization. (6) BENEFIT PLANS 1992 Long Term Incentive Plan -- In late 1992, the Company adopted the Marine Drilling 1992 Long Term Incentive Plan ("1992 Plan"). Pursuant to the terms of the 1992 Plan, an aggregate of 10,000,000 shares (subject to the restrictions described herein) of common stock are available for distribution pursuant to stock options, SARs and restricted stock. The number of shares of common stock available for distribution is further limited in that no stock options, SARs or restricted stock may be issued if, immediately after such issuance, the number of shares subject to outstanding stock options, SARs and restricted stock awards would exceed 5% of the common stock then outstanding. The shares of common stock subject to any stock option or SAR that terminates without a payment being made in the form of common stock would again become available for distribution pursuant to the 1992 Plan. Restricted Common Stock. During 1996, 1995 and 1994, the Company issued restricted stock grants consisting of 80,833, 53,500 and 83,000 shares, respectively, of common stock. These grants generally lapse over four-year periods and the values of the grants are based on the respective closing prices on the day preceding each grant and are recognized as compensation expense over the periods during which the restrictions lapse. Compensation expense related to the issuance of restricted common stock for the years ended December 31, 1996, 1995 and 1994 was $438, $333 and $318, respectively. During 1996, no shares of restricted common stock were forfeited. During 1995 and 1994, respectively, 20,000 and 31,250 shares of restricted common stock were forfeited. 32 35 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock Options. The exercise price of each option equals the market price of the Company's stock on the date of grant. An option's maximum term is ten years. The vesting period ranges from immediately to four years. This period is determined at the issuance of each grant. The following table summarizes stock option transactions pursuant to the 1992 Plan:
1996 1995 1994 ------------------------ ------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price - ------------------------- ------------ --------- ----------- --------- ----------- ----------- Outstanding at beginning of year 1,880,650 $ 2.08 1,575,650 $ 1.97 1,540,650 $ 1.25 Granted 802,500 9.68 530,000 2.50 75,000 4.25 Exercised (961,770) 2.07 (150,000) 1.25 (10,000) 1.25 Forfeited 0 (75,000) 4.25 (30,000) 1.25 --------- --------- --------- Outstanding at year end 1,721,380 $ 5.63 1,880,650 $ 2.08 1,575,650 $ 1.97 ========= ========= ========= Options exercisable at year-end 573,880 888,150 583,150 Weighted-average fair value of options granted during the year $ 5.74 $ 1.59 $ -
The following table summarizes information about fixed-price stock options outstanding and exercisable at December 31, 1996.
Options Outstanding Options Exercisable ----------------------------------------------------- ------------------------------- Number Weighted-Avg. Number Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ---------------- ------------ ----------------- -------------- -------------- ---------------- $ 1.25 482,630 5.8 $ 1.25 482,630 $ 1.25 6.00 66,250 6.5 6.00 18,750 6.00 2.50 370,000 8.2 2.50 47,500 2.50 8.94 500,000 9.5 8.94 -- - 10.38 125,000 9.5 10.38 25,000 10.38 8.94 37,500 9.7 8.94 -- - 8.94 15,000 9.7 8.94 -- - 12.25 125,000 9.8 12.25 -- - ---------- -------- $1.25 to 12.25 1,721,380 8.1 $ 5.63 573,880 $ 1.91 ========== ========
Based upon Common Stock outstanding as of December 31, 1996 and 1995 and shares reserved for issuance as set forth above, the number of shares then available for future stock options, SARs and restricted stock grants was 762,943 and 180,332 shares, respectively. 33 36 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) No compensation costs were recognized in income for 1996, 1995 and 1994 because the Company has elected to continue accounting for such transactions under APB 25. Non-Employee Directors' Plan -- The Company adopted the 1995 Non-Employee Directors' Plan (the "Directors' Plan") effective June 29, 1995. The Directors' Plan provides for the grant of shares and options to acquire common stock to each director who is not an employee of the Company. A maximum of 350,000 shares may be issued pursuant to stock awards or options. Each option granted will vest and become exercisable one year after its grant and will expire ten years from the date the option is granted. The exercise price of each option equals the market price of the Company's stock on the date of grant. No compensation costs were recognized in income. The following table summarizes stock option transactions under the Director's Plan as of December 31, 1996:
1996 1995 --------------------------- ------------------------ Weighted Weighted Average Average Exercise Exercise Fixed Options Shares Price Shares Price - -------------------------------- ------------ ------------ ------------ ----------- Outstanding at beginning of year 50,000 $ 4.00 $ -- $ -- Granted 10,000 9.63 50,000 4.00 Exercised -- -- -- -- Forfeited -- -- -- -- -------- ---------- Outstanding at year end 60,000 $ 4.94 50,000 $ 4.00 ======== ========== Options exercisable at year-end 60,000 50,000 Weighted-average fair value of options granted during the year $ 5.79 $ 2.50
The following table summarizes information about fixed-price stock options outstanding and exercisable at December 31, 1996 under the Director's Plan.
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Number Weighted-Avg. Number Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ---------------- ------------ ---------------- --------------- ------------ -------------- $ 4.00 50,000 8.5 $ 4.00 50,000 $ 4.00 9.63 10,000 9.4 9.63 -- -- ------ ------ $4.00 to 9.63 60,000 8.6 $ 4.94 50,000 $ 4.00 ====== ======
During 1996 and 1995, 4,450 and 14,895 shares were issued as stock awards and related compensation expense of $132 and $60 was recognized in 1996 and 1995, respectively. 34 37 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee 401(k) Profit Sharing Plan -- The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") covering substantially all of its employees who have been employed at least three months. The Company matches employees' contributions to the Plan on a dollar-for-dollar basis, in the form of Company common stock, up to 5% of their eligible compensation. During 1996, 1995 and 1994, the Company made matching contributions with the Company's common stock totaling $1,014, $843 and $744, respectively. Executive Deferred Compensation Plan -- The Company adopted the Executive Deferred Compensation Plan (the "Executive Plan") effective December 31, 1994. Employees who participate in the Executive Plan are selected by an Administrative Committee. Under the Executive Plan, the participating executives may elect (i) to defer up to 15% of compensation after reaching the limitations applicable to the Company's 401(k) Plan and (ii) to defer any excess contributions refunded by the 401(k) Plan. The Company matches executives' contributions to the Executive Plan on a dollar-for-dollar basis, in cash up to 5% of their eligible compensation. As of December 31, 1995, and 1996 the amount deferred under the Executive Plan was $63 and $102, respectively. (7) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for its fixed stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options at the grant date as prescribed by SFAS 123, net income (loss) and net income (loss) per share would approximate the pro forma amounts indicated below:
1996 1995 --------- ---------- Net income (loss) - as reported . . . . . . . . $ 20,670 $ (4,022) Net income (loss) - pro forma . . . . . . . . . 19,497 (4,240) Net income (loss) per share - as reported . . . 0.46 (0.09) Net income (loss) per share - pro forma . . . . $ 0.43 $ (0.10)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.
1996 1995 ---------- ---------- Expected dividend yield . . . . . . . . . . . . -- -- Expected price volatility . . . . . . . . . . . 63.8% 71.2% Risk-free interest rate . . . . . . . . . . . . 6.2% 6.0% Expected life of option . . . . . . . . . . . . 5 years 5 years
The effects of applying SFAS 123 in the pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years were not anticipated in the calculations. (8) SHAREHOLDERS RIGHTS PLAN The Company adopted a shareholder rights plan on November 8, 1996, designed to assure that the Company's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers and other abusive takeover tactics to gain control of the Company without paying all shareholders a fair price. The rights plan was not adopted in response to any specific takeover proposal. Under the rights plan, the Company issued one preferred share purchase right (a "Right") with respect to each outstanding share of Common Stock outstanding on November 20, 1996. Each Right entitles the registered holder to purchase from the Company one one- thousandth of a share of 35 38 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Junior Participating Preferred Stock, $.01 par value per share (the "Preferred Shares"), of the Company at a price of $56.00 per one one-thousandth of a Preferred Share, subject to adjustment. The Rights are not currently exercisable and will become exercisable only in the event a person or group acquires beneficial ownership of 15% or more of the Company's Common Stock. Each whole Preferred Share will be entitled to receive a quarterly preferential dividend in an amount per share equal to the greater of (i) $1.00 in cash, or (ii) in the aggregate, 1,000 times the dividend declared on the Common Stock. In the event of liquidation, the holders of the Preferred Shares will be entitled to receive a preferential liquidation payment equal to the greater of (i) $1,000 per share, or (ii) in the aggregate, 1,000 times the payment made on the shares of Common Stock. In the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged for or changed into other stock or securities, cash or other property, each whole Preferred Share will be entitled to receive 1,000 times the amount received per share of Common Stock. Each whole Preferred Share shall be entitled to 1,000 votes on all matters submitted to a vote of the shareholders of the Company, and Preferred Shares shall generally vote together as one class with the Common Stock and any other capital stock on all matters submitted to a vote of shareholders of the Company. The Rights will expire on November 19, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or the Rights are earlier redeemed or exchanged by the Company. (9) COMMITMENTS AND CONTINGENCIES Legal Proceedings -- The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Operating Leases -- Aggregate future minimum rental payments relating to operating leases are as follows:
1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ Office and equipment leases . . . $ 537 $ 377 $ 375 $ 276 $ 269 ====== ====== ====== ====== ======
The Company rents certain equipment and other property under operating leases. Rental expense was $2,208, $2,066 and $1,707 in 1996, 1995 and 1994, respectively. 36 39 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS The following table summarizes geographic area operating revenues and operating income for the years ended December 31, 1996, 1995 and 1994, and identifiable assets by geographic area at year-end 1996, 1995 and 1994:
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Revenue: United States ................... $104,969 $ 57,293 $ 63,291 India ........................... 5,360 3,260 -- Mexico .......................... -- 2,514 7,306 Middle East ..................... -- -- -- SE Asia ......................... -- -- -- -------- -------- -------- Total Revenues ................ $110,329 $ 63,067 $ 70,597 ======== ======== ======== Operating income (loss): United States ................... $ 30,713 $ (7,444) $ 5,215 India ........................... 1,170 441 -- Mexico .......................... -- 142 2,698 Middle East ..................... (60) -- -- SE Asia ......................... (338) -- -- -------- -------- -------- Operating income (loss) ....... $ 31,485 $ (6,861) $ 7,913 ======== ======== ======== Identifiable assets: United States ................... $105,780 $100,469 $ 87,290 India ........................... 15,098 18,357 -- Mexico .......................... -- -- 16,024 Middle East ..................... 9,287 -- -- SE Asia ......................... 38,062 -- -- -------- -------- -------- Total assets .................. $168,227 $118,826 $103,314 ======== ======== ========
The Company conducts business in one industry segment, oil and gas well contract drilling. The Company negotiates drilling contracts with a number of customers for varying terms, and management believes it is not dependent upon any single customer. For the years 1996, 1995 and 1994, sales to customers that represented 10% or more of consolidated drilling revenues were as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------ ------ ------ Customer A ............................. * * 11% Customer B ............................. * * 10% Customer C ............................. * * 10% Customer D ............................. 19% 14% * Customer E ............................. 16% * *
* Less than 10% 37 40 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As is typical in the industry, the Company does business with a relatively small number of customers at any given time. The loss of any one of such customers could, at least on a short-term basis, have a material adverse effect on the Company's profitability. Management believes, however, that at current levels of drilling activity, the Company would have alternative customers for its services if it lost any single customer and that the loss of any one customer would not have a material adverse effect on the Company on a long-term basis. (11) UNAUDITED QUARTERLY FINANCIAL DATA A summary of unaudited quarterly consolidated financial information for 1996 and 1995 is as follows:
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER ---- ----------- ----------- ----------- ----------- Revenues $ 21,239 $ 27,360 $ 29,819 $ 31,911 Operating income 3,600 6,605 10,032 11,248 Income before income taxes 3,669 6,652 10,404 11,531 Income tax expense 1,357 2,398 3,714 4,117 Net income 2,312 4,254 6,690 7,414 Net income per common share (1) $ .05 $ .10 $ .15 $ .16 Weighted average shares outstanding 43,804,288 44,338,438 45,028,616 46,483,305 Average day rates (2) $ 21,026 $ 23,505 $ 24,932 $ 27,462 Marketed rigs (weighted average) 11.8 12.8 13.0 12.6 Utilization of marketed rigs 94% 100% 100% 100%
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER ---- ----------- ----------- ----------- ----------- Revenues $ 12,545 $ 11,825 $ 15,490 $ 23,207 Operating income (loss) (5,226) (3,032) (1,075) 2,472 Income (loss) before income taxes (4,981) (2,704) (917) 2,500 Income tax expense (benefit) (1,744) (947) (320) 931 Net income (loss) (3,237) (1,757) (597) 1,569 Net income (loss) per common share (1) $ (.07) $ (.04) $ (.01) $ .04 Weighted average shares outstanding 44,033,448 43,959,172 43,656,282 43,608,078 Average day rates (2) $ 18,357 $ 16,621 $ 17,712 $ 22,679 Marketed rigs (weighted average) 10.1 9.1 9.9 11.5 Utilization of marketed rigs 75% 86% 95% 97%
- --------- (1) Quarterly net income per common share may not total to annual results due to rounding. (2) "Average day rate" is determined by dividing the total gross revenue earned by the Company's rigs during a given period by the total number of days that the Company's rigs were under contract during that period. During 1996, the Company's average marketed rigs and day rates increased due primarily to the greater demand for drilling rigs and increased level of drilling activity in the U.S. Gulf of Mexico. The fourth quarter showed a decrease in average marketed rigs due to the removal from marketed status of the MARINE 15 which was damaged by a fire in November 1996 and is being repaired. Furthermore, average day rates continued to increase due to improved market conditions. 38 41 MARINE DRILLING COMPANIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1995, the Company's average marketed rigs and day rates decreased due primarily to a general decline in U.S. Gulf of Mexico market conditions during the first five months of the year and reduced levels of drilling activity in Mexico's Bay of Campeche. The fourth quarter of 1995 includes the mobilization and contract start-up costs of the MARINE 201 in India. Excluding the mobilization to India, average day rates during that quarter were approximately $20,200. (12) SUBSEQUENT EVENT On March 7, 1997, the Company entered into a new credit agreement, the "New Loan Agreement," with Bankers Trust Company ("BTCo"), Christiania Bank og Kreditkasse ("CBK"), and certain other banks providing up to $100,000,000 financing to be used for rig acquisitions and upgrades. This agreement includes a revolving credit facility available through December 31, 1999 which can be converted into a four-year term loan. Interest and facility fees are generally payable quarterly during the terms of both facilities. Principal during the term loan facility is payable quarterly in equal installments. Interest accrues at (i) LIBOR plus a margin of .75% to 1.25% or (ii) prime plus a margin of 0% to .50%, with margins determined pursuant to a debt to capital calculation. The agreement is secured by all of the Company's current rig fleet as well as certain other collateral assignments. The Company has no borrowings outstanding under this agreement at March 11,1997. In connection with the consummation of the New Loan Agreement, the Company repaid and terminated its prior $35,000,000 credit facility with a U.S. financial institution. 39 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III The information called for by Part III, Items 10 through 13, of Form 10-K is incorporated by reference from the Registrant's Proxy Statements relating to its annual meeting of Shareholders to be held May 8, 1997, which will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year. Also reference is made to the information contained under the captioned "Executive Officers of Registrant" contained in Part I hereof. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are included in Part II, Item 8: (1) Consolidated Financial Statements
Page ---- Independent Auditors' Report ................................... 20 Consolidated Balance Sheets at December 31, 1996 and 1995 ...... 21 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1996 ............. 22 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1996 ... 23 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 ............. 24 Notes to Consolidated Financial Statements ..................... 26
All other schedules are omitted as the information is not required or is not applicable. 40 43 (3) Exhibits:
Exhibit Number - ------- 3.1 Restated Articles of Incorporation of Marine Drilling Companies, Inc. (incorporated by reference to Exhibit 28.17 to the Current Report on Form 8-K of the Registrant dated October 30, 1992). 3.2 Amended and Restated Bylaws of Marine Drilling Companies, Inc. (incorporated by reference to Exhibit 28.18 to the Current Report on Form 8-K of the Registrant dated October 30, 1992). ++10.1 Employment Agreement between Marine Drilling Companies, Inc. and Jan Rask dated June 18, 1996 (incorporated by reference to Exhibit 10.1 on Form 10-Q for quarter ended June 30, 1996). ++10.2 Employment Agreement between Marine Drilling Companies, Inc. and William H. Flores dated July 18, 1996 (incorporated by reference to Exhibit 10.2 on Form 10-Q for quarter ended September 30, 1996). ++10.3 Severance Agreement between Marine Drilling Companies, Inc. and H. Larry Adkins dated July 18, 1996 (incorporated by reference to Exhibit 10.3 on Form 10-Q for quarter ended September 30, 1996). ++10.4 Severance Agreement between Marine Drilling Companies, Inc. and G. Ted Greak dated July 18, 1996 (incorporated by reference to Exhibit 10.4 on Form 10-Q for quarter ended September 30, 1996). ++10.5 Severance Agreement between Marine Drilling Companies, Inc. and Danny R. Richardson dated July 18, 1996 (incorporated by reference to Exhibit 10.5 on Form 10-Q for quarter ended September 30, 1996). ++10.6 Marine Drilling Companies, Inc. 1995 Non-Employee Directors' Plan (incorporated by reference to Annex A of the Company's Proxy Statement dated July 17, 1995). ++10.18 The Marine Drilling 1992 Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.26 of the Company's Registration Statement No. 33-52470 on Form S-1). ++*10.25 Marine Drilling Companies, Inc. Amended and Restated Executive Deferred Compensation Plan effective July 1, 1996. 10.26 Marine Drilling Companies, Inc. Shareholders Rights Agreement (incorporated by reference to Exhibits 1 - 5 to the Current Report on Form 8-K of the Registrant dated November 15, 1996). *10.27 Credit Agreement dated as of March 7, 1997 among Marine Drilling Companies, Inc., Bankers Trust Company, Christiania Bank og KreditKasse, New York Branch and certain other banks including Exhibit A thereto. *21.1 Subsidiaries of the Registrant. *23.1 Consent of Independent Certified Public Accountants. *24.1 Powers of attorney. *27 Financial Data Schedule.
- --------- * Filed herewith. ++ Management contract or compensation plan or arrangement required to be filed as an exhibit to this report. 41 44 (b) Reports on Form 8-K: Four reports on Form 8-K were filed during the fourth quarter of 1996. (1) Report of the Company dated November 15, 1996 regarding the Shareholder Rights Agreement between Marine Drilling Companies, Inc. and American Stock Transfer & Trust Company as Rights Agent. (2) Report of the Company dated December 3, 1996 regarding the completion of the acquisition of the MARINE 500 semi-submersible drilling rig (formerly the Chris Chenery) from Odfjell Drilling of Norway and an accident which occurred on the MARINE 15 drilling rig on November 27, 1996. (3) Report of the Company dated December 11, 1996 regarding the completion of the acquisition of the MARINE 500 under Item 2. (4) Report of the Company dated December 12, 1996 regarding a Commitment Letter dated December 4, 1996 between Bankers Trust Company and Marine Drilling Companies, Inc. for financing of up to $100,000,000. 42 45 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUGAR LAND, STATE OF TEXAS, ON MARCH 17, 1997. MARINE DRILLING COMPANIES, INC. By Jan Rask ------------------------------------ Jan Rask President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE --------- ----- ---- Robert L. Barbanell* Chairman of the Board March 17, 1997 - ------------------------- Robert L. Barbanell Jan Rask President, Chief Executive Officer March 17, 1997 - ------------------------- and Director Jan Rask William H. Flores Executive Vice President March 17, 1997 - ------------------------- Chief Financial Officer and Director William H. Flores (Principal Financial Officer) Joan R. Smith Vice President, Controller March 17, 1997 - ------------------------- and Secretary Joan R. Smith (Principal Accounting Officer) David A. B. Brown* Director March 17, 1997 - ------------------------- David A. B. Brown Howard I. Bull* Director March 17, 1997 - ------------------------- Howard I. Bull Nathaniel A. Gregory* Director March 17, 1997 - ------------------------- Nathaniel A. Gregory Christopher M. Linneman* Director March 17, 1997 - ------------------------- Christopher M. Linneman *By William H. Flores March 17, 1997 --------------------- William H. Flores Attorney-in-Fact
43 46 INDEX TO EXHIBITS
Exhibit Number EXHIBITS - ------- -------- 10.25 Marine Drilling Companies, Inc. Amended and Restated Executive Deferred Compensation Plan effective July 1, 1996. 10.27 Credit Agreement dated as of March 7, 1997 among Marine Drilling Companies, Inc., Bankers Trust Company, Christiania Bank og KreditKasse, New York Branch and certain other banks including Exhibit A thereto. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Certified Public Accountants. 24.1 Powers of attorney. 27 Financial Data Schedule.
EX-10.25 2 AMENDED AND RESTATED EXEC. DEFERRED COMP. PLAN 1 MARINE DRILLING COMPANIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN As Amended and Restated Effective July 1, 1996 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I - Definitions and Construction . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 II - Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 III - Account Credits and Allocations of Income or Loss . . . . . . . . . . . . . . . III-1 IV - Deemed Investment of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1 V - Determination of Vested Interest and Forfeitures . . . . . . . . . . . . . . . . V-1 VI - In-Service Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 VII - Termination Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1 VIII - Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 IX - Administration of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 X - Nature of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1 XI - Adopting Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 XII - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
(i) 3 MARINE DRILLING COMPANIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN W I T N E S S E T H : WHEREAS, MARINE DRILLING COMPANIES, INC. (the "COMPANY"), desiring to aid certain of its employees in making more adequate provision for their retirement, has heretofore adopted the MARINE DRILLING COMPANIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN (the "PLAN"); and WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits; NOW THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of July 1, 1996, except as otherwise indicated herein: (ii) 4 I. DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. The capitalized words or terms used in the Plan and which are not otherwise defined herein shall have the same meanings as such words or terms have in the Marine Drilling Companies 401(k) Profit Sharing Plan, as the same may be amended from time to time. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary. (1) ACCOUNT(S): A Member's Company Account and/or Deferral Account, including the amounts credited thereto. (2) AFFILIATE: Each trade or business (whether or not incorporated) which together with the Company would be deemed to be a "single employer" within the meaning of subsections (b), (c), (m) or (o) of section 414 of the Code. (3) CHANGE IN CONTROL: A "Change in Control" of the Company, as such term is defined in Section 9(b) of the Marine Drilling 1992 Long Term Incentive Plan. (4) CODE: The Internal Revenue Code of 1986, as amended. (5) COMMITTEE: The administrative committee appointed by the Directors to administer the Plan. (6) COMPANY: Marine Drilling Companies, Inc., Marine Drilling Management Company and any other adopting entity which adopts the Plan pursuant to the provisions of Article XI, jointly and severally. (7) COMPANY ACCOUNT: An individual account for each Member to which is credited the Company Deferrals made on his behalf pursuant to Section 3.2 and which is credited (or debited) for such account's allocation of net income (or net loss) as provided in Section 3.3. (8) COMPANY DEFERRALS: Deferrals made by the Company on a Member's behalf pursuant to Section 3.2. (9) COMPENSATION: Amounts equal to a Member's "Compensation," as such term is defined under the Profit Sharing Plan, including amounts a Member could have received in cash in lieu of Compensation deferrals pursuant to Section 3.1, and without regard to the maximum dollar limitation of section 401(a)(17) of the Code. (10) DEFERRAL ACCOUNT: An individual account for each Member to which is credited his Compensation deferrals pursuant to Section 3.1 and which is credited (or debited) for such account's allocation of net income (or net loss) as provided in Section 3.3. I-1 5 (11) DIRECTORS: The Board of Directors of Marine Drilling Companies, Inc. (12) DISABILITY: A Member's "disability," as such term is defined under the Profit Sharing Plan. (13) EFFECTIVE DATE: July 1, 1996, as to this restatement of the Plan. (14) FUNDS: The investment funds designated from time to time for the deemed investment of Accounts pursuant to Article IV. (15) INVOLUNTARY TERMINATION: Any termination of a Member's employment with the Company which: (i) results from a resignation by the Member within 12 months after the date upon which a Change in Control occurs if such resignation occurs within 30 days after the Member receives notice from the Company that the Member will be subject to a Material Change in Employment Terms; or (ii) results from a termination by the Company within 12 months after the date upon which a Change in Control occurs; provided, however, the term "Involuntary Termination" shall not include a Termination for Cause or any termination after attainment of a Member's Retirement Date or as a result of death or Disability. (16) MATERIAL CHANGE IN EMPLOYMENT TERMS: A "Material Change in Employment Terms" shall mean any one or more of the following: (i) a material diminution in the nature or scope of the Member's authorities, powers, functions or duties from those applicable to him immediately prior to the date on which a Change in Control occurs; (ii) a reduction in the Member's annual base salary from that provided to him immediately prior to the date on which a Change in Control occurs; (iii) a significant diminution in the Member's eligibility to participate in bonus, stock option, incentive award and other compensation plans under which the Member is participating immediately prior to the date on which a Change in Control occurs; or (iv) a change in the location of the Member's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date on which a Change in Control occurs. I-2 6 (17) MEMBER: Each individual who has been selected for participation in the Plan and who has become a Member pursuant to Article II. (18) PLAN: The Marine Drilling Companies, Inc. Executive Deferred Compensation Plan, as amended from time to time. (19) PLAN YEAR: The twelve-consecutive month period commencing January 1 of each year. (20) PROFIT SHARING PLAN: The Marine Drilling Companies 401(k) Profit Sharing Plan, as amended from time to time. (21) RETIREMENT DATE: The date upon which a Member has attained fifty-five years of age. (22) TERMINATION FOR CAUSE: A "Termination for Cause" shall mean termination of the Member's employment by the Company for any of the following reasons: (i) The Member has engaged in gross negligence or willful misconduct in the performance of the duties required of him; (ii) The Member has been convicted of a felony or a misdemeanor involving moral turpitude; (iii) The Member has willfully refused without proper legal reason to perform the duties and responsibilities required of him; (iv) The Member has materially breached any material corporate policy or code of conduct established by the Company; or (v) The Member has willfully engaged in conduct that he knows or should know is materially injurious to the Company or any of its affiliates. (23) TRUST: The trust, if any, established under the Trust Agreement. (24) TRUST AGREEMENT: The agreement, if any, entered into between the Company and the Trustee pursuant to Article X. (25) TRUST FUND: The funds and properties, if any, held pursuant to the provisions of the Trust Agreement, together with all income, profits and increments thereto. (26) TRUSTEE: The trustee or trustees appointed by the Directors who are qualified and acting under the Trust Agreement at any time. (27) VALUATION DATES: The last business day of each calendar month and any other interim Valuation Date determined by the Committee on a nondiscriminatory basis. I-3 7 (28) VESTED INTEREST: The portion of a Member's Accounts which, pursuant to the Plan, is nonforfeitable. 1.2 NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender. 1.3 HEADINGS. The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. I-4 8 II. PARTICIPATION 2.1 PARTICIPATION. The Committee, in its sole discretion, shall select and notify those management or highly compensated employees of the Company who shall be eligible to become Members. Any such eligible employee may become a Member on the date designated by the Committee by executing and filing with the Committee, prior to such date, the form prescribed by the Committee. Subject to the provisions of Section 2.2, a Member shall remain eligible to defer Compensation hereunder and receive an allocation of Company Deferrals for each Plan Year following his initial year of participation in the Plan. 2.2 CESSATION OF ACTIVE PARTICIPATION. Notwithstanding any provision herein to the contrary, an individual who has become a Member of the Plan shall cease to be entitled to defer Compensation hereunder or receive an allocation of Company Deferrals effective as of any date designated by the Committee. Any such Committee action shall be communicated to the affected individual prior to the effective date of such action. Further, an individual who has become a Member of the Plan may cancel his Compensation deferrals hereunder and his right to receive an allocation of Company Deferrals, effective as of the first day of any subsequent Plan Year, by executing and delivering to the Company the form prescribed by the Committee prior to such date and within the time period prescribed by the Committee. An individual described in the preceding provisions of this Section 2.2 may again become entitled to defer Compensation hereunder and receive an allocation of Company Deferrals beginning on the first day of any subsequent Plan Year selected by the Committee in its sole discretion. II-1 9 III. ACCOUNT CREDITS AND ALLOCATIONS OF INCOME OR LOSS 3.1 MEMBER DEFERRALS. (a) Prior to January 1, 1997, for each payroll period following the date a Member has made the maximum Elective Deferral Contributions under the Profit Sharing Plan permitted under section 402(g) of the Code, such Member may elect to defer hereunder an integral percentage of from 1% to 15% of his Compensation. Effective January 1, 1997, a Member may elect to defer hereunder an integral percentage of from 1% to 80% of his Compensation for any Plan Year. Notwithstanding the foregoing, if an employee initially becomes a Member on a date other than the first day of a Plan Year, such Member's deferral election shall apply only to Compensation (including a pro rata portion of any bonus or other supplemental pay) for services performed after the date of such election. (b) For each Plan Year in which a Member's Elective Deferral Contributions under the Profit Sharing Plan are limited as a result of the limitations contained in section 401(k)(3) and/or 415 of the Code, such Member may elect to defer hereunder an amount equal to the reduction in such Member's Elective Deferral Contributions to the Profit Sharing Plan as a result solely of the application of such limitations. (c) A Member's election to defer a percentage of his Compensation for any Plan Year shall be made prior to the first day of such Plan Year. Notwithstanding the foregoing, if an employee initially becomes a Member on a date other than the first day of a Plan Year, such Member's election to defer a percentage of his Compensation for such Plan Year shall be made prior to such date. A Member's Compensation deferrals shall remain in force and effect unless and until such deferrals are to cease in accordance with the provisions of Section 2.2. Compensation for a Plan Year not deferred by a Member pursuant to the above paragraphs shall be received by such Member in cash except as provided by any other plan maintained by the Company and its Affiliates. Deferrals of Compensation under the Plan shall be made before elective deferrals or contributions of Compensation under any other plan maintained by the Company and its Affiliates. Compensation deferrals made by a Member shall be credited to such Member's Deferral Account as of a date determined in accordance with procedures established from time to time by the Committee; provided, however, that such deferrals shall be credited to the Member's Deferral Account no later than 30 days after the date upon which the Compensation deferred would have been received by such Member in cash if he had not elected to defer such amount pursuant to this Section 3.1. The Company shall effect a Member's Compensation deferrals by withholding such deferrals from such Member's Compensation within the Plan Year. 3.2 COMPANY DEFERRALS. (a) For each calendar month, the Company shall credit a Member's Company Account with an amount which equals 100% of the Compensation deferrals made by such Member III-1 10 pursuant to Section 3.1(a) and (b) during such month; provided, however, that the amount credited to the Member's Company Account pursuant to this Paragraph shall not exceed 5% of a Member's Compensation for such month. (b) For each Plan Year during which a Member has made the maximum Elective Deferral Contributions under the Profit Sharing Plan pursuant to section 402(g) of the Code or under the terms of the Profit Sharing Plan, the Company shall credit a Member's Company Account with an amount equal to the difference, if any, between (1) 100% of such Member's Elective Deferral Contributions under the Profit Sharing Plan for such Plan Year, and (2) the Matching Contributions made by the Company on such Member's behalf under the Profit Sharing Plan for such Plan Year; provided, however, that the sum of (i) the amounts credited to the Member's Company Account pursuant to this Paragraph and (ii) the Matching Contributions made by the Company on such Member's behalf under the Profit Sharing Plan during any Plan Year shall not exceed 5% of such Member's Compensation for such Plan Year. (c) Company Deferrals made on a Member's behalf shall be credited to his Company Account in accordance with the procedures established from time to time by the Committee. 3.3 ALLOCATION OF NET INCOME OR LOSS AND CHANGES IN VALUE AMONG ACCOUNTS. (a) As of each Valuation Date, the Committee shall determine the net income (or net loss) of each Fund for the period elapsed since the next preceding Valuation Date. The net income (or net loss) of each Fund since the next preceding Valuation Date shall be ascertained by the Committee in such manner as it deems appropriate, which may include expenses of administering the Fund, the Trust and the Plan. (b) For purposes of allocations of net income (or net loss), each Member's Accounts shall be divided into subaccounts to reflect such Member's deemed investment in a particular Fund or Funds pursuant to Article IV. As of each Valuation Date, the net income (or net loss) of each Fund, separately and respectively, shall be allocated among the corresponding subaccounts of the Members who had such corresponding subaccounts invested in such Funds since the next preceding Valuation Date. (c) So long as there is any balance in any Account, such Account shall continue to receive allocations pursuant to this Section. III-2 11 IV. DEEMED INVESTMENT OF FUNDS The Committee shall designate, in accordance with procedures established by it from time to time, the manner in which the amounts allocated to the Accounts of Members shall be deemed to be invested from among the Fund or Funds designated from time to time for such purpose by the Committee. The Committee may designate one Fund for the deemed investment of all the amounts allocated to the Accounts of Members or the Committee may split the deemed investment of the amounts allocated to such Accounts among more than one Fund in such increments as the Committee may determine. From time to time, the Committee may, in its discretion, change the deemed investment designation for future amounts to be allocated to the Accounts of Members and/or convert the deemed investment designation with respect to amounts already allocated to such Accounts. All determinations and designations by the Committee pursuant to this Article shall apply to all Members in a uniform and nondiscriminatory manner. IV-1 12 V. DETERMINATION OF VESTED INTEREST AND FORFEITURES 5.1 DEFERRAL ACCOUNT. A Member shall have a 100% Vested Interest in his Deferral Account at all times. 5.2 COMPANY ACCOUNT. Except as provided in the remaining provisions of this Section 5.2, a Member shall have a 0% Vested Interest in his Company Account. A Member shall have a 100% Vested Interest in his Company Account upon completion of five years of continuous employment with the Company and its Affiliates. Employment prior to the Effective Date shall be considered for this purpose. Further, a Member shall have a 100% Vested Interest in his Company Account upon his termination of employment with the Company and its Affiliates after attainment of his Retirement Date or by reason of death or Disability. Finally, a Member who is employed by the Company immediately prior to a Change in Control shall have a 100% Vested Interest in his Company Account if his employment shall be subject to an Involuntary Termination. 5.3 FORFEITURES. A Member who terminates employment with the Company and its Affiliates with a Vested Interest in his Company Account that is less than 100% shall forfeit to the Company the nonvested portion of such Account as of the date of such termination. V-1 13 VI. IN-SERVICE DISTRIBUTIONS In-service distributions shall not be permitted under the Plan. Members shall not be permitted to make withdrawals from the Plan prior to termination of employment with the Company and its Affiliates. Members shall not, at any time, be permitted to borrow from the Trust Fund. Following termination of employment with the Company and its Affiliates, the amounts credited to a Member's Accounts shall be payable to such Member in accordance with the provisions of Article VII. VI-1 14 VII. TERMINATION BENEFITS 7.1 AMOUNT OF BENEFIT. Upon termination of employment of a Member with the Company and its Affiliates for any reason, the Member, or, in the event of the death of the Member while employed by the Company or an Affiliate, the Member's designated beneficiary, shall be entitled to a benefit equal in value to the Member's Vested Interest in the balance in his Accounts as of the Valuation Date next preceding the date the payment of such benefit is to commence pursuant to Section 7.2. 7.2 TIME OF PAYMENT. Payment of a Member's benefit under Section 7.1 shall commence as soon as administratively practicable after the Valuation Date coincident with or next succeeding the date the Member terminates his employment with the Company and its Affiliates. 7.3 ALTERNATIVE FORMS OF BENEFIT PAYMENTS. A Member's benefit under Section 7.1 shall be paid in one of the following forms irrevocably elected by such Member in writing on the form prescribed by the Committee on or before the date he became a Member of the Plan: (1) A single lump sum, cash payment; or (2) Annual installment payments for a term certain of either 5, 10 or 15 years payable to the Member or, in the event of such Member's death prior to the end of such term certain, to his designated beneficiary as provided in Section 7.4. In the event such Member fails to timely elect the form in which his benefit payments are to be made, such benefit payments shall be in the form of annual installment payments for a term certain of 10 years payable to such Member or, in the event of such Member's death prior to the end of such term certain, to his designated beneficiary as provided in Section 7.4. If a Member dies prior to the date the payment of his benefit begins and if the Member failed to timely elect the form in which his benefit payments are to be made, then benefit payments shall be made to the Member's designated beneficiary in the form described in the preceding sentence. If a Member dies prior to the date the payment of his benefit begins and if the Member did timely elect the form in which his benefit payments are to be made, then benefit payments shall be made to the Member's designated beneficiary in the form elected by the Member. 7.4 DESIGNATION OF BENEFICIARIES. (a) Each Member shall have the right to designate the beneficiary or beneficiaries to receive payment of his benefit in the event of his death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. VII-1 15 (b) If no such designation is on file with the Committee at the time of the death of the Member or such designation is not effective for any reason as determined by the Committee, then the designated beneficiary or beneficiaries to receive such benefit shall be as follows: (1) If a Member leaves a surviving spouse, his benefit shall be paid to such surviving spouse; (2) If a Member leaves no surviving spouse, his benefit shall be paid to such Member's executor or administrator, or to his heirs at law if there if no administration of such Member's estate. 7.5 ACCELERATED PAY-OUT OF CERTAIN BENEFITS. Notwithstanding any provision in Section 7.3 to the contrary, if a Member's benefit payments are to be paid in a form other than a single lump sum, cash payment and the aggregate amount to be paid with respect to such Member in any particular calendar year is less than $10,000, then the Committee may, in its sole discretion, elect to cause the entire remaining Account balance with respect to such Member to be paid in a single lump sum, cash payment. 7.6 PAYMENT OF BENEFITS. To the extent the Trust Fund has sufficient assets, the Trustee shall pay benefits to Members or their beneficiaries, except to the extent the Company pays the benefits directly and provides adequate evidence of such payment to the Trustee. To the extent the Trustee does not or cannot pay benefits out of the Trust Fund, the benefits shall be paid by the Company. Any benefit payments made to a Member or for his benefit pursuant to any provision of the Plan shall be debited to such Member's Accounts. All benefit payments shall be made in cash to the fullest extent practicable. 7.7 UNCLAIMED BENEFITS. In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee's determination thereof, such benefit shall be forfeited to the Company. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan by the Company. VII-2 16 VIII. ADMINISTRATION OF THE PLAN 8.1 APPOINTMENT OF COMMITTEE. The general administration of the Plan shall be vested in the Committee which shall be appointed by the Directors and shall consist of one or more persons. Any individual, whether or not an employee of the Company, is eligible to become a member of the Committee. 8.2 TERM, VACANCIES, RESIGNATION, AND REMOVAL. Each member of the Committee shall serve until he resigns, dies, or is removed by the Directors. At any time during his term of office, a member of the Committee may resign by giving written notice to the Directors and the Committee, such resignation to become effective upon the appointment of a substitute member or, if earlier, the lapse of thirty days after such notice is given as herein provided. At any time during his term of office, and for any reason, a member of the Committee may be removed by the Directors with or without cause, and the Directors may in their discretion fill any vacancy that may result therefrom. Any member of the Committee who is an employee of the Company shall automatically cease to be a member of the Committee as of the date he ceases to be employed by the Company and its Affiliates. 8.3 SELF-INTEREST OF MEMBERS. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself under the Plan (including, without limitation, Committee decisions under Article II) or to vote in any case in which his individual right to claim any benefit under the Plan is particularly involved. In any case in which a Committee member is so disqualified to act and the remaining members cannot agree, the Directors shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified. 8.4 COMMITTEE POWERS AND DUTIES. The Committee shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, authority, and duty: (a) To make rules, regulations, and bylaws for the administration of the Plan that are not inconsistent with the terms and provisions hereof, and to enforce the terms of the Plan and the rules and regulations promulgated thereunder by the Committee; (b) To construe in its discretion all terms, provisions, conditions, and limitations of the Plan; (c) To correct any defect or to supply any omission or to reconcile any inconsistency that may appear in the Plan in such manner and to such extent as it shall deem in its discretion expedient to effectuate the purposes of the Plan; VIII-1 17 (d) To employ and compensate such accountants, attorneys, investment advisors, and other agents, employees, and independent contractors as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan; (e) To determine in its discretion all questions relating to eligibility; (f) To determine whether and when there has been a termination of a Member's employment with the Company and its Affiliates, and the reason for such termination; (g) To make a determination in its discretion as to the right of any person to a benefit under the Plan and to prescribe procedures to be followed by distributees in obtaining benefits hereunder; (h) To receive and review reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements; and (i) To establish or designate Funds as provided in Article IV. 8.5 CLAIMS REVIEW. In any case in which a claim for Plan benefits of a Member or beneficiary is denied or modified, the Committee shall furnish written notice to the claimant within ninety days (or within 180 days if additional information requested by the Committee necessitates an extension of the ninety-day period), which notice shall: (a) State the specific reason or reasons for the denial or modification; (b) Provide specific reference to pertinent Plan provisions on which the denial or modification is based; (c) Provide a description of any additional material or information necessary for the Member, his beneficiary, or representative to perfect the claim and an explanation of why such material or information is necessary; and (d) Explain the Plan's claim review procedure as contained herein. In the event a claim for Plan benefits is denied or modified, if the Member, his beneficiary, or a representative of such Member or beneficiary desires to have such denial or modification reviewed, he must, within sixty days following receipt of the notice of such denial or modification, submit a written request for review by the Committee of its initial decision. In connection with such request, the Member, his beneficiary, or the representative of such Member or beneficiary may review any pertinent documents upon which such denial or modification was based and may submit issues and comments in writing. Within sixty days following such request for review the Committee shall, after providing a full and fair review, render its final decision in writing to the Member, his beneficiary or the representative of such Member or beneficiary stating specific reasons for such decision and making specific references to pertinent Plan provisions upon which the decision is based. If special circumstances require an extension of such sixty-day period, the Committee's decision shall be VIII-2 18 rendered as soon as possible, but not later than 120 days after receipt of the request for review. If an extension of time for review is required, written notice of the extension shall be furnished to the Member, beneficiary, or the representative of such Member or beneficiary prior to the commencement of the extension period. 8.6 COMPANY TO SUPPLY INFORMATION. The Company shall supply full and timely information to the Committee, including, but not limited to, information relating to each Member's Compensation, age, retirement, death, or other cause of termination of employment and such other pertinent facts as the Committee may require. The Company shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan and the Trust Agreement. When making a determination in connection with the Plan, the Committee shall be entitled to rely upon the aforesaid information furnished by the Company. 8.7 INDEMNITY. To the extent permitted by applicable law, the Company shall indemnify and save harmless the Directors and each member of the Committee against any and all expenses, liabilities and claims (including legal fees incurred to defend against such liabilities and claims) arising out of their discharge in good faith of responsibilities under or incident to the Plan. Expenses and liabilities arising out of willful misconduct shall not be covered under this indemnity. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, as such indemnities are permitted under applicable law. VIII-3 19 IX. ADMINISTRATION OF FUNDS 9.1 PAYMENT OF EXPENSES. All expenses incident to the administration of the Plan and Trust, including but not limited to, legal, accounting, Trustee fees, and expenses of the Committee, may be paid by the Company and, if not paid by the Company, shall be paid by the Trustee from the Trust Fund, if any. 9.2 TRUST FUND PROPERTY. All income, profits, recoveries, contributions, forfeitures and any and all moneys, securities and properties of any kind at any time received or held by the Trustee, if any, shall be held for investment purposes as a commingled Trust Fund pursuant to the terms of the Trust Agreement. The Committee shall maintain one or more Accounts in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund. No Member shall have any title to any specific asset in the Trust Fund, if any. IX-1 20 X. NATURE OF THE PLAN The Company intends and desires by the adoption of the Plan to recognize the value to the Company of the past and present services of employees covered by the Plan and to encourage and assure their continued service with the Company by making more adequate provision for their future retirement security. The establishment of the Plan is, in part, made necessary by certain benefit limitations which are imposed on the Profit Sharing Plan by the Code. The Plan is intended to constitute an unfunded, unsecured plan of deferred compensation for a select group of management or highly compensated employees of the Company. Plan benefits herein provided are to be paid out of the Company's general assets. Nevertheless, subject to the terms hereof and of the Trust Agreement, the Company may transfer money or other property to the Trustee and the Trustee shall pay Plan benefits to Members and their beneficiaries out of the Trust Fund. The Directors, in their sole discretion, may establish the Trust and enter into the Trust Agreement. In such event, the Company shall remain the owner of all assets in the Trust Fund and the assets shall be subject to the claims of Company creditors if the Company ever becomes insolvent. For purposes hereof, the Company shall be considered "insolvent" if (a) the Company is unable to pay its debts as they become due, or (b) the Company is subject to a pending proceeding as a debtor under the United Sates Bankruptcy Code (or any successor federal statute). The chief executive officer of the Company and its board of directors shall have the duty to inform the Trustee in writing if the Company becomes insolvent. Such notice given under the preceding sentence by any party shall satisfy all of the parties' duty to give notice. When so informed, the Trustee shall suspend payments to the Members and hold the assets for the benefit of the Company's general creditors. If the Trustee receives a written allegation that the Company is insolvent, the Trustee shall suspend payments to the Members and hold the Trust Fund for the benefit of the Company's general creditors, and shall determine within the period specified in the Trust Agreement whether the Company is insolvent. If the Trustee determines that the Company is not insolvent, the Trustee shall resume payments to the Members. No Member or beneficiary shall have any preferred claim to, or any beneficial ownership interest in, any assets of the Trust Fund. X-1 21 XI. ADOPTING ENTITIES It is contemplated that other corporations, associations, partnerships or proprietorships may adopt this Plan and thereby become the Company. Any such entity, whether or not presently existing, may become a party hereto by appropriate action of its officers without the need for approval of its board of directors or noncorporate counterpart or of the Directors; provided, however, that such entity must be an Affiliate. The provisions of the Plan shall apply separately and equally to each Company and its employees in the same manner as is expressly provided for Marine Drilling Companies, Inc. and its employees, except that the power to appoint or otherwise affect the Committee or the Trustee and the power to amend or terminate the Plan or amend the Trust Agreement shall be exercised by the Directors alone. Transfer of employment among Companies and Affiliates shall not be considered a termination of employment hereunder. Any Company may, by appropriate action of its officers without the need for approval of its board of directors or noncorporate counterpart or the Directors, terminate its participation in the Plan. Moreover, the Directors may, in their discretion, terminate a Company's Plan participation at any time. XI-1 22 XII. MISCELLANEOUS 12.1 NOT CONTRACT OF EMPLOYMENT. The adoption and maintenance of the Plan shall not be deemed to be a contract between the Company and any person or to be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time nor shall the Plan be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person's right to terminate his employment at any time. 12.2 ALIENATION OF INTEREST FORBIDDEN. The interest of a Member or his beneficiary or beneficiaries hereunder may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable, nor shall they be an asset in bankruptcy or subject to garnishment, attachment or other legal or equitable proceedings. 12.3 WITHHOLDING. All Compensation deferrals and payments provided for hereunder shall be subject to applicable withholding and other deductions as shall be required of the Company under any applicable local, state or federal law. 12.4 AMENDMENT AND TERMINATION. The Directors may from time to time, in their discretion, amend, in whole or in part, any or all of the provisions of the Plan; provided, however, that no amendment may be made that would impair the rights of a Member with respect to amounts already allocated to his Accounts. The Directors may terminate the Plan at any time. In the event that the Plan is terminated, the balance in a Member's Accounts shall be paid to such Member or his designated beneficiary in the manner specified by the Committee, which may include the payment of a single lump sum, cash payment in full satisfaction of all of such Member's or beneficiary's benefits hereunder. 12.5 SEVERABILITY. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 12.6 GOVERNING LAWS. ALL PROVISIONS OF THE PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF TEXAS EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW. XII-1 23 EXECUTED effective as of July 1, 1996. MARINE DRILLING COMPANIES, INC. By: --------------------------------------------- William H. Flores Senior Vice President/Chief Financial Officer (iii) EX-10.27 3 SENIOR SECURED REVOLVING CREDIT FAC. CREDIT AGMT. 1 SENIOR SECURED REVOLVING CREDIT FACILITY CREDIT AGREEMENT ______________________________ MARINE DRILLING COMPANIES, INC. AS THE BORROWER, THE BANKS NAMED HEREIN, AND BANKERS TRUST COMPANY, AS AGENT AND CHRISTIANIA BANK OG KREDITKASSE, NEW YORK BRANCH AS CO-AGENT ______________________________ DATED AS OF MARCH 7, 1997 2 TABLE OF CONTENTS PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I DEFINITIONS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.03. Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.04. References, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II COMMITMENTS AND TERMS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.01. Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.02. Borrowing Procedures; Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.03. Issuing and Reimbursing the Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 2.04. Collateral Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.05. The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.06. Reduction of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.07. Mandatory Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.08. Interest Accrual, Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.09. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.10. Payments, Notice of Certain Repayments and Computations . . . . . . . . . . . . . . . . . . . 14 Section 2.11. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.12. Setoff, Counterclaims and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.13. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 2.14. Change of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.15. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.16. Claims Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE III CONDITIONS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.01. Conditions Precedent to Effectiveness, the Initial Borrowing . . . . . . . . . . . . . . . . 21 Section 3.02. Conditions Precedent to All Letters of Credit and Loans . . . . . . . . . . . . . . . . . . . 23 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.01. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.02. Corporate Authority; Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.03. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.04. No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.05. No Defaults or Violations of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.06. Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.07. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.09. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3 Section 4.10. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.11. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 4.12. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.13. Title and Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.14. Patents, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.15. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.16. Existing Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.17. Rig Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.18. Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.19. Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.20. Citizenship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE V AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.01. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.02. Taxes; Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.03. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.04. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.05. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.06. Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.07. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 5.08. Accounting Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 5.09. Use of Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 5.10. Rig Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 5.11. Additional Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 5.12. Further Assurances in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VI NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.01. Indebtedness Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.02. Lien Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 6.03. Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.04. Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.05. Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.06. Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.07. Collateral Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.08. Sales of Assets or Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.09. Consolidation and Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.10. Restricted Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.11. Lines of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.12. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.13. Charter and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.14. Rig Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 6.15. Restrictions on Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE VII DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 7.02. Setoff in Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
4 Section 7.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 7.04. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 7.05 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE VIII THE AGENT, THE CO-AGENT AND THE ISSUING BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 8.02. Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 8.03. BTCo and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 8.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 8.06. Employees of the Agent and the Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 8.07. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 8.08. Successor Co-Agent and Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 8.09. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 8.10. Execution of Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 8.11. Release of Mortgaged Rigs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 9.02. Participation Agreements and Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 9.03. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 9.05. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.06. Return of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.07. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.08. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.09. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.10. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.11. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 9.12. Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 9.13. Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 9.14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 9.15. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 9.16. Final Agreement of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ANNEXES; EXHIBITS AND SCHEDULES - ------------------------------- Annex A Definitions Exhibit 1.01-A Mortgaged Rigs Exhibit 2.02(a) Form of Borrowing Request Exhibit 2.02(c) Form of Conversion Notice Exhibit 2.03 Form of Letter of Credit Request Exhibit 2.05 Form of Note Exhibit 9.02 Form of Assignment and Acceptance Agreement Schedule 4.01 List of Borrower's Subsidiaries Schedule 4.04 Consents
5 Schedule 4.07 Litigation Schedule 4.13(c) Rigs Schedule 4.15 Environmental Matters Schedule 4.16 Existing Indebtedness Schedule 4.17 Rig Classification Schedule 6.02 Liens Schedule 6.13 Charters and Leases
6 CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of March 7, 1997 is among MARINE DRILLING COMPANIES, INC., a Texas corporation (the "Borrower"), the banks named on the signature pages hereto (together with their respective successors and assigns in such capacity, the "Banks"), and BANKERS TRUST COMPANY, as agent for the Banks (together with its successors and assigns in such capacity, the "Agent"), and as the issuing bank with respect to the Letters of Credit issued hereunder (together with its successors and assigns in such capacity, the "Issuing Bank"), and CHRISTIANIA BANK OG KREDITKASSE, NEW YORK BRANCH, as co-agent for the Banks (together with its successors and assigns in such capacity, the "Co-Agent"). Unless otherwise defined herein, all capitalized terms used herein and defined in Article I are used herein as so defined. PRELIMINARY STATEMENT The Borrower has requested that the Banks provide the Borrower with a $100,000,000 senior secured credit facility, which will be used as specified herein. The Banks have agreed to provide the Borrower with such credit facility upon the terms and conditions set forth in this Agreement. Accordingly, in consideration of the foregoing and the mutual covenants set forth herein, the parties agree as follows: ARTICLE I DEFINITIONS, ETC. Section 1.01. Certain Defined Terms. Capitalized terms used in this Agreement and not otherwise defined herein, shall have the respective meanings set forth in Annex A hereto (such meanings to be equally applicable to both singular and plural forms of the terms defined). Section 1.02. Accounting Terms. All accounting terms not specifically defined herein shall be construed, and all financial calculations shall be made, in accordance with GAAP consistent with those applied in the preparation of the consolidated financial statements referred to in Section 4.06. Section 1.03. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." Section 1.04. References, Etc. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and 7 not to any particular provision of this Agreement. All references herein to Sections, Annexes, Exhibits and Schedules shall, unless the context requires a different construction, be deemed to be references to the Sections of this Agreement and the Annexes, Exhibits and Schedules attached hereto and made a part hereof. In this Agreement, unless a clear contrary intention appears the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. ARTICLE II COMMITMENTS AND TERMS OF CREDIT Section 2.01. Commitments. (a) (i) Each Bank severally agrees, on the terms and conditions hereinafter set forth, to make one or more loans (the "Loans") to the Borrower from time to time on any Business Day during the period from the Effective Date up to, but excluding, the Termination Date in an aggregate amount outstanding for such Bank not to exceed at any time an amount equal to such Bank's Commitment. Each Loan shall be made as either a Base Rate Loan or a Eurodollar Rate Loan and as part of a single Borrowing made on the same day by the Banks ratably according to their respective Commitment Percentages. Each Base Rate Borrowing shall be in an aggregate amount not less than $2,000,000, or, if less, the entire unfunded portion of the Total Commitment. Each Eurodollar Rate Borrowing shall be in an aggregate amount not less than $2,000,000 or an integral multiple of $1,000,000 in excess thereof. Within the limits set forth above and subject to the terms and conditions of this Agreement, the Borrower may borrow, repay pursuant to Section 2.07 or prepay pursuant to Section 2.09 and reborrow under this Section 2.01(a). (ii) The Issuing Bank agrees, on the terms and conditions hereinafter set forth, to issue standby or commercial letters of credit for the account of the Borrower, and for the benefit of any obligee of payment obligations of the Borrower or any of its Subsidiaries, (the "Letters of Credit") from time to time on any Business Day during the period from the Effective Date up to, but excluding, the Termination Date in an aggregate amount for all Outstanding Letters of Credit not exceeding at any time the Letter of Credit Limit. Each Letter of Credit shall be denominated in Dollars, shall expire no later than the date set forth in Section 2.03(a), and shall be in such form as approved from time to time by the Issuing Bank and the Borrower. Each Bank severally agrees, on the terms and conditions hereinafter set forth, to purchase participations in the Letters of Credit issued by the Issuing Bank pursuant to this Agreement in an amount equal to such Bank's Commitment Percentage of the face amount of such Letter of Credit. Upon the issuance of each Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation, to the extent of such Bank's Commitment Percentage, in such Letter of Credit, the obligations of the Issuing Bank thereunder and in the reimbursement obligations of the Borrower due in respect of drawings made under such Letter of Credit. The Banks will execute any other documents the Issuing Bank may reasonably request to -2- 8 evidence the purchase of such participation. On each day during the period commencing with the issuance by the Issuing Bank of any Letter of Credit and ending on the date when such Letter of Credit shall have expired or been terminated, and, irrespective of whether such Letter of Credit has expired or terminated if such Letter of Credit has been drawn upon and the amount so drawn has not been reimbursed to the Issuing Bank, the Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the Outstanding Letters of Credit. (iii) Notwithstanding any other term or provision hereof (A) no Loan shall be made and no Letter of Credit shall be issued if (1) the Collateral Maintenance Ratio is less than 2 to 1, (2) the Preferred Rig Ratio is less than 1.5 to 1, or (3) after giving effect thereto the aggregate amount of Credit Outstanding would exceed the Total Commitment and (B) no Letter of Credit shall be issued if (1) the initial stated amount thereof would be less than $100,000 or (2) after giving effect thereto the aggregate amount of Outstanding Letters of Credit would exceed the Letter of Credit Limit. (b) Loans of more than one Type may be outstanding at the same time, but the Borrower shall not be entitled to request any Borrowing or to Convert Loans comprising any Borrowing into Loans of another Type, if after giving effect to such Borrowing or Conversion, as the case may be, any Bank would have outstanding at any one time more than six (6) different Types of Loans. Loans having different Interest Periods, regardless of whether they commence on the same date or have the same type of interest rate, shall be considered different Types of Loans; provided, however, that all Base Rate Loans are the same type of Loan so long as they remain Base Rate Loans. Section 2.02. Borrowing Procedures; Conversions. (a) Each Borrowing shall be made upon the written, telecopied or facsimile transmitted request of the Borrower, given to the Agent not later than 11:00 a.m. (New York time) on (i) the third Business Day prior to the proposed Borrowing Date in the case of a Eurodollar Rate Borrowing, or (ii) the Business Day immediately preceding the proposed Borrowing Date in the case of a Base Rate Borrowing, and the Agent shall give each other member of the Bank Group prompt notice of such request by telecopier, telex or cable. Each request for a Borrowing (a "Borrowing Request") made by the Borrower shall be in substantially the form of Exhibit 2.02(a), specifying therein (A) the Borrowing Date for such Borrowing, (B) the Type of Loans comprising such Borrowing, (C) the aggregate amount of such Borrowing and (D) in the case of a Eurodollar Rate Borrowing, the Interest Period for the Loans comprising such Borrowing. Each Bank shall, before 12:00 Noon (New York time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 9.03, in same day funds, such Bank's Commitment Percentage of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Agent's aforesaid address. Each Borrowing Request shall be irrevocable and binding on the Borrower. -3- 9 (b) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's Commitment Percentage of such Borrowing, the Agent may assume that such Bank has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Commitment Percentage of such Borrowing available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan as part of such Borrowing for purposes of this Agreement, and Borrower shall be relieved of Borrower's obligation to repay such amount under this Section 2.02(b). The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make its Loan on the date of such Borrowing or any subsequent Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on the date of any Borrowing. (c) The Borrower may, subject to the terms of this Agreement, on any Business Day, upon written, telecopied or facsimile transmitted notice to the Agent, given not later than 11:00 a.m. (New York time) on (i) the third Business Day prior to the proposed Conversion Date in the case of a Conversion of Loans into Eurodollar Rate Loans, or (ii) the Business Day immediately preceding the proposed Conversion Date in the case of a Conversion of Loans into Base Rate Loans, Convert Loans into Borrowings comprised of Loans of another Type, and the Agent shall promptly transmit the contents of such notice to each other member of the Bank Group by telecopier, telex or cable. Notwithstanding any other term or provision hereof, after giving effect to any such Conversion, the size of all Borrowings outstanding hereunder, and the number of different Types of Loans outstanding hereunder, shall conform to the requirements of Section 2.01. In the event of any Conversion of Eurodollar Rate Loans on any day other than the last day of the Interest Period applicable thereto, the Borrower shall be obligated to reimburse the Banks in respect thereof pursuant to Section 2.13. Each notice of a Conversion (a "Conversion Notice") given by the Borrower shall be in substantially the form of Exhibit 2.02(c) hereto, specifying therein (A) the Conversion Date for such Conversion, (B) the Loans to be Converted, (C) the Type of Loans to which such Loans are to be Converted and (D) in the case of a Conversion into Eurodollar Rate Loans, the Interest Period for such Converted Loans. If the Borrower shall fail to give a timely Conversion Notice conforming to the requirements of this Agreement with respect to any Eurodollar Rate Loans prior to the expiration of the Interest Period applicable thereto, such Eurodollar Rate Loans shall, automatically on the last day of such Interest Period, be Converted into Base Rate Loans. Section 2.03. Issuing and Reimbursing the Letters of Credit. (a) Each Letter of Credit shall, subject to the terms of this Agreement, be issued upon the written or facsimile -4- 10 transmitted request (an original of which shall be immediately forwarded by overnight courier to the Issuing Bank) of the Borrower given to the Issuing Bank and the Agent not later than 11:00 a.m. (New York time) on the third Business Day prior to the proposed date of issuance of such Letter of Credit. Each such request for a Letter of Credit (a "Letter of Credit Request") made by the Borrower shall be in substantially the form of Exhibit 2.03 hereto and shall specify the Business Day on which such Letter of Credit is to be issued, the beneficiary of such Letter of Credit, the amount of such Letter of Credit, the draw conditions applicable thereto and shall provide for an expiry date which is not later than one year from the issuance date. Such request shall also include any documents that the Issuing Bank has specified in writing to the Borrower that it customarily requires in connection therewith to the extent such documents are applicable. The Agent shall promptly notify each Bank of each Letter of Credit Request. If requested in writing by the Borrower no later than 11:00 a.m. (New York time) on the third Business Day prior to the expiry date of any Letter of Credit expiring on or prior to the Termination Date (and otherwise in the same manner as for the issuance of a Letter of Credit), the expiry date of such Letter of Credit may be extended for an additional period of up to one year so long as such Letter of Credit could otherwise be issued pursuant to Sections 2.01(a)(ii) and (iii) and Section 3.02 at such time. (b) Upon satisfaction of the applicable terms and conditions set forth in Article III, the Issuing Bank shall issue such Letter of Credit to the specified beneficiary not later than the close of business (New York time) on the date so specified. The Issuing Bank shall provide each other member of the Bank Group with a copy of each Letter of Credit so issued, but any failure of the Issuing Bank to provide such Persons with a copy of such Letter of Credit shall not in any way affect the Borrower's obligation to reimburse the Issuing Bank for any amount paid by the Issuing Bank under any Letter of Credit or the Banks' obligation to reimburse the Issuing Bank for such amount, to the extent provided herein, in the event the Borrower fails to do so. Each such Letter of Credit shall (i) provide for the payment of drafts or other forms of payment to be presented for honor thereunder by the beneficiary in accordance with the terms thereof, at sight when accompanied by the documents described therein; and (ii) be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, (or any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank) (the "UCP"); and (iii) as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the governing law specified in this Agreement. (c) Upon presentment to the Issuing Bank of any draft for honor under any Letter of Credit by the beneficiary thereof and the determination by the Issuing Bank that such draft is in order, the Issuing Bank shall give prompt notice (a "Reimbursement Notice") to the Borrower of (i) the Letter of Credit to which such Reimbursement Notice relates, (ii) the amounts to be paid on account of such draft (the "Reimbursement Amount") and (iii) the date on which such amounts are to be paid (the "Reimbursement Date"), but any failure to so notify the Borrower shall not in any way affect the Borrower's obligations to reimburse the Issuing Bank for any amount paid by the Issuing Bank under any Letter of Credit. In determining whether to pay under any Letter of Credit, the Issuing Bank shall not have any obligation relative to the Borrower and the Banks other than the -5- 11 obligations imposed on issuing banks under the UCP and applicable law, including the obligation to determine that any documents required to be delivered under such Letter of Credit have been delivered and they substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Issuing Bank under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Issuing Bank any resulting liability to the Borrower or the Banks. (d) Upon receipt of any Reimbursement Notice, the Borrower shall reimburse the Issuing Bank by forthwith paying to the Agent for the benefit of the Issuing Bank (who shall promptly notify the Issuing Bank of such payment) no later than 10:00 a.m. (New York time) on the Reimbursement Date specified in such Reimbursement Notice an amount equal to the Reimbursement Amount specified in such Reimbursement Notice, and, if the Issuing Bank is not fully reimbursed by the Borrower on such Reimbursement Date, together with interest from such Reimbursement Date until such reimbursement is made by the Borrower at a fluctuating rate per annum equal to the lesser of (i) the Highest Lawful Rate and (ii) the Base Rate in effect during the time such reimbursement obligation remains unpaid plus the Applicable Margin for Base Rate Loans from such Reimbursement Date until the third day immediately following the delivery of such Reimbursement Notice by the Issuing Bank to Borrower and thereafter, the Default Rate. To the extent availability may then exist, and upon compliance with the relevant terms and conditions of this Agreement, the Borrower may repay any or all of the obligations described in this paragraph by requesting a Borrowing and applying the proceeds thereof accordingly. (e) If the Borrower shall fail to reimburse the Issuing Bank for any payment by the Issuing Bank under a Letter of Credit by 12:00 noon. (New York time) on the Reimbursement Date specified in the Reimbursement Notice related thereto, the Agent shall give prompt notice thereof to each other member of the Bank Group. Upon receipt of such notice, each Bank shall, notwithstanding any other provision of this Agreement (including the occurrence and continuance of a Default or an Event of Default), make available to the Agent for the benefit of the Issuing Bank an amount equal to its Commitment Percentage of the Reimbursement Amount specified in the related Reimbursement Notice no later than the close of business on such Reimbursement Date. If such Reimbursement Amount is not in fact made available to the Agent by such Bank on such Reimbursement Date, such Bank shall pay to the Agent for the account of the Issuing Bank, on demand made by the Issuing Bank, in addition to such Reimbursement Amount, interest on such amount for the number of days that elapse from such Reimbursement Date to the date on which the amount equal to such Bank's Commitment Percentage of such Reimbursement Amount becomes immediately available to the Issuing Bank at a rate per annum equal to the average daily Federal Funds Rate for such days. Any amount received by the Agent or the Issuing Bank from the Borrower in respect of a draft honored under a Letter of Credit after one or more of the Banks have made funds available for the payment of such draft pursuant to this paragraph shall be paid over by the Agent or the Issuing Bank, as the case may be, to the Banks, pro rata according to the amounts so made available by the Banks, promptly upon receipt by the Agent or the Issuing Bank of such amount. Nothing in this Agreement shall diminish the Borrower's obligation under this Agreement -6- 12 to provide the funds for the payment of, or on demand to reimburse the Issuing Bank for payment of, any draft presented to, and duly honored by, the Issuing Bank under any Letter of Credit. (f) In order to induce the issuance of Letters of Credit by the Issuing Bank and the purchase of participations therein by the Banks, the Borrower irrevocably agrees (i) that the obligation of the Borrower to reimburse the Issuing Bank for amounts paid by the Issuing Bank under any Letter of Credit, including accrued interest thereon, as set forth herein is absolute and unconditional, (ii) that no member of the Bank Group shall be responsible or liable for, and the Borrower's unconditional obligation to reimburse the Issuing Bank through the Agent for amounts paid by the Issuing Bank on account of drafts honored under the Letters of Credit shall not be affected by, any circumstance, act or omission whatsoever relating to any Letter of Credit, whether or not known to any member of the Bank Group, unless such circumstance, act or omission results in the wrongful payment of any Letter of Credit and such circumstance, act or omission constitutes the gross negligence or willful misconduct on the part of such member of the Bank Group, (iii) that any action taken or omitted to be taken by any member of the Bank Group under or in connection with any Letter of Credit or any related draft, document or property shall be binding on the Borrower and shall not put any member of the Bank Group under any resulting liability to the Borrower, unless such action or omission results in the wrongful payment of any Letter of Credit and such action or omission constitutes the gross negligence or willful misconduct on the part of such member of the Bank Group and (iv) to indemnify, defend and hold each member of the Bank Group harmless from and against any and all liabilities, damages, claims or reasonable expenses (including reasonable attorneys' fees and amounts paid in settlement) arising out of or based on any Letter of Credit, except to the extent the same is the result of the wrongful payment of any Letter of Credit and such wrongful payment constitutes gross negligence or willful misconduct on the part of the Person seeking indemnity hereunder, IT BEING THE EXPRESS INTENTION OF THE BORROWER THAT EACH MEMBER OF THE BANK GROUP SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LIABILITIES, CLAIMS, OR REASONABLE EXPENSES ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE, CONCURRENT, OR CONTRIBUTORY) OF SUCH MEMBER OF THE BANK GROUP. The Borrower hereby waives presentment for payment and notice of dishonor, protest and notice of protest with respect to drafts honored under the Letters of Credit. (g) The provisions of this Agreement and the other Loan Documents concerning collateral, timing of payments, interest rates applicable to any reimbursement obligation relating to any Letter of Credit, any representations, warranties, covenants, events of default, remedies and governing law shall supersede in their entirety the provisions of any Letter of Credit application relating to such matters. In the event any other provision of any Letter of Credit application is inconsistent with, or in conflict of any provision of this Agreement or any Loan Documents, the provisions of this Agreement or the Loan Documents shall govern. Section 2.04. Collateral Market Value. "Collateral Market Value" means, as of any date of determination, the aggregate Market Value of the Mortgaged Rigs; provided, that if the Market Value for any single Mortgaged Rig would otherwise exceed 25% of the Collateral Market -7- 13 Value, the Market Value of such Mortgaged Rig shall, solely for the purpose of calculating the Collateral Maintenance Ratio, be reduced by an amount necessary to cause the Market Value of such Mortgaged Rig (after giving effect to such reduction) to equal 25% of Collateral Market Value (after giving effect to such reduction). The Collateral Market Value shall initially be calculated as of the Effective Date by reference to the Initial Rig Appraisal Report. Concurrently with delivery of any subsequent Rig Appraisal Report, the Agent shall calculate the Collateral Market Value as of the date of such report. The recalculated Collateral Market Value shall become effective immediately upon receipt of such subsequent Rig Appraisal Report by the Agent. In addition, the Collateral Market Value shall be adjusted from time to time to reflect any Casualty Event occurring with respect to any Mortgaged Rig or any Collateral Disposition. Section 2.05. The Notes. The Loans made by each Bank shall be evidenced by a single Note issued to such Bank by the Borrower, (i) dated the date of this Agreement (or such other date as may be specified in Section 9.02), (ii) payable to the order of such Bank in a principal amount equal to such Bank's Commitment on the Effective Date and (iii) otherwise duly completed. Each Loan made by a Bank to the Borrower and all payments made on account of the principal amount thereof shall be entered by such Bank in its records or on the schedule (or a continuation thereof) attached to the Note of such Bank, provided, that prior to any transfer of any such Note, such Bank shall endorse the amount and maturity of any outstanding Loans on the schedule (or a continuation thereof) attached to such Note. Section 2.06. Reduction of the Commitments. (a) The Borrower shall have the right, upon at least three Business Days' notice to the Agent to terminate in whole or reduce ratably in part the unused portion of the Total Commitment; provided, that each partial reduction in the Total Commitment shall be in the aggregate amount of $5,000,000 or an integral multiple of $5,000,000 in excess thereof. Any such reduction or termination by the Borrower shall be irrevocable. (b) During the period prior to the Termination Date, upon the occurrence of any Collateral Disposition not resulting from a Total Loss, and 90 days after the occurrence of any Collateral Disposition resulting from a Total Loss, the Commitment of each Bank shall be reduced ratably by (i) if the Collateral Disposition involves a Semisubmersible Rig, an amount equal to the Total Commitment in effect immediately prior to such Collateral Disposition multiplied by 200% of the Appraised Value Percentage of the Mortgaged Rig disposed of in such Collateral Disposition, and (ii) if the Collateral Disposition involves any Mortgaged Rig other than a Semisubmersible Rig, an amount equal to the Total Commitment in effect immediately prior to such Collateral Disposition multiplied by the Appraised Value Percentage of the Mortgaged Rig disposed of in such Collateral Disposition; provided, that no such reduction shall occur under this Section 2.06(b) if (A) the Mortgaged Rig disposed of in such Collateral Disposition is a Mat Supported Rig, (B) such Collateral Disposition does not constitute a Subsidiary Mat Supported Rig Disposition, and (C) after giving effect to such Collateral Disposition the Collateral Maintenance Ratio is equal to or greater than 3 to 1. Prior to the Termination Date, any such reduction in a Bank's Commitment under this Section 2.06(b) shall be reinstated if, on or before the 90th day following such Collateral Disposition, the Borrower or Guarantor who owned such disposed Mortgaged Rig shall have -8- 14 replaced such disposed Mortgaged Rig with an offshore drilling rig of the same type and class as the disposed Mortgaged Rig or with another offshore drilling rig acceptable to the Agent and the Co-Agent and, in either case, with a Market Value equal to or greater than 75% of the Market Value of the disposed Mortgaged Rig and such Person shall have delivered to the Agent all of the following: (A) such Loan Documents as may be reasonably required by the Agent (collectively, the "Post Closing Security Documents") to grant a duly perfected Lien to the Collateral Agent, for the ratable benefit of the Bank Group as security for the Obligations, covering such additional offshore drilling rig (which shall thereafter constitute a Mortgaged Rig). (B) Evidence that the Liens created by the Post Closing Security Documents have been duly perfected, and constitute valid first priority Liens. (C) A certificate of the secretary or an assistant secretary of each Person executing a Post Closing Security Document certifying, inter alia, (1) true and correct copies of resolutions adopted by the Board of Directors of such Person authorizing the execution, delivery and performance by such Person of the Post Closing Security Documents to which it is or will be a party, approving the forms of the Post Closing Security Documents to which it is or will be a party and authorizing officers of such Person to negotiate, execute and deliver the Post Closing Security Documents to which it is or will be a party and any related documents and (2) the incumbency and specimen signatures of the officers of such Person executing any Post Closing Security Documents to which it is a party. (D) An opinion of counsel for each Person executing a Post Closing Security Document, in form, scope and substance reasonably satisfactory to the Agent, to the effect that such documents have been duly executed and delivered by a duly authorized officer of such Person, that such documents are the legal, valid and binding obligation of such Person, that the Liens created by such Post Closing Security Documents have been duly perfected in accordance with all Requirements of Law, that the execution, delivery and performance of such Post Closing Security Documents will not violate or cause a default under any agreement to which such Person is a party or by which its Properties are bound or any Requirement of Law and addressing such other matters as the Agent may reasonably request. (E) Evidence of insurance of such additional Mortgaged Rig, naming the Bank Group as additional insured or loss payee, as appropriate. (F) Any supplemental Rig Appraisal Report necessary to establish the Market Value of such additional Mortgaged Rig, together with a calculation of the Collateral Market Value as of the date of such report, certified by a Responsible Officer of the Borrower as conforming to the requirements of this Agreement. -9- 15 (G) Such other documents, certificates and opinions as the Agent may reasonably request relating to the Post Closing Security Documents. (c) If EBITDA, measured as of the last day of any calendar quarter for the twelve month period then ended, as reflected in the financial statements delivered for such period pursuant to Section 5.01, is (or as of the end of current calendar quarter is projected to be) less than $25,000,000, the Borrower shall notify the Agent as soon as it becomes aware of such event and for so long as EBITDA shall be less than $25,000,000, the Commitment of each Bank shall be reduced so that, after giving effect thereto, the Available Commitment of each Bank is zero. Any reduction in a Bank's Commitment under this Section 2.06(c) shall be reinstated if (i) thereafter EBITDA measured as of the last day of any calendar quarter for the twelve month period then ended, as reflected in the financial statements delivered for such period pursuant to Section 5.01, is equal to or greater than $25,000,000 and (ii) no Default exists; provided that such Commitment shall be reinstated only to the extent such Commitment would not have been otherwise reduced under Section 2.06 (b). (d) On the Termination Date, the Commitment of each Bank shall be automatically reduced to zero. Section 2.07. Mandatory Repayment of Loans. (a) The Borrower shall from time to time repay or provide cover for (as applicable) any Credit Outstanding in such amounts as shall be necessary so that at all times the Credit Outstanding shall not be in excess of the Total Commitment. Any repayment or cover required by this Section 2.07(a) shall be due and payable on the date such repayment or cover obligation accrues pursuant to the preceding sentence, including any date on which the Total Commitment is reduced pursuant to Section 2.06(b). (b) If an Event of Default exists all Casualty Proceeds received by the Borrower, any Guarantor or the Collateral Agent shall be applied to repay or provide cover for (as applicable) the Credit Outstanding on the date such Casualty Proceeds are first received by any such Person. If all necessary repairs and replacements to any Mortgaged Rig affected by a Casualty Event shall not have been made within 90 days following such Casualty Event as required under Section 5.07 and an Event of Default does not otherwise exist, all Casualty Proceeds received by the Borrower, any Guarantor or the Collateral Agent as a result of such Casualty Event shall be applied to repay or provide cover for (as applicable) the Credit Outstanding on the later of (i) the 91st day after the occurrence of such Casualty Event or (ii) the day such Casualty Proceeds are first received by the Borrower, any Guarantor or the Collateral Agent. In addition, if any excess Casualty Proceeds remain after all necessary repairs and replacements have been completed and all costs therefor have been paid in full, such excess Casualty Proceeds shall be applied to repay or provide cover for (as applicable) the Credit Outstanding on the date it is determined that such excess Casualty Proceeds exist. (c) On the first Business Day following the receipt of any Collateral Disposition Proceeds by the Borrower, any Guarantor or the Collateral Agent before the Termination Date, the -10- 16 Borrower shall repay or provide cover for (as applicable) any Credit Outstanding in an amount equal to the amount of such Collateral Disposition Proceeds. (d) Upon the date 90 days after any Collateral Disposition occurring on or after the Termination Date, the Borrower shall repay or provide cover for (as applicable) any Credit Outstanding in an amount equal to (i) if the Collateral Disposition involves a Semisubmersible Rig, the Credit Outstanding as of the date of such Collateral Disposition multiplied by 200% of the Appraised Value Percentage of the Mortgage Rig disposed of in such Collateral Disposition, and (ii) if the Collateral Disposition involves any Mortgaged Rig other than a Semisubmersible Rig, the Credit Outstanding as of the date of such Collateral Disposition multiplied by the Appraised Value Percentage of the Mortgaged Rig disposed of in such Collateral Disposition; provided, that no such payment or cover shall be required under this Section 2.07(d) if (A) (1) the Mortgaged Rig disposed of in such Collateral Disposition is a Mat Supported Rig, (2) such Collateral Disposition does not constitute a Subsidiary Mat Supported Rig Disposition, and (3) after giving effect to such Collateral Disposition the Collateral Maintenance Ratio is equal to or greater than 3 to 1, or (B) on or before the day such payment or cover is required under this Section 2.07(d), the Borrower or Guarantor who owned such disposed Mortgaged Rig shall have replaced such disposed Mortgaged Rig with an offshore drilling rig of the same type and class as the disposed Mortgaged Rig or with another offshore drilling rig acceptable to the Agent and the Co-Agent and, in either case, with a Market Value equal to or greater than 75% of the Market Value of the disposed Mortgaged Rig and such Person shall have delivered to the Agent Post Closing Security Documents necessary to grant a duly perfected Lien to the Collateral Agent, for the ratable benefit of the Bank Group and as security for the Obligations, covering such additional offshore drilling rig (which shall thereafter constitute a Mortgaged Rig) and the other items required under Section 2.06(b)(ii)(B)-(F). (e) In the event that the Borrower shall be required pursuant to this Section 2.07 to repay or provide cover for Credit Outstanding, the Borrower shall make such repayment and provide such cover in the following order: (i) first, pay the amount of all unreimbursed drawings under any Letters of Credit, (ii) second, repay the principal of any Base Rate Loans, (iii) third, repay the principal of any Eurodollar Rate Loans and (iv) fourth, provide cover for the undrawn portion of any Letters of Credit. Cover for the undrawn portion of any Letters of Credit shall be effected by paying to the Collateral Agent immediately available funds, to be held by the Collateral Agent in an account under the sole dominion and control of the Collateral Agent, for the benefit of the Bank Group, as security for the Obligations until the earlier of (A) the occurrence in this Section 2.07 which necessitated such cover no longer exists or (B) such time as the Letters of Credit have been terminated and all obligations of the Borrower to the Bank Group (including the Issuing Bank) in respect thereof have been paid in full, at which time the Collateral Agent shall remit the amount of such cover, in immediately available funds, at the direction or instruction of the Borrower. Any funds delivered pursuant to the preceding sentence shall be placed in an interest bearing account selected by the Collateral Agent and so long as no Default has occurred and is continuing, any accrued interest on such funds shall be distributed monthly to the Borrower. -11- 17 (f) On each Scheduled Payment Date, the Borrower shall (i) repay the Loans in an amount equal to 6.25% of the aggregate amount of Loans outstanding on the Termination Date, and (ii) if any Letter of Credit is outstanding on such Scheduled Payment Date, provide cover for such Letter of Credit in an amount equal to 6.25% of the face amount of such Letter of Credit. Any prepayments made after the Termination Date under Section 2.07(b) or Section 2.07(d) shall be applied against the scheduled installments required under this Section 2.07(f), in inverse order of maturity. (g) All outstanding Loans shall be fully due and payable on the Maturity Date. (h) Each repayment of Loans required by this Section 2.07 shall be accompanied by payment of accrued interest to the date of such payment on the principal amount paid. In the event of any payment of a Eurodollar Rate Loan, the Borrower shall be obligated to reimburse the Banks for funding losses, if any, pursuant to Section 2.13. Section 2.08. Interest Accrual, Payments. (a) Accrual and Payment. Subject to the provisions of Section 9.13, the Borrower shall pay interest on the unpaid principal amount of each Loan made by each Bank from the Borrowing Date of such Loan until such principal amount shall be paid in full, on the dates and at the rates per annum specified as follows: (i) Base Rate Loans. If such Loan is a Base Rate Loan, a rate per annum equal at all times to the lesser of (A) the Highest Lawful Rate and (B) the Base Rate in effect from time to time plus the Applicable Margin in effect from time to time for Base Rate Loans, and unpaid accrued interest on such Loans shall be due and payable on each Payment Date and on the date such Base Rate Loan shall be paid in full or Converted. (ii) Eurodollar Rate Loans. If such Loan is a Eurodollar Rate Loan, a rate per annum equal at all times during the Interest Period for such Loan to the lesser of (A) the Highest Lawful Rate and (B) the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect as of the first day of such Interest Period for Eurodollar Rate Loans, and unpaid accrued interest on such Loans shall be due and payable the last day of such Interest Period and, in the case of an Interest Period longer than three months, on the date occurring every three months after the first day of such Interest Period, and on the date such Eurodollar Rate Loan shall be paid in full or Converted. Any amount of principal or, to the extent permitted by applicable law, interest which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, at a rate per annum equal at all times to the lesser of (A) the Highest Lawful Rate and (B) the Base Rate in effect from time to time during the applicable period plus the Applicable Margin in effect from time to time during such period plus two percent (2%) (the "Default Rate"), payable on demand. -12- 18 (b) Determination of Interest Rates. (i) The Agent shall give prompt notice to the Borrower and each other member of the Bank Group of the applicable interest rate determined by the Agent hereunder for each Borrowing. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (ii) If the Majority Banks shall, at least one Business Day before the date of any requested Eurodollar Rate Borrowing, notify the Agent that the Eurodollar Rate applicable to such Borrowing will not adequately reflect the cost to such Banks of making, funding or maintaining their respective Eurodollar Rate Loans for such Borrowing, the right of the Borrower to select Eurodollar Rate Loans for such Borrowing or any subsequent Borrowing shall be suspended until the Agent shall notify the Borrower and each other member of the Bank Group that the circumstances causing such suspension no longer exist, and each Loan comprising such Borrowing shall be made as, or Converted into, as applicable, a Base Rate Loan. (c) Applicable Margin. As used in this Agreement and the other Loan Documents, "Applicable Margin" means, as to Loans consisting of a single Borrowing, a rate per annum determined by reference to the Type of Loans comprising such Borrowing as follows: (i) if the Margin Ratio as of the date of determination is less than .15 to 1.00, then such rate per annum shall be zero percent (0%) for Base Rate Loans, and three-quarters of one percent (3/4%) for Eurodollar Rate Loans; (ii) if the Margin Ratio as of the date of determination is equal to or greater than .15 to 1.00 but less than .25 to 1.00, such rate per annum shall be one-quarter of one percent ( 1/4%) for Base Rate Loans and one percent (1%) for Eurodollar Rate Loans; and (iii) if the Margin Ratio as of the date of determination is equal to or greater than .25 to 1.00, such rate per annum shall be one-half of one percent (1/2%) for Base Rate Loans, and one and one-quarter of one percent (1 1/4%) for Eurodollar Rate Loans. Section 2.09. Optional Prepayments. (a) The Borrower may, from time to time on any Business Day, upon notice to the Agent stating the proposed date and aggregate principal amount thereof, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Base Rate Loans (without premium or penalty) comprising part of the same Borrowing in whole or ratably in part; provided, that any partial prepayment of such Base Rate Loans shall be in an aggregate principal amount of not less than $2,000,000. The Borrower may from time to time upon at least three Business Days' notice to the Agent stating the proposed date and the aggregate principal amount thereof, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Eurodollar Rate Loans comprising part of the same Borrowing in whole or ratably in part; provided, that any partial prepayment of such Eurodollar Rate Loans shall be in an aggregate principal amount of not less than $2,000,000 or an integral multiple of $1,000,000 in excess thereof. -13- 19 (b) Each prepayment of Loans made pursuant to this Section 2.09 shall be accompanied by a payment of accrued interest to the date of such prepayment on the principal amount prepaid. In the event of any prepayment of a Eurodollar Rate Loan, the Borrower shall be obligated to reimburse the Banks for funding losses, if any, pursuant to Section 2.13. Section 2.10. Payments, Notice of Certain Repayments and Computations. (a) All payments of principal, interest, commitment fees and other amounts hereunder, under the Notes and the other Loan Documents shall be made in Dollars to the Agent at its address specified in Section 9.03 for the account of each of the Banks, in immediately available funds not later than 11:00 a.m. (New York time) on the date when due. Upon receipt of such payments, the Agent will promptly cause to be distributed like funds relating to the payment of principal or interest or commitment fees ratably (other than amounts payable pursuant to Section 2.12, Section 2.13, Section 2.14 or Section 2.15) to the Banks, for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank, to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks under the Loan Documents that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest thereon for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent at the Federal Funds Rate. (c) All payments by the Borrower of the fees payable to the Agent or the Issuing Bank shall be made in Dollars directly to such Person at its address specified in Section 9.03 in immediately available funds not later than 11:00 a.m. (New York time) on the date when due. (d) All computations of interest based on the Prime Rate shall be made on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate, as well as commitment fees, shall be made on the basis of a year of 360 days (unless use of a 360 day year would cause the interest contracted for, charged or received hereunder to exceed the Highest Lawful Rate, in which case such computations shall be made on the basis of a year of 365 or 366 days, as the case may be), in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. (e) Whenever any payment under the Loan Documents shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of -14- 20 interest or commitment fee, as the case may be; provided, if such extension would cause payment of interest on or principal of Eurodollar Rate Loans to be made in the next following calendar month, such payment shall be made on the immediately preceding Business Day. (f) If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of the Loans made by it (other than pursuant to Section 2.08(b), Section 2.12, Section 2.13, Section 2.14 or Section 2.15), or payments by the Issuing Bank made pursuant to Section 2.03, in excess of its ratable share of payments on account of the Loans or payments by the Issuing Bank made pursuant to Section 2.03, obtained by all the Banks, such Bank shall forthwith purchase from the other Banks such participations in the Loans made by such other Banks, or the reimbursement obligations in respect of the payments by the Issuing Bank made pursuant to Section 2.03, as the case may be, as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.10(f) may, to the fullest extent permitted by law and this Agreement, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. Section 2.11. Fees. (a) Subject to the provisions of Section 9.13, the Borrower agrees to pay to each Bank a commitment fee equal to three-tenths of one percent (3/10 of 1%) per annum on the Available Commitment of such Bank in effect from time to time for the period from the Execution Date to, but excluding, the Termination Date (or if earlier, the termination in full of such Bank's Commitment). Accrued commitment fees shall be due and payable in arrears on each Payment Date in each year, on the date of any reduction or termination of the Commitment of such Bank and on the Termination Date (or if earlier, the termination in full of such Bank's Commitment); and shall be computed for the period commencing with the day to which such fee was last paid (or, in the case of the first commitment fee payment date, for the period commencing with and including the Execution Date) to the date such fee is due and payable. (b) (i) The Borrower agrees to pay the Issuing Bank, for the account of the Banks, a fee in respect of each Letter of Credit issued for the account of the Borrower (the "L/C Fees") for the period from the date of issuance of such Letter of Credit to and including the expiry date of such Letter of Credit computed at a rate per annum equal to the Applicable Margin for Eurodollar Rate Loans then in effect on the outstanding face amount of such Letter of Credit. All L/C Fees shall be paid in immediately available funds and shall based on a 360 day year and actual days elapsed. Accrued L/C Fees for each Letter of Credit shall be due and payable in arrears on each Payment Date and on the termination or expiration date of such Letter of Credit (or if earlier, the termination in full of the Total Commitment). (ii) In addition to the L/C Fees, the Borrower agrees to pay the Issuing Bank, solely for the Issuing Bank's account, a fee in respect of each Letter of Credit issued by the Issuing Bank for the account of the Borrower (the "Facing Fees"), for the period from the date of issuance of such Letter of Credit to and including the expiry date of such Letter of Credit computed at the rate -15- 21 of one tenth of one percent (1/10 of 1%) per annum on the outstanding face amount of such Letter of Credit; provided that in no event shall the annual Facing Fees payable in respect of any such Letter of Credit be less than $500. All Facing Fees shall be paid in immediately available funds and shall be based on a 360 day year and actual days elapsed. Accrued Facing Fees for each Letter of Credit shall be due and payable in arrears on each Payment Date and on the termination or expiration date of such Letter of Credit (or if earlier, the termination in full of the Total Commitment). In addition to the Facing Fees, the Borrower shall pay the Issuing Bank, solely for the Issuing Bank's account, its customary administrative service charges relating to the issuance of, amendment to, payment under and transfer of any Letters of Credit. Such amounts to be due and payable when such services are rendered by the Issuing Bank. (iii) On each Payment Date, the Issuing Bank shall pay the aggregate amount of all L/C Fees collected by the Issuing Bank during the quarterly period then ended to the Agent. Upon receipt by the Agent, the Agent shall distribute such amount of L/C Fees to the Banks ratably according to their respective Commitment Percentages. (c) Subject to the provisions of Section 9.13, the Borrower shall pay the Agent, solely for the Agent's account, such other fees as agreed to in writing between the Borrower and the Agent, when and as due. Section 2.12. Setoff, Counterclaims and Taxes. (a) All payments of principal, interest, expenses, reimbursements, compensation, commitment fees, letter of credit fees, facing fees, arrangement fees or administration fees and any other amount from time to time due under the Notes, this Agreement or any other Loan Document shall be made by the Borrower without setoff or counterclaim and shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each member of the Bank Group, taxes imposed on its income or gross receipts, and franchise taxes imposed on it, by the jurisdiction under the laws of which such member of the Bank Group is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non- excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Loan Document to any member of the Bank Group, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) such member of the Bank Group receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from -16- 22 any payment made hereunder or under the Notes or the other Loan Documents or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes or the other Loan Documents (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each member of the Bank Group for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid, by such member of the Bank Group (whether paid on its own behalf or on behalf of any other member of the Bank Group) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 10 days from the date such member of the Bank Group makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Agent, at its address referred to in Section 9.03, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.12 shall survive the payment in full of the Credit Outstanding and all other amounts owing under the other Loan Documents. The provisions of this Section 2.12 are in all respects subject to Section 9.13 hereof. (f) Each member of the Bank Group represents and warrants to the Agent, the Issuing Bank and the Borrower and each Guarantor that it is either (i) a corporation organized under the laws of the United States or a state thereof or (ii) entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement and the other Loan Documents (x) under an applicable provision of a tax convention to which the United States is a party or (y) because it is acting through a branch, agency or office in the United States and any payment to be received by it hereunder is effectively connected with a trade or business in the United States. Upon becoming a party to this Agreement (whether by assignment or as an original signatory hereto), and in any event, from time to time upon the request of the Agent or the Borrower, each Bank which is not a corporation organized under the laws of the United States or any state thereof shall deliver to the Agent and the Borrower such forms, certificates or other instruments as may be required by the Agent or the Borrower in order to establish that such Bank is entitled to complete exemption from United States withholding taxes imposed on or with respect to any payments, including fees, to be made to such Bank under this Agreement and the other Loan Documents. Each Bank also agrees to deliver to the Borrower and the Agent and such other supplemental forms as may at any time be required as a result of the passage of time or changes in applicable law or regulation in order to confirm or maintain in effect its entitlement to exemption from U.S. withholding tax on any payments hereunder; provided, that the circumstances of the Bank at the relevant time and applicable laws permit it to do so. If a Bank determines, as a result of any change in either (1) applicable law, regulation or treaty, or in any official application thereof or (2) its circumstances, that it is unable to submit any form or certificate -17- 23 that it is obligated to submit pursuant to this Section 2.12(f), or that it is required to withdraw or cancel any such form or certificate previously submitted, it shall promptly notify the Borrower and the Agent of such fact. If a Bank is organized under the laws of a jurisdiction outside the United States, and the Borrower and the Agent have not received forms, certificates or other instruments indicating to their satisfaction that all payments to be made to such Bank hereunder are not subject to United States withholding tax or the Agent otherwise has reason to believe that such Bank is subject to U.S. withholding tax, the Borrower shall withhold taxes from such payments at the applicable statutory rate. Each Bank shall indemnify and hold the Borrower, the Issuing Bank and the Agent harmless from any United States taxes, penalties, interest and other expenses, costs and losses incurred or payable by them as a result of either (A) such Bank's failure to submit any form or certificate that it is required to provide pursuant to this Section 2.12(f) or (B) reliance by the Borrower, the Issuing Bank or the Agent on any such form or certificate which such Bank has provided to them pursuant to this Section 2.12(f). (g) If a Bank shall receive a refund of any Taxes paid by the Borrower pursuant to this Section 2.12 by reason of the fact that such Taxes were not correctly or legally asserted, the Bank shall within 90 days after receipt of such refund pay to the Borrower the amount of such refund; provided, however, that in no event shall the amount paid by the Bank to the Borrower pursuant to this sentence exceed the amount of Taxes originally paid by the Borrower; and provided, further, that no Bank shall have any obligation under this Agreement to claim or otherwise seek to obtain any such refund. Section 2.13. Funding Losses. The Borrower shall indemnify each Bank against any loss or reasonable expense (including, but not limited to, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or reemploying deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Rate Loan) which such Bank may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any Borrowing hereunder the applicable conditions set forth in Article III, (b) any failure by the Borrower to borrow hereunder, or to Convert Loans hereunder after a Borrowing Request or Conversion Notice, respectively, has been given, (c) any payment, prepayment or Conversion of a Eurodollar Rate Loan required or permitted by any other provisions of this Agreement, including, without limitation, payments made due to the acceleration of the maturity of the Notes pursuant to Section 7.01, or otherwise made on a date other than the last day of the applicable Interest Period, (d) any default in the payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by notice of prepayment or otherwise) or (e) the occurrence of an Event of Default. Such loss or reasonable expense shall include, without limitation, an amount equal to the excess, if any, as determined by each Bank of (i) its cost of obtaining the funds for the Loan being paid, prepaid or Converted or not borrowed or Converted (based on the Eurodollar Rate applicable thereto) for the period from the date of such payment, prepayment or Conversion or failure to borrow or Convert to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow or Convert, the Interest Period for the Loan which would have commenced on the date of such failure to borrow or Convert) over (ii) the amount of interest (as estimated by such Bank) that would be realized by such Bank in -18- 24 reemploying the funds so paid, prepaid or Converted or not borrowed or Converted for such period or Interest Period, as the case may be. The Borrower shall pay to the Agent for the account of each Bank the amount shown as due on any certificate received under Section 2.16 within 10 days after its receipt of the same. Notwithstanding the foregoing, in no event shall any Bank be permitted to receive any compensation hereunder constituting interest in excess of the Highest Lawful Rate. Without prejudice to the survival of any other obligations of the Borrower hereunder, but subject to the last sentence of Section 2.16, the obligations of the Borrower under this Section 2.13 shall survive the termination of this Agreement and/or the payment or assignment of any of the Notes. Section 2.14. Change of Law. (a) If at any time after the Effective Date any Bank determines in good faith (which determination shall be conclusive) that any change in any applicable Requirement of Law, or in the interpretation, application or administration thereof makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or its Eurodollar Lending Office to fund or maintain any Eurodollar Rate Loan (any of the foregoing determinations being a "Eurodollar Event"), then, such Bank, at its option, may: (i) declare that Eurodollar Rate Loans will no longer be made or maintained by such Bank, whereupon the right of the Borrower to select Eurodollar Rate Loans for any Borrowing shall be suspended until such Bank shall notify the Agent that the circumstances causing such Eurodollar Event no longer exist; (ii) with respect to any Eurodollar Rate Loans of such Bank then outstanding, require that all such Eurodollar Rate Loans be Converted to Base Rate Loans, in which event all such Eurodollar Rate Loans shall automatically be Converted into Base Rate Loans on the effective date of such notice and all payments or prepayments of principal that would have otherwise been applied to repay such Converted Eurodollar Rate Loans shall instead be applied to repay the Base Rate Loans resulting from such Conversion; and/or (iii) with respect to any Eurodollar Rate Loans requested of such Bank but not yet made as or Converted into such, require that such Eurodollar Rate Loans be made as or Converted into, as applicable, Base Rate Loans. (b) Upon the occurrence of any Eurodollar Event, and at any time thereafter so long as such Eurodollar Event shall continue, such Bank may exercise its aforesaid option by giving written notice thereof to the Agent and the Borrower, such notice to be effective upon receipt thereof by the Borrower. Any Conversion of any Eurodollar Rate Loan which is required under this Section 2.14 shall be made, together with accrued and unpaid interest and all other amounts payable to such Bank under this Agreement with respect to such Converted Loan (including, without limitation, amounts payable pursuant to Section 2.13 hereof), on the date stated in the notice to the Borrower referred to above. Section 2.15. Increased Costs. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any Requirement of Law after the Effective Date or (ii) the compliance with any guideline issued or request made after the Effective Date by any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining Eurodollar Rate Loans, then the Borrower shall from time to time, subject to the provisions of Section 2.16 and Section 9.13, pay to the Agent for the account of such Bank additional amounts sufficient to -19- 25 compensate such Bank for such increased cost within 10 days after the receipt by the Borrower of a certificate received under Section 2.16 showing the amount due. (b) If any Bank shall have determined in good faith that any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards" or that the adoption of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration thereof by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or compliance by such Bank (or any Applicable Lending Office of such Bank) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority or comparable agency, increases the amount of capital required or expected to be maintained by such Bank or any corporation controlling such Bank from the level required as of the Effective Date, then the Borrower shall from time to time, subject to the provisions of Section 2.16 and Section 9.13, pay to such Bank additional amounts sufficient to compensate such Bank or such corporation in the light of such circumstances, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's Commitment hereunder. (c) If any law, executive order or regulation is adopted or interpreted by any central bank or other Governmental Authority so as to affect any of the Borrower's obligations or the compensation to any Bank or the Issuing Bank in respect of the Letters of Credit or the cost to such Bank or the Issuing Bank of establishing and/or maintaining the Letters of Credit (or any participation therein), then the Borrower shall from time to time, subject to the provisions of Section 2.16 and Section 9.13, reimburse or indemnify such Bank or the Issuing Bank, as the case may be, with respect thereto so that such Bank or the Issuing Bank, as the case may be, shall be in the same position as if there had been no such adoption or interpretation. The protection of this Section 2.15 shall be available to the Issuing Bank and the Banks regardless of any possible contention of invalidity or inapplicability of law, regulation or condition which shall have been imposed. Section 2.16. Claims Certificate. Each Bank or the Issuing Bank, as the case may be, will notify the Borrower of any event occurring after the date of this Agreement which will entitle such Bank or the Issuing Bank, as the case may be, to compensation or indemnification pursuant to Sections 2.12, 2.13 or 2.15 as promptly as practicable after such Bank obtains knowledge of the occurrence of such event. A certificate of such Bank or the Issuing Bank, as the case may be, setting forth in reasonable detail (i) such amount or amounts as shall be necessary to compensate such Bank (or participating banks or other entities pursuant to Section 9.02) or the Issuing Bank, as the case may be, as specified above and (ii) the calculation of such amount or amounts shall be delivered to the Borrower (with a copy to the Agent) and shall be conclusive absent manifest error. The Borrower shall pay to such Bank or to the Issuing Bank, as the case may be, the amount shown as due on any such certificate within ten (10) days after its receipt of the same. Subject to the last sentence of this Section 2.16, the failure of any Bank or the Issuing Bank to demand any such compensation or indemnification shall not constitute a waiver of the right of such Bank, any other -20- 26 Bank or the Issuing Bank, to demand any such compensation or indemnification as such rights are set forth herein. In no event shall the Borrower be obligated to compensate any Bank pursuant to Sections 2.12, 2.13, or 2.15 for any such amount that accrued more than one hundred eighty (180) days prior to the date notice is given to the Borrower by the Bank requesting such compensation. ARTICLE III CONDITIONS OF CREDIT Section 3.01. Conditions Precedent to Effectiveness, the Initial Borrowing or Letter of Credit. The obligation of each Bank to make its initial Loan on the occasion of the initial Borrowing hereunder or the obligation of the Issuing Bank to issue the initial Letter of Credit hereunder, as the case may be, is subject to the conditions precedent that the Agent shall have received on or before the date of such initial Borrowing or initial Letter of Credit issuance, all of the following, each in form and substance reasonably satisfactory to the Bank Group and in such number of counterparts as may be reasonably requested by the Agent: (a) The following Loan Documents duly executed by the Persons indicated below: (i) this Agreement executed by the Borrower and each member of the Bank Group, (ii) the Notes executed by the Borrower, (iii) the Fleet Mortgages executed by the Guarantors, as applicable, (iv) the Security Agreements executed by each Guarantor, (v) the Assignments of Earnings executed by each Guarantor, (vi) the Collateral Assignments of Insurance executed by each Guarantor, (vii) the Pledge Agreement executed by the Borrower, and (viii) the Guaranty Agreements executed by each Guarantor. (b) Evidence that the Liens created by the Security Documents have been duly perfected and constitute valid first priority Liens, which shall include, without limiting the generality of the foregoing: (i) the delivery to the Collateral Agent of such financing statements under the Uniform Commercial Code for filing in such jurisdictions as the Collateral Agent may require; (ii) the delivery to the Collateral Agent of the Fleet Mortgages for filing in such jurisdictions as the Collateral Agent may require; and (iii) delivery of certificates representing the "Pledged Shares" described in the Pledge Agreement and related stock powers executed in blank by the Borrower. -21- 27 (c) A certificate of the secretary or an assistant secretary of the Borrower certifying, inter alia, (i) true and correct copies of resolutions adopted by the Board of Directors of the Borrower (A) authorizing the execution, delivery and performance by the Borrower of the Loan Documents to which it is or will be a party and the Borrowings to be made or Letters of Credit to be issued thereunder and the consummation of the transactions contemplated thereby, and (B) authorizing officers of the Borrower to negotiate, execute and deliver the Loan Documents to which it is or will be a party and any related documents, including, without limitation, any agreement contemplated by this Agreement, (ii) true and correct copies of the articles of incorporation and bylaws (or other similar charter documents) of the Borrower and (iii) the incumbency and specimen signatures of the officers of the Borrower executing any Loan Documents to which it is a party. (d) A certificate of the secretary or an assistant secretary of each Guarantor certifying, inter alia, (i) true and correct copies of resolutions adopted by the Board of Directors of such Person (A) authorizing the execution, delivery and performance by such Person of the Loan Documents to which it is or will be a party and the consummation of the transactions contemplated thereby, and (B) authorizing officers of such Person to execute and deliver the Loan Documents to which it is or will be a party and any related documents, including, without limitation, any agreement or Security Document contemplated by this Agreement, (ii) true and correct copies of the articles of incorporation and bylaws (or other similar charter documents) of such Person and (iii) the incumbency and specimen signatures of the officers of such Person executing any Loan Documents to which it is a party. (e) Certificates of appropriate public officials as to the existence and good standing of the Borrower in the State of Texas. (f) Certificates of appropriate public officials as to the existence and good standing of each Guarantor in the State of Delaware and certificates of appropriate public officials as to the authority of each Guarantor to do business in the State of Texas. (g) A written appraisal report, in form and substance satisfactory to the Agent, dated as of January 9, 1997 and prepared by Normarine Offshore Consultants, Inc., setting forth the Market Value of each offshore drilling rig and other vessel owned by the Borrower and its Subsidiaries as of such date (the "Initial Rig Appraisal Report"). (h) Evidence that the Indebtedness owed by Marine 300 Series (and guaranteed by the Borrower) to CIT Group/Equipment Financing, Inc. has been (or with the proceeds of the initial Borrowing, will be) paid in full and the underlying credit facility has been cancelled and all Liens securing such Indebtedness have been released. (i) Copies of all authorizations, consents, approvals, licenses, filings or registrations obtained from or made with any Governmental Authority or any other Person in connection with the execution, delivery and performance of the Loan Documents, together with a certificate from a Responsible Officer of the Borrower to the effect that all such authorizations, -22- 28 consents, approvals, licenses, filings or registrations have been obtained or made, as applicable, and are in full force and effect. (j) A detailed report from the Borrower's independent maritime insurance broker with respect to all insurance policies and programs in effect with respect to the Mortgaged Rigs, specifying for each such policy or program the amount thereof, the risks insured against thereby, the name of the insurer and each insured party thereunder and the policy or other identification number thereof, together with a certificate from such broker certifying that all such policies and programs are (i) in full force and effect, (ii) are placed with such insurance companies, underwriters or associations, in such amounts, against such risks, and in such form, as are normally issued against by Persons of similar size and established reputation engaged in the same or similar businesses and similarly situated and as are necessary or advisable for the protection of the Collateral Agent as mortgagee, and (iii) conform with the requirements of this Agreement and the Security Documents. (k) A certificate signed by a Responsible Officer of the Borrower certifying as to the satisfaction of the conditions specified in Section 3.02(a). (l) The favorable, signed opinions of Vinson & Elkins L.L.P., New York, counsel to the Borrower and its Subsidiaries, Griggs & Harrison, P.C., special counsel to the Bank Group and Frank de la Guardia, special Panamanian counsel to the Borrower, each addressed to the Agent and the Bank Group, in form and substance reasonably satisfactory to the Agent and its counsel. (m) A written confirmation from the Process Agent of its appointment and acceptance as process agent for the Borrower and each Guarantor. (n) The payment to the Bank Group of the fees due to them as of such date under the Loan Documents, and the payment of all legal fees and expenses of counsel to the Agent, including those of Andrews & Kurth L.L.P. (o) Such other documents, certificates and opinions as the Agent may reasonably request relating to this Agreement and the other Loan Documents. Section 3.02. Conditions Precedent to All Letters of Credit and Loans. The obligation of the Issuing Bank to issue any Letter of Credit, and of each Bank to make any Loan, shall be subject to the further conditions precedent that (a) on the Borrowing Date of such Loan or the issuance date of such Letter of Credit, as the case may be, the following statements shall be true, and the Borrower, by virtue of its delivery of a Borrowing Request or a Letter of Credit Request, as applicable, shall be deemed to have certified to the Bank Group as of such date that (i) the representations and warranties contained in Article IV are true and correct on and as of such date, before and after giving effect to such Loan or Letter of Credit, as the case may be, and as though made on and as of such date, (ii) no Default or Event of Default has occurred and is continuing, or would result from such Loan or Letter of Credit, as the case may be, and (iii) no event has occurred that could reasonably be expected to have a Material Adverse Effect on the Borrower or any of its -23- 29 Subsidiaries and (b) the Agent shall not have received any notice under Section 5.01(e), Section 5.01(f), Section 5.01(g), or Section 5.01(h). ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Bank Group to enter into this Agreement, the Borrower hereby represents and warrants to the Bank Group as follows: Section 4.01. Corporate Existence. Each of the Borrower and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified or licensed to transact business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the conduct of its operations or the ownership or leasing of its properties requires such qualification or licensing, except where the failure to be so qualified or licensed could not reasonably be expected to have a Material Adverse Effect. Schedule 4.01 is a complete list of the Borrower's Subsidiaries as of the Execution Date. Section 4.02. Corporate Authority; Binding Obligations. Each of the Borrower and its Subsidiaries has all requisite corporate power and authority to conduct its business, to own, operate and encumber its Property, and to execute, deliver and perform all of its obligations under the Loan Documents executed by, or to be executed by, such Person. The execution, delivery and performance of each of the Loan Documents to which the Borrower or any of its Subsidiaries is a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action. Each of the Loan Documents to which the Borrower or any of its Subsidiaries is a party has been duly executed and delivered by such Person, is in full force and effect and constitutes the legal, valid and binding obligation of such Person, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditor's rights generally and general principles of equity. Section 4.03. No Conflict. The execution, delivery and performance by the Borrower and its Subsidiaries of each Loan Document to which such Person is a party and the consummation of each of the transactions contemplated thereby do not and shall not, by the lapse of time, the giving of notice or otherwise: (a) constitute a violation of any Requirement of Law or a breach of any provision contained in the articles or certificate of incorporation or bylaws of such Person, or any shareholder agreement pertaining to such Person, or contained in any material agreement, instrument or document to which it is now a party or by which it or its properties is bound, except for such violations or breaches that could not reasonably be expected to have a Material Adverse Effect; or (b) result in or require the creation or imposition of any Lien whatsoever upon any of the Properties of the Borrower or any of its Subsidiaries (other than Liens in favor of the Agent or Collateral Agent arising pursuant to the Loan Documents). -24- 30 Section 4.04. No Consent. No authorization, consent, approval, license, or exemption of or filing or registration with, any Governmental Authority or any other Person, which has not been obtained, was, is or will be necessary for (a) the valid execution, delivery or performance by the Borrower or any of its Subsidiaries of any of the Loan Documents to which it is a party, (b) the legality, validity, binding effect or enforceability of any of the Loan Documents, or (c) the Borrower's or any of its Subsidiaries' ownership, use or operation of any of their Properties other than those listed on Schedule 4.04 and those that could not reasonably be expected to have a Material Adverse Effect. Section 4.05. No Defaults or Violations of Law. No Default or Event of Default has occurred and is continuing. No default (or event or circumstance occurred which, but for the passage of time or the giving of notice, or both, would constitute a default) has occurred and is continuing with respect to any note, indenture, loan agreement, mortgage, lease, deed or other agreement to which the Borrower or any of its Restricted Subsidiaries is a party or by which any of them or their Properties is bound, except for such defaults that could not reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any of its Restricted Subsidiaries is in violation of any applicable Requirement of Law except for such violations that could not reasonably be expected to have a Material Adverse Effect. Section 4.06. Financial Position. (a) Prior to the Execution Date, the Borrower has furnished to the Bank Group (i) the consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal year then ended, audited by KPMG Peat Marwick LLP, independent certified public accountants, and (ii) the consolidated balance sheet of the Borrower and its Subsidiaries as at September 30, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine-month period then ended. The financial statements referred to in the previous sentence have been prepared in accordance with GAAP consistently applied throughout the periods involved and present fairly in all material respects the financial condition of the Borrower and its Subsidiaries as of the dates thereof and the results of their operations for the periods then ended. No event has occurred since December 31, 1995 that could reasonably be expected to have a Material Adverse Effect. (b) Except as fully reflected in the audited financial statements referred to in paragraph (a) of this Section 4.06, as of the Execution Date, there are no liabilities or obligations of the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, could reasonably be expected to have a Material Adverse Effect. (c) On and as of the Effective Date, on a pro forma basis after giving effect to all Indebtedness incurred, and to be incurred, and Liens created, and to be created, by the Borrower and its Subsidiaries in connection therewith, (x) the sum of the assets, at a fair valuation, of the Borrower and its Subsidiaries taken as a whole will exceed its debts, (y) the Borrower and its Subsidiaries taken as a whole will not have incurred or intended to, or believe that they will, incur debts beyond -25- 31 their ability to pay such debts as such debts mature and (z) the Borrower and its Subsidiaries taken as a whole will not have unreasonably small capital with which to conduct its business. Section 4.07. Litigation. Except as set out in Schedule 4.07, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower threatened against or affecting the Borrower or any of its Restricted Subsidiaries, or the Properties of any such Person, before or by any Governmental Authority or other Person, which could reasonably be expected to have a Material Adverse Effect. Section 4.08. Use of Proceeds. (a) The Borrower's uses of the proceeds of the Loans and of the Letters of Credit are, and will continue to be, legal and proper corporate uses (duly authorized by Borrower's Board of Directors), and such uses do not violate and are otherwise consistent with the terms of the Loan Documents, including, without limitation, Section 5.09, and all Requirements of Law (including Regulations G, T, U and X of the Board of Governors of the Federal Reserve System). (b) Neither the Borrower nor any of its Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U), and no part of the proceeds of any Loan or Letter of Credit will be used, directly or indirectly, (i) to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or (ii) for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve the Borrower or any of its Subsidiaries in a violation of Regulation X. Section 4.09. Governmental Regulation. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act, as amended, the Investment Company Act of 1940, as amended, or any other Requirement of Law such that the ability of any such Person to incur Indebtedness is limited or its ability to consummate the transactions contemplated by this Agreement or the other Loan Documents is impaired. Section 4.10. Disclosure. The schedules, documents, exhibits, reports, certificates and other written statements and information furnished by or on behalf of the Borrower or any of its Subsidiaries to the Bank Group do not contain any material misstatement of fact, or omit to state a Material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading. Neither the Borrower nor any of its Subsidiaries has withheld any fact known to it which has or could reasonably be expected to have a Material Adverse Effect. Section 4.11. ERISA. (a) The Borrower, and each ERISA Affiliate and Subsidiary have operated and administered each Pension Plan and Other Benefit Plan in compliance with all applicable laws, except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Borrower nor any ERISA Affiliate or Subsidiary has incurred any liability pursuant to Title I or IV of ERISA or the penalty -26- 32 or excise tax provisions of the Internal Revenue Code relating to employee benefit plans (as defined in Section 3 of ERISA); and no event, transaction or condition has occurred or exists or is threatened that could reasonably be expected to result in the incurrence of any such liability by the Borrower or any ERISA Affiliate or Subsidiary, or in the imposition of any Lien on any of the Properties of the Borrower or any ERISA Affiliate or Subsidiary, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Internal Revenue Code, other than such liabilities or Liens as could not be reasonably expected to have a Material Adverse Effect. (b) The present value of the aggregate benefit liabilities under each Pension Plan subject to Title IV of ERISA, determined as of the end of such Pension Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Pension Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Pension Plan allocable to such benefit liabilities by an amount that is Material. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in Section 3 of ERISA. (c) The Borrower and its ERISA Affiliates and Subsidiaries do not currently and have never had any liability or obligation with respect to any Material liabilities (and are not subject to Material contingent withdrawal liabilities) under section 4201 or 4204 of ERISA with respect to any Multiemployer Plan. (d) The expected post-retirement benefit obligation (determined as of the last day of the Borrower's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Internal Revenue Code ("COBRA")) of the Borrower and its ERISA Affiliates and Subsidiaries is not Material and, except as modified by COBRA, such obligations can be unilaterally terminated at any time by the Borrower, or its ERISA Affiliates and Subsidiaries without any Material liability. Section 4.12. Payment of Taxes. The Borrower has filed, and has caused each of its Subsidiaries to file, all federal, state and local tax returns and other reports that the Borrower and each such Subsidiary are required by law to file and have paid all taxes and other similar charges that are due and payable pursuant to such returns and reports, except to the extent any of the same are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, and with respect to which adequate reserves have been set aside on the books of such Person in accordance with GAAP. Section 4.13. Title and Liens. (a) The Borrower and each of its Subsidiaries have good title to the Collateral and all of its other material Properties, free and clear of all Liens except Liens permitted by Section 6.02. -27- 33 (b) All material agreements necessary for the conduct of the business of the Borrower and its Restricted Subsidiaries are valid and subsisting, in full force and effect and, to the knowledge of the Borrower, there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such agreement, which would affect in any Material respect the conduct of the business of the Borrower and its Restricted Subsidiaries. (c) Schedule 4.13(c) sets forth all the offshore drilling rigs and other vessels owned by or chartered by the Borrower and each of its Subsidiaries on the Execution Date, and identifies the registered owner, flag, official or patent number, as the case may be, the home port, class, location and operating status on the Execution Date, and, if chartered-in by the Borrower or any of its Subsidiaries, the name and address of the owner of such chartered-in vessel. Section 4.14. Patents, etc. The Borrower and each of its Subsidiaries has obtained all material patents, trademarks, service marks, trade names, copyrights, licenses and other rights, that are necessary for the operation of their businesses taken as a whole as presently conducted. Section 4.15. Environmental Matters. Except as disclosed in Schedule 4.15 hereto, (a) (i) the Borrower and each of its Subsidiaries possess all Material environmental, health and safety licenses, permits, authorizations, registrations, approvals and similar rights necessary under law or otherwise for such Person to conduct its operations as now being conducted, (ii) each of such licenses, permits, authorizations, registrations, approvals and similar rights is valid and subsisting, in full force and effect and enforceable by such Person, and (iii) such Person is in compliance with all terms, conditions or other provisions of such permits, authorizations, registrations, approvals and similar rights, except, in each case, to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect on such Person; (b) neither the Borrower nor any of its Subsidiaries has received any notices of any violation of, noncompliance with, or remedial obligation under, Requirements of Environmental Laws, and there are no writs, injunctions, decrees, orders or judgments outstanding, or lawsuits, claims, proceedings, investigations or inquiries pending or, to the knowledge of the Borrower, threatened, relating to the ownership, use, condition, maintenance, or operation of, or conduct of business related to, any Property owned, leased or operated by the Borrower or any of its Subsidiaries, other than those violations, instances of noncompliance, obligations, writs, injunctions, decrees, orders, judgments, lawsuits, claims, proceedings, investigations or inquiries that could not reasonably be expected to have a Material Adverse Effect on such Person; (c) there are no Material obligations, undertakings or liabilities arising out of or relating to Environmental Laws to which the Borrower or any of its Subsidiaries has agreed to, assumed or retained, or by which the Borrower or any of its Subsidiaries is adversely affected, by contract or otherwise; (d) there are no facts, circumstances or conditions on or related to any Property of the Borrower or its Subsidiaries that could reasonably be expected to have a Material Adverse Effect on any such Person or any of their respective Property or cause any such Property to be subject to any Material restrictions on its ownership, use, occupancy or transferability, and (e) neither the Borrower nor any of its Subsidiaries has received a written notice or claim to the effect that such Person is or may be liable to any Person as the result of a release or threatened -28- 34 release of a hazardous material or solid waste that could reasonably be expected to have a Material Adverse Effect on such Person. Section 4.16. Existing Indebtedness. Schedule 4.16 sets forth a true and complete list of all Indebtedness of the Borrower and each of its Subsidiaries on the Execution Date, in each case showing the aggregate principal amount thereof and the name of the respective borrower (or issuer) and any other Person which directly or indirectly guaranteed such Indebtedness. Section 4.17. Rig Classification. Except as set forth on Schedule 4.17, each offshore drilling rig owned or leased by the Borrower and its Subsidiaries is classified in the highest class available for rigs of its age and type with the American Bureau of Shipping, Inc. or another internationally recognized classification society acceptable to the Agent, free of any requirements or recommendations affecting class, other than (i) with respect to any Mortgaged Rig, as permitted under the Ship Mortgage relating thereto and (ii) with respect to any other rigs, such requirements or recommendations which if not cured by the owner thereof would not Materially diminish such rig's value. Section 4.18. Security Interests. Upon the filing of the Security Documents referred to in this Section 4.18, each of the Security Documents creates, as security for the Obligations purported to be secured thereby, a valid and enforceable perfected security interest in and Lien on all of the Collateral subject thereto, to the extent perfection of a security interest or Lien is governed by Article 9 of the UCC (as defined in the applicable Security Documents) or the Ship Mortgage Act (as defined in the Ship Mortgages), and subject to no other Liens (other than Excepted Liens) in favor of the Collateral Agent for the benefit of the Banks. No filings or recordings are required in order to perfect the security interests created under any Security Document except for filings or recordings required in connection with any such Security Document which shall have been made upon or prior to (or are the subject of arrangements, satisfactory to the Agent, for filing on or promptly after the date of) the execution and delivery thereof. Section 4.19. Labor Relations. Neither the Borrower nor its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (a) no unfair labor practice compliant pending against the Borrower or any of its Subsidiaries or threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Borrower or any of its Subsidiaries or, to the best of the Borrower's knowledge, threatened against any of them, (b) no strike, labor dispute, slowdown or stoppage pending against the Borrower or any of its Subsidiaries or, to the best of the Borrower's knowledge, threatened against the Borrower or any of its Subsidiaries and (c) no union representation petition existing with respect to the employees of the Borrower or any of its Subsidiaries and no union organizing activities are taking place, except with respect to any matter specified in clause (a), (b) or (c) above, either individually or in the aggregate, such as could not reasonably be expected to have a Material Adverse Effect. -29- 35 Section 4.20. Citizenship. Each of Management Co. and Marine 300 Series is qualified to own and operate the Mortgaged Rigs owned by such Person under the laws of the United States or such other jurisdiction in which such Mortgaged Rig is flagged. ARTICLE V AFFIRMATIVE COVENANTS So long as any Letter of Credit remains outstanding, any principal amount of any Loan, any principal amount of any reimbursement obligation in respect of any Letter of Credit, any amount of interest accrued under the Notes or in respect of any Letter of Credit, or any commitment or other fee, expense, compensation or any other amount payable to any member of the Bank Group under the Loan Documents shall remain unpaid or outstanding or any Bank shall have any Commitment hereunder. Section 5.01. Reporting Requirements. The Borrower shall deliver or cause to be delivered to the Agent (with sufficient copies for the Agent to distribute the same to the other members of the Bank Group): (a) As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of the Borrower: (i) copies of the unaudited consolidated balance sheets of the Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries as of the end of such period, and unaudited consolidated statements of operations, shareholders' equity and cash flows of the Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries for that fiscal period and for the portion of the fiscal year ending with such period, in each case setting forth in comparative form (on a consolidated basis) the figures for the corresponding period of the preceding fiscal year, all in reasonable detail; and (ii) a certificate of a Responsible Officer of the Borrower (1) stating that (A) such financial statements fairly present in all material respects the consolidated financial position and results of operations of the Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries, as applicable, in accordance with GAAP consistently applied, subject to year-end adjustments and the absence of notes and (B) no Default or Event of Default has occurred and is continuing and the Borrower is not aware of any event or condition which could reasonably be expected to create a Default or Event of Default or, if any such event has occurred and is continuing, the action the Borrower is taking or proposes to take with respect thereto, and (2) setting forth calculations demonstrating compliance by the Borrower with Sections 6.04, 6.05, and 6.06. (b) As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Borrower (i) copies of the audited consolidated balance sheets of the -30- 36 Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries as of the close of such fiscal year and audited consolidated statements of operations, shareholders' equity and cash flows of the Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries for such fiscal year, in each case setting forth in comparative form (on a consolidated basis) the figures for the preceding fiscal year, all in reasonable detail and accompanied by an opinion thereon (which shall not be qualified by reason of any limitation imposed by the Borrower) of independent accountants of recognized national standing selected by the Borrower and reasonably satisfactory to the Majority Banks, to the effect that such consolidated financial statements have been prepared in accordance with GAAP consistently applied (except for changes with which such accountants concur) and that such audit has been made in accordance with generally accepted auditing standards and (ii) a certificate of a Responsible Officer of the Borrower (A) setting forth calculations demonstrating compliance by the Borrower with Sections 6.04, 6.05 and 6.06 and (B) stating that no Default or Event of Default has occurred and is continuing or, if any such event has occurred and is continuing, the action the Borrower is taking or proposes to take with respect thereto. (c) As soon as available and in any event with forty-five (45) days after the end of each calendar quarter, a certificate of a Responsible Officer of the Borrower setting forth a calculation of the Margin Ratio (a "Margin Ratio Certificate") as of the end of such calendar quarter. (d) Within ten (10) days after the sending or filing thereof, copies of all reports and shareholder information which the Borrower or any of its Subsidiaries sends to any holders of its respective securities or the SEC, or otherwise makes available to the public or the financial community. (e) As soon as reasonably possible and in any event within ten (10) days after the Borrower or any of its Subsidiaries becomes aware of the occurrence or the likelihood of an occurrence of a Default or Event of Default, a certificate of a Responsible Officer of the Borrower setting forth details of such Default or Event of Default and the action which has been taken or is to be taken with respect thereto. (f) As soon as reasonably possible and in any event within ten (10) days after the Borrower or any of its Subsidiaries becomes aware thereof, written notice from a Responsible Officer of the Borrower of (i) the institution of or overt threat of, any action, suit, proceeding, governmental investigation or arbitration by any Governmental Authority or other Person against or affecting the Borrower or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect and that has not been previously disclosed in writing to the Bank Group pursuant to this Section 5.01 or (ii) any material development in any action, suit, proceeding, governmental investigation or arbitration already disclosed to the Bank Group pursuant to this Section 5.01. (g) As soon as reasonably possible and in any event within ten (10) days after the Borrower or any of its Subsidiaries becomes aware thereof, written notice from a Responsible Officer of the Borrower of (i) any violation of, noncompliance with, or remedial obligations under, -31- 37 Requirements of Environmental Laws that could reasonably be expected to have a Material Adverse Effect, (ii) any release or threatened release affecting any Property owned, leased or operated by the Borrower or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect, (iii) the amendment or revocation of any permit, authorization, registration, approval or similar right that could reasonably be expected to have a Material Adverse Effect or (iv) changes to Requirements of Environmental Laws that could reasonably be expected to have a Material Adverse Effect. (h) Promptly, and in any event within ten (10) days after becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Borrower or an ERISA Affiliate or Subsidiary proposes to take with respect thereto: (i) with respect to any Pension Plan, any Reportable Event, for which notice thereof has not been waived pursuant to applicable regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan, or the receipt by the Borrower or any ERISA Affiliate or Subsidiary of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any Material liability by the Borrower or any ERISA Affiliate or Subsidiary pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Internal Revenue Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Borrower or any ERISA Affiliate or Subsidiary pursuant to Title I or IV of ERISA or such penalty or excise tax provisions; or (iv) the inability or failure of the Borrower or any ERISA Affiliate or Subsidiary to make timely any payment or contribution to or with respect to any Pension Plan, Multiemployer Plan or Other Benefit Plan, if such failure, either separately or together with all other such failures could reasonably be expected to be Material; or (v) any event with respect to any Pension Plan, Multiemployer Plan and/or Other Benefit Plan, individually or in the aggregate, that could reasonably be expected to result in a Material liability. (i) On or before 30 days after the commencement of each fiscal year of the Borrower, a budget which includes income statements, balance sheets and cash flow statements of the Borrower and its Subsidiaries and the Borrower and its Restricted Subsidiaries for each of the four fiscal quarters of such fiscal year, including a breakdown of projected revenues, operating expenses, utilizations and capital expenditures for each offshore drilling rig owned or leased by the Borrower and its Subsidiaries. Together with each delivery of consolidated financial statements pursuant to Sections 5.01(a) and (b), a comparison of the current year to date financial results against the budgets required to be submitted pursuant to this clause (i) shall be presented. (j) On or before the fifteenth (15th) day of each calendar month, a report detailing (i) the then current location of each of the offshore drilling rigs and other vessels owned or leased by the Borrower and its Subsidiaries, and the then current term of and parties to any contract of any such vessels and (ii) for the previous calendar month, the average day rates and utilization for each such rig or vessel. -32- 38 (k) Promptly upon receipt thereof and following such time as the appropriate officers of the Borrower shall have had reasonable time to respond thereto, a copy of each formal report or "management letter" submitted to the Borrower by its independent accountants in connection with any annual, interim or special audit made by it of the books of the Borrower. (l) Such other information as any member of the Bank Group may from time to time reasonably request respecting the business, Properties, operations or condition, financial or otherwise, of the Borrower or any of its Subsidiaries. (m) In addition, on or before April 15 of each year commencing April 15, 1997, the Borrower will deliver to the Collateral Agent a report prepared by the Borrower's independent maritime insurance broker which report (i) lists all insurance policies and programs then in effect with respect to the Mortgaged Rigs, (ii) specifies for each such policy and program, (A) the amount thereof, (B) the risks insured against thereby, (C) the name of the insurer and each insured party thereunder and (D) the policy or other identification number thereof, and (iii) certifies that all such policies and programs are (A) in full force and effect, (B) are placed with such insurance companies, underwriters or associations, in such amounts, against such risks, and in such form, as are normally issued against by Persons of similar size and established reputation engaged in the same or similar businesses and similarly situated and as are necessary or advisable for the protection of the Collateral Agent as mortgagee, and (C) conform with the requirements of this Agreement and the Security Documents. Section 5.02. Taxes; Claims. The Borrower will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon such Person or upon its income or profits, or upon any Properties belonging to such Person, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon any Properties of such Person, other than any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted, and with respect to which adequate reserves are set aside on the books of such Person in accordance with GAAP. Section 5.03. Compliance with Laws. The Borrower will comply, and will cause each of its Subsidiaries to comply, with all applicable Requirements of Law imposed by, any Governmental Authority, if non-compliance with such Requirement of Law could reasonably be expected to have a Material Adverse Effect. Without limitation of the foregoing, the Borrower shall, and shall cause each of its Subsidiaries to, comply with all Requirements of Environmental Laws, operate Properties and conduct its business in accordance with good environmental practices, and handle, treat, store and dispose of hazardous materials or solid waste in accordance with such practices, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. Section 5.04. Insurance. In addition to any requirements set forth in the Ship Mortgages, the Borrower will maintain, and will cause each of its Subsidiaries to maintain insurance, -33- 39 with financially sound and reputable insurance companies or associations, against such risks and in such amounts (and with co-insurance and deductibles), as are usually insured against by Persons of similar size and established reputation engaged in the same or similar businesses and similarly situated, including insurance against fire, casualty, business interruption, injury to Persons or property and other normal hazards normally insured against. Other than with respect to worker's compensation policies, each policy listed on the schedule delivered pursuant to Section 3.01 and each additional policy maintained in compliance with this Agreement shall be endorsed showing the Collateral Agent as an additional insured, or a loss payee, as applicable. All policies of insurance required by the terms of this Agreement or any Security Document shall provide that at least 30 days' prior written notice be given to the Agent of any termination, cancellation, reduction or other modification of such insurance. So long as no Event of Default exists and the Borrower or Guarantor who owns the Mortgaged Rig affected by a Casualty Event shall have made all necessary repairs and replacements to the Mortgaged Rig affected by such Casualty Event within 90 days following such Casualty Event as required under Section 5.07, all Casualty Proceeds received by the Borrower, any Guarantor or the Collateral Agent as a result of such Casualty Event shall be applied in payment for all necessary repairs and replacement to the Mortgaged Rig affected by such Casualty Event, or, to the extent the costs of such repairs and replacements shall have been paid by the Borrower or a Guarantor, to reimburse such Person. If an Event of Default exists or all necessary repairs and replacements to any Mortgaged Rig affected by a Casualty Event shall not have been made within 90 days following such Casualty Event as required under Section 5.07, all Casualty Proceeds received by the Borrower, any Guarantor or the Collateral Agent as a result of such Casualty Event shall be applied to repay or provide cover for the Credit Outstanding as required under Section 2.07(b). If any excess Casualty Proceeds remain after all necessary repairs and replacements have been completed and all costs therefor have been paid in full, such excess Casualty Proceeds shall be used to repay or provide cover for the Credit Outstanding as required under Section 2.07(b). Section 5.05. Corporate Existence. The Borrower will preserve and maintain, and will cause each of its Restricted Subsidiaries to preserve and maintain, its existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each of its Subsidiaries to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is material to the business and operations of such Person or the ownership or leasing of the Properties of such Person except to the extent that a Subsidiary merges or consolidates in compliance with Section 6.09 or ceases to be a Subsidiary of Borrower if such cessation is permitted under this Agreement. Section 5.06. Inspections. From time to time during regular business hours upon reasonable prior notice (and subject to the requirements of applicable insurance policies), the Borrower will permit, and will cause each of its Subsidiaries to permit, any agents or representatives of any member of the Bank Group to examine and make copies of and abstracts from the records and books of account of, and visit the Properties of the Borrower and its Subsidiaries and to discuss the affairs, finances and accounts of any such Person with any of its independent public accountants, -34- 40 officers or directors. In connection with each visit to the Properties of the Borrower and its Subsidiaries, the Borrower will pay the reasonable out-of-pocket expenses of one representative of the Banks from the Borrower's principal place of business. Section 5.07. Maintenance of Properties. The Borrower will maintain and preserve, and will cause each Subsidiary of the Borrower to maintain and preserve, all of its Property necessary for the proper conduct of its business in good repair, good working order and condition, ordinary wear and tear excepted, and make all necessary and proper repairs, replacements, additions and improvements thereto to the extent and in the manner customary in the industry except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, the Borrower will, or will cause the Guarantor who owns the Mortgaged Rig affected by a Casualty Event, to make all necessary repairs and replacements to any Mortgaged Rig affected by a Casualty Event within 90 days following such Casualty Event. Section 5.08. Accounting Systems. The Borrower will keep, and will cause each of its Subsidiaries to keep, adequate records and books of account in which complete entries will be made in accordance with GAAP consistently applied (subject to year end adjustments), reflecting all financial transactions of such Person. The Borrower shall maintain or cause to be maintained a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP, and each of the financial statements described herein shall be prepared from such system and records. Section 5.09. Use of Loans and Letters of Credit. All Letters of Credit shall be issued for general corporate purposes consistent with the terms of this Agreement and all Requirements of Law. The Borrower will use the proceeds of all Loans hereunder (a) to pay the Indebtedness owing by Marine 300 Series to CIT Group/Equipment Financing, Inc. to the extent not paid prior to the Effective Date, (b) to refurbish and upgrade offshore drilling rigs of the Borrower and its Restricted Subsidiaries, (c) to acquire new offshore drilling rigs for the Borrower and its Restricted Subsidiaries, and (d) for other general corporate purposes consistent with the terms of this Agreement and all Requirements of Law. Section 5.10. Rig Appraisals. (a) On or before March 31 of each year commencing March 31, 1998, the Borrower shall deliver to the Banks a written appraisal report prepared by an Approved Rigbroker setting forth the Market Value of each offshore drilling rig and other vessel owned by the Borrower and its Subsidiaries as of the date appraised (each a "Rig Appraisal Report"). The cost of each such Rig Appraisal Report shall be paid by the Borrower. (b) At any time the Agent, at the request of the Majority Banks, may request that the Borrower deliver an additional Rig Appraisal Report to the Banks prepared by an Approved Rigbroker designated by the Agent. Upon receipt of such request by the Borrower, the Borrower shall retain such Approved Rigbroker to prepare such Rig Appraisal Report and deliver it to the Banks within 30 days after receipt of such request. The Borrower shall pay the costs of the first Rig Appraisal Report requested by the Agent under this Section 5.10(b) during each calendar year, and -35- 41 the Banks shall pay the costs of any subsequent Rig Appraisal Reports requested by the Agent under this Section 5.10(b) during such calendar year. (c) Each Rig Appraisal Report delivered under this Section 5.10 shall be in form, scope and substance reasonably satisfactory to the Agent. Section 5.11. Additional Guarantors. In the event the assets of any Restricted Subsidiary of the Borrower organized under the laws of the United States or any state or territory thereof, constitutes more than 5% of the combined book value of the assets of the Borrower and its Restricted Subsidiaries on a consolidated basis, such Restricted Subsidiary shall execute and deliver to the Agent a Guaranty Agreement guaranteeing the Obligations on the same basis as the other Guarantors and the Borrower shall execute and deliver to the Agent an amendment and supplement to the Pledge Agreement, in form and substance reasonably satisfactory to the Agent, pledging 100% of the capital stock of such Restricted Subsidiary as security for the Obligations and such financing statements, stock powers, legal opinions and other documents or certificates related thereto as the Agent may reasonably request. Section 5.12. Further Assurances in General. The Borrower shall, and shall cause each of its Subsidiaries to, protect and perfect the Liens contemplated by the Security Documents. The Borrower at its expense shall, and shall cause each of its Subsidiaries to, promptly execute and deliver all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Borrower or any of its Subsidiaries in the Loan Documents, including, without limitation, the accomplishment of any condition precedent that may have been temporarily waived by the Banks prior to the initial Borrowing or Letter of Credit or any subsequent Borrowings or Letters of Credit. ARTICLE VI NEGATIVE COVENANTS So long as any Letter of Credit remains outstanding, any principal amount of any reimbursement obligation in respect of any Letter of Credit, any principal amount of any Loan, any amount of interest accrued under the Notes or in respect of any Letter of Credit, or any commitment, facility or other fee, expense, compensation or any other amount payable to any member of the Bank Group under the Loan Documents shall remain unpaid or outstanding or any Bank shall have any Commitment hereunder: Section 6.01. Indebtedness Restriction. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist, any Indebtedness other than: (a) Indebtedness of the Borrower and the Guarantors under the Loan Documents; (b) Indebtedness of the Borrower or its Subsidiaries in respect of any Derivatives permitted by Section 6.03; -36- 42 (c) Non-Recourse Indebtedness in an aggregate amount not to exceed $100,000,000, so long as no Default exists on the date such Non-Recourse Indebtedness is created, incurred or assumed and the Borrower has given the Agent prior written notice thereof (accompanied by supporting documentation) that such Indebtedness constitutes Non-Recourse Indebtedness; (d) unsecured Indebtedness of the Borrower so long as (i) such Indebtedness is not owing to any Subsidiary of the Borrower, (ii) the terms of such Indebtedness do not require any principal payment or sinking fund payment on or prior to 90 days after the Maturity Date, (iii) such Indebtedness is subordinated to the Obligations on terms reasonably acceptable to the Majority Banks, (iv) the aggregate principal amount of such Indebtedness does not exceed $100,000,000 minus the aggregate amount of any Preferred Stock issued by the Borrower pursuant to Section 6.08(d), and (v) no Default exists on the date such unsecured Indebtedness is created, incurred or assumed; (e) unsecured Indebtedness owing by the Borrower to any of the Guarantors, so long as such Indebtedness is subordinated to the Obligations on terms reasonably acceptable to the Agent; (f) Indebtedness owing to the Borrower by any Guarantor or any other Subsidiary to the extent such Indebtedness is permitted by Section 6.10(i); (g) Indebtedness of Borrower and its Subsidiaries in the aggregate amount not to exceed $7,000,000 in addition to all other Indebtedness permitted by this Section 6.01; and (h) Indebtedness of the Guarantors in connection with any guarantees in favor of any protection and indemnity or war risk associations to the extent such guarantees are required under Clause 5.01(i) of any Fleet Mortgage. Section 6.02. Lien Restriction. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to be created, assumed or incurred or to exist, any Lien upon any of such Person's Property, whether now owned or hereafter acquired, other than the following Liens ("Excepted Liens"): (a) Liens created pursuant to this Agreement or any other Loan Document; (b) statutory liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings and for which the Borrower or its Subsidiaries have set aside on their books adequate reserves in accordance with GAAP consistently applied); (c) Liens imposed by law which were incurred in the ordinary course of business, such as carriers', warehousemen's and mechanics' liens, statutory landlord's liens, maritime liens and other similar liens arising in the ordinary course of business, and (x) which do not in the -37- 43 aggregate materially detract from the value of such Property or materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries or (y) which are being contested in good faith by appropriate proceedings (including the providing of bail), which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Lien or procuring the release of the Property subject to such lien from arrest or detention; and (d) immaterial Liens on any real property of the Borrower or any of its Subsidiaries; (e) Liens securing Indebtedness permitted by Section 6.01(g) so long as such Liens (i) do not attach to any Collateral and (ii) do not attach to any other offshore drilling rigs; (f) Liens existing on the Effective Date and listed on Schedule 6.02, without giving effect to any subsequent extensions or renewals thereof; (g) any interest or title of a lessor or charterer under any lease or charter permitted by this Agreement; (h) Liens securing Non-Recourse Indebtedness permitted by Section 6.01(c) so long as such Liens (i) do not attach to any Collateral and (ii) do not attach to any other Property except Property owned by an Unrestricted Subsidiary; and (i) Liens on cash and Cash Equivalents in an aggregate amount not to exceed $5,000,000 to secure performance of bids, trade contracts, leases, charters and other similar obligations incurred in the ordinary course of business. Section 6.03. Derivatives. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any Derivatives other than (a) interest rate Derivatives entered into by Unrestricted Subsidiaries so long as neither the Borrower nor any Restricted Subsidiary shall have any direct or indirect liability or obligation with respect thereto, and (b) interest rate and foreign exchange Derivatives entered into with any Bank or otherwise approved by the Majority Banks. Section 6.04. Interest Coverage Ratio. The Borrower will not permit the ratio of (a) EBITDA to (b) the sum of (i) Interest Expense and (ii) the amount of dividends paid by the Borrower on its Preferred Stock, for any twelve month period, to be less than 2 to 1. Section 6.05. Leverage Ratio. The Borrower will not permit the Leverage Ratio, to be greater than 0.40 to 1 at any time. Section 6.06. Working Capital. The Borrower will not permit the sum of (a) its Consolidated Current Assets, minus (b) its Consolidated Current Liabilities, to be less than $1.00, measured as of the last day of any calendar quarter. -38- 44 Section 6.07. Collateral Maintenance. The Borrower shall at all times maintain a Collateral Maintenance Ratio of at least 2 to 1 and a Preferred Rig Ratio of at least 1.5 to 1. The Borrower will not at any time permit the Collateral to include (a) less than a total of four Mortgaged Rigs and (b) less than three Preferred Rigs. Section 6.08. Sales of Assets or Preferred Stock. The Borrower will not, and will not permit any of its Restricted Subsidiaries to (a) sell, transfer, assign or otherwise dispose of the capital stock of any Guarantor, (b) sell, transfer, assign or otherwise dispose of any Mortgaged Rig other than (i) Collateral Dispositions to an Unrestricted Subsidiary (ii) Collateral Dispositions to any other Person for a cash consideration in an amount at least equal to the Fair Market Value of the Mortgaged Rig so disposed of or for such other consideration reasonably acceptable to the Majority Banks, (c) sell, transfer, assign or otherwise dispose of any Property (except for sales or other dispositions of drill pipe or other similar items of inventory in the ordinary course of business) if a Default exists prior to such sale, transfer, assignment or other disposition or would occur as a result thereof, or (d) sell or issue any Preferred Stock other than Preferred Stock of the Borrower provided that (i) such Preferred Stock is not issued to or held by any Subsidiary of the Borrower, (ii) such Preferred Stock is not subject to purchase, retirement, redemption, exchange or conversion (other than exchange for or conversion to common stock of the Borrower), in whole or in part under any circumstances whatsoever at any time prior to 90 days after the Maturity Date, (iii) such Preferred Stock is subordinate in right of payment of dividends and liquidation preference to the Obligations, (iv) the aggregate amount of such Preferred Stock does not exceed $100,000,000 minus the aggregate principal amount of any outstanding Indebtedness incurred in reliance on Section 6.01(d) and (v) no Default exists on the date such Preferred Stock is issued or sold or would occur as a result thereof. Section 6.09. Consolidation and Mergers. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, consolidate with or merge into any Person or permit any Person to consolidate with or merge into it, except that any Restricted Subsidiary of the Borrower may merge into or consolidate with any other Restricted Subsidiary of the Borrower (provided that if either of such Restricted Subsidiaries is a Guarantor, the surviving entity shall be a Guarantor) and any Restricted Subsidiary of the Borrower may merge into or consolidate with the Borrower (so long as the Borrower is the surviving entity), provided in each case that: (a) immediately after giving effect and pro forma effect thereto, no event shall occur and be continuing which constitutes either a Default or an Event of Default, and (b) if any Collateral is transferred pursuant to this Section 6.09, the Borrower shall provide the Agent with ten Business Days' notice prior to such transfer, and the Borrower or such Guarantor, as the case may be, owning the Collateral after such transfer shall ratify and confirm the Lien on such Collateral and shall take all action reasonably requested by the Collateral Agent in respect of the continued priority and perfection of such Collateral. Section 6.10. Restricted Disbursements. The Borrower will not, and will not permit any of its Subsidiaries to approve, make, incur or commit to incur any Restricted Disbursements after the Execution Date other than: -39- 45 (a) advances or extensions of credit on terms customary in the industry involved in the form of accounts receivable incurred, and investments, loans, and advances made in settlement of such accounts receivable, all in the ordinary course of business; (b) investments in Cash Equivalents; (c) dividends paid by any Subsidiary of the Borrower to the Borrower or any Guarantor; (d) dividends paid on Preferred Stock issued by the Borrower pursuant to Section 6.08(d) provided that no Default exists on the date such dividends are declared by the Borrower and such dividends are paid within 30 days after such declaration. (e) Indebtedness between the Borrower and its Subsidiaries to the extent permitted by Section 6.01; (f) investments in the Borrower or any Guarantor; (g) Subject to Sections 2.06 and 2.07, Collateral Dispositions to any Unrestricted Subsidiary; (h) acquisitions by the Borrower of capital stock or other equity interests in any other Person the consideration for which is common stock of the Borrower; provided that no Default exists or would occur as a result of such acquisition; and (i) other Restricted Disbursements in an aggregate amount equal to $5,000,000 plus thirty-three and one third percent (33 1/3%), if positive, zero percent (0%), if negative, of the cumulative Net Income for the period commencing on January 1, 1997 and ending on the date of determination. Section 6.11. Lines of Business. The Borrower will not, and will not permit any of its Subsidiaries to, materially alter the character of the business of the Borrower and its Subsidiaries taken on a whole from that conducted on the Effective Date. Section 6.12. Transactions with Affiliates. Neither the Borrower nor any of its Subsidiaries, will enter into any transaction with an Affiliate other than transactions entered into in the ordinary course of business and upon terms no less favorable than those that the Borrower or its Subsidiary, as applicable, could obtain in an arms length transaction with a Person that is not an Affiliate. Section 6.13. Charter and Leases. The Borrower shall not, and shall not permit any of its Subsidiaries to, incur, assume or suffer to exist, any obligation for payments under operating charters or leases (including, without limitation, rental payments and payments of taxes thereunder) -40- 46 with respect to any Property, except that the following shall be permitted: (a) obligations with respect to operating charters or leases of offshore drilling rigs or other equipment having terms of twelve months or less (including options); (b) obligations identified on Schedule 6.13; and renewals or extensions thereof on terms no less favorable, but in no event for a period longer, than those obligations identified on Schedule 6.13; (c) leases having an aggregate rental payment obligation for any 12 month period of less than $100,000; (d) obligations with respect to operating charters or leases between Restricted Subsidiaries of the Borrower; or (e) obligations as have been approved in writing by the Agent with the consent of the Majority Banks. Section 6.14. Rig Management. Neither the Borrower nor any of its Restricted Subsidiaries will at any time permit more than a total of two offshore drilling rigs owned by the Borrower and its Restricted Subsidiaries to be managed by any Person other than the Borrower and its Restricted Subsidiaries; provided that no such offshore drilling rig shall be managed by any Person who is not financially sound and reputable and no contract for the management of any such offshore drilling rig shall be for a term of longer than two years. Section 6.15. Restrictions on Subsidiaries. The Borrower will not, and will not permit any of its Restricted Subsidiaries to, create or otherwise cause or suffer to exist any encumbrance or restriction which prohibits or otherwise restricts (a) the ability of any Restricted Subsidiary to (i) pay dividends or make other distributions or pay any Indebtedness owed to the Borrower or any Subsidiary, (ii) make loans or advances to the Borrower or any Subsidiary, or (iii) transfer any of its Properties to the Borrower or any Subsidiary or (b) the ability of the Borrower or any Restricted Subsidiary of the Borrower to create, incur, assume or suffer to exist any Lien upon its Property to secure the Obligations or to become a guarantor of the Obligations, other than prohibitions or restrictions existing under or by reason of: (1) this Agreement and the other Loan Documents; (2) applicable law; (3) customary non-assignment provisions entered into in the ordinary course of business and consistent with past practices; (4) any restriction or encumbrance with respect to a Subsidiary of the Borrower imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary, so long as such sale or disposition is permitted under this Agreement; and (5) Liens, prohibitions or restrictions permitted by Section 6.02 and any documents or instruments governing the terms of any Indebtedness or other obligations secured by any such Liens, provided that such prohibitions or restrictions apply only to the Property subject to such Liens. ARTICLE VII DEFAULT AND REMEDIES Section 7.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) the Borrower shall fail to pay when due any installment of principal of the Notes or any reimbursement obligation in respect of any Letter of Credit; or -41- 47 (b) the Borrower shall fail to pay any interest on any Loan or any arrangement fee, commitment fee, administration fee, funding fee, L/C Fee, Facing Fee, commission, expense, compensation, reimbursement or other amount when due and such default shall continue for a period of three days; or (c) the Borrower shall fail to perform any term, covenant or agreement contained in Article VI, or Section 5.01(e) of this Agreement; or (d) the Borrower shall fail to perform any term, covenant or agreement contained in this Agreement (other than those referenced in subsections (a), (b) and (c) of this Section 7.01) and such failure shall not have been remedied within thirty (30) days after notice thereof from the Agent to the Borrower; or (e) the Borrower or any Guarantor shall fail to perform any term, covenant or agreement contained in any Loan Document (other than those referenced in subsections (a), (b), (c) and (d) of this Section 7.01) and such failure shall not have been remedied within thirty (30) days after notice thereof from the Agent to the Borrower; or (f) any representation or warranty made by the Borrower or any Guarantor or any of their respective officers, in any Loan Document or in any certificate, agreement, instrument or statement contemplated by or delivered pursuant to, or in connection with, any Loan Document shall prove to have been incorrect in any Material respect when made; or (g) the Borrower or any of its Restricted Subsidiaries shall (i) fail to pay Indebtedness having a principal amount in excess of $2,500,000 in the aggregate (other than the amounts referred to in subsections (a) and (b) of this Section 7.01) owing by such Person, or any interest or premium thereon, when due (or, if permitted by the terms of the relevant document, within any applicable grace period), whether such Indebtedness shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise; or (ii) fail to perform any term, covenant or condition on its part to be performed under any agreement or instrument evidencing, securing or relating to any such Indebtedness, when required to be performed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure is to accelerate, or to permit the holder or holders of such Indebtedness to accelerate, the maturity of such Indebtedness; or (h) any Loan Document shall (other than with the consent of the Majority Banks), at any time after its execution and delivery for any reason, cease to be in full force and effect or to provide the Liens contemplated thereby, or shall be declared to be null and void, or the validity or enforceability thereof or of the Liens contemplated thereby shall be contested by the Borrower or any of its Subsidiaries or the Borrower or any of its Subsidiaries shall deny in writing that it has any or further liability or obligation under any such Loan Document; or -42- 48 (i) the Borrower or any of its Restricted Subsidiaries shall be adjudicated insolvent, or shall generally not pay, or admit in writing its inability to pay, its debts as they mature, or make a general assignment for the benefit of creditors, or any proceeding shall be instituted by any such Person seeking to adjudicate it insolvent, seeking liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its Property, or the Borrower or any of its Restricted Subsidiaries shall take any action in furtherance of any of the actions set forth above in this Section 7.01(i); or (j) any proceeding of the type referred to in Section 7.01(i) is filed, or any such proceeding is commenced against the Borrower or any of its Restricted Subsidiaries or any such Person by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order for relief is entered in an involuntary case under the bankruptcy law of the United States, or an order, judgment or decree is entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating any such Person insolvent, or approving the petition in any such proceedings, and such order, judgment or decree remains in effect for sixty (60) days; or (k) a final judgment or order for the payment of money in excess of $2,500,000 (net of acknowledged, uncontested insurance coverage) shall be rendered against the Borrower or any of its Restricted Subsidiaries which has not been discharged, vacated or reversed and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) a stay of enforcement of such judgment or order by reason of a pending appeal or otherwise, shall not be in effect for any period of thirty (30) consecutive days; or (l) if (i) any Pension Plan shall fail to satisfy the minimum funding standards of ERISA or the Internal Revenue Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Internal Revenue Code, (ii) a notice of intent to terminate any Pension Plan shall have been or is reasonably expected to be filed with the PBGC (other than in connection with a termination under Section 4041(b) of ERISA) or the PBGC shall have instituted proceedings under Section 4042 of ERISA to terminate or appoint a trustee to administer any Pension Plan or the PBGC shall have notified the Borrower or any ERISA Affiliate or Subsidiary that a Pension Plan may become a subject to any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under all Pension Plans, determined in accordance with Title IV of ERISA, shall exceed $500,000, (iv) the Borrower or any ERISA Affiliate or Subsidiary shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA, the penalty or excise tax provisions of the Internal Revenue Code relating to employee benefit plans and/or other liability with respect to one or more Other Benefit Plans, (v) the Borrower or any ERISA Affiliate or Subsidiary withdraws from any Multiemployer Plan, (vi) the Borrower or any ERISA Affiliate or Subsidiary fails to make any contribution due, or payment to, any Pension Plan, Multiemployer Plan and/or Other Benefit Plan, or (vii) the Borrower or any ERISA Affiliate or Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment -43- 49 welfare benefits in a manner that would increase the liability of the Borrower or any ERISA Affiliate or Subsidiary thereunder, and any such event or events described in clauses (i) through (vii) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or (m) a Change of Control shall occur; or (n) any owner of a Mortgaged Rig shall cease to be qualified to own and operate such Mortgaged Rig under the laws of the United States or the jurisdiction in which such Mortgaged Rig is flagged; then, (i) upon the occurrence of any Event of Default described in Section 7.01(i) or Section 7.01(j), (A) the Commitments shall automatically terminate and (B) the entire unpaid principal amount of all Loans, all interest accrued and unpaid thereon, and all other amounts payable by the Borrower under this Agreement, the Notes and, the other Loan Documents shall automatically become immediately due and payable, without presentment for payment, demand, protest, notice of intent to accelerate, notice of acceleration or further notice of any kind, all of which are hereby expressly waived by the Borrower, and the Agent may direct the beneficiary of any outstanding Letter of Credit to make a drawing under such Letter of Credit in an amount equal to the full amount available thereunder and require from the Borrower immediate reimbursement for payments made pursuant to such drawing, or the Agent, to the extent cover had not already been provided, may direct the Borrower to deposit with the Collateral Agent cash equal to the aggregate amount of all Outstanding Letters of Credit as security for the Borrower's obligations in respect of such Letters of Credit, and (ii) upon the occurrence of any Event of Default, the Agent may, and upon the direction of the Majority Banks shall, by notice to the Borrower (A) declare the Commitments to be terminated, whereupon the same shall forthwith terminate and (B) declare the entire unpaid principal amount of all Loans, all interest accrued and unpaid thereon, and all other amounts payable by the Borrower under this Agreement, the Notes, and the other Loan Documents, to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable, without presentment for payment, demand, protest, notice of intent to accelerate, notice of acceleration or further notice of any kind, all of which are hereby expressly waived by the Borrower, and the Agent may direct the beneficiary of any outstanding Letter of Credit to make a drawing under such Letter of Credit in an amount equal to the full amount available thereunder and require from the Borrower immediate reimbursement for payments made pursuant to such drawing, or the Agent, to the extent cover had not already been provided, may direct the Borrower to deposit with the Collateral Agent cash equal to the aggregate amount of all Outstanding Letters of Credit as security for the Borrower's obligations in respect of such Letters of Credit. Section 7.02. Setoff in Event of Default. Upon the occurrence and during the continuance of any Event of Default, each member of the Bank Group is hereby authorized, at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower) and to the fullest extent permitted by applicable law, to setoff and apply any and all deposits at any time held and other indebtedness at any time owing by such member of the Bank -44- 50 Group (or any branch, Subsidiary or Affiliate of such member of the Bank Group) to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower or any other Person, now or hereafter existing under this Agreement, the Notes or the other Loan Documents, irrespective of whether or not such member of the Bank Group shall have made any demand for satisfaction of such obligations and although such obligations may be unmatured. Any member of the Bank Group exercising such right agrees to notify the Borrower promptly after any such setoff and application made by such Person; provided, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Bank Group under this Section 7.02 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Bank Group may have hereunder or under any applicable law. Section 7.03. No Waiver; Remedies. No failure on the part of any member of the Bank Group to exercise, or any delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided in any of the other Loan Documents or by law. Section 7.04. Enforcement. The amounts payable by the Borrower at any time hereunder and under the other Loan Agreements to each Bank shall be a separate and independent debt except that no Bank shall be entitled to enforce any right arising out of this Agreement, its Note or any other Loan Document except through the Agent acting for and on behalf of all Banks unless otherwise agreed by the Majority Banks. Section 7.05 Application of Proceeds. All proceeds received after or held at the time of maturity of the Obligations, whether by acceleration or otherwise shall be applied first to reimbursement of expenses and indemnities provided for in this Agreement and the other Loan Documents; second to accrued, unpaid interest on the Obligations; third to fees; fourth pro rata to the outstanding principal amount of the Obligations, fifth to serve as cash collateral to secure all Outstanding Letters of Credit; and sixth any excess after payment in full of all Obligations shall be paid to the Borrower or any Guarantor as appropriate or to such other Person who may be lawfully entitled to receive such excess. ARTICLE VIII THE AGENT, THE CO-AGENT AND THE ISSUING BANK Section 8.01. Authorization and Action. Each Bank hereby appoints and authorizes the Agent and the Issuing Bank to take such action in such capacity on such Bank's behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent or the Issuing Bank by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes or of amounts owing under the other Loan Documents), neither the Agent nor the Issuing Bank shall be required to exercise any -45- 51 discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and any other holders of Notes; provided, however, that neither the Agent nor the Issuing Bank shall be required to take any action which exposes it to personal liability or which is contrary to the Loan Documents or applicable law. Each of the Agent and the Issuing Bank is hereby expressly authorized on behalf of the other members of the Bank Group, without hereby limiting any implied authority, (a) to receive on behalf of each of the other members of the Bank Group any payment of principal of or interest on the Loans outstanding hereunder, any Letters of Credit and all other amounts accrued hereunder paid to such Persons, and promptly to distribute to each other member of the Bank Group its proper share of all payments so received; (b) to give notice within a reasonable time on behalf of each other member of the Bank Group to the Borrower of any Default or Event of Default specified in this Agreement of which the Agent has actual knowledge as provided in Section 8.09; (c) to distribute to the other members of the Bank Group copies of all notices, agreements and other material as provided for in this Agreement as received by such Person; and (d) to distribute to the Borrower any and all requests, demands and approvals received by such Person from any other member of the Bank Group. Nothing herein contained shall be construed to constitute the Agent or the Issuing Bank as a trustee for any holder of the Notes or of a participation therein, nor to impose on the Agent any duties or obligations other than those expressly provided for in the Loan Documents. Section 8.02. Reliance, Etc. None of the Agent, the Issuing Bank, their Affiliates and their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent and the Issuing Bank: (a) may treat the payee of any Note as the holder thereof until the Agent receives and accepts an Assignment and Acceptance entered into by the Bank which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.02; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement or the other Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Loan Documents on the part of the Borrower or any other Person or to inspect the property (including the books and records) of the Borrower or any other Person; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document, any collateral provided for therein, or any other instrument or document furnished pursuant thereto; and (f) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. None of the Agent, the Issuing Bank, their Affiliates and their respective directors, officers, employees or agents shall have any responsibility to the Borrower on -46- 52 account of the failure or delay in performance or breach by any Bank of any of its obligations hereunder or to any Bank on account of the failure of or delay in performance or breach by any other Bank or the Borrower of any of its obligations hereunder or in connection herewith; provided, however, that the foregoing shall not relieve BTCo of its obligations as a Bank hereunder. Section 8.03. BTCo and Affiliates. Without limiting the right of any other Bank to engage in any business transactions with the Borrower or any of its Affiliates, with respect to its Commitment, the Loans made by it, the Notes issued to it and its interest in the Outstanding Letters of Credit, BTCo shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Issuing Bank or the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include BTCo in its individual capacity. BTCo, or any of its Affiliates, may be engaged in, or may hereafter engage in, one or more loan, Letter of Credit, leasing, derivative or other financing activities not the subject of the Loan Documents (collectively, the "Other Financings") with the Borrower or any of its Affiliates, or may act as trustee on behalf of, or depositary for, or otherwise engage in other business transactions with the Borrower or any of its Affiliates (all Other Financings and other such business transactions being collectively, the "Other Activities") with no responsibility to account therefor to the Banks. Without limiting the rights and remedies of the Banks specifically set forth in the Loan Documents, no other Bank shall have any interest in (a) any Other Activities, (b) any present or future guarantee by or for the account of the Borrower not contemplated or included in the Loan Documents, (c) any present or future offset exercised by BTCo in respect of any such Other Activities, (d) any present or future Property taken as security for any such Other Activities or (e) any Property now or hereafter in the possession or control of BTCo which may be or become security for the obligations of the Borrower under the Loan Documents by reason of the general description of indebtedness secured, or of Property, contained in any other agreements, documents or instruments related to such Other Activities; provided, that if any payment in respect of such guarantees or such Property or the proceeds thereof shall be applied to reduction of the obligations evidenced hereunder and by the Notes, then each Bank shall be entitled to share in such application according to its pro rata portion of such obligations. Section 8.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any other member of the Bank Group and based on the financial statements referred to in Section 4.06 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any other member of the Bank Group and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 8.05. Indemnification. The Banks agree to indemnify each of the Agent, the Co-Agent and the Issuing Bank, their Affiliates or any of their respective directors, officers, agents or employees (to the extent not reimbursed by the Borrower), ratably according to its Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be -47- 53 imposed on, incurred by, or asserted against any such Person in any way relating to or arising out of this Agreement or the other Loan Documents or any action taken or omitted by any such Person under this Agreement or the other Loan Documents, provided, that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Person's gross negligence or willful misconduct. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE AGENT, THE CO-AGENT, THE ISSUING BANK AND THEIR AFFILIATES AND THEIR DIRECTORS, OFFICERS, AGENTS OR EMPLOYERS SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OF SUCH PERSON. Neither the Agent, the Co-Agent nor the Issuing Bank shall be required to do any act hereunder or under any other document or instrument delivered hereunder or in connection herewith or take any action toward the execution or enforcement of the agencies hereby created, or to prosecute or defend any suit in respect of this Agreement or the Loan Documents or any Collateral, unless indemnified to its satisfaction by the holders of the Notes against loss, cost, liability, and expense. If any indemnity furnished to the Agent, the Co-Agent and the Issuing Bank for any purpose is, in the opinion of such Person insufficient or becomes impaired, such Person may call for additional indemnity and not commence or cease to do the acts indemnified against until such additional indemnity is furnished. Without limitation of the foregoing, each Bank agrees to reimburse the Agent, the Co-Agent and the Issuing Bank promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by such Person in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and the other Loan Documents, to the extent that the Agent, the Co-Agent or the Issuing Bank is not reimbursed for such expenses by the Borrower. Section 8.06. Employees of the Agent and the Issuing Bank. Each of the Agent and the Issuing Bank may execute any of their respective duties under this Agreement, the other Loan Documents and any instrument, agreement or document executed, issued or delivered pursuant hereto or thereto or in connection herewith or therewith, by or through employees, agents and attorneys-in-fact, and shall not be answerable for the default or misconduct of any such employee, agent or attorney-in-fact selected by it with reasonable care. Each of the Agent and the Issuing Bank may, and upon the written instruction of the Majority Banks shall, enforce on behalf of the Banks any claims which the Agent and/or the Banks may have against any such employee, agent or attorney-in-fact, and any recovery therefrom shall be applied for the pro rata benefit of the Banks. Section 8.07. Successor Agent. The Agent may resign at any time by giving written notice thereof to the other members of the Bank Group and the Borrower. Upon any such resignation, the Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation, then -48- 54 the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank or corporation organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. So long as no Default exists, the Borrower shall have the right to approve each successor Agent, which approval shall not be unreasonably withheld. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement, subject to the requirement that such retiring Agent will execute such documents and take such actions as may be necessary or desirable to cause the successor Agent to be vested with all such rights, powers, privileges and duties. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. All reasonable costs and expenses incurred by the Bank Group in connection with any amendments or other documentation required by this Section 8.07 shall be paid by the Borrower pursuant to Section 9.04 hereof. Section 8.08. Successor Co-Agent and Issuing Bank. (a) The Co-Agent may resign at any time by giving written notice thereof to the other members of the Bank Group and the Borrower. Upon any such resignation, the Majority Banks shall have the right to appoint a successor Co-Agent. If no successor Co-Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within thirty (30) days after the retiring Co-Agent's giving of notice of resignation, then the retiring Co-Agent may, on behalf of the Banks, appoint a successor Co-Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. So long as no Default exists, the Borrower shall have the right to approve each successor Co-Agent, which approval shall not be unreasonably withheld. Upon the acceptance of any appointment as Co-Agent hereunder by a successor Co-Agent, such successor Co-Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Co-Agent, and the retiring Co-Agent shall be discharged from its duties and obligations under this Agreement, subject to the requirement that such retiring Co-Agent will execute such documents and take such actions as may be necessary or desirable to cause the successor Co-Agent to be vested with all such rights, powers, privileges and duties. After any retiring Co-Agent's resignation hereunder as Co-Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Co-Agent under this Agreement. All reasonable costs and expenses incurred by the Bank Group in connection with any amendments or other documentation required by this Section 8.08(a) shall be paid by the Borrower pursuant to Section 9.04 hereof. (b) The Issuing Bank may resign at any time by giving written notice thereof to the other members of the Bank Group and the Borrower. Upon any such resignation, the Majority Banks shall have the right to appoint a successor Issuing Bank. If no successor Issuing Bank shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within thirty (30) days after the retiring Issuing Bank's giving of notice of resignation, then the retiring Issuing Bank may, on behalf of the Banks, appoint a successor Issuing Bank, which shall be a -49- 55 commercial bank or corporation organized under the laws of the United States of America or of any state thereof and having a combined capital and surplus of at least $500,000,000. So long as no Default exists, the Borrower shall have the right to approve each successor Issuing Bank, which approval shall not be unreasonably withheld Upon the acceptance of any appointment as Issuing Bank hereunder by a successor Issuing Bank, such successor Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Issuing Bank, and the retiring Issuing Bank shall be discharged from its duties and obligations under this Agreement, subject to the requirement that such retiring Issuing Bank will execute such documents and take such actions as may be necessary or desirable to cause the successor Issuing Bank to be vested with all such rights, powers, privileges and duties. Without limiting the generality of the foregoing, the Borrower, the retiring Issuing Bank and the successor Issuing Bank will cause each Letter of Credit issued by the retiring Issuing Bank to be terminated and replaced by a Letter of Credit issued by the successor Issuing Bank. After any retiring Issuing Bank's resignation hereunder as Issuing Bank, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Issuing Bank under this Agreement. All reasonable costs and expenses incurred by the Bank Group in connection with any amendments or other documentation required by this Section 8.08(b) shall be paid by the Borrower pursuant to Section 9.04 hereof. Section 8.09. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it shall have received notice from a Bank or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default" or "notice of event of default," as applicable. If the Agent receives such a notice from the Borrower, the Agent shall give notice thereof to the other members of the Bank Group and, if such notice is received from a Bank, the Agent shall give notice thereof to the other members of the Bank Group and the Borrower. The Agent shall be entitled to take action or refrain from taking action with respect to such Default or Event of Default as provided in this Article VIII. Section 8.10. Execution of Loan Documents. Each member of the Bank Group hereby authorizes and directs the Agent and the Issuing Bank to execute and deliver on its behalf each Loan Document to be executed by the Agent pursuant to the terms of this Agreement. Section 8.11. Release of Mortgaged Rigs. Subject to Sections 2.06 and 2.07, with respect to any Collateral Disposition the Banks hereby consent to the release by the Agent and the Collateral Agent of the Liens created under any Loan Document on any Mortgaged Rig to the extent such Collateral Disposition is otherwise permitted under the terms of this Agreement. ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, any Note or any other Loan Document, or consent to any departure by any Person -50- 56 herefrom or therefrom, shall in any event be effective unless the same shall be in writing and signed by the Borrower and the Majority Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, that no amendment, waiver or consent shall, unless in writing and signed by the Borrower and all the Banks, do any of the following: (a) waive any of the conditions specified in Article III, (b) increase the Commitments of the Banks, (c) reduce the principal of, or interest on, the Notes, the reimbursement obligations in respect of the Letters of Credit or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes, the reimbursement obligations in respect of the Letters of Credit or any fees or other amounts payable hereunder, (e) release the Borrower or any other Person from its payment obligations to the Bank Group, regardless of whether such obligations are those of a primary obligor, a guarantor or surety, or otherwise, (f) authorize the Agent to release Liens against any Collateral covered by the Security Documents, (g) take action which expressly requires the signing of all the Banks pursuant to the terms of this Agreement, (h) reduce the Commitment Percentages or the aggregate unpaid principal amount of the Notes, or the number of Banks, as the case may be, required for the Agent, the Issuing Bank or the Banks or any of them to take any action under this Agreement or change the definition of Majority Banks or (i) amend this Section 9.01; provided, further, that no amendment, waiver or consent shall (i) unless in writing and signed by the Borrower and the Agent in addition to the Banks required above to take such action, affect the rights or duties of the Agent under this Agreement or any other Loan Document, (ii) unless in writing and signed by the Borrower and the Co-Agent in addition to the Banks required above to take such action, affect the rights or duties of the Co-Agent under this Agreement or any other Loan Document and (iii) unless in writing and signed by the Borrower and the Issuing Bank in addition to the Banks required above to take such action, affect the rights or duties of the Issuing Bank under this Agreement, the Letters of Credit, Letter of Credit Applications, or any other Loan Document. Any amendment, waiver or consent that becomes effective in accordance with this Section 9.01 shall be binding on all of the Banks and upon each future holder of any Note and upon the Borrower and the Guarantor without regard to whether such Note has been marked to indicate such amendment, waiver or consent. Notwithstanding the foregoing, the Agent and/or the Collateral Agent may (without the consent of the Banks) release the Lien created under the Security Documents on any Property of the Borrower or any of its Subsidiaries if the sale of such Property is permitted under Section 6.08. Section 9.02. Participation Agreements and Assignments. (a) Each Bank may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Loans owing to it, the Note or the Notes held by it, its interest in the Outstanding Letters of Credit and the other Loan Documents); provided, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations of the assignor under this Agreement and the other Loan Documents, and no assignment shall be made unless it covers a pro rata share of all rights and obligations of such assignor under this Agreement and the other Loan Documents, (ii) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall, unless otherwise agreed to by the Agent or unless such assignment is to a member of the Bank -51- 57 Group, in no event be less than $5,000,000, (iii) each such assignment to an Eligible Assignee who is not a member of the Bank Group must be approved by the Agent (which approval shall not be unreasonably withheld) and, so long as no Default exists, by the Borrower (which approval shall not be unreasonably withheld), and (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a recordation fee in the amount of $3,500 for processing such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank under the Loan Documents, (y) the assigning Bank thereunder shall, to the extent that rights and obligations under the Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from further obligations under the Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto) and (z) the assignee thereunder shall be deemed to have made, as of such effective date, to the Agent and the Borrower the representations and warranties set forth in Section 2.12(f) hereof. (b) By executing and delivering an Assignment and Acceptance, the assigning Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Person or the performance or observance by the Borrower or any other Person of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement and the other Loan Documents, together with copies of the financial statements referred to in Sections 4.06 and 5.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any member of the Bank Group (including such assigning Bank) and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent and the Issuing Bank, to take such action on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to such Person by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Bank. -52- 58 (c) The Agent shall maintain at its address referred to in Section 9.03 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Loans owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower and each member of the Bank Group may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any member of the Bank Group at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee representing that it is an Eligible Assignee, together with any Notes subject to such assignment and the administrative fee payable to the Agent for such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit 9.02 hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five (5) Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for the surrendered Notes, new Notes to the order of such Eligible Assignee in an amount corresponding to the Commitment assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount corresponding to the Commitment retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form prescribed by Section 2.05 hereto. The Agent shall promptly return the surrendered Note to the Borrower marked "cancelled" or otherwise appropriately defaced. (e) Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Loans owing to it and its interest in the Outstanding Letters of Credit); provided, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) and the other Loan Documents shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, and the participating banks or other entities shall not be considered a "Bank" for purposes of the Loan Documents, (iii) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.13 through 2.15 to the same extent that the Bank from which such participating bank or other entity acquired its participation would be entitled to the benefit of such cost protection provisions, so long as Borrower is not obligated to pay any amount under such Sections in excess of the amount that would have been due to such Bank under such Sections if no participations had been made by such Bank, and (iv) the Borrower and the other members of the Bank Group shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents, and such Bank shall retain the sole right to enforce the obligations of the Borrower -53- 59 relating to the Loans and the Letters of Credit to the extent permitted hereby and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers with respect to the amounts of any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans or the amount of any reimbursement obligations payable with respect to any Letter of Credit or the dates fixed for payments of principal or interest on the Loans or reimbursement obligations in respect of any Letters of Credit). (f) Any Bank may at any time pledge or assign all or any portion of its rights under this Agreement and the other Loan Documents to any Federal Reserve Bank without notice to or consent of the Borrower. No such pledge or assignment shall release the assigning Bank from its obligations hereunder. (g) The Agent, the Issuing Bank and each Bank may furnish any information concerning the Borrower or its Subsidiaries in the possession of the Agent or such Bank from time to time to Affiliates of the Agent or such Bank (including without limitation, in the case of Bankers Trust Company, BT Securities Corporation and its employees, to the extent necessary for the purposes contemplated by this Agreement, including, without limitation, the syndication of the credit facilities contemplated hereby) and, in the case of each Bank, to assignees and participants (including prospective assignees and participants) of such Bank; provided such recipient agrees to be bound by the terms of Section 9.15. If requested by the Borrower, such Bank will identify the prospective assignees and participants that have received such information. (h) Notwithstanding any other provisions of this Section 9.02, no transfer or assignment of the interests or obligations of any Bank hereunder or any grant of participation therein shall be permitted if such transfer, assignment or grant would require the Borrower to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any State. (i) Each Bank initially party to this Agreement hereby represents, and each Person that became a Bank pursuant to an assignment permitted by this Section 9.02 will, upon its becoming party to this Agreement, represent that it is a commercial lender, other financial institution or other "accredited" investor (as defined in SEC Regulation D) which makes loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that subject to the other provision of this Section 9.02, the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Bank shall at all times be within its exclusive control. Section 9.03. Notices. All correspondence, statements, notices, requests and demands (collectively "Communications") shall be in writing (including telegraphic Communications) and mailed, telegraphed, telecopied, facsimile transmitted or delivered as follows: -54- 60 if to the Borrower -- Marine Drilling Companies, Inc. One Sugar Creek Center Blvd., Suite 600 Sugar Land, Texas 77478 Attn: William H. Flores Telecopier: 281-243-3090 if to the Issuing Bank or the Agent-- Bankers Trust Company 130 Liberty Street, 14th Floor New York, New York 10006 Attention: James T. Cullen Telecopier: (212) 250-6029 or (212) 250-7351 with a copy to -- BT Securities Corporation 909 Fannin Street, Suite 3000 Houston, Texas 77010 Attention: Robert D. Wagner, Jr. Telecopier: (713) 759-6708 if to any Bank, at its Domestic Lending Office, or as to each such party, at such other address as such party shall designate in a written Communication to each of the other parties hereto. All such Communications shall be effective, in the case of written or telegraphed Communications, when deposited in the mails or delivered to the telegraph company, respectively, and, in the case of a Communication by telecopy or facsimile transmission, when telecopied or transmitted against receipt of a confirmation, in each case addressed as aforesaid, except that Communications to any member of the Bank Group pursuant to Article II and Article VIII shall not be effective until received by such Persons. Section 9.04. Costs and Expenses. The Borrower agrees to pay promptly (a) all reasonable costs and expenses (including fees and expenses of legal counsel) of the Agent and the Issuing Bank incurred in connection with the preparation, execution, delivery, filing, administration and recording of the Loan Documents and the syndication of this Agreement both before and after the date hereof, and (b) all reasonable costs and expenses of any member of the Bank Group incurred in connection with the enforcement of the Loan Documents including, but not limited to, the reasonable fees and out-of-pocket expenses of counsel for any member of the Bank Group, and local counsel who may be retained by such counsel, with respect thereto, and the costs and expenses in connection with the custody, preservation, or the sale of, or collection from, or other realization upon the sale of, or collection from, or other realization upon any Collateral covered by any of the Loan -55- 61 Documents. The agreements of Borrower contained in this Section 9.04 shall survive the termination of the Commitments and the payment of all other amounts owing under any of the Loan Documents. Section 9.05. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Bank Group and their respective successors and assigns, except that the Borrower may not assign or transfer its rights hereunder without the prior written consent of the Banks. Section 9.06. Return of Notes. As soon as possible, but in any event no later than ninety (90) days after Borrower has paid in full all outstanding Loans and the Commitments have been terminated, each Bank shall return to Borrower all outstanding Notes issued to such Bank marked "cancelled" or "paid" or otherwise defaced. Section 9.07. Survival of Representations and Warranties. All representations and warranties contained in this Agreement and the other Loan Documents or made in writing by the Borrower or any Guarantor in connection herewith or therewith, shall survive the execution and delivery of this Agreement, the Notes and the other Loan Documents. Any investigation by any member of the Bank Group shall not diminish in any respect whatsoever its right to rely on such representations and warranties. Section 9.08. Separability. Should any clause, sentence, paragraph, subsection, Section or Article of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement. The parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom by the parties hereto, and the remainder will have the same force and effectiveness as if such stricken part or parts had never been included herein. Section 9.09. Captions. The captions in this Agreement have been inserted for convenience only and shall be given no substantive meaning or significance whatsoever in construing the terms and provisions of this Agreement. Section 9.10. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. Section 9.11. Governing Law. THIS AGREEMENT (INCLUDING THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. -56- 62 Section 9.12. Submission to Jurisdiction. (a) The Borrower hereby irrevocably submits to the non-exclusive jurisdiction of any New York state court located in the Borough of Manhattan, City and State of New York, or any federal court located in the Southern District of New York over any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, and the Borrower irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such New York state or federal court; provided, nothing in this Section 9.12 is intended to waive the right of any member of the Bank Group to remove any such action or proceeding commenced in any such New York state court to an appropriate New York federal court to the extent the basis for such removal exists under applicable law. The Borrower hereby irrevocably appoints CT Corporation System (the "Process Agent"), with an office on the date hereof at 1633 Broadway, New York, New York 10019, as its agent to receive on behalf of it and its Properties service of copies of the summons and complaint and any other process which may be served in any such action or proceeding. Such service may be made by mailing by certified mail a copy of such process to the Borrower in care of the Process Agent at the Process Agent's above address, with a copy to the Borrower at its address specified herein and the Borrower hereby irrevocably authorizes and directs the Process Agent to accept such service on its behalf. As an alternative method of service, the Borrower also irrevocably consents to the service of any and all process in any such action or proceeding by the mailing by certified mail of copies of such process to it at its address specified herein. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section 9.12 shall affect the right of any member of the Bank Group to serve legal process in any other manner permitted by law or affect the right of any member of the Bank Group to bring any action or proceeding against the Borrower, or its Properties, in the courts of any other jurisdiction. Section 9.13. Limitation on Interest. Each provision in this Agreement and each other Loan Document is expressly limited so that in no event whatsoever shall the amount paid, or otherwise agreed to be paid, by the Borrower for the use, forbearance or detention of the money to be loaned under this Agreement or any other Loan Document or otherwise (including any sums paid as required by any covenant or obligation contained herein or in any other Loan Document which is for the use, forbearance or detention of such money), exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate, and all amounts owed under this Agreement and each other Loan Document shall be held to be subject to reduction to the effect that such amounts so paid or agreed to be paid which are for the use, forbearance or detention of money under this Agreement or such Loan Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. To the extent that the Highest Lawful Rate applicable to a Bank is at any time determined by Texas law, such rate shall be the "indicated rate ceiling" described in Section (a)(1) of Article 1.04 of Chapter 1, Subtitle 1, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended; provided, to the extent permitted by such Article, the Banks from time to time by notice from the Agent to Borrower may revise the aforesaid election of such interest rate ceiling as such ceiling affects the then-current or -57- 63 future balances of the Loans outstanding under the Notes. Notwithstanding any provision in this Agreement or any other Loan Document to the contrary, if the maturity of the Notes or the obligations in respect of the other Loan Documents are accelerated for any reason, or in the event of prepayment of all or any portion of the Notes or the obligations in respect of the other Loan Documents by the Borrower or in any other event, earned interest on the Loans and such other obligations of the Borrower may never exceed the maximum amount permitted by applicable law, and any unearned interest otherwise payable under the Notes or the obligations in respect of the other Loan Documents that is in excess of the maximum amount permitted by applicable law shall be cancelled automatically as of the date of such acceleration or prepayment or other such event and, if theretofore paid, shall be credited on the principal of the Notes or, if the principal of the Notes has been paid in full, held as collateral for any contingent or unmatured obligation of the Borrower, or, if there are no contingent or unmatured obligations of the Borrower then outstanding, refunded to the Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the Highest Lawful Rate, the Borrower and the Banks shall, to the maximum extent permitted by applicable law, amortize, prorate, allocate and spread, in equal parts during the period of the actual term of this Agreement, all interest at any time contracted for, charged, received or reserved in connection with this Agreement. Chapter 15, Subtitle 3, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended (relating to revolving loans and revolving triparty accounts), shall not apply to this Agreement or the Notes or the transactions contemplated hereby. Section 9.14. Indemnification. (a) The Borrower agrees to indemnify, defend and hold the Agent and each member of the Bank Group, their Affiliates and their officers, employees, agents, directors, shareholders and Affiliates (collectively, "Indemnified Persons") harmless from and against any and all loss, liability, damage, judgment, claim, deficiency or reasonable expense (including interest, penalties, reasonable attorneys' fees and amounts paid in settlement) incurred by or asserted against any Indemnified Person arising out of, in any way connected with, or as a result of (i) the execution and delivery of this Agreement and the other Loan Documents, the performance by the parties hereto and thereto of its obligations hereunder and thereunder (including but not limited to the making of the Commitments of each Bank) and consummation of the transactions contemplated hereby and thereby, (ii) the actual or proposed use of the Letters of Credit or the proceeds of the Loans, (iii) any violation by the Borrower or any of its Subsidiaries of any Requirement of Law, including but not limited to Environmental Laws, (iv) ownership by the Bank Group of any Property following foreclosure under the Security Documents, to the extent such losses, liabilities, damages, judgments, claims, deficiencies or expenses arise out of or result from the presence, disposal or release of any hazardous materials or solid waste in, on or under such property during the period owned, leased or operated by the Borrower or any of its Subsidiaries, including, without limitation, losses, liabilities, damages, judgments, claims, deficiencies or expenses which are imposed under Environmental Laws upon Persons by virtue of their ownership, (v) any member of the Bank Group being deemed an operator of any such real or personal property in circumstances in which no member of the Bank Group is generally operating or generally exercising control over such Property, to the extent such losses, liabilities, damages, judgments, claims, deficiencies or expenses arise out of or result from any hazardous materials or solid waste located in, on or under such property or (vi) any claim, litigation, investigation or proceeding relating -58- 64 to any of the foregoing, whether or not any Indemnified Person is a party thereto; provided that such indemnity shall not apply to any such losses, claims, damages, liabilities or related expenses that are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Person. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, IT IS THE EXPRESS INTENTION OF THE BORROWER THAT EACH INDEMNIFIED PERSON SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DEFICIENCIES, JUDGMENTS OR REASONABLE EXPENSES ARISING OUT OF OR RESULTING FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE, CONCURRENT OR CONTRIBUTORY) OF SUCH INDEMNIFIED PERSON. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 9.14 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT. Notwithstanding anything contained herein to the contrary, the Borrower shall not indemnify an Indemnified Person for any matters arising solely by reason of claims between the Banks or any Bank and the Agent or Co-Agent or a Bank's shareholder against the Agent, Co-Agent, or Bank. (b) Within a reasonable period of time after an Indemnified Person receives actual notice of any claim or the commencement of any action covered by this Section 9.14, the Indemnified Person shall, if a claim in respect thereof is to be made against the Borrower under this Section 9.14, notify the Borrower in writing of such claim or action; provided, however, that the failure to so notify the Borrower shall not relieve the Borrower from any liability which the Borrower may have to the Indemnified Person under this Section 9.14 unless, and only to the extent that, such Indemnified Person had actual notice of such claim or action and the obligations of the Borrower under this Section 9.14 have been significantly increased as a direct result of such failure. With respect to any claim or action brought against an Indemnified Person, and for which a claim in respect thereof is to be made against the Borrower under this Section 9.14, the Borrower and such Indemnified Person shall cooperate in the defense of any such claim or action and shall take those actions reasonably within their power to take which are reasonably necessary to preserve any legal defenses to such matters. If any such claim or action shall be brought against the Indemnified Person, so long as no Default exists, the Borrower shall be entitled to participate in the defense thereof, and, with the consent of such Indemnified Person, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Person. If the Borrower shall assume the defense of such claim or action, the Indemnified Person (i) shall nonetheless have the right to employ counsel to represent it if the Indemnified Person determines in good faith that a conflict of interest exists between the Borrower and the Indemnified Person, and the reasonable fees and expenses of such counsel shall be paid by the Borrower and (ii) may at any time revoke its consent with respect thereto and resume its own defense of such claim or action. Notwithstanding any provision hereof to the contrary, no consent order shall be entered into or claim or action settled unless (A) the Indemnified Person has given its prior written consent thereto and (B) the Borrower has been advised of the terms of such consent order or settlement and consulted with respect thereto. Section 9.15. Confidentiality. In the event that the Borrower or any of its Subsidiaries provides any member of the Bank Group with written confidential information -59- 65 belonging to the Borrower or any of its Subsidiaries, that has been identified in writing at the time of delivery as "confidential", each member of the Bank Group severally agrees to thereafter maintain such information in confidence in accordance with the standards of care and diligence that each utilizes in maintaining its own confidential information. This obligation of confidence shall not apply to such portions of the information which (i) are in the public domain, (ii) hereafter become part of the public domain without any member of the Bank Group breaching its obligation of confidence to the Borrower, (iii) are previously known by the Bank Group from some source other than the Borrower, (iv) are hereafter obtained by or available to any member of the Bank Group from a third party who owes no obligation of confidence to the Borrower with respect to such information or through any other means other than through disclosure by the Borrower, (vi) are disclosed with the Borrower's consent, (vii) must be disclosed either pursuant to any Requirements of Law or to Persons regulating the activities of any member of the Bank Group, or (viii) as may be required by law or regulation or order of any Governmental Authority in any judicial, arbitration or governmental proceeding. Further, any member of the Bank Group may disclose any such information to any other Bank, any consultants, any independent certified public accountants, any legal counsel employed by such Person in connection with this Agreement or any other Loan Document, including without limitation, the enforcement or exercise of all rights and remedies thereunder, or any assignee or participant (including prospective assignees and participants) in the Loans; provided, however, that the member of the Bank Group disclosing such information imposes on the Person to whom such information is disclosed the same obligation to maintain the confidentiality of such information as is imposed upon it hereunder. Notwithstanding anything to the contrary provided herein, this obligation of confidence shall cease three (3) years from the date the information was furnished, unless the Borrower requests, in writing at least thirty (30) days prior to the expiration of such three year period, that the Bank Group maintain the confidentiality of such information for an additional three year period. The Borrower waives any and all other rights it may have to confidentiality as against the Bank Group arising by contract, agreement, statute or law except as expressly stated in this Section 9.15. Section 9.16. Final Agreement of the Parties. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES. -60- 66 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by its officers thereunto duly authorized as of the date first above written. MARINE DRILLING COMPANIES, INC. By:_____________________________________ Name: William H. Flores Title: Executive Vice President and Chief Financial Officer BANKERS TRUST COMPANY, as Agent and as Issuing Bank By:_____________________________________ Name: Steven Park Title: Vice President CHRISTIANIA BANK OG KREDITKASSE, NEW YORK BRANCH, as Co-Agent By:_____________________________________ Name:___________________________________ Title: _________________________________ By:_____________________________________ Name:___________________________________ Title: _________________________________ 67 Bank: Commitment: $22,500,000.00 BANKERS TRUST COMPANY By:____________________________________ Name: Steven Park Title: Vice President Address: 130 Liberty Street, 14th Floor New York, New York 10006 Telecopy No.: (212) 250-6029 DOMESTIC LENDING OFFICE Bankers Trust Company 130 Liberty Street, 14th Floor New York, New York 10006 EURODOLLAR LENDING OFFICE Bankers Trust Company 130 Liberty Street, 14th Floor New York, New York 10006 68 Bank: Commitment: $22,500,000.00 CHRISTIANIA BANK OG KREDITKASSE, NEW YORK BRANCH By:____________________________________ Name: _________________________________ Title: ________________________________ By:____________________________________ Name: _________________________________ Title: ________________________________ Address: 11 West 42 Street, 7th Floor New York, New York 10036 Telecopy No.: (212) 827-4888 DOMESTIC LENDING OFFICE Christiania Bank og Kreditkasse, New York Branch 11 West 42 Street, 7th Floor New York, New York 10036 EURODOLLAR LENDING OFFICE Christiania Bank og Kreditkasse, New York Branch 11 West 42 Street, 7th Floor New York, New York 10036 69 Bank: Commitment: $20,000,000.00 SKANDINAVISKA ENSKILDA BANKEN AB (PUBL.) By:____________________________________ Name: _________________________________ Title: ________________________________ By:____________________________________ Name: _________________________________ Title: ________________________________ Address: Rosenkrantz gate 22 N-0160 Oslo Norway Telecopy No.:011-47 22 82 71 71 DOMESTIC LENDING OFFICE Skandinaviska Enskilda Banken AB (Publ.) Rosenkrantz gate 22 N-0160 Oslo Norway EURODOLLAR LENDING OFFICE Skandinaviska Enskilda Banken AB (Publ.) Rosenkrantz gate 22 N-0160 Oslo Norway 70 Bank: Commitment: $20,000,000.00 BANQUE INDOSUEZ S.A. By:__________________________________ Name: _______________________________ Title: ______________________________ Address: c/o Representative Office Norway Ruselokkveien 6 N-0251 Oslo Norway Telecopy No.:011-47 22 83 30 55 DOMESTIC LENDING OFFICE Banque Indosuez S.A. 47 rue de Monceau 75007 Paris France Telecopy No.: 011-33-1-44 20 19 34 EURODOLLAR LENDING OFFICE Banque Indosuez S.A. 47 rue de Monceau 75007 Paris France Telecopy No.: 011-33-1-44 20 19 34 71 Bank: Commitment: $15,000,000.00 NEDERLANDSE SCHEEPSHYPOTHEEKBANK N.V. By:____________________________________ Name: _________________________________ Title: ________________________________ Address: Parklaan 2, 3016 BB Rotterdam Postbus 307, 3000 AH Rotterdam Telecopy No.:31 10 436 2957 DOMESTIC LENDING OFFICE Nederlandse Scheepshypotheekbank N.V. Parklaan 2, 3016 BB Rotterdam Postbus 307, 3000 AH Rotterdam EURODOLLAR LENDING OFFICE Nederlandse Scheepshypotheekbank N.V. Parklaan 2, 3016 BB Rotterdam Postbus 307, 3000 AH Rotterdam 72 ANNEX A DEFINITIONS "Affiliate" means, when used with respect to any Person, any other Person (including any member of the immediate family of any such natural person) who directly or indirectly beneficially owns or controls five percent (5%) or more of the total voting power of shares of capital stock of such Person having the right to vote for directors under ordinary circumstances or any Person controlling, controlled by or under common control with any such Person. As used in this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" has the meaning specified in the introduction to this Agreement. "Agreement" means this Credit Agreement, as the same may from time to time be amended, supplemented or modified and in effect. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of a Base Rate Loan and such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Loan. "Applicable Margin" has the meaning specified in Section 2.08(c). "Appraised Value Percentage" means, with respect to any Mortgaged Rig, a fraction the numerator of which is the Market Value of such Mortgaged Rig as of the date of determination and the denominator of which is the Collateral Market Value as of the date of determination. "Approved Rigbroker" shall mean Normarine Offshore Consultants, Inc. or any other first-class, international, independent, sale-and-purchase offshore drilling rig broker reasonably acceptable to the Agent. "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee and accepted by the Agent, in substantially the form of Exhibit 9.02 hereto. "Assignments of Earnings" means each Assignment of Earnings of even date herewith or executed and delivered pursuant to Section 2.06(b) or Section 2.07(d) executed by the Borrower or the Guarantors in favor of the Collateral Agent, as same may be amended, supplemented, restated or otherwise modified from time to time. 73 "Available Commitment" means, with respect to each Bank, the excess of (i) the Commitment of such Bank in effect at such time over (ii) such Bank's Commitment Percentage of the Credit Outstanding at such time. "Bank Group" means, collectively, the Agent, the Co-Agent, the Issuing Bank and the Banks. "Banks" has the meaning specified in the introduction to this Agreement. "Base Rate" means, as of any particular date, the rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) equal to the greater of (a) the Prime Rate per annum in effect on such day, and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1% per annum. "Base Rate Borrowing" means a Borrowing consisting of Base Rate Loans. "Base Rate Loan" means a Loan that the Borrower has designated, or is deemed to have designated, as such in accordance with Article II. "Borrower" has the meaning specified in the introduction to this Agreement. "Borrowing" means a group of Loans of a single Type made by the Banks, or Converted into such, as applicable, on a single date and, in the case of a Eurodollar Rate Loan, as to which a single Interest Period is in effect. "Borrowing Date" means, when used with respect to the initial funding of any Borrowing, the date upon which the proceeds of such Borrowing are to be made available to the Borrower. "Borrowing Request" has the meaning specified in Section 2.02. "BTCo" means Bankers Trust Company. "Business Day" means (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day that is, in New York, New York or London, England, a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Rate Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank Eurodollar market. A-2 74 "Capital Lease" means, as to the Borrower and its Subsidiaries, any lease or rental agreement in respect of which such Person's obligations as lessee under such lease or rental agreement constitute obligations which shall have been in accordance with GAAP, capitalized on the balance sheet of such Person. "Cash Equivalents" means (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) U.S. dollar denominated time deposits, certificates of deposit and bankers' acceptances of (x) any Bank, (y) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 as of its most recent financial statements or (z) any bank (or the parent company of such bank) whose short-term commercial paper rating from Standard & Poor's Corporation ("S&P") is at least A-2 or the equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at least P-2 or the equivalent thereof (any such bank, an "Approved Bank"), in each case with maturities of not more than one year from the date of acquisition, (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any Approved Bank, (iv) commercial paper issued by any Bank or Approved Bank or by the parent company of any Bank or Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's (any such company, an "Approved Company"), or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within six months after the date of acquisition and (v) investments in money market funds substantially all of whose assets are comprised of securities of the type described in clauses (i) though (iv) above. "Casualty Event" means, with respect to any Mortgaged Rig, any loss or damage to, or any condemnation or taking of, such Mortgaged Rig other than a Total Loss of any Mortgaged Rig, for which such Person receives, anticipates recovering or has filed a claim for Casualty Proceeds. "Casualty Proceeds" means the proceeds of any insurance, condemnation award or other compensation paid or payable to the Borrower, any Guarantor or the Collateral Agent in respect of any Casualty Event, less the reasonable fees, taxes and expenses paid to collect such proceeds. "CERCLA" shall have the meaning provided in the definition of "Environmental Laws." A-3 75 "Change of Control" means any of (a) the acquisition by any Person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) (excluding underwriters in the course of their distribution of voting stock in an underwritten public offering), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 30% or more of the voting power of the outstanding shares of voting stock of the Borrower, (b) 50% or more of the members of the Board of Directors of the Borrower on any date shall not have been (i) members of the Board of Directors of the Borrower on the date 12 months prior to such date or (ii) approved (by recommendation, nomination, election or otherwise) by Persons who constitute at least a majority of the members of the Board of Directors of the Borrower as constituted on the date 12 months prior to such date, (c) all or substantially all of the assets of the Borrower are sold in a single transaction or series or related transactions to any Person or (d) the Borrower merges or consolidates with or into any other Person, with the effect that immediately after such transaction the stockholders of the Borrower immediately prior to such transaction hold less than a majority of the total voting power entitled to vote in the election of directors, managers or trustees of the Person surviving such transaction. "Co-Agent" has the meaning specified in the introduction to this Agreement "Collateral" means the Mortgaged Rigs and all other collateral as defined in each of the Security Documents and any cash collateral delivered to the Collateral Agent pursuant to this Agreement or the Security Documents. "Collateral Agent" means the Agent acting as collateral agent and/or mortgagee for the Bank Group. "Collateral Assignments of Insurance" means each Collateral Assignment of Insurance of even date herewith or executed and delivered pursuant to Section 2.06(b) or Section 2.07(d) executed by the Borrower or the Guarantors in favor of the Collateral Agent, as same may be amended, supplemented, restated or otherwise modified for time to time. "Collateral Disposition" means (a) the sale, transfer, contribution or other voluntary disposition by (i) the Borrower to any Person other than a Guarantor or (ii) any Guarantor to any Person other than the Borrower or a Guarantor, of any Mortgaged Rig and (b) any Total Loss of any Mortgaged Rig. "Collateral Disposition Proceeds" means (a) with respect to any Collateral Disposition involving a sale of a Mortgaged Rig, the gross proceeds thereof received by the Borrower or Guarantor selling such Mortgaged Rig less the reasonable fees, taxes and expenses paid by such Person that are directly related to such sale and (b) with respect to any Collateral Disposition involving a Total Loss of a Mortgaged Rig, the proceeds of any insurance proceeds, condemnation A-4 76 award or other compensation paid or payable to the Borrower, any Guarantor or the Collateral Agent in respect of such Total Loss less the reasonable fees, taxes and expenses paid to collect such proceeds. "Collateral Maintenance Ratio" means, as at any date of determination, the ratio of (a) the Collateral Market Value (as adjusted pursuant to Section 2.04 for purposes of calculating this ratio) as of such date to (b) (i) prior to the Termination Date, the Total Commitment as of such date, and (ii) thereafter the aggregate amount of Credit Outstanding as of such date. "Collateral Market Value" has the meaning specified in Section 2.04. "Commitment" means as to any Bank, the amount set forth on the signature page of such Bank hereto under the caption "Commitment," as such amount may be reduced or adjusted pursuant to this Agreement. "Commitment Percentage" means, as to any Bank, a percentage determined pursuant to the following formula: (C / T) X 100 = CP; where C is such Bank's Commitment (without giving effect to any termination of the Commitments pursuant to Section 2.06(d) or Section 7.01), T is the Total Commitment (without giving effect to any termination of the Commitments pursuant to Section 2.06(d) or Section 7.01) and CP is such percentage. "Communications" has the meaning specified in Section 9.03. "Consolidated Current Assets" means the current assets of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP, less any such current assets held by an Unrestricted Subsidiary as of the date of determination. "Consolidated Current Liabilities" means the current liabilities of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP, less any such current liabilities of an Unrestricted Subsidiary that are not Guaranteed by the Borrower or any Restricted Subsidiary as of the date of determination. "Consolidated Indebtedness" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness (including any Credit Outstanding) of the Borrower and its Subsidiaries on a consolidated basis as determined in accordance with GAAP, less any such Indebtedness of an Unrestricted Subsidiary that does not constitute Indebtedness of the Borrower or any Restricted Subsidiary as of the date of determination. "Consolidated Net Worth" means, at any time, the net worth of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP. A-5 77 "Conversion Date" means, when used with respect to the Conversion of any group of Loans, the date such Loans are to be Converted into Loans of another Type pursuant to Section 2.02 or otherwise in accordance with Article II. "Conversion Notice" has the meaning specified in Section 2.02(c). "Convert," "Conversion" and "Converted" each refers to a conversion of Loans of one Type into Loans of another Type pursuant to Section 2.02(c) or otherwise in accordance with Article II. "Credit Outstanding" means, at any time, without duplication, the sum of (i) the aggregate unpaid principal amount of the Loans and (ii) the Outstanding Letters of Credit. "Default" means an Event of Default or an event or condition which with the giving of notice or the lapse of time or both could, unless cured or waived, become an Event of Default. "Default Rate" has the meaning specified in Section 2.08. "Derivatives" means, with respect to any Person, foreign exchange transactions and commodity, currency and interest rate swaps, floors, caps, collars, forward sales, options, other similar transactions and combinations of the foregoing. "Dollars" and "$" each means lawful money of the United States. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" below its name on its signature page hereto, or such other office of such Bank as such Bank may from time to time specify in writing to the Borrower and the Agent. "EBITDA" means for any period, (a) the sum of the following: (i) the Net Income for such period, (ii) the amount of amortization or write-off of deferred financing costs which were deducted from gross income in determining such Net Income for such period, (iii) the amount of depreciation and amortization expense which was deducted from gross income in determining such Net Income for such period, (iv) the amount of Interest Expense which was deducted in the calculation of such Net Income for such period, (v) the amount of income taxes deducted in the calculation of such Net Income for such period and (vi) the amount of losses on sales of assets (excluding sales in the ordinary course of business) and other extraordinary losses which were deducted in the calculation of such Net Income for such period, less (b) (1) any interest income included in the calculation of Net Income for such period and (2) the amount of gains on sales of A-6 78 assets (excluding sales in the ordinary course of business) and other extraordinary gains which were added in the calculation of such Net Income for such period, all as determined on a consolidated basis in accordance with GAAP. "Effective Date" means the date on which the conditions to effectiveness set forth in Article III to this Agreement are first satisfied. "Eligible Assignee" means (i) any Bank or any Affiliate of any Bank; (ii) a commercial bank organized under the laws of the United States, or any state thereof, having deposits rated in either of the two highest generic letter rating categories (without regard to subcategories) from either S&P or Moody's; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development ("OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (iv) the central bank of any country which is a member of the OECD; (v) any other Person which is an "accredited investor" (as defined in Regulation D of the Securities Act of 1933) that extends credit or buys loans as one of its businesses, including insurance companies mutual funds and lease financing companies; and (vi) any other financial institution approved by the Borrower and the Agent. "Environmental Laws" means federal, state or local laws of any country, rules or regulations, and any judicial, arbitral or administrative interpretations thereof, including, without limitation, any judicial, arbitral or administrative order, judgment, permit, approval, decision or determination pertaining to health, safety or the environment in effect at the time in question, including, without limitation, the Oil Pollution Act 1990, as amended ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act, as amended, the Resource Conservation and Recovery Act ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, comparable state and local laws, and other environmental conservation and protection laws. The terms "hazardous substance," "release" and "threatened release" shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA and the term "oil" shall have the meaning specified in OPA; provided, that (i) in the event either CERCLA, RCRA or OPA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment with respect to all provisions of this Agreement, (ii) to the extent the laws of the state or states in which any Property of the Borrower or its Subsidiaries is located establish a meaning for "hazardous substance," "release," "threatened A-7 79 release," "solid waste," "disposal" or "oil" which is broader than that specified in CERCLA, RCRA or OPA, such broader meaning shall apply. "ERISA" means the Employee Retirement Income Security Act of 1974, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. "ERISA Affiliate" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as the Borrower, (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with the Borrower, (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as the Borrower, any corporation described in clause (i) above or any partnership or trade or business described in clause (ii) above or (iv) other Person required to be aggregated with the Borrower or an ERISA Affiliate thereof, as defined above, pursuant to Section 414(o) of the Internal Revenue Code. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Event" has the meaning specified in Section 2.14(a). "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" below its name on its signature page hereto (or, if no such office is specified, its Domestic Lending Office), or such other office of such Bank as such Bank may from time to time specify in writing to the Borrower and the Agent. "Eurodollar Rate" means, with respect to each Interest Period for each Eurodollar Rate Loan, the quotient of (a) (i) the composite offered rate for London interbank deposits (rounded to the nearest 1/16 of 1%) for US dollar deposits for a period equivalent to the Interest Period to be applicable to such Eurodollar Rate Loan, determined as of 11:00 a.m. (London time) on the date which is two Business Days prior to the commencement of such Interest Period, that is displayed on Telerate page 3750 (British Bankers' Association Interest Settlement Rates) or such other page as may replace such page 3750 on such system; or (ii) if the rate in clause (i) is not so displayed on such date, the arithmetic average (rounded to the nearest 1/16 of 1%) of the offered quotation to first-class banks in the interbank Eurodollar market by the Agent for US dollar deposits of an amount in same day funds comparable to the outstanding principal amount of the Eurodollar Rate Loan of the Agent for which an interest rate is then being determined with maturities comparable to the Interest Period to be applicable to such Eurodollar Rate Loan, determined as of 10:00 a.m. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period, divided (and A-8 80 rounded upward to the next whole multiple of 1/16 of 1%) by (b) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D of the Board of Governors of the Federal Reserve System (or any successor category of liabilities under Regulation D). "Eurodollar Rate Borrowing" means a Borrowing consisting of Eurodollar Rate Loans. "Eurodollar Rate Loan" means a Loan that the Borrower has designated, or is deemed to have designated, as such in accordance with Article II. "Events of Default" has the meaning specified in Section 7.01. "Excepted Liens" has the meaning specified in Section 6.02. "Execution Date" means the date upon which this Agreement shall have been executed by the Borrower and the Bank Group. "Facing Fees" has the meaning specified in Section 2.11(b)(ii). "Fair Market Value" means, with respect to any Mortgaged Rig, the price that an informed and willing purchaser would pay for such Mortgaged Rig in an arm's length transaction to an informed and willing owner under no compulsion to sell. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fleet Mortgages" means the First Preferred Fleet Mortgages of even date herewith executed by the Guarantors in favor of the Collateral Agent covering the respective United States flagged Mortgaged Rigs of each Guarantor, the First Naval Fleet Mortgage of even date herewith executed by Management Co. in favor of the Collateral Agent covering the Panamanian flagged Mortgaged Rigs and the First Preferred Fleet Mortgage of even date herewith executed by A-9 81 Management Co. in favor of the Collateral Agent covering the Vanuatuan flagged Mortgaged Rigs, as same may be amended, supplemented, restated or otherwise modified from time to time. "GAAP" means generally accepted accounting principals in the United States of America as in effect on the date of this Agreement, it being understood and agreed that determinations in accordance with GAAP are subject to Section 1.02. "Governmental Authority" means, with respect to any Person, any nation or government, any federal, state, province, city, town, municipality, county, local or other political subdivision thereof or thereto and any court, tribunal, department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, whether foreign or domestic that has jurisdiction over such Person or its Property. "Guaranties" means, as to any Person, all obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or, in effect, guaranteeing any Indebtedness, dividend or other obligation, of any other Person (the "primary obligor') in any manner, whether directly or indirectly, including all obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (b) to advance or supply funds (i) for the purchase or payment of such Indebtedness or obligation or (ii) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation, (c) to lease property or to purchase securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obligor to make payment of the Indebtedness or obligation or (d) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Guarantors" means Marine 300 Series and Management Co., and any other Subsidiary hereafter executing and delivering a Guaranty Agreement pursuant to Section 5.11. "Guaranty Agreements" means each Guaranty Agreement of even date herewith or issued pursuant to Section 5.11 executed by the Guarantors in favor of the Agent and the Banks, as same may be amended, supplemented, restated or otherwise modified from time to time. A-10 82 "Highest Lawful Rate" means, as to any Bank, at the particular time in question, the maximum nonusurious rate of interest which, under applicable law, such Bank is then permitted to charge the Borrower on the Loans or the other obligations of the Borrower hereunder, and as to any other Person, at the particular time in question, the maximum nonusurious rate of interest which, under applicable law, such Person is then permitted to charge with respect to the obligation in question. If the maximum rate of interest which, under applicable law, the Banks are permitted to charge the Borrower on the Loans or the other obligations of the Borrower hereunder shall change after the Execution Date, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, as of the effective time of such change without notice to the Borrower or any other Person. "Indebtedness" of any Person means without duplication: (a) any obligation of such Person for borrowed money, including: (i) any obligation of such Person evidenced by bonds, debentures, notes or other similar debt instruments and (ii) any obligation for borrowed money which is non-recourse to the credit of such Person but which is secured by any asset of such Person, (b) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (c) any obligation of such Person for the deferred purchase price of any property or services, except accounts payable arising in the ordinary course of such Person's business that have been outstanding less than ninety (90) days since the date of the related invoice or longer if such payables are being contested in good faith by appropriate proceedings and for which such Person has set aside on its books adequate reserves in accordance with GAAP, (d) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases, (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), (f) liabilities in respect of Derivatives, (g) Guaranties by such Person to the extent required pursuant to the definition thereof, and (h) any Indebtedness of another Person secured by a Lien on any asset of such first Person, whether or not such Indebtedness is assumed by such first Person. "Initial Rig Appraisal Report" has the meaning specified in Section 3.01(g). "Interest Expense" means, for any period, the aggregate of all interest expense deducted in the calculation of the Net Income for such period excluding amortization of deferred financing costs. "Interest Period" means, for each Eurodollar Rate Loan comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Loan or the date of the Conversion of such Eurodollar Rate Loan, as applicable, and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period A-11 83 shall be 1, 2, 3, or 6 months (or any longer period requested by the Borrower and agreed to by the Banks); provided, that: (i) the Borrower may not select any Interest Period for a Loan that ends after the Maturity Date; (ii) Interest Periods commencing on the same date for Loans comprising part of the same Borrowing shall be of the same duration; (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (iv) no Interest Period with respect to any Loan may be elected that would extend beyond any Scheduled Payment Date if, after giving effect to the selection of such Interest Period, the aggregate principal amount of Loans maintained as Eurodollar Rate Loans with Interest Periods ending after such Scheduled Payment Date would exceed the aggregate principal amount of Loans permitted to be outstanding after such Scheduled Payment Date; and (v) no Interest Period may be elected at any time when a Default or Event of Default is then in existence if the Agent or the Majority Banks have determined that such an election at such time would be disadvantageous to the Banks. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time (or any successor statute), and the regulations promulgated thereunder. "Issuing Bank" has the meaning specified in the introduction to this Agreement. "L/C Fees" has the meaning specified in Section 2.11(b)(i). "Letter of Credit" has the meaning specified in Section 2.01(a)(ii). "Letter of Credit Limit" means, as of the date of determination, the amount equal to the lesser of (a) the Total Commitment less the principal amount of all Loans outstanding as of such date and (b) $20,000,000. "Letter of Credit Request" has the meaning specified in Section 2.03(a). A-12 84 "Leverage Ratio" means at any date of determination, the ratio of Consolidated Indebtedness on such date to Total Capitalization on such date. "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or capital lease, upon or with respect to any Property of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Loans" has the meaning specified in Section 2.01(a)(i). Each Loan shall be either a Base Rate Loan or a Eurodollar Rate Loan (each of which shall be a "Type" of Loan). "Loan Documents" means this Agreement, the Notes, the Letters of Credit, the Security Documents, the Guaranty Agreements and all other agreements, instruments and documents, including, without limitation, security agreements, notes, warrants, guaranties, mortgages, deeds of trust, subordination agreements, pledges, powers of attorney, consents, assignments, collateral assignments, letter agreements, contracts, notices, leases, amendments, financing statements, Letter of Credit applications and reimbursement agreements, and all other writings heretofore, now, or hereafter executed by or on behalf of the Borrower or any of its Subsidiaries, any of their respective Affiliates or any other Person in connection with or relating to this Agreement, together with all agreements, instruments and documents referred to therein or contemplated thereby. "Majority Banks" means at any time Banks holding at least fifty one percent (51%) of the then aggregate unpaid principal amount of the Loans or, if no Loans are outstanding, Banks having Commitment Percentages in the aggregate equal to at least fifty one percent (51%). "Management Co." means Marine Drilling Management Company, a Delaware corporation and Wholly Owned Subsidiary of the Borrower. "Margin Ratio" means, as of any date, the Leverage Ratio as of the calendar quarter ending on or prior to such date, provided that in calculating the Leverage Ratio for purposes of this definition, Consolidated Indebtedness and Total Capitalization shall each be reduced by the amount of cash and Cash Equivalents reflected on the consolidated balance sheet of the Borrower as of the end of such calendar quarter in excess of $15,000,000. The Margin Ratio set forth in the most recent Margin Ratio Certificate delivered to the Agent shall, for purposes of determining the Applicable Margin, be in effect from the date such Margin Ratio Certificate is delivered until the date preceding the delivery of the next such Margin Ratio Certificate, with the following exceptions: (a) if the Agent in good faith determines that the calculations of the Margin Ratio reflected in any Margin Ratio Certificate are not accurate, the Agent may correct any error and calculate the appropriate Margin A-13 85 Ratio (and promptly give the Borrower notice thereof), (b) if the Borrower fails to deliver any Margin Ratio Certificate when due, the Margin Ratio shall be deemed to be greater than .25 to 1.0 until such Margin Ratio Certificate is delivered, and (c) for the period commencing on the Execution Date and ending on the date the next Margin Ratio Certificate is due, the Margin Ratio shall be deemed to be less than .15 to 1.0. "Margin Ratio Certificate" has the meaning specified in Section 5.01(c). "Marine 300 Series" means Marine 300 Series, Inc., a Delaware corporation and Wholly Owned Subsidiary of the Borrower and formerly known as Keyes Holding Corporation. "Market Value" means, as of any date of determination, the fair market value (or to the extent such fair market value is expressed as a range, the midpoint of such fair market value range) of each Mortgaged Rig or other offshore drilling rig or vessel set forth in the most recent Rig Appraisal Report covering such Mortgaged Rig or other offshore drilling rig or vessel delivered to the Banks. "Mat Supported Rigs" means the Marine 3, Marine 4, Marine 15, Marine 16, Marine 17, Marine 18, Marine 200, Marine 201, Marine 225 and any other mat supported offshore drilling rig now or hereafter owned by the Borrower or any Guarantor. "Material" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Borrower and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Borrower or any of its Subsidiaries, or (b) the ability of the Borrower or any of its Subsidiaries to perform their obligations under this Agreement and the other Loan Documents, or (c) the validity or enforceability of this Agreement or the other Loan Documents. "Maturity Date" means December 31, 2003. "Mortgaged Rigs" means the offshore drilling rigs described in Exhibit 1.01-A which remain subject to a Lien under any Fleet Mortgage, together with any other offshore drilling rig that hereafter becomes a "Mortgaged Rig" pursuant to Section 2.06(b) or Section 2.07(d). "Multiemployer Plan" means any employee benefit plan that is a "multiemployer plan," as such term is defined in section 4001(a)(3) of ERISA. A-14 86 "Net Income" means, for any period, the consolidated net earnings of the Borrower and its Subsidiaries for such period, determined in accordance with GAAP, less any portion of such net earnings attributable to an Unrestricted Subsidiary. "Non-Recourse Indebtedness" means Indebtedness of any Unrestricted Subsidiary in respect of which (a) the recourse of the holder of such Indebtedness, whether direct or indirect and whether contingent or otherwise, is effectively limited to Property of such Unrestricted Subsidiary and is not otherwise Guaranteed by the Borrower or any Restricted Subsidiary, and (b) the holder of such Indebtedness shall have agreed in writing that (i) neither the Borrower nor any Restricted Subsidiary, nor any of their respective Properties shall be liable for the payment or performance of the obligations of such Unrestricted Subsidiary in respect of such Indebtedness and (ii) that such holder shall not seek payment of such Indebtedness from the Borrower, any Restricted Subsidiary or any of their respective Properties. "Note" means a promissory note of the Borrower payable to the order of a Bank, in substantially the form of Exhibit 2.05 hereto, evidencing the aggregate indebtedness of the Borrower to such Bank resulting from the Loans made by such Bank, together with all modifications, extensions, renewals and rearrangements thereof from time to time in effect. "Obligations" means all obligations, Indebtedness and liabilities of the Borrower or any of its Subsidiaries to any member of the Bank Group, now existing or hereafter arising under or in connection with any Loan Document, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including the obligations, Indebtedness and liabilities of the Borrower under the Notes or otherwise pursuant to the terms of the other Loan Documents, and all interest accruing thereon (including any interest that accrues after the commencement of any proceeding by or against the Borrower or any other Person under any bankruptcy, insolvency, liquidation, moratorium, receivership, reorganization or other debtor relief law) and all reasonable attorneys' fees and other reasonable and customary expenses incurred in the collection or enforcement thereof. "Other Activities" has the meaning specified in Section 8.03. "Other Benefit Plan" means any employee benefit plan, within the meaning of Section 3(3) of ERISA, employment or other compensation plan, program or contract, including, without limitation, a "cafeteria plan" under Section 125 of the Internal Revenue Code, under any of which the Borrower or any Subsidiary of the Borrower has any liability or obligation, but excluding any Pension Plan or Multiemployer Plan. "Other Financings" has the meaning specified in Section 8.03. A-15 87 "Other Taxes" has the meaning specified in Section 2.12(b). "Outstanding Letters of Credit" means, at any time without duplication, the sum of (i) the aggregate undrawn face amount of the Letters of Credit then outstanding and (ii) the aggregate amount of unpaid reimbursement obligations in respect of Letters of Credit issued hereunder. "Payment Date" means the last day of any calendar quarter, commencing March 31, 1997. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. "Pension Plan" means any employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code, and in respect of which the Borrower, or any ERISA Affiliate. or Subsidiary is an "employer" as defined in Section 3(5) of ERISA or has any liability or obligations. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other entity, or Governmental Authority. "Pledge Agreement" means the Pledge Agreement of even date herewith executed by the Borrower in favor of the Collateral Agent, pledging all of the capital stock of the Guarantors, as same may be amended, supplemented, restated or otherwise modified from time to time. "Post Closing Security Documents" has the meaning specified in Section 2.06(b). "Preferred Rig Ratio" means, as at any date of determination, the ratio of (a) the total Market Value as of such date of all Mortgaged Rigs that are Preferred Rigs to (b) (i) prior to the Termination Date, the Total Commitment as of such date, and (ii) thereafter the aggregate amount of Credit Outstanding as of such date. "Preferred Rigs" means the Marine 300, Marine 301, Marine 303, Marine 304, Marine 305 and Marine 500 and any other offshore drilling rig now or hereafter owned by the Borrower or any Guarantor that is of similar type and class as the foregoing named offshore drilling rigs. "Preferred Stock" means, as to any Person, any capital stock of such Person having a preference in liquidation over any other capital stock of such person, and in any event including instruments commonly referred to or considered to be "preferred stock." The amount of any A-16 88 Preferred Stock shall be the maximum consideration required to be paid upon the purchase, retirement, redemption, exchange, or conversion thereto (such consideration, if other than cash, to be valued at the fair market value thereof), provided that in computing such consideration there shall be excluded any consideration payable solely in common stock of the Borrower. "Prime Rate" means, the rate per annum which BTCo announces from time to time as its "prime lending rate," the Prime Rate to change when and as such prime lending rate changes. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Process Agent" has the meaning specified in Section 9.12(a). "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Register" has the meaning specified in Section 9.02(c). "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System as the same is from time to time in effect, and all official rulings and interpretations thereunder of thereof. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System as the same is from time to time in effect, and all official rulings and interpretations thereunder of thereof. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Reimbursement Amount" has the meaning specified in Section 2.03(c). "Reimbursement Date" has the meaning specified in Section 2.03(c). "Reimbursement Notice" has the meaning specified in Section 2.03(c). A-17 89 "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder. "Requirements of Environmental Laws" means the requirements of any applicable Environmental Law relating to or affecting the Borrower or any of its Subsidiaries or the condition or operation of such Person's business or its Properties. "Requirements of Law" means, as to any Person, any applicable federal, state or local law, rule or regulation, permit or other binding determination of any Governmental Authority, whether foreign or domestic having jurisdiction over such Person or its Properties. "Responsible Officer" means, as to any Person, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer of such Person, or any employee of such Person designated in writing as a Responsible Officer by the Chief Executive Officer of such Person. "Restricted Disbursement" means, as to any Person, any: (a) loan or advance to or investment in any other Person, or any commitment to make such a loan, advance or investment in any other Person; (b) acquisition by such Person of or investments by such Person in the debt of or equity of, and any capital contribution (including capital contributions by transfer of assets or services) by such Person to, another Person; (c) purchase, redemption or exchange of any shares of any class of capital stock of such Person or any options, rights or warrants to purchase any such stock or setting aside funds for any such purpose; (d) declaration or payment of any dividends on shares of any class of capital stock of such Person (other than dividends payable in capital stock, or rights to acquire capital stock, of such Person); (e) distribution to a sinking fund or other payment or distribution made to or for the benefit of any holders of the capital stock of such Person with respect to such capital stock (other than distributions payable in capital stock, or rights to acquire capital stock, of such Person) or setting aside funds for any such purpose; and (f) payment, purchase or redemption by such Person of Indebtedness owing by such Person to any of its Affiliates. "Restricted Subsidiary" means each of (a) the Guarantors, (b) any Subsidiary of the Borrower that owns, either directly or indirectly through one or more other Subsidiaries of the Borrower, any of the capital stock or other equity interest of any Guarantor and (c) any other Subsidiary of the Borrower that has not been designated in writing by the Borrower as an Unrestricted Subsidiary. "Rig Appraisal Report"has the meaning specified in Section 5.10(a); provided that prior to delivery of the first Rig Appraisal Report required by Section 5.10, Rig Appraisal Report shall mean the Initial Rig Appraisal Report. A-18 90 "Scheduled Payment Date" means the last day of each calendar quarter commencing March 31, 2000 up to but excluding the Maturity Date. "SEC" means the Securities and Exchange Commission and any successor agency. "Security Agreements" means each Security Agreement of even date herewith executed by the Guarantors in favor of the Collateral Agent or executed and delivered pursuant to Section 2.06(b) or Section 2.07(d), as same may be amended, supplemented, restated or otherwise modified from time to time. "Security Documents" shall mean the Ship Mortgages, the Security Agreements , the Assignments of Earnings, the Collateral Assignments of Insurance, the Pledge Agreement and, when executed and delivered, as each may be amended from time to time, and any other security agreement or pledge agreement, assignment, mortgage or any other agreement, in form and substance satisfactory to the Agent and the Majority Banks, executed and delivered by the Borrower, any of its Subsidiaries or any other Person in connection with or pursuant to this Agreement for the purpose of creating a Lien on any of its property or assets, as it may be modified or amended from time to time. "Semisubmersible Rigs" means the Marine 500 and any other semisubmersible offshore drilling rig now or hereafter owned by the Borrower or any Guarantor. "Ship Mortgages" means the Fleet Mortgages and any other mortgage executed and delivered pursuant to Section 2.06(b) or Section 2.07(d). "Subsidiary" means, as to any Person, any other Person in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such other Person, and any partnership or joint venture if either (i) more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or (ii) such Person or one or more of its Subsidiaries is a general partner in such partnership or joint venture. Unless otherwise indicated (or the context requires otherwise) references to a Subsidiary shall be to a Subsidiary of the Borrower. "Subsidiary Mat Supported Rig Disposition" means each Collateral Disposition of a Mat Supported Rig to an Unrestricted Subsidiary (other than a sale for a cash consideration in an amount equal to or greater than Fair Market Value of the Mat Supported Rig sold) in excess of a total of three such Collateral Dispositions. "Taxes" has the meaning specified in Section 2.12(a). A-19 91 "Termination Date" means December 31, 1999 or such earlier date on which the Commitments are terminated pursuant to Section 2.06 or Section 7.01. "Total Capitalization" shall mean, at any time, the sum of Consolidated Indebtedness and Consolidated Net Worth at such time. "Total Commitment" means, as of any date, an amount equal to the sum of the Banks' Commitments, as of such date. "Total Loss" shall mean any "Total Loss" as defined in any Ship Mortgage. "Type" has the meaning set forth in the definition of Loan. "Unrestricted Subsidiaries" means each Subsidiary of the Borrower (other than the Guarantors and any Subsidiary of the Borrower that owns, either directly or indirectly through one or more other Subsidiaries of the Borrower, any of the capital stock or other equity interest of any Guarantor) designated in writing by the Borrower to the Agent as an Unrestricted Subsidiary. "Wholly Owned Subsidiary" means any Subsidiary of the Borrower of which all (other than director's qualifying shares) the outstanding voting securities normally entitled to vote in the election of directors are owned, directly or indirectly, by the Borrower. A-20 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 MARINE DRILLING COMPANIES, INC. SUBSIDIARIES AND PARTNERSHIPS DECEMBER 31, 1996
Place of Incorporation Ownership Subsidiary/Partnership or Domicile Owner Percentage - ----------------------------------- -------- ---------------------------------- ---------- Marine Drilling Management Company Delaware Marine Drilling Companies, Inc. 100% Marine Drilling International, Inc. Delaware Marine Drilling Management Company 100% Keyes Holding Corporation(1) Delaware Marine Drilling Companies, Inc. 100%
(1) Effective February 1, 1997, the name was changed to Marine 300 Series, Inc. EX-23.1 5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Marine Drilling Companies, Inc.: We consent to incorporation by reference of our report dated January 24, 1997, relating to the consolidated balance sheets of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Marine Drilling Companies, Inc., in the following registration statements of Marine Drilling Companies, Inc.: (i) No. 33-56920 on Form S-8 dated January 11, 1993, (ii) No. 33-54909 on Form S-3 dated August 3, 1994, (iii) No. 33-61901 on Form S-8 dated August 17, 1995, (iv) No. 333-6995 on Form S-4 dated June 27, 1996, and amended July 11, 1996, and (v) No. 333-6997 on Form S-3 dated June 27, 1996, amended July 11, 1996 and supplement dated November 22, 1996. KPMG PEAT MARWICK LLP Houston, Texas March 17, 1997 EX-24.1 6 POWERS OF ATTORNEY 1 Exhibit 24.1 MARINE DRILLING COMPANIES, INC. POWER OF ATTORNEY WHEREAS, Marine Drilling Companies, Inc., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the year ended December 31, 1996 and quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said reports; NOW, THEREFORE, the undersigned in his capacity as a director of the Company, does hereby appoint each of William H. Flores and Joan R. Smith, signing singly, the undersigned's true and lawful attorney with power to act with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as Director the reports referred to above, together with any and all amendments thereto as said attorney shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Such attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of such attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument as of this 13th day of February 1997. /s/ ROBERT L. BARBANELL ------------------------- Robert L. Barbanell 2 Exhibit 24.1 MARINE DRILLING COMPANIES, INC. POWER OF ATTORNEY WHEREAS, Marine Drilling Companies, Inc., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the year ended December 31, 1996 and quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said reports; NOW, THEREFORE, the undersigned in his capacity as a director of the Company, does hereby appoint each of William H. Flores and Joan R. Smith, signing singly, the undersigned's true and lawful attorney with power to act with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as Director the reports referred to above, together with any and all amendments thereto as said attorney shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Such attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of such attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument as of this 13th day of February 1997. /s/ DAVID A.B. BROWN ---------------------- David A.B. Brown 3 Exhibit 24.1 MARINE DRILLING COMPANIES, INC. POWER OF ATTORNEY WHEREAS, Marine Drilling Companies, Inc., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the year ended December 31, 1996 and quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said reports; NOW, THEREFORE, the undersigned in his capacity as a director of the Company, does hereby appoint each of William H. Flores and Joan R. Smith, signing singly, the undersigned's true and lawful attorney with power to act with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as Director the reports referred to above, together with any and all amendments thereto as said attorney shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Such attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of such attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument as of this 13th day of February 1997. /s/ HOWARD I. BULL -------------------- Howard I. Bull 4 Exhibit 24.1 MARINE DRILLING COMPANIES, INC. POWER OF ATTORNEY WHEREAS, Marine Drilling Companies, Inc., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the year ended December 31, 1996 and quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said reports; NOW, THEREFORE, the undersigned in his capacity as a director of the Company, does hereby appoint each of William H. Flores and Joan R. Smith, signing singly, the undersigned's true and lawful attorney with power to act with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as Director the reports referred to above, together with any and all amendments thereto as said attorney shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Such attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of such attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument as of this 13th day of February 1997. /s/ NATHANIEL A. GREGORY ------------------------ Nathaniel A. Gregory 5 Exhibit 24.1 MARINE DRILLING COMPANIES, INC. POWER OF ATTORNEY WHEREAS, Marine Drilling Companies, Inc., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the year ended December 31, 1996 and quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said reports; NOW, THEREFORE, the undersigned in his capacity as a director of the Company, does hereby appoint each of William H. Flores and Joan R. Smith, signing singly, the undersigned's true and lawful attorney with power to act with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as Director the reports referred to above, together with any and all amendments thereto as said attorney shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Such attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of such attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument as of this 13th day of February 1997. /s/ CHRISTOPHER M. LINNEMAN ---------------------------- Christopher M. Linneman EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 71,961 9,990 21,378 0 897 105,687 182,200 33,463 254,947 9,016 0 0 0 513 221,220 254,947 110,329 110,329 59,770 59,770 11,576 0 895 32,256 11,586 20,670 0 0 0 20,670 0.46 0
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