-----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, MRVjQwBChFHs8SlIo046x6e26BC2W9GZCoSCvJMn4FtTsUYv2A6K1CMchx/aj6XE jwacPWQhKatDejYTltLLIw== 0000950129-97-001318.txt : 19970329 0000950129-97-001318.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950129-97-001318 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON DRILLING CO INC CENTRAL INDEX KEY: 0000892179 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 760351754 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12503 FILM NUMBER: 97566974 BUSINESS ADDRESS: STREET 1: 1900 W LOOP S STE 1910 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7136238984 MAIL ADDRESS: STREET 1: 1900 WEST LOOP SOUTH, SUITE 19010 STREET 2: 1900 WEST LOOP SOUTH, SUITE 19010 CITY: HOUSTON STATE: TX ZIP: 77027 10-K 1 FALCON DRILLING COMPANY, INC. - 12/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-26388 FALCON DRILLING COMPANY, INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0351754 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1900 WEST LOOP SOUTH, SUITE 1800, HOUSTON, TEXAS 77027 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 623-8984 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 the 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. [ ] The aggregate market value of common stock held by non-affiliates of the registrant (based on the closing price as reported on the New York Stock Exchange on March 21, 1997) was approximately $922,081,292. Shares of common stock held by each executive officer and director and by each stockholder affiliated with a director have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock as of March 21, 1997 was 39,349,406. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for Annual Meeting of Stockholders to be held on May 29, 1997 -- Part III ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Item. 1 Business.................................................... 1 General................................................... 1 Industry Conditions....................................... 1 Business Strategy......................................... 2 Developments During 1996.................................. 2 Recent Developments....................................... 3 Drilling Markets.......................................... 3 Contracts and Customers................................... 4 Related Oil and Gas Activities............................ 5 Governmental Regulation and Environmental Matters......... 5 Operating Risks and Insurance............................. 7 Employees................................................. 7 Item 2. Properties.................................................. 7 Rig Fleet................................................. 7 Inland Marine Vessels..................................... 12 Facilities................................................ 13 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 14 Item 6. Selected Financial Data..................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 General................................................... 16 Changes in Financial Condition............................ 16 Results of Operations..................................... 16 Liquidity and Capital Resources........................... 18 New Accounting Standards.................................. 19 Item 8. Financial Statements and Supplementary Data................. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 52 PART III Item 10. Directors and Executive Officers of the Registrant.......... 52 Item 11. Executive Compensation...................................... 54 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 54 Item 13. Certain Relationships and Related Transactions.............. 54 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 55 SIGNATURES
3 Certain statements in this Annual Report on Form 10-K include forward-looking information within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. The statements regarding future financial performance and results and the other statements which are not historical facts contained in this report are forward-looking statements. The words "expect," "anticipate," "estimate," and similar expressions are also intended to identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, oil and gas prices and other market factors, rig dayrates, rig utilization rates, and operating costs. Should one or more such risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. PART I ITEM 1. BUSINESS. GENERAL Falcon Drilling Company, Inc., together with its subsidiaries ("Falcon" or the "Company"), is a provider of contract drilling and workover services for the domestic and international oil and gas industry. The Company's rig fleet consists of barge drilling rigs, barge workover rigs, jackup rigs, submersible rigs, and drillships. The Company's barge rig fleet is the largest in the world. The Company also owns tugboats, crewboats and utility barges, which are primarily used in conjunction with its barge drilling and workover operations. The Company markets its rigs and vessels to oil and gas companies and turnkey operators. The Company was incorporated as a Delaware corporation in October 1991. The Company's headquarters are located at 1900 West Loop South, Suite 1800, Houston, Texas 77027 and its telephone number is (713) 623-8984. INDUSTRY CONDITIONS The Company's operations are materially dependent upon the levels of activity in oil and gas exploration, development and production. Such activity levels are affected by both short-term and long-term trends in oil and gas prices. In recent years, oil and gas prices have been volatile. Worldwide military, political and economic events have contributed to, and are likely to continue to contribute to, price volatility. Any prolonged reduction in oil and gas prices will likely depress the level of exploration, development and production activity and result in a corresponding decline in the demand for the Company's services and, therefore, have a material adverse effect on the Company's revenues and profitability. Much of the Company's equipment is currently in service in the U.S. Gulf of Mexico transition zone and offshore drilling markets where, despite occasional upturns, the demand for drilling and related services was severely depressed from the early 1980's through 1992, due in large part to prolonged weakness and uncertainty in the price of natural gas. Diminished drilling demand during this period led to low day rates and low utilization of available equipment. In addition to adverse effects that future declines in demand could have on the Company, ongoing movement or reactivation of offshore rigs or construction of new rigs could adversely affect dayrates and utilization levels, even in an environment of stronger natural gas prices and increased drilling activity. The Company can predict neither the future level of demand for its services nor future conditions in the drilling industry. During 1996, demand for the Company's drilling equipment strengthened, particularly during the second half of the year. At the end of 1996, the Company's domestic drilling fleets were operating essentially at full utilization, and at the highest dayrates for such equipment that the Company has experienced. However, there is no assurance that the current level of demand for the Company's equipment will be maintained. 1 4 BUSINESS STRATEGY The Company's strategy is to focus on oil and gas drilling markets where cost efficient acquisitions and economies of scale in operations will lead to significant competitive positions. Key elements of this strategy include the acquisition and consolidation of under-utilized assets, the deployment of assets to more attractive markets and the reactivation of idle capacity in markets with increasing demand. The initial focus of the Company's strategy was the barge drilling business. Barge drilling rigs are used for shallow-water drilling in areas commonly referred to as "transition zones," typically found in and around major river delta systems, bays and coastal tidal zones. Historically, the largest such market has been south Louisiana. Outside the U.S., other barge drilling markets include Venezuela (where the Company operates three rigs), Nigeria, Indonesia, Tunisia, and Mexico. The Company has also established a significant presence in the U.S. Gulf of Mexico offshore drilling market, where it currently operates a fleet of 17 bottom-supported rigs, and in the international deepwater drilling market, where it currently operates five drillships. DEVELOPMENTS DURING 1996 The Company continued to increase its active fleet during 1996 through the following transactions: - The purchase for $6.0 million of a barge drilling rig (Rig 55) from Noble Drilling (USA), Inc., which rig is currently operating in South Louisiana. - The purchase for $24.0 million of a drillship (Peregrine II) from UME Drilling Ltd., which drillship is currently operating offshore Brazil. - The lease from Nabors Drilling USA, Inc. of a barge drilling rig (Rig 3) and a barge workover rig (Rig 24), which rigs are currently operating in South Louisiana. - The purchase for $8.0 million of a submersible rig (Falrig 78), which rig is currently operating in the U.S. Gulf of Mexico. - The purchase for $8.5 million of a mat-slot jackup rig (Falrig 83), which rig is currently operating off the West Coast of Africa. - The lease, with an option to purchase, of a mat-slot jackup rig (Falrig 82), which rig is currently operating in the U.S. Gulf of Mexico. - The purchase for $34.5 million of a drillship (Peregrine III), which drillship is currently contracted for work offshore Western Africa. - The purchase for $20.0 million of a drillship (Falcon Duchess), which drillship is currently operating offshore India. - The lease, with an option to purchase, of a drillship (Falcon Ice), which drillship is currently operating offshore Indonesia. The Company's principal financing activities in 1996 were: - The placement in March of $120 million of 8 7/8% senior notes maturing March 15, 2003, resulting in net proceeds to the Company of approximately $116 million. - The establishment in November of a $40 million line of credit with its bank lenders, maturing November 1998, secured primarily by five of the Company's jack-up rigs. At the same time, the Company restructured its $25 million receivable-secured line of credit, extending its maturity to November 1999. - The public offering in December of 3,212,500 shares of the Company's common stock, resulting in net proceeds to the Company of $108.5 million. 2 5 RECENT DEVELOPMENTS During the first two months of 1997, the Company acquired 35 tugs and 29 utility barges, for an aggregate purchase price of $23.4 million. These assets are used primarily in connection with the Company's domestic barge drilling and workover operations. In addition, in January 1997, the Company purchased for $7.5 million an inactive oil/bulk/ore carrier. The Company is evaluating conversion of this vessel to a dynamically positioned drillship. DRILLING MARKETS The Company performs contract drilling and workover services in the U.S. and international shallow-water markets, the offshore U.S. Gulf of Mexico market, and the international deepwater market. Domestic Barge Drilling Market. The Company's principal barge drilling market is the transition zone area of the U.S. Gulf Coast (Alabama, Mississippi, Louisiana and Texas). This area historically has been the world's largest market for shallow-water drilling. Barge rigs are employed both inland, in lakes, bays, rivers and marshes, and in shallow-water coastal areas. During the drilling boom of the early 1980's, there were approximately 125 barge drilling rigs in the U.S. Gulf Coast operating at dayrates as high as $18,000. As a result of the severe decline in oil and gas exploration and development in the remainder of the decade, dayrates fell as low as $6,000 and the number of barge drilling rigs in operation dramatically decreased. Since early 1989, the structure of the domestic shallow-water market has changed materially as the result of (i) barge rigs being scrapped, committed to international markets, or taken out of service and (ii) the consolidation of barge rig companies. The Company estimates that at March 1, 1997, there were approximately 32 barge drilling rigs being actively marketed on the U.S. Gulf Coast (excluding rigs suitable principally for workover or shallow drilling), of which 25 rigs were operated by the Company. The Company also owns 16 barge drilling rigs that were not in service at March 1, 1997. The Company currently anticipates that it will place at least two additional barge drilling rigs in service in the domestic market during 1997. During 1996, Company's domestic barge drilling fleet had a utilization rate of approximately 91.3% and an average base dayrate of approximately $13,673. International Barge Drilling Market. International markets for barge rigs include Venezuela, West Africa, Southeast Asia, Tunisia and Mexico. Drilling in these international markets is typically driven primarily by exploration for oil as opposed to gas. International markets frequently offer a drilling contractor the opportunity to enter into longer term contracts at higher operating margins than can be obtained domestically. Offsetting these benefits are the risks of political uncertainty and currency fluctuations, and increased overhead in establishing a foreign base of operation. During 1996, the Company operated three barge rigs in Venezuela under term contracts with Maraven, S.A. (a subsidiary of Venezuela's government owned oil company). These rigs experienced 99% utilization during the period, and an average dayrate of $18,400. These contracts run through December, 1999. In addition, through July 1996 the Company operated a barge rig in Venezuela under contract with BP Venezuela (an affiliate of British Petroleum). This rig was returned to the United States upon completion of the contract with BP Venezuela, and is currently operating in the U.S. Gulf Coast. Domestic Barge Workover Market. The Company's barge workover fleet operates in the same geographical area as its domestic barge drilling fleet. The same factors which have affected the structure of the barge drilling market have also affected the barge workover market, with considerable consolidation of competitors and reduction of available rigs since the early 1980's. The Company estimates that at March 1, 1997 there were approximately 27 barge workover rigs being actively marketed in the U.S. Gulf Coast, of which 10 were operated by the Company. During 1996, the Company's workover rigs experienced an average utilization rate of approximately 67.2% and an average base dayrate of approximately $8,984. Offshore Bottom-Supported Drilling Rig Market. At March 1, 1997, the Company's offshore bottom-supported drilling fleet was located in the U.S. Gulf of Mexico, except for one submersible rig in Venezuela 3 6 and one jackup rig offshore West Africa. The number of offshore rigs under contract in the U.S. Gulf of Mexico declined steadily from the early 1980's until 1992, but has recovered since then. In particular, the last half of 1996 saw a significant strengthening in this market, and at December 31, 1996, all of the Company's bottom-supported offshore rigs were contracted, including eight rigs under term contract through December 31, 1997. The Company estimates that at March 1, 1997, there were approximately 120 bottom-supported offshore drilling rigs being actively marketed in the U.S. Gulf, of which the Company operates 17. There are jackup rigs stacked in the U.S. Gulf of Mexico that, subject to varying levels of expenditure, could be reactivated for drilling, and there are jackup rigs currently located outside the U.S. that could be moved to the U.S. Gulf of Mexico within a short period time. Either of the foregoing could have the effect of reducing dayrates. There can be no assurance that the present levels of drilling activity will be maintained. International opportunities for the Company's offshore bottom-supported rigs are limited to areas where soft bottom conditions are conducive to the use of mat-supported rigs, including certain offshore waters of India, Southeast Asia, West Africa and Mexico. At March 1, 1997, the Company was operating one jackup off West Africa under a term contract and one submersible in Venezuela under a well to well contract. Although the Company has no current plans to mobilize any of its other offshore bottom-supported rigs to international waters, it could do so if market conditions made that advantageous. During 1996, the Company's Gulf of Mexico offshore fleet had a utilization rate of approximately 96.4% and an average base dayrate of approximately $19,962. Drillship Market. Drillships are used to drill wells in water depths beyond the capabilities of bottom-supported rigs. Because of their greater capacity to store supplies and equipment, they may have a competitive advantage over bottom-supported rigs and semisubmersibles in remote areas where getting materials to a rig is costly. Markets that utilize drillships include West Africa, Brazil, Australia, Southeast Asia, India and the U.S. Gulf of Mexico. The Company's drillship fleet consists of three dynamically positioned drillships and two conventionally moored drillships (one of which the Company leases with an option to purchase). Two of the dynamically positioned drillships are working offshore Brazil under long-term contracts with Petrobras, and the third dynamically positioned drillship is under multi-well contracts for work offshore West Africa. The two conventionally moored drillships are working under well-to-well contracts in Southeast Asia. The Company believes the deepwater market is attractive because (i) advances in technology have made production from deeper waters more economical, and (ii) there is a greater possibility of finding significant new reservoirs of hydrocarbons in deeper waters than in shallower waters, which have been more extensively explored. CONTRACTS AND CUSTOMERS Drilling in the areas served by the Company ranges from shallow wells (up to 12,000 feet) to deep wells (up to 25,000 feet). Deeper wells generally take disproportionately longer to drill than shallower wells, due primarily to more varied and difficult subsurface conditions and the frequent need to run protective casing. The Company's drilling rigs are competitive for all types of drilling, but are particularly designed to drill to depths in excess of 12,000 feet. The Company's drilling and workover rigs are generally operated under dayrate contracts between the Company and its customers, which are major and independent oil and gas companies, government owned oil and gas companies, and turnkey operators. Historically, most domestic drilling contracts have been on a well-to-well basis. However, since mid-1996, the U.S. Gulf of Mexico offshore market has strengthened to the point that the Company has been able to place a majority of its offshore bottom-supported rigs on term contracts. Domestic workover contracts are typically on a well-to-well basis and shorter in duration than drilling contracts. Contracts in the international markets are frequently offered on a term basis. The Company obtains most of its contracts through competitive bidding against other contractors in response to solicitations of bids by oil and gas companies and turnkey operators. The awarding of drilling 4 7 contracts depends on numerous factors, including pricing, availability, rig specifications, safety record and crew quality. Dayrate contracts generally provide for a fixed dayrate, regardless of whether drilling is successful. Drilling contracts also provide for lower rates during periods when the rig is being moved or when drilling operations are interrupted or restricted due to equipment breakdowns, adverse weather or water conditions or other conditions beyond the control of the Company. Under dayrate contracts, the Company generally pays operating expenses of the rig, including wages and the cost of incidental supplies. Revenues from dayrate contracts have historically accounted for substantially all of the Company's revenues. The Company has generally been able to obtain contractual indemnification pursuant to which the Company's customers agree to protect and indemnify the Company to some degree from liability for reservoir, pollution and environmental damages, but there can be no assurance that the Company can obtain such indemnities in all of its contracts, that the level of indemnification that can be obtained will be meaningful, that such indemnification agreements will be enforceable or that the customer will be financially able to comply with its indemnity obligations. In 1994, 1995, and 1996, the Company contracted with 80, 75 and 102 customers, respectively. Applied Drilling Technology Inc., a provider of turnkey drilling services, accounted for 11.2% of total revenues in 1994. Maraven, S.A. accounted for 11.3% of total revenues in 1995. Applied Drilling Technology, Inc. accounted for 12.4% of total revenues in 1996. No other customer accounted for more than 10% of total revenues in any such period. With the entry of the Company into the drillship market, Petrobras, which has contracted for the use of the Peregrine I and Peregrine II, is expected to become one of the most important customers of the Company. RELATED OIL AND GAS ACTIVITIES The Company has in the past entered into arrangements whereby it contracted to provide a rig and related services in connection with the acquisition of a working interest in a well. In some cases such an arrangement would provide for a day rate structured to cover the Company's variable costs, with the Company acquiring a working interest in the well in lieu of the difference between such costs and the Company's normal rates. The Company has also in some cases participated as a working interest owner in connection with providing a rig and related services under a normal dayrate structure. Generally, these arrangements are entered into only where the Company believes the standard day rate contract, without any investment obligations as a working interest owner, would not be available to the Company. In addition, the Company, through a subsidiary, has engaged in the development of drilling prospects in the general areas of the Company's barge drilling operations and, in one instance, has participated with several other companies in the funding of seismic activities on an oil and gas drilling prospect in South Louisiana. The Company's expenditures and commitments to date for the prospect development and funding of these activities have been limited to an aggregate of approximately $2.2 million. The Company has not yet received any revenues from oil and gas production and has no current plans to make any material additional commitments for such activities, as the Company intends to devote its resources to the further growth of its drilling and workover operations. GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS The Company's business is affected by domestic and foreign laws relating to the energy industry in general and the marine drilling industry in particular. To the extent these laws materially restrict oil and gas exploration or make it less economical, the Company's business would in all likelihood be adversely affected. Public interest in the protection of the environment has increased dramatically in recent years, particularly in the United States, where the Company derives a majority of its revenues. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. To the extent laws are enacted or other governmental action is taken that prohibits or restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and gas industry in general and the drilling industry in particular, the business and prospects of the Company could be adversely affected. 5 8 The transition zone and shallow-water areas of the U.S. Gulf Coast, where the Company's operations are concentrated, are ecologically sensitive. Environmental issues have led to higher drilling costs, a more difficult and lengthy well permitting process and, in general, have adversely affected decisions of the oil companies to drill in these areas. U.S. laws and regulations applicable to the Company's operations include those controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment, or otherwise relating to the protection of the environment. For example, as an operator of drilling rigs in navigable U.S. waters and certain offshore areas, the Company may be liable for damages and costs incurred in connection with spills or discharges of oil or other substances for which it is held responsible. The discharge of oil or other substances in a wetland or inland waterway could produce substantial damage to the environment, including wildlife and ground water. Laws and regulations protecting the environment have become more stringent in recent years, and may, in certain circumstances, impose "strict liability," rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. 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 Federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA") prohibits the discharge of certain substances into the navigable waters of the United States without a permit. The regulations implementing the CWA require permits to be obtained by an operator before certain exploration activities occur. Violations of monitoring, reporting and permitting requirements can result in the imposition of civil and criminal penalties. The provisions of the Clean Water Act can also be enforced by citizen's groups. The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the CWA and other statutes as they pertain to the prevention of and response to hazardous substances and oil spills into navigable waters. CWA, OPA and regulations promulgated pursuant thereto impose a variety of regulations on "responsible parties" related to the prevention of oil spills and the regulation and restriction of the discharge of other materials and liability for damages resulting from such spills and discharge. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. CWA and OPA assign liability to each responsible party for removal costs of oil and other discharged materials and a variety of public and private damages. While liability limits apply in some circumstances, a responsible party for an offshore facility must pay all removal costs incurred by a federal, state or local government. Few defenses exist to the liability imposed by CWA and OPA. CWA and OPA also impose ongoing requirements on a responsible party. The Company has to date been able to comply with these financial responsibility requirements, but there is no assurance that it will be able to do so in the future or that compliance will not increase its cost of doing business. OPA requires the Minerals Management Service to promulgate regulations to implement the financial responsibility requirements for offshore facilities, which regulations could have the effect of increasing significantly the amounts of financial responsibility that oil and gas operators and drilling contractors must demonstrate in order to comply with OPA. These regulations could make it more difficult for drilling contractors to drill in U.S. waters. 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 environmental-related lease conditions 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. The Company believes it is in material compliance with applicable federal, state, local and foreign legislation and regulations relating to environmental controls. However, the existence of such laws and regulations has had and will continue to have a restrictive effect on the Company and its customers. 6 9 OPERATING RISKS AND INSURANCE The Company's business is subject to operating risks that include fires, well blowouts, explosions, collapse of rigs, capsizing of rigs under transport, equipment failures, and accidents that occur both with and without negligence. These events may result in damage to or loss of the Company's equipment, personal injury and loss of life, pollution, and loss of revenues due to unavailability of equipment. As a protection against operating hazards, the Company maintains broad insurance coverage, including all-risk physical damage, employer's liability, comprehensive commercial general liability and workers' compensation insurance. The Company's current insurance program includes coverage for well control, cratering, seepage, and pollution coverage for Outer Continental Shelf Lands Act statutory obligations. Each form of coverage provides for a deductible for the account of the Company, as well as a maximum limit of liability. Each casualty is an occurrence, and there may be more than one such occurrence on a well, each of which would be subject to a separate deductible. The Company believes that it is adequately insured for public liability and property damage to others with respect to its operations. However, such insurance may not be sufficient to protect the Company against liability for all consequences of well disasters, extensive fire damage or damage to the environment. The Company also carries insurance to cover physical damage to or loss of its drilling rigs. No assurance can be given that the Company will be able to maintain the type and amount of coverage that it considers adequate. The Company does not maintain business interruption insurance. Thus physical damage to a rig, even if substantially covered by insurance, would result in loss of revenue while the rig is repaired, which loss would not be insured. EMPLOYEES The Company emphasizes employee safety, training and retention. Through its various acquisitions, the Company has retained many experienced personnel. The number of employees varies depending on the level of drilling activity. As of December 31, 1996, the Company employed approximately 2,896 persons, approximately 2,413 of whom were hourly employees. There are no collective bargaining contracts covering the Company's domestic employees in effect. Of the Company's employees, 364 persons are employed in Venezuela, all of whom are covered by the Collective Labor Contract of the Venezuelan Petroleum Industry. The Company believes its relations with its employees are good. The recent increase in rig utilization has resulted in increased demand for the personnel necessary to operate the rigs. The Company has experienced delays in placing rigs in service due to the shortage of qualified personnel. The increased demand for labor may in the future result in increases in the compensation the Company is required to pay to attract and retain qualified personnel. In order to expand its pool of qualified personnel, the Company has sometimes placed extra personnel on certain of its rigs in order to have them gain experience. The cost of these extra personnel is borne by the Company, and increases its operating costs. ITEM 2. PROPERTIES. RIG FLEET The Company's actively marketed drilling rig fleet at March 1, 1997 consisted of 28 barge drilling rigs, ten barge workover rigs, 16 jackup rigs, three submersible rigs, and five drillships. In addition, at such date the Company owned two barge drilling rigs being refurbished for active service, 14 cold-stacked barge drilling rigs, one cold-stacked semisubmersible, one drillship hull, and one inactive oil/bulk/ore carrier. There are several factors that determine the type of rig most suitable for a particular job, the most significant of which are the marine environment, water depth and seabed conditions at the proposed drilling location, whether the drilling or workover is being done over a platform or other structure, and the intended well depth. The following sets forth a brief description of the types and capabilities of the rigs operated by the Company. 7 10 Domestic Barge Drilling Rigs. Barge drilling rigs are mobile drilling platforms that are submersible and are built to work in eight to 20 feet of water. They are towed by tugboats to the drill site with the derrick lying down. The lower hull is then submerged by flooding until it rests on the sea floor. The derrick is then raised and drilling operations are conducted with the barge in this position. There are two basic types of barge rigs, "posted" and "conventional." A posted barge is identical to a conventional barge except that the hull and superstructure are separated by 10 to 14 foot columns, which increases the water depth capabilities of the rig. 8 11 The following table provides certain information regarding the Company's domestic barge drilling fleet as of March 1, 1997:
MAXIMUM HORSEPOWER YEAR DRILLING RIG DRILLING EQUIPMENT/MAIN POWER RATING BUILT DEPTH(FEET) CUSTOMER(1) --- ----------------------------- ---------- ----- ----------- ---------------- Conventional Barge Rigs for Deep Drilling 1 Skytop Brewster/Caterpillar........... 2,000 1980 20,000 LLOG 3 Mid-continent/Caterpillar(2).......... 3,000 1981 25,000 Oryx Energy 4 Oilwell/Caterpillar................... 3,000 1981 25,000 Cold Stacked 6 Mid-Continent/Caterpillar............. 3,000 1981 25,000 Cold Stacked 11 Gardner Denver/Caterpillar............ 3,000 1982 30,000 (3) 15 National/EMD.......................... 2,000 1981 25,000 Castex 21 Oilwell/Caterpillar................... 1,500 1982 15,000 Kelley Operating 25 Continental Emsco/Caterpillar......... 3,000 1976 25,000 Cold Stacked 28 Continental Emsco/Caterpillar......... 3,000 1979 30,000 Plains Resources 29 Continental Emsco/Caterpillar......... 3,000 1980 30,000 Texaco 30 Continental Emsco/Caterpillar......... 3,000 1981 30,000 Texaco 31 Continental Emsco/Caterpillar......... 3,000 1981 30,000 Texaco 32 Continental Emsco/Caterpillar......... 3,000 1982 30,000 Forman 37 National/EMD.......................... 3,000 1965 20,000 Cold Stacked 38 National/EMD.......................... 3,000 1965 20,000 Cold Stacked Posted Barge Rigs for Deep Drilling 2 Skytop Brewster/Caterpillar........... 2,000 1980 20,000 Cold Stacked 5 National/Caterpillar.................. 3,000 1981 25,000 Cold Stacked 7 Oilwell/Caterpillar................... 2,000 1978 25,000 Flores & Rucks 8 Oilwell/Caterpillar................... 2,000 1978 25,000 Cold Stacked 9 Oilwell/Caterpillar................... 2,000 1981 25,000 Denbury 10 Oilwell/Caterpillar................... 2,000 1981 25,000 Exxon 16 National/EMD.......................... 3,000 1981 30,000 Texaco 17 National/EMD.......................... 3,000 1981 30,000 Shell Western 27 Continental Emsco/Caterpillar......... 3,000 1978 30,000 (4) 39 National/EMD.......................... 3,000 1970 30,000 Cold Stacked 41 National/EMD.......................... 3,000 1981 30,000 Cold Stacked 44 Oilwell/Superior...................... 3,000 1979 30,000 Cold Stacked 45 Oilwell/Superior...................... 3,000 1979 30,000 Cold Stacked 46 Oilwell/EMD........................... 3,000 1981 30,000 Cold Stacked 47 Oilwell/EMD........................... 3,000 1982 30,000 OTV 48 Gardner Denver/Caterpillar............ 3,000 1982 30,000 UPRC 49 Oilwell/Caterpillar................... 3,000 1980 30,000 UPRC 52 Oilwell/Caterpillar................... 2,000 1981 25,000 Trans Texas Gas 54 National/EMD.......................... 3,000 1970 30,000 Fina 55 Ideco/EMD............................. 3,000 1981 30,000 Newfield 56 National/Caterpillar.................. 2,000 1973 25,000 Enserch 57 National/Caterpillar.................. 2,000 1975 25,000 Cold Stacked 61 Mid-Continent/EMD..................... 3,000 1978 30,000 Texaco 62 Mid-Continent/EMD..................... 3,000 1978 30,000 Amerada Hess 63 Mid-Continent/EMD..................... 3,000 1978 30,000 Shell Offshore 64 Mid-Continent/EMD..................... 3,000 1979 30,000 Phillips
- --------------- (1) Rigs listed as cold stacked are not being actively marketed and are in need of refurbishment to be activated. (2) This rig is leased to the Company. (3) This is a hull built in 1982 that is being completed as a barge drilling rig. (4) This rig is being refurbished for active service. 9 12 Lake Maracaibo Barge Rigs. Rigs designed to work in Lake Maracaibo, Venezuela, require modification to work in a floating mode in up to 150 feet of water. The typical domestic barge is modified by widening the hull, installing a mooring system and cantilevering the drill floor. Three of the Company's barge rigs have been so modified and are currently operating in Lake Maracaibo, pursuant to contracts with Maraven. After such modifications, these rigs generally are not suitable for deployment to other locations. The following table provides certain information regarding the Company's Lake Maracaibo barge rigs as of March 1, 1997:
DRILLING MAXIMUM EQUIPMENT/MAIN HORSEPOWER YEAR YEAR DRILLING RIG POWER RATING BUILT REBUILT DEPTH(FEET) CUSTOMER --- -------------- ---------- ----- ------- ----------- -------- 40 Oilwell/EMD............ 3,000 1980 1994 25,000 Maraven 42 National/EMD........... 3,000 1982 1994 25,000 Maraven 43 National/EMD........... 3,000 1982 1994 25,000 Maraven
Barge Workover Rigs. Barge workover rigs typically differ from barge drilling rigs both in the size of the hull and the capability of the drilling equipment. Because workover operations require less pulling power and mud system capacity, a smaller, lower capacity unit can be used. In addition, workover rigs, which are equipped with specialized pumps and handling tools, do not require heavy duty drill pipe. Operating costs for workover rigs are lower because the rigs require smaller crews, use less fuel and require less repair and maintenance. Workover rigs can also be utilized to drill shallow wells to depths ranging from 5,000 to 12,000 feet depending upon the rig's capabilities. The following table provides certain information regarding the Company's workover fleet as of March 1, 1997:
MAST MAXIMUM CAPACITY YEAR WORKOVER RIG DRAWWORKS (POUNDS) BUILT DEPTH(FEET) CUSTOMER --- --------- ---------- ----- ----------- -------- SDI Ideco H-30.................... 250,000 1990(1) 15,000 Equinox 6 Ideco H-35.................... 450,000 1978 20,000 Ensearch 7 Gardner Denver 800............ 800,000 1972 25,000 Apache 14 Skytop Brewster N95(2)........ 1,000,000 1978 30,000 Flores & Rucks 16 Mid-Continent U36A............ 550,000 1979 25,000 Stone 18 Skytop Brewster N75........... 530,000 1980 25,000 Legacy 19 Skytop Brewster N75........... 750,000 1996(1) 25,000 Undergoing repair 22 Wilson 75..................... 369,000 1991(1) 20,000 Redfish Bay Dev. 23 Mid-Continent V-914(3)........ 1,000,000 1995(1) 25,000 Grand Operating 24 National(3)................... 760,000 1978 25,000 Apache
- --------------- (1) These rigs were reconstructed on the date indicated using the existing hull. (2) This rig is a posted barge capable of deep drilling operations, but is currently marketed for workover activity in areas requiring a posted barge. (3) These rigs are leased to the Company. Offshore Bottom-Supported Rigs. The Company operates two types of offshore bottom-supported rigs: jackups and submersibles. Jackup 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. The rig hull includes the drilling rig, 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 mat attached to the lower portion of the legs in order to provide a more stable foundation in soft bottom areas. All of the Company's jackup rigs are mat-supported rigs. Moving a rig to the drill site involves jacking up its legs until the hull is floating on the surface of the water. The hull is then towed to the drill site by tugboats and the legs are jacked down until contact is made with the seabed. The jacking operation continues until the hull is raised to the desired elevation above sea level and drilling operations are 10 13 conducted with the hull in its raised position. Certain of the Company's jackup rigs are cantilever design, a feature that permits the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over pre-existing platforms or structures. The other jackups are slot type rigs that are configured for the drilling operations to take place through a keyway in the hull. Jackup rigs with the cantilever feature historically have achieved higher day rates and utilization rates. A submersible rig is a mobile drilling platform that is towed to the drill site and submerged to drilling position by flooding the lower hull until it rests on the sea floor, with the upper deck above the water surface. After completion of the drilling operation, the rig is refloated by pumping the water out of the lower hull, after which it may be towed to another location. The Company's submersible rigs are cantilever design. The following is a summary of the Company's offshore bottom-supported fleet at March 1, 1997:
MAXIMUM MAXIMUM WATER DRILLING DEPTH DEPTH YEAR RIG RIG DESCRIPTION (FEET) (FEET) BUILT CUSTOMER --- --------------- ------- -------- ----- -------- Slot type Mat-Supported Jackup Rigs Falrig 17 Bethlehem JU-250MS 250 25,000 1974 ADTI Falrig 18 Bethlehem JU-250MS 250 25,000 1978 Zilkha Falrig 19 Bethlehem JU-250MS 250 25,000 1978 ADTI Falrig 20 Bethlehem JU-250MS 250 25,000 1982 ADTI Falrig 82 Baker Marine BMC 200MS 200 25,000 1978 Sonat Falrig 83 Bethlehem JU-250MS 250 25,000 1978 Global Marine Falrig 84 Bethlehem JU-250MS 250 25,000 1975 ADTI Achilles Baker Marine BMC 250MS 200 25,000 1981 Triton Sea Hawk Bethlehem JU-250MS 250 25,000 1976 King Ranch Taurus Bethlehem JU-250MS 250 25,000 1976 Undergoing Repair Cantilevered Mat-Supported Jackup Rigs Phoenix I Bethlehem JU-200MC 200 25,000 1981 ADTI Phoenix II Bethlehem JU-200MC 200 25,000 1982 Houston Exploration Phoenix III Bethlehem JU-200MC 200 25,000 1981 ADTI Phoenix IV Bethlehem JU-200MC 200 25,000 1981 Petsec Falrig 85 Bethlehem JU-200MC 200 25,000 1979 Unocal Falrig 86 Bethlehem JU-200MC 200 25,000 1980 ADTI Cantilevered Submersible Rigs Rig 203 Pace 85G 85 30,000 1983 BP Venezuela Falrig 77 Donhaiser Marine DMI85 85 30,000 1983 Undergoing Repair Falrig 78 Donhaiser Marine DMI85 85 30,000 1983 ADTI
Except for Rig 203, which was operating in Venezuela, and FALRIG 83, which was operating offshore West Africa, all of the above rigs were located in the U.S. Gulf of Mexico at March 1, 1997. The Company's offshore bottom-supported rigs, like most of the rigs with which they compete, were constructed during the last drilling boom, which ended about 1982. The average age of the Company's offshore bottom-supported fleet is approximately 17.5 years. With increasing age, the likelihood that a rig will require major repairs in order to remain operational increases. The Company expects that repair and maintenance of its offshore bottom-supported rigs will require increasing amounts of capital, and will result in such rigs being unavailable for service from time to time. During any such period of repair to a rig, the Company will not earn revenues from such rig, but will continue to incur a substantial portion of the costs that would be incurred while the rig is operating. Drillships. A drillship is a self-propelled ship specifically outfitted for drilling operations. Many of the drillships built after 1975 featured a dynamic positioning system which allows the ship to position itself over the well site through the use of thrusters controlled by a satellite navigation system. The prior generation of drillships, often called "conventionally moored" drillships, are anchored over the well site and thus are 11 14 generally more limited in terms of water depth than dynamically positioned drillships. Drillships typically are able to carry more supplies on board than semisubmersible rigs, which frequently makes them better suited for drilling in locations where resupply is difficult. However, drillships are limited to areas of calmer water conditions than those in which semisubmersibles can operate, and thus cannot compete with semisubmersibles in areas with harsh environments, such as the North Sea. The Company currently operates five drillships, four of which it owns and one of which (Falcon Ice) it leases (with an option to purchase). A summary of the Company's drillship fleet at March 1, 1997, is as follows: Peregrine I is a dynamically positioned drillship contracted to Petrobras for five years, for work offshore Brazil. The Peregrine I was purchased by the Company in September 1995, and was extensively refurbished and upgraded. The refurbishment and upgrade costs of the Peregrine I far exceeded the Company's original estimates, and completion thereof was substantially delayed. The vessel was mobilized to Brazil in the fourth quarter of 1996, but as of March 1997, the Company continued to experience difficulties in getting the vessel fully operational. The dayrate at March 1, 1997 was approximately $50,800 per day. The vessel is designed to drill in water depths up to 7,000 feet. Peregrine II is a dynamically positioned drillship purchased by the Company in February 1996. It is contracted to Petrobras through August 1998, for work offshore Brazil, at a day rate of $44,900 per day. During the period in 1996 that the vessel was owned by the Company, it had a 91% utilization rate. The vessel is capable of drilling in water depths up to 3,300 feet. Peregrine III is a dynamically positioned drillship purchased by the Company in May 1996. It contracted to affiliates of Shell and Exxon for a series of wells offshore West Africa. The Company estimates that these wells will occupy the vessel through June 1999. At March 1, 1997, the vessel was in Cape Town undergoing an upgrade and is expected to return to service by May 1, 1997. The vessel will operate under its current contracts at dayrates ranging from approximately $62,000 to $68,000. During the period in 1996 that the vessel was owned by the Company, it had a 94% utilization rate. The vessel is capable of drilling in water depths up to 4,200 feet. Falcon Duchess is a conventionally moored drillship purchased by the Company in December 1996. Following the purchase, the Company undertook refurbishment of the vessel, and it was not placed in service until 1997. At March 1, 1997, it was working offshore India for Vaalco Energy at a dayrate of $52,500. The vessel is capable of drilling in water depths up to 1,500 feet. Falcon Ice is a conventionally moored drillship. The Company leased this drillship for a three-year term commencing in December 1996, and has an option to purchase it at any time during the lease term. At the time the vessel was leased by the Company, it was working offshore Indonesia under contract with an affiliate of Arco, at a dayrate of $50,000. At March 1, 1997, it continued to work under this contract. The vessel is capable of drilling in water depths up to 1,500 feet. INLAND MARINE VESSELS In connection with barge drilling and workover operations, it is necessary to utilize other types of vessels: - Utility barges are barges generally 100 to 120 feet in length, which are positioned alongside the barge rig and are used (i) to store materials or (ii) as a container in which to dump cuttings from the well bore, which cuttings then are transported elsewhere for disposal. - Service tugs are ships approximately 50 to 60 feet in length, having 400 to 900 horsepower, which are used to move and position utility barges and transport materials and personnel to and from the barge rig. - Rig moving tugs are ships approximately 60 to 70 feet in length, having 900 horsepower or greater, which are used to move barge rigs to and from the drilling location. They can also be used to move and position utility barges and move materials and personnel to and from the barge rig. 12 15 A rig moving tug is typically used to move barge rigs and utility barges to and from location, and is normally contracted by the hour. It may sometimes be used in a service tug capacity if water conditions require a more powerful vessel or if no smaller vessels are available, in which event it is normally contracted on a dayrate basis. Once a barge rig is on location, the movement of utility barges, supplies and personnel can normally be more economically handled with service tugs, which are on contract throughout the operation, usually on a dayrate basis. During drilling operations, anywhere from two to six utility barges may be in use throughout the operation, as well as one to three service tugs. In a barge rig operation, the Company's customer may contract directly for the utility barges and tugs, or may ask the Company to provide them. In the first two months of 1997, the Company acquired, in three transactions, 35 tugs and 29 utility barges. Although the Company expects that these assets will be used primarily in conjunction with the Company's barge rig business, they will also be used in other applications. FACILITIES The Company's headquarters occupy approximately 19,700 square feet of office space in Houston, Texas, under a lease that expires in 2004. The Company's barge drilling operations are located in Houma, Louisiana, and the barge workover operations are located in Belle Chasse, Louisiana. The land at Houma is leased under an agreement expiring in 2015 and the improvements are owned by the Company. The lease for the Belle Chasse facility expires in 1997. At Houma and Belle Chasse, in addition to office space, the Company maintains a facility, including a slip, for the repair of barge rigs and drilling equipment and a warehouse for storage of drilling supplies and equipment. The Company's Gulf of Mexico offshore operations are located in Broussard, Louisiana, where the Company maintains an office and a facility to repair drilling equipment and store drilling supplies and equipment. The lease on this facility expires in 1999 but is subject to renewal for an additional five-year term at the Company's option. In connection with its Venezuelan operations, the Company leases office and warehouse space in Ojeda on Lake Maracaibo in Venezuela and has an office in Maturin in the Orinoco Delta region of Venezuela. The Company owns an office and warehouse facility in Macae, Brazil, that is used to support the Company' drillship operations offshore Brazil. The Company leases office space in Singapore from which it will support the operations of the Falcon Ice and Falcon Duchess while such rigs work in southeast Asia. The Company leases a facility at Morgan City, Louisiana and owns a facility in LaFourche Parish, Louisiana, both of which are used in connection with its inland marine vessel operations. ITEM 3. LEGAL PROCEEDINGS. Various claims have been filed against the Company in the ordinary course of business. These are primarily claims alleging personal injuries, which claims the Company believes are covered by its insurance, subject to a deductible for each claim, which is borne by the Company. In addition to such claims, the Company is party to suits alleging patent infringement and breach of contract, which are not covered by insurance. In the opinion of management, no pending claims, actions or proceedings against the Company are expected to have a material adverse effect on its consolidated 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. 13 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company has not paid dividends and does not anticipate paying dividends on the Common Stock in the foreseeable future. The Company expects that it will retain all earnings for the development and growth of its business. Any future determination as to the payment of dividends will be made in the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. The payment of cash dividends is restricted by the terms of the Company's bank loan facilities and the debt instruments pursuant to which the Company's senior notes and subordinated notes were issued. The Company's Common Stock was traded on the NASDAQ National Market System under the symbol "FLCN" from the Company's initial public offering in August 1995 until December 3, 1996. Since December 3, 1996, the Company's Common Stock has been traded on the New York Stock Exchange under the symbol "FLC". The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock.
HIGH LOW ---- --- Year ending December 31, 1995 Third Quarter............................................. $13 1/2 $ 91/4 Fourth Quarter............................................ 15 1/4 97/8 Year ending December 31, 1996 First Quarter............................................. 25 5/8 12 Second Quarter............................................ 28 1/2 221/4 Third Quarter............................................. 27 7/8 20 Fourth Quarter............................................ 43 1/4 253/4
As of March 21, 1997, there were 89 record holders of the Company's Common Stock as reflected by the records of the Company's stock transfer agent. The last sale price of the Common Stock as reported by the New York Stock Exchange on March 21, 1997, was $35 5/8. 14 17 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth certain historical financial data relating to the Company. The information set forth below is not necessarily indicative of the results of future operations and 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 the notes thereto included in Item 8 of this Report.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- -------- -------- -------- (IN THOUSANDS) INCOME STATEMENT DATA: Revenues(1)............................ $ 9,673 $ 61,840 $138,503 $177,505 $319,341 Operating costs........................ 9,674 46,126 95,256 120,992 198,755 General and administrative expenses(2)......................... 1,625 5,520 11,887 13,871 18,176 Depreciation........................... 1,696 2,990 9,445 16,527 28,875 ------- -------- -------- -------- -------- Operating income (loss)............. (3,322) 7,204 21,915 26,115 73,535 Interest expense....................... 1,880 2,743 12,046 18,021 23,894 Amortization of deferred costs......... 158 538 690 2,140 2,902 Foreign currency translation gain...... -- -- -- (1,023) -- Other (income) expense, net............ -- (927) (1,969) (2,850) (4,815) ------- -------- -------- -------- -------- Income (loss) before taxes.......... (5,360) 4,850 11,148 9,827 51,554 Provision for income taxes............. -- 952 3,232 3,481 19,075 ------- -------- -------- -------- -------- Net income (loss) before minority interest.......................... (5,360) 3,898 7,916 6,346 32,479 ------- -------- -------- -------- -------- Minority interest...................... -- -- 3,486 1,291 -- ------- -------- -------- -------- -------- Net income (loss)...................... $(5,360) $ 3,898 $ 4,430 $ 5,055 $ 32,479 ------- -------- -------- -------- -------- Preferred stock dividends and accretion........................... -- 743 565 374 -- ------- -------- -------- -------- -------- Net income (loss) applicable to common shares.............................. $(5,360) $ 3,155 $ 3,865 $ 4,681 $ 32,479 ======= ======== ======== ======== ======== Net income (loss) per common share..... $ (0.46) $ 0.14 $ 0.14 $ 0.16 $ 0.90 ======= ======== ======== ======== ======== Shares used to compute net income (loss) per common share............. 11,695 21,899 26,880 29,543 36,238 ======= ======== ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents.............. $ 572 $ 6,708 $ 4,868 $ 9,016 $ 85,050 Rigs and equipment, net................ 36,124 72,655 170,823 265,608 467,962 Total assets........................... 42,515 109,994 224,146 341,023 652,042 Long-term debt and other obligations... 35,536 39,006 141,379 179,362 292,305 Total debt............................. 36,060 42,030 158,400 183,361 295,051 Redeemable preferred stock............. -- 7,432 4,145 -- -- Total stockholders' equity............. 974 31,011 34,087 115,516 273,748
- --------------- (1) The historical revenues include management fee income of $170,000, $2,987,000 and $92,000 for the years ended December 31, 1992, 1993 and 1994, respectively, from rigs owned by affiliates. (2) Included in general and administrative expenses is a nonrecurring executive bonus of $2.0 million which was granted by the Company's board of directors to the chief executive officer in September 1994. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company's financial condition and historical results of operations have been significantly affected by a series of acquisitions that have resulted in the Company's current fleet. Changes in the number of actively marketed rigs and their geographic locations significantly affect the Company's capital expenditure requirements, working capital requirements and results of operations. During 1996, the Company significantly expanded its fleet and commenced operations in Brazil, West Africa, and Southeast Asia. Revenues. The Company's revenues are determined primarily by (a) the number of rigs it has available for service and (b) demand for contract drilling and workover services, which affects the utilization rates and dayrates of the Company's active rigs. Operating Costs. Operating costs include all direct costs and expenditures associated with operating active rigs and stacking inactive rigs. These costs and expenditures vary based on rig utilization and the number of rigs actively marketed by the Company. These costs and expenditures include rig labor costs, repair, maintenance and supply expenditures, insurance costs, mobilization costs and other costs related to operations. Operating Income. Changes in the Company's operating income tends to be more directly affected by revenue factors than expense factors, for several reasons. First, changes in dayrates directly impact revenues but do not affect operating expenses. Second, changes in utilization rates have an immediate impact on revenues, but in the short term do not materially impact operating expenses, since it is not the Company's current policy to lay off employees during short-term declines in rig utilization. Over a longer period, significant changes in rig utilization can change the level of operating expenses from period to period as the Company may adjust the level of its actively marketed rig fleet and labor force to match more closely the anticipated level of demand. Third, general and administrative expenses, which generally include the costs of the company's shore-based support functions, do not vary significantly from period to period unless the Company materially expands its asset base, nor do they vary over short periods of time with changes in rig utilization. Depreciation, which is determined by the level of the Company's capital expenditures and depreciation practices, is another major determinant of operating income. It is not affected by changes in dayrates or utilization rates. CHANGES IN FINANCIAL CONDITION Rig acquisitions, financings completed, upgrade and refurbishment of rigs, and cash flow generated from operations were responsible for the significant changes in the company's financial position between December 31, 1995, and December 31, 1996. The following are the most significant of such activities: (1) The purchase of three drillships, the significant upgrade of a fourth drillship, and the acquisition of spares for drillships, for an aggregate of approximately $148 million. (2) The purchase of one jackup drilling rig, one barge drilling rig and one submersible drilling rig, for an aggregate of approximately $28.2 million. (3) The upgrade or refurbishment of eight barge drilling and workover rigs for approximately $11 million. (4) The charter to the Company of one drillship, one jackup drilling rig, one barge drilling rig, and two barge workover rigs. (5) The placement of $120 million of senior unsecured notes in March 1996. (6) The issuance and sale of 3,212,500 shares of Common Stock in December 1996. RESULTS OF OPERATIONS In general, during 1996, operating results in the domestic barge drilling and domestic offshore markets exceeded the Company's expectations, operating results in the international shallow-water market were in line 16 19 with expectations, and operating results in the domestic barge workover and deepwater markets were below expectations. The better than expected results in the domestic drilling barge and domestic offshore fleets were primarily the result of higher utilization and dayrates for such rigs, reflecting the increased drilling demand in the U.S. Gulf of Mexico market. The international shallow-water fleet, with the majority of its rigs under long-term contracts, was not subject to material fluctuation in dayrates and utilization rates, and with no unanticipated operating problems, achieved results in line with expectations. Although the domestic barge workover fleet achieved increased revenues as a result of additional equipment being placed in service and higher utilization rates, its overall results were below expectations, due primarily to the inability to achieve higher dayrates and to keep costs within expectations. The disappointing results of the deepwater fleet were attributable primarily to the failure to have the Peregrine I fully operational when anticipated, and higher than expected operating costs in connection with the operation of the Peregrine II and Peregrine III. Comparative data relating to the Company's revenues and operating expenses by major areas of operations are listed below. The results of operations of Rig 203 and Falrig 83 are included under international shallow water drilling.
1994 1995 1996 --------------- --------------- --------------- ($000) % ($000) % ($000) % ------- ----- ------- ----- ------- ----- Revenues: Domestic barge drilling...................... 58,922 42.5 75,145 42.3 114,068 35.7 Domestic barge workover...................... 9,020 6.5 14,350 8.1 20,231 6.4 Domestic offshore drilling................... 63,430 45.8 56,687 31.9 114,115 35.7 International shallow-water drilling......... 7,131 5.2 31,323 17.7 37,958 11.9 Deepwater operations......................... -- -- -- -- 32,969 10.3 ------- ----- ------- ----- ------- ----- 138,503 100.0 177,505 100.0 319,341 100.0 ======= ===== ======= ===== ======= ===== Operating costs: Domestic barge drilling...................... 42,585 44.7 50,672 41.9 72,230 36.3 Domestic barge workover...................... 4,934 5.2 8,497 7.0 16,356 8.2 Domestic offshore drilling................... 42,536 44.6 46,102 38.1 68,072 34.3 International shallow-water drilling......... 5,201 5.5 15,721 13.0 20,230 10.2 Deepwater operations......................... -- -- -- -- 21,867 11.0 ------- ----- ------- ----- ------- ----- 95,256 100.0 120,992 100.0 198,755 100.0 ======= ===== ======= ===== ======= ===== Rig operating income: Domestic barge drilling...................... 16,337 37.8 24,473 43.3 41,838 34.7 Domestic barge workover...................... 4,086 9.4 5,853 10.4 3,875 3.2 Domestic offshore drilling................... 20,894 48.3 10,585 18.7 46,043 38.2 International shallow-water drilling......... 1,930 4.5 15,602 27.6 17,728 14.7 Deepwater operations......................... -- -- -- -- 11,102 9.2 ------- ----- ------- ----- ------- ----- 43,247 100.0 56,513 100.0 120,586 100.0 ======= ===== ======= ===== ======= ===== General and administrative expenses.......... 11,887 13,871 18,176 Depreciation expense......................... 9,445 16,527 28,875 ------- ------- ------- Operating income............................. 21,915 26,115 73,535 ======= ======= =======
Revenues. Revenues were $138.5 million, $177.5 million and $319.3 million for 1994, 1995, and 1996, respectively. The increases in revenues were primarily due to the acquisition and placing in service of additional drilling equipment, and, during 1996, increases in utilization rates and dayrates in the domestic market. Operating Costs. Operating costs were $95.3 million, $121.0 million and $198.8 million for 1994, 1995, and 1996, respectively. The increases in operating costs were primarily the result of the expansion of the Company's operations. 17 20 Operating Income. Operating income was $21.9 million, $26.1 million and $73.5 million for 1994, 1995 and 1996, respectively. The increases in operating income were primarily attributable to the increases in revenues, partially offset by the increases in operating costs, general and administrative expenses and depreciation expense. The increase in general and administrative expenses for each such year was primarily due to the increasing number of shore-based personnel required to support the Company's growing rig fleet. Depreciation expense increased each year as a result of the Company's expanded rig fleet. Interest Expense. Interest expense was $12.0 million in 1994, $18.0 million in 1995, and $23.9 million in 1996. The increasing interest expense primarily reflects (i) the issuance by the Company of $50 million in subordinated notes in 1995, and (ii) increased borrowings during 1995 under the Company's revolving credit facility, and (iii) the issuance by the Company of $120 million in senior notes in 1996. Interest expense excludes interest capitalized in connection with rig betterments of $0.6 million, $0.4 million, and $4.9 million in 1994, 1995 and 1996 respectively. The significant increase in capitalized interest in 1996 was attributable to the refurbishment and upgrade of the Peregrine I. Amortization of Deferred Costs. Amortization of deferred costs was $700,000, $2.1 million and $2.9 million for the years ended December 31, 1994, 1995, and 1996, respectively. The increases were due primarily to increases in deferred financing costs associated with the Company's debt financings during the periods. Foreign Currency Translation Gain. In December 1995, the Venezuelan government devalued its currency (the Bolivar). At the time of the devaluation, the obligation of the Company payable in Bolivars exceeded the receivables of the Company that were payable in Bolivars, and accordingly, the Company recognized a translation gain of $1.0 million during the fourth quarter of 1995, which has been included in other income. There were no foreign currency translation gains or losses in 1994 or 1996. Other Income and Expense. Other income was $2.0 million during 1994, $2.9 million in 1995 and $4.8 million in 1996. Substantially all of the other income for all three years ended December 31, 1994, 1995 and 1996, was from gains on the sale of surplus assets and interest income. Net Income. Net income applicable to common shares was $3.9 million in 1994, $4.7 million in 1995 and $32.5 million in 1996. The increase in 1995 as compared to 1994 was primarily as a result of improved operating results in the Company's domestic barge and international shallow water drilling operations, which more than offset a decline in the results for the Company's domestic offshore rig fleet and increases in depreciation expense, interest expense, and general and administrative expenses. The increase in 1996 as compared to 1995 was primarily the result of higher utilization rates and dayrates in the domestic markets. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $18.6 million, $23.6 million and $65.1 million for 1994, 1995 and 1996, respectively. The increases during each year were the result of improved operating results, partially offset by an increase in the receivables component of working capital. Operating results improved primarily as a result of a significant expansion of the Company's operations. Net cash used in investing activities was $101.2 million for 1994, $113.9 million for 1995, and $207.4 million for 1996. The increase of $93.5 million from 1995 to 1996 was primarily due to expenditures related to the expansion of the Company's rig fleet, including approximately $148 million expended in connection with the acquisition, upgrade and purchase of fleet spares related to the Company's dynamically positioned deep water drillships. In addition, during 1996, the Company also expended approximately $28.2 million in connection with the acquisition of three other drilling rigs (one barge rig, one submersible rig and one jackup rig) and approximately $26.1 million of the purchase of drillpipe, rig reactivations, and rig upgrades. The cost of the upgrade of the Peregrine I substantially exceeded the Company's original estimates and completion was approximately nine months behind schedule, due in part to delays in equipment deliveries and technical problems with certain of the equipment delivered. Net cash provided by financing activities was $80.7 million for 1994, $94.7 million for 1995 and $218.4 million for 1996. The $123.7 million increase from 1995 to 1996 was primarily due (i) to the issuance by the 18 21 Company of $120 million of senior notes in March 1996, and (ii) the sale of 3,212,500 shares of common stock in December 1996, which yielded net proceeds of $108.5 million. During 1995, the Company issued $50.0 million of subordinated notes and sold 7,425,000 shares of stock yielding net proceeds of $65.3 million. The Company's principal financing activity in 1994 was the issuance of $110 million of senior notes. In November 1996, the Company restructured and increased its bank credit facilities, which now consist of (i) a $25 million revolving loan facility secured by accounts receivable, maturing in November 1999, and (ii) a $40 million revolving loan facility secured by certain drilling rigs and receivables, maturing in November 1998. As of December 31, 1996, the Company had cash of approximately $85 million and credit availability under its line of credit of $65 million. The Company believes that its available funds, together with cash generated from operations, will be sufficient to fund its capital expenditure program, working capital and debt service requirements. Future commitments for capital expenditures will depend upon market conditions and opportunities, as well as the availability of adequate financing. The improvement in the offshore Gulf of Mexico market during 1996 has allowed the Company to place some of its domestic offshore rigs under term contracts of up to one year in duration. However, the Company's domestic based rigs are historically contracted on a well-to-well basis or on short-term contracts which typically expire within six months. A decline in demand for oil and gas drilling could therefore adversely impact the Company's cash flow from operations. Should these circumstances occur and persist for a material length of time, there could be no assurance that the Company's cash flow from operations would remain adequate to meet its requirements and the Company would likely scale back the scope of its operations and dispose of assets. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Implementation of this statement in 1996 did not have an effect on the Company's financial position or results of operations. The FASB also issued SFAS No. 123, "Accounting for Stock Based Compensation", effective for fiscal years beginning after December 15, 1995. This statement allows companies to choose to adopt the statement's new rules for accounting for employee stock-based compensation plans. For those companies who choose not to adopt the new rules, the statement requires disclosures as to what net income and net income per share would be if the new rules were adopted. Management has adopted the disclosure requirements in 1996. 19 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS OF FALCON DRILLING COMPANY, INC. Report of Independent Public Accountants.................. 21 Consolidated Balance Sheets as of December 31, 1995 and 1996................................................... 22 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996....................... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....................... 24 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996........... 26 Notes to Consolidated Financial Statements................ 27
20 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Falcon Drilling Company, Inc.: We have audited the accompanying consolidated balance sheets of Falcon Drilling Company, Inc. (a Delaware corporation) (Falcon) and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of Falcon's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Falcon Drilling Company, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 13, 1997 21 24 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996 ASSETS
DECEMBER 31, ---------------------- 1995 1996 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) CURRENT ASSETS: Cash and cash equivalents................................. $ 9,016 $ 85,050 Accounts receivable, net of allowance for doubtful accounts of $375 and $1,471 at December 31, 1995 and 1996, respectively..................................... 38,000 71,591 Other current assets...................................... 4,888 9,933 -------- -------- Total current assets.............................. 51,904 166,574 EQUIPMENT AND PROPERTY: Drilling rigs and equipment............................... 295,004 520,025 Vessels and other equipment............................... 3,903 6,803 -------- -------- 298,907 526,828 Less -- Accumulated depreciation.......................... (33,299) (58,866) -------- -------- 265,608 467,962 OTHER ASSETS, net........................................... 23,511 17,506 -------- -------- Total assets...................................... $341,023 $652,042 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities.................. $ 31,326 $ 53,903 Income tax payable........................................ 141 413 Debt due within one year.................................. 3,999 2,746 -------- -------- Total current liabilities......................... 35,466 57,062 LONG-TERM DEBT, less current portion........................ 179,362 292,305 DEFERRED INCOME TAXES....................................... 10,679 28,927 COMMITMENTS AND CONTINGENCIES............................... -- -- STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized, 35,244,384 and 39,285,473 shares issued and outstanding at December 31, 1995 and 1996, respectively........................................... 352 393 Preferred stock, no par value, 526,489 shares of all Series authorized, none issued and outstanding at December 31, 1995 and 1996............................. -- -- Additional paid-in capital................................ 112,853 238,565 Accumulated earnings...................................... 2,311 34,790 -------- -------- Total stockholders' equity........................ 115,516 273,748 -------- -------- Total liabilities and stockholders' equity........ $341,023 $652,042 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 22 25 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING REVENUES.......................................... $138,503 $177,505 $319,341 COSTS AND EXPENSES: Operating costs........................................... 95,256 120,992 198,755 General and administrative expenses....................... 11,887 13,871 18,176 Depreciation.............................................. 9,445 16,527 28,875 -------- -------- -------- OPERATING INCOME............................................ 21,915 26,115 73,535 OTHER (INCOME) EXPENSE: Interest expense.......................................... 12,046 18,021 23,894 Amortization of deferred costs............................ 690 2,140 2,902 Foreign currency translation gain......................... -- (1,023) -- Other income, net......................................... (1,969) (2,850) (4,815) -------- -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 11,148 9,827 51,554 INCOME TAX PROVISION........................................ 3,232 3,481 19,075 -------- -------- -------- INCOME BEFORE MINORITY INTEREST............................. 7,916 6,346 32,479 MINORITY INTEREST........................................... 3,486 1,291 -- -------- -------- -------- NET INCOME.................................................. 4,430 5,055 32,479 PREFERRED STOCK DIVIDENDS AND ACCRETION..................... 565 374 -- -------- -------- -------- NET INCOME APPLICABLE TO COMMON SHARES...................... $ 3,865 $ 4,681 $ 32,479 ======== ======== ======== NET INCOME PER COMMON SHARE................................. $ 0.14 $ 0.16 $ 0.90 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 23 26 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 -------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 4,430 $ 5,055 $ 32,479 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.......................... 10,135 18,667 31,777 Realized gain on sale of assets........................ (1,337) (962) (2,290) Minority interest in earnings of subsidiary............ 3,486 1,291 -- Provision for deferred income taxes.................... 1,643 3,481 18,248 Foreign currency translation gain...................... -- (1,023) -- Changes in assets and liabilities -- Accounts receivable, trade, net...................... (8,446) (6,251) (33,591) Other assets, less deposits for rigs and equipment... (5,026) (283) (4,420) Accounts payable and accrued liabilities............. 13,746 3,582 22,849 -------- -------- -------- Net cash provided by operating activities......... 18,631 23,557 65,052 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and property....................... (50,348) (104,138) (217,145) (Deposits) refunds of deposits for drillpipe, rigs and equipment, net......................................... -- (11,155) 6,505 Proceeds from sale of equipment and property.............. 2,550 3,201 3,208 Distribution for minority owner's interest in Blake Workover............................................... -- (1,804) -- Purchase of FALRIG Offshore Inc., net of cash acquired.... (25,389) -- -- Purchase of FALRIG Offshore (USA), L.P., net of cash acquired............................................... (28,015) -- -- -------- -------- -------- Net cash used in investing activities............. (101,202) (113,896) (207,432) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt.......................................... 120,000 50,000 120,000 Payments of outstanding debt.............................. (35,288) (19,071) (3,310) Borrowings pursuant to revolving credit facility.......... 5,000 28,000 67,000 Payments of amounts borrowed pursuant to revolving credit facility............................................... -- (28,000) (72,000) Issuance of common stock, net............................. -- 70,423 110,753 Debt issuance costs....................................... (5,130) (2,125) (4,029) Redemption of preferred stock............................. (3,500) (3,500) -- Dividends on preferred stock.............................. (351) (1,019) -- -------- -------- -------- Net cash provided by financing activities......... 80,731 94,708 218,414 -------- -------- -------- EFFECT OF EXCHANGE RATES ON CASH............................ -- (221) -- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,840) 4,148 76,034 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6,708 4,868 9,016 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 4,868 $ 9,016 $ 85,050 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 24 27 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 -------- -------- -------- (IN THOUSANDS) SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid............................................. $ 6,925 $ 17,488 $ 25,803 Income taxes paid......................................... 2,125 -- 1,139 Purchase of FALRIG Offshore, Inc., net of cash acquired -- Equipment and property................................. (36,005) -- -- Accounts receivable, net............................... (3,850) -- -- Other current assets................................... (85) -- -- Accounts payable and accrued liabilities............... 1,247 -- -- Income taxes payable................................... 1,584 -- -- Deferred income taxes.................................. 11,720 -- -- -------- -------- -------- Net cash used for acquisition..................... (25,389) -- -- Noncash investing and financing activities -- Issuance of common stock for purchase of rigs and equipment.............................................. -- -- 15,000 Issuance of common stock for purchase of 50% of Blake Workover and one barge rig............................. -- 6,325 -- Debt issuance for rig acquisition......................... 11,700 -- -- Issuance of common stock for debt cancellation............ 605 -- -- Warrants exercised for shares of common stock and debt cancellation........................................... 4 -- --
The accompanying notes are an integral part of these consolidated financial statements. 25 28 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SERIES A CONVERTIBLE COMMON STOCK PREFERRED STOCK ADDITIONAL ACCUMULATED ------------------- ----------------- PAID-IN EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ---------- ------ ------- ------- ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) BALANCE, December 31, 1993.......... 15,545,100 $155 25,989 $14,328 $ 21,365 $(4,837) NET INCOME.......................... -- -- -- -- -- 4,430 ISSUANCE OF COMMON STOCK FOR CONVERSION OF SUBORDINATED DEBT... 212,700 2 -- -- 603 -- WARRANTS EXERCISED FOR SHARES OF COMMON STOCK...................... 164,700 2 -- -- 2 -- EXCESS OF COST OF ASSETS ACQUIRED FROM STOCKHOLDERS IN EXCESS OF STOCKHOLDER'S HISTORICAL NET BOOK VALUE............................. -- -- -- -- -- (1,398) DIVIDENDS AND ACCRETION OF REDEEMABLE PREFERRED STOCK........ -- -- -- -- -- (565) ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1994.......... 15,922,500 159 25,989 14,328 21,970 (2,370) NET INCOME.......................... -- -- -- -- -- 5,055 CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK................... 7,796,700 78 (25,989) (14,328) 14,250 -- ISSUANCE OF COMMON STOCK............ 7,425,000 75 -- -- 65,225 -- ISSUANCE OF COMMON STOCK FOR PURCHASE OF BUSINESS AND ASSETS... 702,778 7 -- -- 6,318 -- ISSUANCE OF COMMON STOCK FOR EXERCISE OF WARRANTS AND OPTIONS........................... 3,397,406 33 -- -- 5,090 -- DIVIDENDS AND ACCRETION OF PREFERRED STOCK............................. -- -- -- -- -- (374) ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1995.......... 35,244,384 352 -- -- 112,853 2,311 ISSUANCE OF COMMON STOCK............ 3,212,500 32 -- -- 108,424 -- ISSUANCE OF COMMON STOCK FOR PURCHASE OF ASSETS................ 392,157 4 -- -- 14,996 -- NET INCOME.......................... -- -- -- -- -- 32,479 ISSUANCE OF COMMON STOCK FOR EXERCISE OF WARRANTS AND OPTIONS........................... 436,432 5 -- -- 2,292 -- ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1996.......... 39,285,473 $393 -- $ -- $238,565 $34,790 ========== ==== ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 26 29 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: Business Falcon Drilling Company, Inc., a Delaware corporation, and its subsidiaries (collectively Falcon or the Company) are primarily engaged in domestic and international oil and gas contract drilling and workover operations for oil and gas companies and turnkey operators. The accompanying consolidated financial statements include the accounts of Falcon Drilling Company, Inc., its wholly-owned subsidiaries and its controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, all liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. Equipment and Property Equipment and property are stated at cost. Depreciation of drilling rigs, vessels and equipment is provided on the straight-line method over their remaining estimated useful lives from the date the rigs are acquired by Falcon, including periods when the rigs are in a nonoperating status. Falcon anticipates being required to refurbish significantly and modify some of its rigs in order to operate in international and domestic drilling markets. At December 31, 1996, drilling rigs and other related equipment with a carrying value of $17,758,000 were held in a nonoperating status pending modification and decisions regarding their deployment. Such assets are being depreciated, and management believes market value exceeds their net book value. Routine maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Interest capitalized in connection with significant betterments totaled $647,000, $405,000 and $4,921,000 in 1994, 1995, and 1996, respectively. Falcon incurred $14,716,905, $19,052,904 and $30,424,554 in repair and maintenance expense in 1994, and 1995 and 1996 respectively. The costs of assets sold, retired or otherwise disposed of are removed from the accounts at the time of disposition, and any resulting gains or losses are reflected in the period's results of operations. Drilling rigs are depreciated over an estimated useful life of 15 years. Vessels and other equipment are depreciated over estimated lives of three to five years. Other Assets Falcon has incurred costs and paid fees in connection with Falcon's various financing arrangements as discussed in Note 5. These costs, primarily legal fees, underwriters costs and loan commitment fees, have been deferred and are included in other assets at December 31, 1996 and are being amortized into the results of operations over the term of the related financing instruments. Also included in other assets is approximately $3.1 million in costs associated with the mobilization of three barge rigs to Venezuela pursuant to an agreement with Maraven (Note 3). Falcon is amortizing these costs over the five year term of the agreement which began in January 1995. 27 30 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Falcon sold two barge drilling rigs to a third party during 1995 for a price of $4 million for which Falcon received credits towards the future purchase of drillpipe. Unused credits of $2.6 million were included in other assets at December 31, 1995. All credits were fully utilized as of December 31, 1996. Revenue Recognition Falcon recognizes revenue from operations on the basis of the number of days worked at the contractual day rate. Foreign Joint Venture Falcon and an unrelated entity created a joint venture which engages in drilling operations under contracts with a subsidiary of the Venezuelan stated-owned oil company. In 1992, Falcon agreed to transfer two of its barge rigs and certain related equipment into the foreign corporations in exchange for $3 million in cash, two $1.5 million noninterest-bearing notes and stock representing a 37.5% interest in the entity owning and operating the rigs. Falcon used the cash received to repay $3 million of the debt outstanding on the rigs and equipment. The Venezuelan joint venture borrowed $14.5 million from a foreign bank which was utilized to refurbish the barge rigs. This bank loan is secured by the barge rigs. Repayment of the venture's outstanding debt is contingent upon the venture realizing positive cash flow from its contracts with a subsidiary of the Venezuelan state-owned oil company. Falcon accounts for its interests in the Venezuelan joint venture under the cost method as it does not exercise significant influence over the venture. During the year ended December 31, 1994, Falcon received cash distributions of $279,000 which Falcon recorded as a reduction of the investment in the joint venture. During the year ended December 31, 1995, Falcon had received additional cash distributions of $1,565,000 of which $600,000 were recorded by Falcon to reduce its investment in the joint venture to zero and $965,000 are included in revenues in the consolidated statement of operations for the year ended December 31, 1995. Falcon received additional cash distributions of $1,195,000 during 1996 which are included in revenues in the consolidated statement of operations for the year ended December 31, 1996. Net Income Per Common Share Net income per share of common stock has been computed on the basis of the weighted average number of common shares outstanding during the period and, where dilutive, the effect of common stock contingently issuable, which arises primarily from the exercise of stock options and warrants and the conversion of certain subordinated notes and convertible preferred stock. The weighted average number of common shares and common share equivalents outstanding during the years ended December 31, 1994, 1995 and 1996 are 26,879,719, 29,593,096 and 36,237,638, respectively. Accrued dividends on the Series B redeemable preferred stock as well as the accretion of the difference between the value of the Series B redeemable preferred stock at the date of issue and the redemption value have been deducted from net income for purposes of calculating net income applicable to common stock. Fully diluted earnings per share are considered to be equal to primary earnings per share in all periods presented because the effects of potentially dilutive securities that are not common stock equivalents were either antidilutive or immaterial. Foreign Currency Translation Falcon accounts for foreign currency translations in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation." The U.S. dollar is the functional currency for Falcon's foreign operations. Foreign currency exchange gains and losses are included in other income as incurred. Net foreign currency exchange gains amounted to $1.0 million in 1995. There were no significant foreign currency exchange gains or losses in 1994 or 1996. 28 31 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement sets forth guidelines regarding when to recognize an impairment of long-lived assets, including goodwill, and how to measure such impairment. Adoption of this statement during the current year did not have a significant effect on the Company's financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The statement establishes a fair value based method of accounting for stock-based compensation plans. The Company adopted certain disclosure requirements required by this statement as further discussed at Note 6. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. 2. ACQUISITIONS AND EXPANSION OF RIG FLEET Business Combinations In January 1994, the Company completed a series of acquisitions funded through proceeds received from the 9 3/4% Note offering (see Note 5). These included Falcon's acquisition of the equity interest of the FALRIG Corporation for a purchase price of approximately $25 million. Previously in 1992, Falcon had negotiated the purchase of four jackup rigs from the offshore drilling division of Teledyne, Inc. for a cash purchase price of $4.1 million and transferred these rights to the FALRIG Corporation. In January 1994, Falcon completed the acquisition of the FALRIG Corporation and began consolidating the operating results of the FALRIG Corporation as of January 24, 1994. Taladro Associates (Taladro), a general partnership composed of three parties, two of whom were officers of Falcon and two of whom were also directors of Falcon, who each own approximately equal percentages of Taladro, held a 4.3 percent contingent profit participation interest in the net proceeds of the sale of stock of the FALRIG Corporation which resulted in payment of approximately $583,000 to Taladro. During the second quarter of 1994, Falcon acquired a 50% interest in Blake Workover & Drilling Company (Blake Workover). Blake Workover acquired four barge workover rigs and associated assets from Blake Drilling & Workover Co., Inc. (Blake Drilling). The purchase price of the four rigs and associated assets purchased from Blake Drilling was $5,750,000, of which $2,750,000 was paid in cash and the remaining $3,000,000 was evidenced by a note from Blake Workover to Blake Drilling. Falcon leased two workover barge rigs to Blake Workover pursuant to a three-year zero cost bareboat charter in exchange for its 50% interest and an undertaking from Blake Workover to refurbish these rigs. The acquisition of the remaining 50% interest in Blake Workover and certain crewboats and tugboats utilized in the business of Blake Workover was completed on August 15, 1995 through the issuance of 638,889 shares of Falcon's common stock and cash of $6.8 million, which included the retirement of debt outstanding of $2.3 million. 29 32 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following presents the unaudited pro forma results of operations of Falcon for the years ended December 31, 1994 and 1995, as if the above-described acquisitions of the FALRIG Corporation, Blake Workover and certain crewboats and tugboats used in the business of Blake Workover had occurred on January 1, 1994 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 ---------- ---------- (UNAUDITED) Pro forma operating revenues................................ $143,589 $177,505 Pro forma income before income taxes and minority interest.................................................. 10,571 9,789 Pro forma net income applicable to common shares............ 5,757 5,496 Pro forma net income per common share....................... $ 0.20 $ 0.18
The pro forma results presented above are not necessarily indicative of the actual results that would have occurred had the acquisitions actually taken place at the beginning of the periods presented. In addition, the pro forma results are not intended to be a projection of future results of combined operations. Falcon has made numerous additions to its drilling fleet during 1994, 1995 and 1996 and has financed these acquisitions through issuances of debt and equity securities as described in Notes 5 and 6. Deepwater drillships Prior to 1995, the Company's operations were focused primarily on shallow-water drilling markets. Beginning in 1995, the Company began to target the deepwater drilling market. Falcon purchased the Peregrine I in September 1995 and has entered into a contract with Petroleo Brasiliero S.A. (Petrobras) providing for the Peregrine I to drill offshore Brazil for a five year period. In September 1996, Falcon recorded a $2.5 million fee upon mobilization of the Peregrine I to Brazil, which has been reflected as revenues during the year ended December 31, 1996. The Peregrine I commenced operations in 1997, but as of March 1997 Falcon continued to experience difficulties in getting the vessel fully operational. Falcon purchased the Peregrine II in February 1996 and assumed a drilling contract with Petrobras which expires in 1998. In May 1996, Falcon purchased the Peregrine III and assumed a series of drilling contracts which management estimates will utilize the Peregrine III through June 1999. In December 1996, Falcon purchased a conventionally moored drillship, the Falcon Duchess, for $5 million in cash and $15 million in shares of Company common stock. Additionally in December 1996, Falcon leased a conventionally moored drillship, the Falcon Ice, for a three year term. In December 1996, Falcon purchased a substantially completed drillship hull which will require substantial costs to complete as an operational drillship. Management does not intend to undertake the completion of this hull until Falcon has obtained a long-term commitment for the use of the completed drillship. Acquisitions Subsequent to December 31, 1996 During the first two months of 1997, the Company acquired 35 tugs and 29 utility barges, for an aggregate purchase price of $23.4 million. These assets are used primarily in connection with the Company's domestic barge drilling and workover operations. In addition, in January 1997, the Company purchased for $7.5 million an inactive oil/bulk/ore carrier. The Company is evaluating conversion of this vessel to a dynamically positioned drillship. 30 33 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SEGMENT, CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS: Falcon operates in one principal business segment, diversified contract drilling and workover services. Operations are conducted in the U.S. Gulf of Mexico and related coastal areas and in various foreign locations including Venezuela, Brazil, Australia, and West Africa. Since late 1994, Falcon has operated two barge drilling rigs and a workover barge rig in Venezuela under contract with Maraven, S.A., a state-owned oil company. These contracts have a five year term expiring in 1999. Revenues, operating income and identifiable assets of the respective operations are as follows (in thousands):
1994 1995 1996 -------- -------- -------- Revenues -- United States.................................... $131,280 $146,182 $248,415 Venezuela........................................ 4,923 31,323 36,068 Offshore Brazil.................................. -- -- 16,123 Other Non-U.S.................................... 2,300 -- 18,735 -------- -------- -------- Total.................................... $138,503 $177,505 $319,341 ======== ======== ======== Operating income (loss) -- United States.................................... $ 20,643 $ 16,318 56,506 Venezuela........................................ 1,794 9,797 10,616 Offshore Brazil.................................. -- -- 3,445 Other Non-U.S.................................... (522) -- 2,968 -------- -------- -------- Total.................................... $ 21,915 $ 26,115 $ 73,535 ======== ======== ======== Identifiable assets -- United States.................................... $175,267 $263,845 $341,301 Venezuela........................................ 48,879 77,178 106,415 Offshore Brazil.................................. -- -- 128,238 Other Non-U.S.................................... -- -- 76,088 -------- -------- -------- Total.................................... $224,146 $341,023 $652,042 ======== ======== ========
The market for Falcon's service is the oil and gas industry, and Falcon's customers consist primarily of major oil and gas companies (including government-owned companies) and turnkey operators. Falcon's credit risks primarily consist of accounts receivable from such customers. Management performs ongoing credit evaluations of its customers and provides allowances for credit losses when necessary. Major customers are those that individually account for more than 10% of Falcon's total operating revenues. Applied Drilling Technology, Inc. accounted for 11.2% of operating revenues for the year ended December 31, 1994. Maraven, S.A. accounted for 11.3% of operating revenues for the year ended December 31, 1995 and Applied Drilling Technology, Inc. accounted for 12.4% of operating revenues in 1996. No other customer accounted for more than 10% of revenues in any such period. 4. INCOME TAXES: Falcon follows Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under SFAS No. 109, the tax provision is determined based upon the liability method in which deferred tax assets and liabilities are recognized based on differences between the financial statement and tax basis of assets using enacted tax rates. 31 34 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 109 provides in part that a deferred tax asset shall be evaluated for realization based on a more likely than not criteria using a valuation allowance. No valuation allowance was required at December 31, 1995 and 1996. The components of the net deferred tax liability are as follows (in thousands):
DECEMBER 31, ------------------ 1995 1996 ------- ------- Deferred tax liabilities -- Excess of book basis of equipment and property over tax basis.................................................. $25,118 $45,557 Other..................................................... 313 530 ------- ------- 25,431 46,087 ------- ------- Deferred tax assets -- Net operating loss carryforwards and other tax credit carryforwards.......................................... 14,323 15,172 Accrued expenses not currently deductible................. 429 1,988 ------- ------- Subtotal............................................. 14,752 17,160 ------- ------- Net deferred tax liability........................... $10,679 $28,927 ======= =======
The components of the income tax provision are as follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------ ------ ------- Federal -- Current............................................... $ -- $ -- $ -- Deferred.............................................. 2,413 1,056 15,236 State -- Current............................................... -- -- 139 Deferred.............................................. 63 686 1,631 Foreign -- Current............................................... 756 -- 688 Deferred.............................................. -- 1,739 1,381 ------ ------ ------- $3,232 $3,481 $19,075 ====== ====== =======
Included in the deferred federal tax provisions are the following: excess of tax depreciation expense over book depreciation expense, expenses accrued for financial statement purposes which are not yet deductible for tax purposes, and other benefits which have been reduced by the tax benefit of the U.S. net operating loss carryforward created. In August 1995, Falcon acquired the remaining 50% interest in Blake Workover and certain crewboats and tugboats utilized in the business of Blake Workover (Note 2). The tax effect of the $3.9 million excess of net assets acquired for financial statement purposes over the related tax basis was recorded as a deferred tax liability as of December 31, 1995. 32 35 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of federal statutory and effective income tax rates for each of the three years ended December 31, 1996, is shown below.
YEAR ENDED DECEMBER 31, -------------------- 1994 1995 1996 ---- ---- ---- Statutory rate.............................................. 35% 35% 35% State income taxes, net of federal income tax benefit....... 1 6 2% Foreign income taxes, net of federal income tax benefit..... 6 - - -- -- -- Effective rate.............................................. 42% 41% 37% == == ==
As of December 31, 1995 and 1996, Falcon's net operating losses (NOLs) for income tax purposes were $40,235,000 and $43,349,000, respectively (tax effect $14,323,000, and $15,172,000 respectively). These tax NOLs expire from 2006 through 2010 if not utilized before such dates. At December 31, 1996, Falcon had U.S. foreign tax credit carryforwards of $688,000. 5. LONG-TERM DEBT: Falcon had the following debt outstanding as of December 31, 1995 and 1996 (in thousands):
DECEMBER 31, ------------------- 1995 1996 -------- -------- 8 7/8% Senior Notes, due 2003............................... -- $120,000 9 3/4% Senior Notes, due 2001............................... $110,000 110,000 Floating Rate Senior Notes, bearing interest at LIBOR plus 3.5%, redeemable in varying amounts beginning in 1998..... 10,000 10,000 12 1/2% Subordinated Notes, due 2005........................ 50,000 50,000 Borrowings pursuant to revolving loan facilities............ 5,000 -- Secured promissory note payable to Grace Offshore Company, bearing interest at 8.7%, secured by certain FALRIG Partnership jackup rigs, principal payments of $1,667 due March 31, 1997 and 1998................................... 5,000 3,333 Note payable to a bank, noninterest-bearing through August 16, 1994 and at LIBOR plus 1.5% through maturity at December 31, 1999......................................... 1,969 689 Notes payable by affiliates, secured by certain rigs, bearing interest at 7.0%, due in varying amounts commencing July 1994 with final payment due June 30, 1999...................................................... 1,392 1,029 -------- -------- 183,361 295,051 Less -- Amounts due within one year......................... (3,999) (2,746) -------- -------- $179,362 $292,305 ======== ========
Pursuant to an offering in March 1996, Falcon issued $120 million principal amount of 8 7/8% Senior Notes (the 8 7/8% Notes), resulting in net proceeds of approximately $116 million to Falcon after deducting offering-related expenses. The 8 7/8% Notes mature on March 15, 2003, and bear interest at a rate of 8 7/8%, payable semiannually on March 15 and September 15 of each year beginning September 15, 1996. The 8 7/8% Notes are unsecured obligations of Falcon, ranking pari passu in right of payment with all other senior indebtedness of Falcon, and senior in right of payment to all subordinated indebtedness of Falcon. The 8 7/8% Notes are not guaranteed by any of Falcon's subsidiaries, and thus are structurally subordinated to the 9 3/4% Notes (defined below) and other indebtedness of the subsidiaries. Further, they are effectively subordinated to any secured indebtedness of Falcon to the extent of the collateral securing such secured indebtedness. 33 36 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to an offering in January 1994, Falcon issued $110 million principal amount of 9 3/4% Senior Notes (the 9 3/4% Notes). The 9 3/4% Notes mature on January 15, 2001, and bear interest at a rate of 9.75%, payable semiannually on January 15 and July 15. Falcon used a portion of the proceeds to finance a series of previously planned transactions, including the prepayment of certain outstanding debts and the consummation of certain acquisitions. On February 23, 1994, Falcon issued $10 million of Floating Rate Notes which bear interest at LIBOR plus 3.5%. The principal amounts of the Floating Rate Notes are due in payments of $1,000,000, $2,000,000 and $2,000,000 on the fourth, fifth and sixth years following issuance, respectively, with the balance due January 24, 2001. The 9 3/4% Notes and the Floating Rate Notes are guaranteed by certain of Falcon's Subsidiaries (see Note 11). Pursuant to an offering in March 1995, Falcon issued $50 million principal amount of Subordinated Notes (the Subordinated Notes), resulting in net proceeds of approximately $48 million to Falcon after deducting offering-related expenses of approximately $2 million. The Subordinated Notes mature on March 15, 2005, and bear interest at a rate of 12.5%, payable semiannually on March 15 and September 15. The indentures pursuant to which the 8 7/8% Notes, 9 3/4% Notes, and the Subordinated Notes were issued (i) provide that Falcon may redeem such obligations at a premium at certain times prior to maturity, (ii) require Falcon to offer to redeem such obligations at a premium if there is a change of control of Falcon (as defined), and (iii) impose restrictions on certain actions by Falcon, including payment of dividends, incurrence of debt, pledging of assets, sale of assets, and investment. On September 12, 1994, Falcon established a revolving credit facility with commercial banks providing for borrowings of up to $25.0 million subject to adequate levels of eligible accounts receivable, which amounts borrowed are secured by Falcon's accounts receivable. Falcon had borrowings outstanding under this credit facility of $5.0 million at December 31, 1995. This facility, as amended, provided that amounts borrowed bore interest at floating rates based on LIBOR plus 2 1/2% or 1% over the greater of the prime rate or the federal funds rate plus 1/2%. In November 1996 this facility was replaced by the facilities described in the following paragraph. In November 1996, Falcon entered into agreements with its commercial bank lenders to increase its bank credit facilities up to $65 million consisting of (i) a $25 million revolving loan facility secured by accounts receivable, maturing in November 1999, and (ii) a $40 million revolving loan facility secured by certain drilling rigs and receivables, maturing in November 1998. At December 31, 1996, there were no borrowings outstanding under either facility. Both facilities require Falcon to meet certain tests related to its net worth, interest coverage ratio, and current ratio, and place restrictions on dividends and investments by Falcon. The $25 million facility provides for interest at LIBOR plus 1% to 1 1/2% (depending on outstanding borrowings) or the greater of prime or 1/2% over the federal funds rate. The $40 million facility provides for interest at LIBOR plus 2% or the greater of prime plus 1/2% or the federal funds rate plus 1%. Falcon was required to pay one-time fees to the banks in the aggregate amount of $525,000 in order to implement the facilities, and pays a commitment fee on each facility equal to 3/8% per annum of the unused portion of the facility. In February 1996, pursuant to another agreement, Falcon borrowed $20 million from one of the banks that provides Falcon's revolving credit facility. The amounts borrowed bore interest at prime plus 1% and were payable on the earlier of December 31, 1996 or upon completion of a capital market transaction, as defined. In February 1996, Falcon paid fees of $300,000 in connection with obtaining this loan. In March 1996, Falcon repaid the $20 million indebtedness with proceeds from the issuance of the 8 7/8% Notes due 2003 described above. 34 37 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The annual maturities of the debt outstanding at December 31, 1996 are $2,746,000 in 1997, $3,084,000 in 1998, $2,221,000 in 1999, $2,000,000 in 2000, $115,000,000 in 2001, and $170,000,000 thereafter. Falcon estimates the fair value of its debt obligations to be $308,440,000 compared to a historical value of $295,051,000, both as of December 31, 1996. 6. STOCKHOLDERS' EQUITY: COMMON STOCK In 1994, the board of directors of Falcon approved (a) an amendment of Falcon's certificate of incorporation increasing the authorized shares of Falcon's common stock to 28,500,000 shares and (b) a stock split effected in the form of a stock dividend of 299 shares of common stock for each outstanding share of common stock of Falcon. Accordingly, share amounts presented for all periods have been restated to reflect the stock dividend. In June 1995, the board of directors of Falcon approved an amendment of Falcon's certificate of incorporation (a) increasing the authorized shares of Falcon's common stock to 100,000,000 shares and (b) increasing the authorized shares of Falcon's preferred stock to 526,489 shares. On July 28, 1995, Falcon, a participating stockholder and a group of underwriters entered into an agreement resulting in the initial public sale by Falcon of 4,250,000 shares of common stock and the sale of 750,000 shares of common stock by the participating shareholder. The initial public offering closed on August 2, 1995 and resulted in net proceeds to Falcon of $34.4 million after deducting offering-related expenses of $3.9 million. In September 1995, Falcon purchased a barge drilling rig for a purchase price of $1,275,000 consisting of cash of $700,000 and 63,889 shares of Falcon's Common Stock. On November 15, 1995, Falcon, participating stockholders and a group of underwriters entered into an agreement resulting in the public sale of 3,175,000 shares of common stock by Falcon and the sale of 2,000,000 shares of common stock by selling shareholders. The public offering closed on November 21, 1995 and resulted in net proceeds to Falcon of $30.9 million after deducting offering-related expenses of approximately $2.4 million. On December 9, 1996, Falcon, participating stockholders and a group of underwriters entered into an agreement resulting in the public sale of 3,212,500 shares of common stock by Falcon and the sale of 4,680,000 shares of common stock by selling shareholders. The public offering closed on December 13, 1996 and resulted in net proceeds to Falcon of $108.5 million after deducting offering-related expenses of approximately $5.5 million. PREFERRED STOCK Falcon has 526,489 shares of preferred stock, no par value, authorized. The board of directors has the authority to issue the unissued shares of preferred stock and to establish the designation and terms thereof. In January 1993, Falcon issued to the S-C Interests, 25,989 shares of Series A convertible preferred stock, 1,000 shares of Series B redeemable preferred stock, and a shadow warrant to purchase up to 1,847,100 shares of common stock at an exercise price of $.01 per share in full satisfaction of a $15 million advance and for $6,993,843 in cash. Offering expenses of $314,000 and $672,000 related to the Series A convertible preferred stock and Series B redeemable preferred stock, respectively, were deducted from the proceeds of the issuance of the preferred stock. Through 1993, Falcon had an agreement with another affiliate to pay an investment services fee of three percent of capital placed by the affiliate; $660,000 was paid in connection with the preferred stock sale and treated as expenses of the offering. 35 38 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Series A convertible preferred stock was converted into 7,796,700 shares of Falcon's common stock in connection with Falcon's initial public offering on August 2, 1995. The Series B redeemable preferred stock (a) was entitled to an annual cash dividend of $700 per share from January 29, 1993, through December 31, 1995, which was payable in one installment on December 31, 1995, (b) had a liquidation preference equal to $7,000 per share plus all unpaid accrued dividends, (c) was redeemable at the option of Falcon at any time for a redemption price of $7,000 per share plus all accrued and unpaid dividends and, if redeemed after December 31, 1995, the redemption price was to be increased by an amount equal to 2.5% per quarter on the balance of any unpaid redemption price, (d) was redeemable at the option of the holder at any time on or after December 31, 1995, at a redemption price of $7,000 per share plus any accrued unpaid dividends, plus an amount equal to 2.5% of any unpaid redemption price per quarter beginning December 31, 1995, and (e) was secured by a junior mortgage on a portion of Falcon's barge rig fleet. The difference between the redemption value of $7,000 and the value of the Series B redeemable preferred stock at the date of issue was accreted by a ratable charge to retained earnings during the redemption period until redeemed. Falcon elected to redeem 500 shares of its Series B redeemable preferred stock in January 1994 for $3.9 million, including accrued dividends of approximately $351,000 as of the redemption date. Upon the redemption of the 500 shares of Series B redeemable preferred stock, the junior mortgage on a portion of the barge rig fleet was released by the holder of the remaining 500 shares of Falcon's Series B redeemable preferred stock. On December 27, 1995, Falcon redeemed the remaining 500 outstanding shares of Series B redeemable preferred stock for $4,520,000 including accrued dividends. WARRANTS In 1992, Falcon issued (a) 2,800 Class A warrants, each of which represented the right to purchase 300 shares of Falcon's common stock for $3.33 per share, and (b) 2,600 Class B warrants, each of which represented the right to purchase 600 shares of Falcon's common stock at an exercise price of $3.33 per share. The exercise price of the Class A and B warrants was adjusted to $2.42 per share subsequent to their issuance. Two hundred Class A warrants were exercised on July 31, 1993, while 1,200 Class A warrants expired on such date. During 1995, 1,400 Class A warrants, and 2,600 Class B warrants, were exercised. At December 31, 1995 and 1996, no Class A or Class B warrants were outstanding. In connection with the sale of preferred stock to the S-C Interests in January 1993, Falcon issued a shadow warrant exercisable for up to an aggregate of 1,847,100 shares of Falcon's common stock at a purchase price of $.01 per share of common stock. Such warrant is exercisable only to the extent that certain other warrants, options and convertible securities of Falcon are exercised or converted. The aggregate number of shares for which the shadow warrant was exercisable by the S-C Interests was reduced to 1,567,100 shares upon the expiration of 1,200 of the Class A warrants and the exercise of 200 Class A warrants on July 31, 1993, as discussed above. On March 31, 1994, various convertible subordinated debtholders exercised options to convert $605,000 in convertible subordinated debt for 212,700 shares of common stock and holders of bonus warrants (issued in connection with the prepayment of convertible subordinated debt) exercised such warrants. In connection therewith, 150,900 shares of common stock were issued under the shadow warrant. Additionally, rights to acquire 94,692 shares of common stock pursuant to the shadow warrant expired during 1994. As a result of the exercise of the Class A and Class B warrants in 1995, 1,320,006 shares of common stock were issued pursuant to the shadow warrant. The number of shares for which the shadow warrant was exercisable at December 31, 1996 was 1,508. Certain members of the Mullen Group, who owned approximately 50 percent of the FALRIG Corporation (Note 2), held warrants to purchase an aggregate of 120,000 shares of common stock of Falcon at an exercise price of $3.33 per share. During 1995, 60,000 warrants were exercised. The remaining options were exercised in the fourth quarter of 1996. 36 39 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the prepayment of certain convertible debt in January 1993, bonus warrants to acquire approximately 16,000 shares of common stock were issued to an executive of Falcon, the owners of Taladro (Note 2), and a third party. Bonus warrants to purchase approximately 13,800 shares of common stock were exercised in March 1994 by the executive of Falcon and the owners of Taladro. The third party's bonus warrants to purchase approximately 2,300 shares of common stock remain outstanding at December 31, 1996 and expire on December 31, 1997 if not previously exercised. STOCK OPTION PLANS At December 31, 1996, Falcon had stock options outstanding under three stock-based compensation plans, which are described below. Falcon applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for its option plans when the exercise price of the respective options was greater than or equal to the fair market value of the stock at the date of the grant. Had compensation cost for Falcon's 1995 Stock Option Plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method outlined under SFAS No. 123, Falcon's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 ------ ------- Net income applicable to common shares As reported............................................... $4,681 $32,479 Pro forma................................................. 4,527 $31,348 Net income per common share As reported............................................... $ .16 $ .90 Pro forma................................................. $ .15 $ .87
The effects of applying SFAS No. 123 in the pro forma disclosure may not be indicative of future amounts. SFAS No. 123 does not apply to options awarded prior to 1995 and additional awards in future years may occur. The fair value of each option grant under the pro forma presentation above was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996: no expected dividends; expected volatility of 56.4 percent, risk-free interest rate of 5.73 percent; and expected lives of ten years for the options. Falcon adopted, effective January 1, 1992, a stock option plan (1992 Stock Option Plan) pursuant to which an aggregate of 495,000 incentive stock options or nonqualified stock options were granted to directors, officers and employees of Falcon on November 10, 1992. These options vested immediately. The exercise price of these stock options range from $3.33 to $3.70 per share, which was the estimated fair market value of the stock at the date of grant. An aggregate of 37,400 and 258,100 of these options were exercised during 1995 and 1996 respectively leaving 199,500 options outstanding at December 31, 1996. In 1994, the board of directors of Falcon authorized the grant of options to purchase an aggregate of 285,000 shares to certain members of management of Falcon (1994 Stock Option Plan). Such options entitle the option holder to purchase one share of Falcon's common stock, vest in one-third increments over three years, expire in January 2004, and have an exercise price of $10 per share which was the estimated fair market value of the stock at the date of grant. During 1996, 105,000 of these options were exercised leaving 180,000 options outstanding at December 31, 1996. On February 16, 1995, the board of directors adopted a third stock option plan covering up to 500,000 shares of common stock (the 1995 Stock Option Plan), and granted options under the plan to purchase an aggregate of 125,000 shares to directors, officers and employees of Falcon. These options vest in one-third increments over a three-year period beginning on the date of grant, expire in 2005 and have an exercise price 37 40 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of $10 per share, which was the estimated fair market value of the stock at the date of grant. In January 1996, an additional 140,000 options were granted under the plan to officers of Falcon at an exercise price of $12.13 per share, which was the estimated fair market value of the stock at the date of grant. These options vest in one-third increments over a two-year period beginning on the date of grant, and expire in 2006. In April 1996, an additional 75,000 options were granted to an officer of Falcon at an exercise price of $19.44 per share, which was $6.69 per share below the estimated fair market value of the stock at the date of grant. These options vest over a five year period commencing April 1996, and expire in 2006. During 1996, 13,332 of the options granted under the 1995 Stock Option Plan were exercised leaving 326,668 options outstanding at December 31, 1996. In February 1997 Falcon granted 129,000 options under the 1995 Stock Option Plan at an exercise price of $25 per share, which was $5.88 per share below the estimated fair market value of the stock on the date of the grant. Of these options, 25,000 were granted to a director and vested immediately, 30,000 were granted to executive officers and vest ratably in the third, fourth, and fifth years after the date of the grant, and 74,000 were granted to non-officer employees and vest ratably in the third, fourth and fifth years following the date of the grant. For all options granted with an exercise price less than the fair market value of the underlying shares on the date of the option grant, Falcon records compensation expense during the vesting period for such options, based upon the difference between the exercise price and the fair market value of the underlying shares as of the date of grant. 7. COMMITMENTS AND CONTINGENCIES: LEGAL PROCEEDINGS Falcon is currently involved in various lawsuits and other contingencies arising out of operations in the normal course of business. Most, but not all of these claims involve personal injuries and are covered by the Company's insurance, subject to a deductible. Falcon is also the subject of suits alleging claims based on patent infringement and breach of contract, which claims are not covered by insurance. In the opinion of management, uninsured losses, if any, in excess of those accrued will not have a material adverse effect on Falcon's consolidated financial position or results of operations. SELF INSURANCE Falcon is self-insured for the deductible portion of its insurance coverage. In the opinion of management, adequate accruals have been made based on known and estimated exposures up to the deductible portion of Falcon's insurance coverages. Management believes that future claims and liabilities in excess of the amounts accrued are fully insured. EMPLOYMENT AGREEMENTS Falcon has multiyear employment agreements with several of its officers. The employment agreements with Falcon's officers provide for annual salaries and discretionary bonuses to be determined by the board of directors. 401(k) PLAN AND MEDICAL PLAN On October 1, 1993 Falcon adopted a contributory 401(k) savings plan for its domestic employees. The plan provides that employees may contribute up to 16% of pretax earnings up to designated amounts and Falcon may elect to match such contributions at its discretion. Falcon incurred $461,000, $522,000 and $960,000 in such expenses in 1994, 1995 and 1996 respectively. On January 1, 1994, Falcon adopted an employee-funded medical, life and disability insurance plan. 38 41 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPERATING LEASES Falcon leases certain facilities and equipment under operating leases. Falcon also enters into charters with drilling rig and vessel owners which may have variable payment terms depending on whether the leased rig or vessel is operating. Total lease expense on drilling rigs and vessels was $6,363,860, $6,134,465 and $9,671,204 for the years ended December 31, 1994, 1995 and 1996, respectively. Falcon incurred total rental expenses exclusive of leased rigs and vessels of $2,078,856, $2,201,948, and $3,547,281 during the years ended December 31, 1994, 1995, and 1996, respectively. Aggregate minimum future annual rental commitments under unaffiliated noncancelable operating leases with lease terms in excess of one year as of December 31, 1996, are as follows: 1997........................................................ $10,062,128 1998........................................................ 10,410,946 1999........................................................ 9,416,728 2000........................................................ 1,078,404 2001........................................................ 223,404
COMMITMENTS RELATING TO CERTAIN RIGS Falcon has entered into an agreement to purchase three barge drilling rigs for an approximate cost of $5.25 million. At December 31, 1996, Falcon had a deposit of approximately $500,000 under this agreement which has been included in other assets. Falcon has recently commenced a legal action to enforce its rights under that contract. Management of Falcon believes the deposit on these rigs is refundable should the delivery of these rigs not be accomplished. In connection with the acquisition of certain barge drilling rig operations in 1992, Falcon entered into contingent profits interest agreements with the former rig owners and former mortgage holder. The periods for determination of these payments began in 1993 and continue through 1997, or until payment of $5 million has been made. In May 1996, Falcon completed the purchase of the Peregrine III (a dynamically positioned drillship) (see Note 2). Management has committed to spend an additional $7 million in 1997 on upgrades of the Peregrine III, pursuant to agreements with the operators that will result in an increase in dayrates under the existing drilling contracts for such vessel. In December 1996, Falcon purchased a substantially completed drillship hull for approximately $8.0 million. Management estimates that it will cost approximately $120 million to complete the construction necessary for this hull to become an operational drillship. Falcon currently has no construction obligations relative to this hull. Management does not intend to undertake the completion of this hull until Falcon has obtained a long-term commitment for the use of the completed drillship and arranged for financing of the construction. Pursuant to certain of Falcon's long term drilling contracts, the operator may purchase three of Falcon's barge drilling rigs for specified prices which decrease each year through 1999. Management of Falcon estimates that the option price will be less than the carrying value for one of these rigs by approximately $880,000 in 1998, and that the aggregate option price for the three rigs will be below the aggregate carrying value for such rigs by approximately $1.2 million and $3.5 million in 1998 and 1999, respectively. Management does not expect the purchase option to be exercised and will continue to evaluate the net book value of these rigs for possible future impairment. Falcon has made certain commitments to its customers in the normal course of business whereby Falcon has agreed to make enhancements and additions of equipment to certain of its drilling rigs. Generally, Falcon's customers agree to increase the day rate paid to the Company for making enhancements. 39 42 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OIL AND GAS EXPLORATION JOINT VENTURE Falcon from time to time enters into arrangements whereby it contracts to provide a rig and related services in connection with the acquisition of a working interest in a well. Generally, these arrangements are entered into only where Falcon believes a standard day rate contract, without any investment obligations as a working interest, would not be available to Falcon. During 1994, a subsidiary of Falcon (Raptor) acquired an interest in a joint venture engaged in the development of drilling prospects in the general areas of Falcon's barge drilling operations and, in one instance, has participated with several other companies in the funding of seismic activities in south Louisiana. Falcon utilizes the full cost method of accounting for its oil and gas activities. Included in other assets at December 31, 1995 and 1996 are $2.8 million and $1.7 million, respectively, of Falcon's expenditures for its share of the funding of the exploratory efforts of the joint venture. In June 1996, the joint venture distributed these properties to Raptor and the other joint venturer, and Raptor sold a portion of the distributed properties for $1.2 million cash and a promissory note of approximately $700,000. The promissory note bears interest at two percent over prime, and is due June 1, 1999, or earlier based upon revenues generated by the properties. There is currently no production from the properties sold. Falcon has no remaining funding commitments to these properties as a result of the sale. During the year ended December 31, 1994, approximately $873,000 was charged to operating expense relating to certain wells which were discovered to be nonproducing wells. There were no charges to operating expense from nonproducing wells during 1995 or 1996. Future participation in the development of oil and gas prospects and related activities will depend in large part upon the availability of cash flows and cash balances in excess of Falcon's needs to fund its obligations and further growth in its basic contract drilling business, as well as upon future determinations by Falcon as to the attractiveness of such other activities. LIQUIDITY Liquidity of Falcon should be considered in light of the significant fluctuations in demand experienced by drilling contractors as rapid changes in oil and gas producers' expectations and budgets occur. These fluctuations can rapidly impact Falcon's liquidity as supply and demand factors directly affect utilization and day rates, which are the primary determinants of cash flow from Falcon's operations. Falcon believes that its available funds, together with cash generated from operations and amounts that may be borrowed under the revolving credit agreement will be sufficient to fund its capital expenditures, working capital and debt service requirements for the remainder of 1997. Future cash flows are subject to a number of uncertainties, particularly the condition of the oil and gas industry and the related drilling activity in Falcon's markets. There can therefore be no assurance that these resources will continue to be sufficient to fund Falcon's cash requirements. 8. QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for the four quarters ended December 31, 1995 and 1996, is as follows (in thousands, except per share amounts):
UNAUDITED THREE MONTHS ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1995 1995 1995 1995 1996 1996 1996 1996 --------- -------- --------- -------- --------- -------- --------- -------- Operating revenues................... $41,217 $39,419 $47,977 $48,892 $56,134 $73,946 $90,885 $98,376 Operating costs...................... 31,313 31,735 34,213 37,602 38,145 47,634 55,532 57,444 Depreciation......................... 3,604 3,802 4,296 4,825 6,033 7,045 7,761 8,036 Income (loss) before income taxes and minority interest.................. 2,118 (246) 5,217 2,738 1,715 9,414 17,512 22,913 Net income (loss) applicable to common shares...................... 894 (639) 2,920 1,506 995 6,016 11,033 14,435 Net income (loss) per common share... $ .03 $ (.04) $ .10 $ .04 $ .03 $ .17 $ .31 $ .39
40 43 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. ADDITIONAL BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION: Other current assets include the following (in thousands):
DECEMBER 31, ---------------- 1995 1996 ------ ------ Insurance claim receivables................................. $ -- $4,506 Worker compensation insurance receivables................... 2,600 1,847 Prepaid insurance........................................... 1,125 879 Short-term investments...................................... 842 -- Other....................................................... 321 2,701 ------ ------ $4,888 $9,933 ====== ======
Other assets include the following (in thousands):
DECEMBER 31, ----------------- 1995 1996 ------- ------- Deferred financing costs.................................... $ 8,295 $13,230 Deposits on drillpipe, rigs, and equipment.................. 11,763 4,121 Deferred mobilization costs................................. 3,100 3,100 Oil and gas properties...................................... 2,821 1,652 Other....................................................... -- 773 ------- ------- $25,979 $22,876 Less Accumulated Amortization............................... (2,468) (5,370) ------- ------- Other assets, net........................................... $23,511 $17,506 ======= =======
Accounts payable and accrued liabilities include the following (in thousands):
DECEMBER 31, ----------------- 1995 1996 ------- ------- Accounts payable, trade..................................... $15,891 $23,465 Accrued interest............................................ 7,136 10,148 Accrued payroll............................................. 1,763 2,617 Accrued sales taxes......................................... 1,640 1,161 Accrued worker compensation claims.......................... 1,225 3,398 Other....................................................... 3,671 13,114 ------- ------- $31,326 $53,903 ======= =======
Other income (expense) includes the following items (in thousands):
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 1996 ------ ------ ------ Interest income............................................. $1,036 $1,118 $1,262 Gain on sale of assets...................................... 1,337 962 2,290 Other....................................................... (404) 770 1,263 ------ ------ ------ $1,969 $2,850 $4,815 ====== ====== ======
41 44 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. RELATED PARTY TRANSACTIONS: The former owners of a company acquired by Falcon in 1992, who are also officers of Falcon, lease crewboats, tugboats and supply barges and other vessels to Falcon at a contracted bareboat rate of $100 per day for crewboats and tugboats and $60 per day for other vessels, with Falcon responsible for drydocking, painting and repairs. The former owners received revenues of $829,000, $866,000, and $881,000 respectively, for the years ended December 31, 1994, 1995 and 1996. A director and stockholder of Falcon was a partner through mid-1994 in a law firm which provided legal services to Falcon and certain of its affiliated entities. Fees paid by Falcon to this law firm were $501,000 in the year ended December 31, 1994. The director became a partner in a new law firm during mid-1994. Fees paid by Falcon to this new law firm were $282,000, $1,141,000 and $555,000 for the years ended December 31, 1994, 1995 and 1996, respectively. A director of Falcon who performs financial consulting services for Falcon from time to time and is also an officer of Raptor Exploration Company, Inc., a wholly-owned subsidiary of Falcon, received $161,000 and $120,000 for such services in the years ended December 31, 1994 and 1995 respectively. In addition, during 1996, Raptor paid such officer $90,000 for services rendered in connection with the sale of certain assets of Raptor. During 1994, the Company exercised an option to acquire four barge drilling rigs from an affiliate of Falcon for a price of $7 million, consisting of $6 million cash and $1 million in assumed debt. The assets and liabilities in this acquisition were recorded at the seller's historical net book value. The purchase price in excess of the seller's historical cost of $1.4 million was recorded as a reduction in Falcon's accumulated earnings. In June 1994, Falcon entered into an agreement with Eilert-Olsen Investments, Inc. (Eilert-Olsen), to buy the equity interest of Eilert-Olsen for a nominal purchase price. In June of 1994, Eilert-Olsen acquired three barge drilling rigs for a cost of approximately $2.8 million consisting of cash of approximately $900,000 and the assumption of debt of approximately $1.9 million secured by the three barge drilling rigs. Falcon advanced $900,000 to Eilert-Olsen in June of 1994 and has subsequently advanced approximately $265,000, $803,000 and $453,000 to pay principal and interest due on this debt for the years ended December 31, 1994, 1995 and 1996, respectively. Due to Falcon's affiliation with Eilert-Olsen, the financial statements of Eilert-Olsen and the option to purchase Eilert-Olsen from inception have been consolidated with the financial statements of Falcon and, accordingly, the accounts and transactions between Falcon and Eilert-Olsen have been eliminated in consolidation. Through 1995, Falcon paid a quarterly fee to a privately held company controlled by a stockholder, for financial advisory services. The fee is tied proportionately to the aggregate total of the stockholder's equity investment in Falcon. Falcon paid $247,000 and $126,000 for such services for the years ended December 31, 1994 and 1995, respectively. In 1995 and 1996, Falcon paid $478,000 and $852,925, respectively, to Bantam Services, Inc. under a contract pursuant to which Bantam is to supply, at cost, groceries and supplies to be used on certain of Falcon's rigs. Bantam is entitled under the contract to bill third parties for meals and lodging supplied to their personnel on such rigs. In the absence of such contract, Falcon would be entitled to bill the third parties for the food and lodging provided. Bantam is owned by an officer of Falcon Workover, a wholly-owned subsidiary of Falcon. 11. SUPPLEMENTAL GUARANTOR INFORMATION: Falcon's obligations under the 9 3/4% Notes and Floating Rates Notes are fully and unconditionally guaranteed by Falcon and each of Falcon's directly held subsidiaries and certain of Falcon's indirectly held 42 45 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subsidiaries on a joint and several basis. The indenture and note purchase agreement under which the 9 3/4% Notes and Floating Rates Notes were issued provides for acquired subsidiaries subsequent to the issuance of the 9 3/4% Notes and Floating Rates Notes to be designated as guarantors of the 9 3/4% Notes and Floating Rates Notes. The indentures pursuant to which the 9 3/4% Notes, the Floating Rate Notes, the 8 7/8% Notes and the Subordinated Notes were issued provide that 12 specified barge rigs are to be nonrecourse rigs whereby Falcon has the option to transfer such nonrecourse barge rigs to nonguarantor subsidiaries at any time; provided, however, that Falcon may, at its option and at any time, designate up to two of its barge rigs in substitution for any two of the designated nonrecourse barge rigs. In addition, up to two of Falcon's jackup rigs may be designated nonrecourse rigs provided certain financial tests are met. During December 1994, Falcon transferred three nonrecourse barge rigs to a newly formed nonguarantor subsidiary, Falcon Drilling de Venezuela, Inc. During March 1995, Falcon Drilling de Venezuela, Inc., was merged with a guarantor subsidiary of Falcon in connection with the issuance of the Subordinated Notes, and the three barge rigs previously designated as nonrecourse rigs ceased being nonrecourse rigs. The following condensed consolidating financial statements are presented for purposes of complying with the reporting requirements of the parent company and the subsidiaries which are guarantors under the 9 3/4% Notes and Floating Rate Notes. Falcon believes that separate financial statements and other disclosures of the guarantors are not material. 43 46 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET--DECEMBER 31, 1996 (IN THOUSANDS) ASSETS
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------- ------------ ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents.............. $ 82,559 $ 2,491 $ -- $ -- $ 85,050 Accounts receivable, net............... 27,510 44,081 -- -- 71,591 Other current assets................... 130 9,803 -- -- 9,933 -------- -------- ------ --------- -------- Total current assets........... 110,199 56,375 -- -- 166,574 EQUIPMENT AND PROPERTY, net.............. 9,503 455,951 2,508 -- 467,962 OTHER ASSETS, net........................ 0 17,506 -- -- 17,506 INTERCOMPANY AND INVESTMENT IN SUBSIDIARIES........................... 463,932 -- -- (463,932) 0 -------- -------- ------ --------- -------- Total assets................... $583,634 $529,832 $2,508 $(463,932) $652,042 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities......................... $ 19,196 $ 35,120 $ -- $ -- $ 54,316 Debt due within one year............... 689 1,667 390 -- 2,746 -------- -------- ------ --------- -------- Total current liabilities......... 19,885 36,787 390 -- 57,062 LONG-TERM DEBT, net...................... 290,000 1,667 638 -- 292,305 DEFERRED INCOME TAXES.................... -- 28,927 -- -- 28,927 STOCKHOLDERS' EQUITY: Partnership capital.................... -- 56,672 -- (56,672) -- Common stock........................... 393 -- -- -- 393 Preferred stock, Series A.............. -- -- -- -- -- Additional paid-in capital............. 238,565 341,807 1,954 (343,761) 238,565 Accumulated earnings (deficit)......... 34,790 63,973 (474) (63,499) 34,790 -------- -------- ------ --------- -------- Total stockholders' equity..... 273,748 462,452 1,480 (463,932) 273,748 -------- -------- ------ --------- -------- Total liabilities and stockholders' equity......... $583,633 $529,833 $2,508 $(463,932) $652,042 ======== ======== ====== ========= ========
44 47 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET--DECEMBER 31, 1995 (IN THOUSANDS) ASSETS
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents............. $ 141 $ 8,875 $ -- $ -- $ 9,016 Accounts receivable, net.............. 11,953 26,047 -- -- 38,000 Other current assets.................. 2,524 2,364 -- -- 4,888 -------- -------- ------ --------- -------- Total current assets.......... 14,618 37,286 -- -- 51,904 EQUIPMENT AND PROPERTY, net............. 18,598 244,313 2,697 -- 265,608 OTHER ASSETS, net....................... 137 23,374 -- 23,511 INTERCOMPANY AND INVESTMENT IN SUBSIDIARIES.......................... 268,118 -- -- (268,118) -- -------- -------- ------ --------- -------- Total assets.................. $301,471 $304,973 $2,697 $(268,118) $341,023 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities........................ $ 8,985 $ 22,482 $ -- $ -- $ 31,467 Debt due within one year.............. 1,969 1,666 364 -- 3,999 -------- -------- ------ --------- -------- Total current liabilities..... 10,954 24,148 364 -- 35,466 LONG-TERM DEBT, net..................... 175,000 3,334 1,028 -- 179,362 DEFERRED INCOME TAXES................... 10,679 10,679 STOCKHOLDERS' EQUITY: Partnership capital................... -- 56,672 -- (56,672) -- Common stock.......................... 352 -- -- -- 352 Additional paid-in capital............ 112,854 191,921 1,603 (193,525) 112,853 Accumulated earnings (deficit)........ 2,311 18,219 (298) (17,921) 2,311 -------- -------- ------ --------- -------- Total stockholders' equity.... 115,517 266,812 1,305 (268,118) 115,516 -------- -------- ------ --------- -------- Total liabilities and stockholders' equity........ $301,471 $304,973 $2,697 $(268,118) $341,023 ======== ======== ====== ========= ========
45 48 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ OPERATING REVENUES.................. $ 12,533 $306,808 $ -- $ -- $319,341 COSTS AND EXPENSES: Operating costs................... 8,406 190,349 -- -- 198,755 General and administrative........ 542 17,634 -- -- 18,176 Depreciation...................... 759 27,927 189 -- 28,875 -------- -------- ----- -------- -------- OPERATING INCOME.................... 2,826 70,898 (189) -- 73,535 OTHER (INCOME) EXPENSE: Interest expense.................. 23,472 331 91 -- 23,894 Other (income) expense, net....... 145 (2,058) -- -- (1,913) Equity in income of subsidiaries................... (45,578) -- -- 45,578 -- -------- -------- ----- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES... 24,787 72,625 (280) (45,578) 51,554 INCOME TAX PROVISION (BENEFIT)...... (7,692) 26,871 (104) -- 19,075 -------- -------- ----- -------- -------- NET INCOME (LOSS)................... $ 32,479 $ 45,754 $(176) $(45,578) $ 32,479 ======== ======== ===== ======== ========
46 49 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------------- ------------ ------------ ------------ ------------ OPERATING REVENUES................... $ 11,726 $165,779 $ -- $ -- $177,505 COSTS AND EXPENSES: Operating costs.................... 8,495 112,497 -- -- 120,992 General and administrative expenses........................ 471 13,400 -- -- 13,871 Depreciation....................... 837 15,548 142 -- 16,527 -------- -------- ----- -------- -------- OPERATING INCOME..................... 1,923 24,334 (142) -- 26,115 OTHER (INCOME) EXPENSE: Interest expense................... 17,103 8,191 110 (7,383) 18,021 Other (income) expense, net........ (612) (8,504) -- 7,383 (1,733) Equity in income of subsidiaries... (14,446) -- -- 14,446 -- -------- -------- ----- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST.................. (122) 24,647 (252) (14,446) 9,827 INCOME TAX PROVISION (BENEFIT)....... (6,468) 10,052 (103) -- 3,481 -------- -------- ----- -------- -------- INCOME (LOSS) BEFORE MINORITY INTEREST........................... 6,346 14,595 (149) (14,446) 6,346 MINORITY INTEREST.................... 1,291 -- -- -- 1,291 -------- -------- ----- -------- -------- NET INCOME (LOSS).................... $ 5,055 $ 14,595 $(149) $(14,446) $ 5,055 ======== ======== ===== ======== ========
47 50 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ OPERATING REVENUES.................. $65,968 $68,553 $3,982 $ -- $138,503 COSTS AND EXPENSES: Operating costs................... 47,712 44,215 3,329 -- 95,256 General and administrative expenses....................... 10,853 1,027 7 -- 11,887 Depreciation................... 3,704 5,371 370 -- 9,445 ------- ------- ------ ------- -------- OPERATING INCOME.................... 3,699 17,940 276 -- 21,915 OTHER (INCOME) EXPENSE: Interest expense.................. 11,377 735 50 (116) 12,046 Other (income) expense, net....... (2,083) 688 -- 116 (1,279) Equity in income of subsidiaries................... (9,711) -- -- 9,711 -- ------- ------- ------ ------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST............. 4,116 16,517 226 (9,711) 11,148 INCOME TAX PROVISION (BENEFIT)...... (3,800) 6,937 95 -- 3,232 ------- ------- ------ ------- -------- INCOME (LOSS) BEFORE MINORITY INTEREST.......................... 7,916 9,580 131 (9,711) 7,916 MINORITY INTEREST................... 3,486 -- -- -- 3,486 ------- ------- ------ ------- -------- NET INCOME (LOSS)................... $ 4,430 $ 9,580 $ 131 $(9,711) $ 4,430 ======= ======= ====== ======= ========
48 51 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................... $ 32,479 $ 45,754 $(176) $(45,578) $ 32,479 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Equity in unconsolidated subsidiaries........................ (45,578) -- -- 45,578 -- Depreciation and amortization......... 3,685 27,903 189 -- 31,777 Realized gain on the sale of assets... -- (2,290) -- -- (2,290) Provision for deferred income tax..... -- 18,248 -- -- 18,248 Changes in current assets and liabilities and intercompany balances............................ (72,524) 57,011 351 -- (15,162) -------- --------- ----- -------- --------- Net cash provided by (used in) operating activities........... (81,938) 146,626 364 -- 65,052 -------- --------- ----- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and property... (62,594) (154,551) -- -- (217,145) Refunds on drillpipe, rigs and equipment, net of deposits.......... 6,505 -- -- -- 6,505 Proceeds from sale of equipment and property............................ -- 3,208 -- -- 3,208 -------- --------- ----- -------- --------- Net cash used in investing activities..................... (56,089) (151,343) -- -- (207,432) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt...................... 187,000 -- -- -- 187,000 Issuance of common stock, net......... 110,753 -- -- -- 110,753 Payments of outstanding debt.......... (73,279) (1,667) (364) -- (75,310) Debt issuance costs................... (4,029) -- -- -- (4,029) -------- --------- ----- -------- --------- Net cash provided by (used in) financing activities........... 220,445 (1,667) (364) -- 218,414 -------- --------- ----- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 82,418 (6,384) -- -- 76,034 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 141 8,875 -- -- 9,016 -------- --------- ----- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 82,559 $ 2,491 $ -- $ -- $ 85,050 ======== ========= ===== ======== =========
49 52 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)...................... $ 5,055 $ 14,595 $(149) $(14,446) $ 5,055 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Equity in unconsolidated subsidiaries......................... (14,446) -- -- 14,446 -- Depreciation and amortization.......... 1,075 17,450 142 -- 18,667 Realized gain on the sale of assets.... -- (962) -- -- (962) Minority interest in earnings of subsidiary........................... 1,291 -- -- -- 1,291 Provision for deferred income taxes.... -- 3,481 -- -- 3,481 Foreign currency translation gain...... (857) (166) -- -- (1,023) Changes in current assets and current liabilities and intercompany balances............................. (88,637) 85,339 346 -- (2,952) -------- -------- ----- -------- --------- Net cash provided by (used in) operating activities.......... (96,519) 119,737 339 -- 23,557 -------- -------- ----- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and property.... (5,939) (98,199) -- -- (104,138) Deposits on drillpipe, rigs and equipment............................ (11,155) -- -- -- (11,155) Distribution for minority owner's interest in Blake Workover........... -- (1,804) -- -- (1,804) Proceeds from sale of equipment and property............................. -- 3,201 -- -- 3,201 -------- -------- ----- -------- --------- Net cash used in investing activities.................... (17,094) (96,802) -- -- (113,896) -------- -------- ----- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt....................... 50,000 -- -- -- 50,000 Payments of outstanding debt........... -- (18,732) (339) -- (19,071) Borrowings pursuant to revolving credit facility............................. 28,000 -- -- -- 28,000 Payments of amounts borrowed pursuant to revolving credit facility......... (28,000) -- -- -- (28,000) Issuance of common stock............... 70,423 -- -- -- 70,423 Debt issuance costs.................... (2,125) -- -- -- (2,125) Redemption of preferred stock.......... (3,500) -- -- -- (3,500) Dividends on preferred stock........... (1,019) -- -- -- (1,019) -------- -------- ----- -------- --------- Net cash provided by (used in) financing activities.......... 113,779 (18,732) (339) -- 94,708 -------- -------- ----- -------- --------- EFFECT OF EXCHANGE RATES ON CASH......... (25) (196) -- -- (221) NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 141 4,007 -- -- 4,148 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................. -- 4,868 -- -- 4,868 -------- -------- ----- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 141 $ 8,875 $ -- $ -- $ 9,016 ======== ======== ===== ======== =========
50 53 FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
FALCON DRILLING GUARANTOR NONGUARANTOR COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------------- ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. $ 4,430 $ 9,580 $ 131 $ (9,711) $ 4,430 Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Equity in unconsolidated subsidiaries......................... (9,711) -- -- 9,711 -- Depreciation and amortization.......... 4,394 5,371 370 -- 10,135 Realized gain on the sale of assets.... (1,097) (240) -- -- (1,337) Minority interest in earnings of subsidiary........................... 3,486 -- -- -- 3,486 Provision for deferred income taxes.... -- 1,643 -- 1,643 Changes in current assets and current liabilities and intercompany balances............................. 12,247 (11,783) (190) -- 274 -------- -------- ----- -------- --------- Net cash provided by operating activities.................... 13,749 4,571 311 -- 18,631 -------- -------- ----- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment................. (45,955) (4,313) (80) -- (50,348) Purchase of FALRIG Corporation......... (25,389) -- -- -- (25,389) Purchase of FALRIG USA................. (28,015) -- -- -- (28,015) Proceeds from sale of equipment........ 1,098 1,452 -- -- 2,550 -------- -------- ----- -------- --------- Net cash used in investing activities.................... (98,261) (2,861) (80) -- (101,202) -------- -------- ----- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt....................... 120,000 -- -- -- 120,000 Payments of outstanding debt........... (34,225) (832) (231) -- (35,288) Borrowings pursuant to revolving credit facility............................. 5,000 5,000 Debt issuance costs.................... (5,130) -- -- -- (5,130) Retirement of preferred stock.......... (3,500) -- -- -- (3,500) Dividends on preferred stock........... (351) -- -- -- (351) -------- -------- ----- -------- --------- Net cash provided by (used in) financing activities.......... 81,794 (832) (231) -- 80,731 -------- -------- ----- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH AND CASH EQUIVALENTS................... (2,718) 878 -- -- (1,840) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 2,718 3,990 -- -- 6,708 -------- -------- ----- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ -- $ 4,868 $ -- $ -- $ 4,868 ======== ======== ===== ======== =========
51 54 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file its definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 29, 1997 pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information with respect to the executive officers and directors of the Company:
NAME AGE POSITION ---- --- -------- Steven A. Webster...................... 45 Chairman of the Board and Chief Executive Officer Bernie W. Stewart...................... 52 Chief Operating Officer Robert H. Reeves, Jr................... 60 Executive Vice President Robert F. Fulton....................... 45 Executive Vice President Michael E. Blake....................... 38 President of the Falcon Workover Company, Inc. Rodney W. Meisetschlaeger.............. 43 Vice President -- Offshore Operations Steven R. Meheen....................... 40 Vice President -- Deepwater Operations Lloyd M. Pellegrin..................... 49 Vice President -- Administration Don P. Rodney.......................... 49 Vice President -- Finance Leighton E. Moss....................... 46 Vice President and General Counsel Purnendu Chatterjee.................... 46 Director(1) Douglas A.P. Hamilton.................. 50 Director(2) Kenneth H. Hannan, Jr.................. 55 Director(2) James R. Latimer, III.................. 51 Director Michael E. Porter...................... 49 Director William R. Ziegler..................... 54 Director(1)
- --------------- (1) Member of Compensation Committee (2) Member of Audit Committee Mr. Webster, a director and the Chairman, Chief Executive Officer and Treasurer of the Company since its organization in 1991, is a founder and original investor in the Company and its predecessors, which commenced operation in 1988. In addition to his administrative duties, Mr. Webster has been responsible for developing the Company's strategic plan, raising capital and implementing its acquisition program. He serves as a director of DI Industries, Inc.(a land drilling contractor), a director of Crown Resources Corporation (a mining company), and as a trust manager of Camden Property Trust (a real estate investment trust). Mr. Webster is also general partner of Equipment Asset Recovery Fund (an investment fund). Mr. Stewart joined Falcon in April 1996 as Chief Operating Officer. From 1993 until joining Falcon, Mr. Stewart was Chief Operating officer for Hornbeck Offshore Services, Inc., an offshore supply boat operator, where he was responsible for overall supervision of that company's operations. From 1986 until 1993, he was President of Western Oceanics, Inc., an offshore drilling contractor. Mr. Robert H. Reeves, Jr., Executive Vice President of the Company since January 1993, is responsible for managing the Company's domestic barge rig business. Mr. Reeves joined Two R Drilling Company, Inc. in 1961 and served as its President from 1974 until joining the Company in December 1992. 52 55 Mr. Fulton, Executive Vice President of the Company since January 1, 1995, is the Company's chief financial officer, responsible for overseeing accounting, financial and general administrative matters. From 1991 until joining the Company in 1995, Mr. Fulton served as an executive officer of Chiles Offshore Corporation (recently merged with Noble Drilling Corporation to form Noble Offshore Corporation), most recently as Senior Vice President and Chief Financial Officer. Mr. Blake, President of Falcon Workover Company, Inc. since January 1996, was president of the joint venture that had operated the Company's workover business since its formation in April 1994 until December 31, 1996. Prior to that time, he was president of Blake Drilling and Workover Company and certain predecessor companies from 1986, and has been employed by companies engaged in shallow-water barge drilling operations since 1981. Mr. Meisetschlaeger, Vice President -- Offshore Operations of the Company since 1993, is responsible for managing the Company's domestic offshore operations and Venezuelan operations. He served in a similar capacity for the Huthnance Drilling Division of W.R. Grace & Co. from 1981 until joining the Company 1993. Mr. Meheen, Vice President -- Deepwater Operations of the Company since January 1995, is responsible for developing and operation of the Company's deepwater business. Mr. Meheen has been employed in offshore operations since 1976 for Santa Fe Drilling, Maretech Pacific Ltd. and as a consultant with Mobil Oil. Mr. Pellegrin, Vice President -- Administration of the Company since November 1992, has primary responsibility for administrative matters, personnel safety and risk management. He held a similar position with Atlantic Pacific Marine Company, where he worked from 1977 until joining the Company in 1992. Mr. Rodney, Vice President -- Finance of the Company since 1993, has overall responsibility for the accounting and control functions for both the offshore and barge divisions. He worked for Atlantic Pacific Marine Company from 1977 through 1992, serving as controller for his last nine years. Mr. Moss, Vice President and General Counsel of the Company, joined the Company on January 1, 1996, and is primarily responsible for management of the legal affairs of the Company. From October 1995 until joining the Company, Mr. Moss was a member of the law firm of Gardere Wynne Sewell & Riggs, L.L.P. For more than five years prior to October 1995, Mr. Moss was a member of the law firm of Sewell & Riggs, P.C. Dr. Chatterjee, a director of the Company since 1993, is an investor in public and private companies and has been associated with the George Soros organization for approximately nine years. A corporation controlled by Dr. Chatterjee is the general partner of a limited partnership that constitutes the Company's largest stockholder group. In January 1993, Dr. Chatterjee, without admitting or denying the charges, resolved an action brought by the Commission alleging that he had disclosed material non-public information by paying a fine and consenting to an injunction that requires, among other things, observance of applicable securities laws and regulations. Mr. Hamilton, a director of the Company since 1992, is a private investor who is one of the Company's original investors. He has experience in executive management in various businesses and has been an investor in oil and gas ventures since 1983. Mr. Hannan, a director of the Company since 1991, is President of Colonial Navigation, a New York based shipping company that is affiliated with the shipping interests of Francis and Marios Stafilopatis. Entities owned by Stafilopatis family were early investors in the Company. Mr. Latimer, a director of the Company since 1993, is an independent oil and gas operator and investor based in Dallas. He has experience managing a large institutional portfolio of oil and gas properties and as a management consultant. Mr. Latimer is also the President of Raptor Exploration Company, Inc., a wholly owned subsidiary of the Company through which the Company participates in oil and gas exploration and production activities. Dr. Porter, a director since January 1, 1997, is the C. Roland Christensen Professor of Business Administration at the Harvard Business School, a position he has held for more than the past five years. He is 53 56 also a director of Alpha-Beta Technology, Inc., Parametric Technology Corporation and ThermoQuest Corporation. Mr. Ziegler, a director of the Company since 1991, is a partner of the law firm of Parson & Brown and was a partner in the law firm of Whitman Breed Abbott & Morgan and a predecessor firm until May 1994. Both firms have acted as counsel to the Company. He is also a director of DI Industries, Inc. (a land drilling contractor). The officers of the Company are elected by the Board of Directors and serve until removed by the Board or until their death or resignation. Certain officers have employment contracts with the Company. A description of such employments contracts will be contained in the Company's Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year covered by this Report, and is incorporated herein by reference. All of the directors of the Company except for Mr. Porter were initially elected pursuant to a stockholders agreement entered into by four major stockholder groups. The provisions of this agreement relating to the election of directors terminated in August, 1995 upon the initial public offering of the Company's Common Stock. Mr. Latimer and Mr. Ziegler were re-elected at the annual stockholders meeting in May 1996, after the expiration of these provisions. Certificate of Incorporation and Bylaws provide that the Board is divided into three classes of directors and that the directors are elected for staggered three-year terms. The terms of Mr. Hannan and Dr. Porter expire at the annual meeting of stockholders in 1997, and it is anticipated that they will be nominated and will stand for re-election. The terms of Mr. Webster, Dr. Chatterjee and Mr. Hamilton expire in 1998, and the terms of Mr. Latimer and Mr. Ziegler expire in 1999. Certain information required by Item 10 will be contained in the Company's Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year covered by this Report, and is incorporated herein by reference. In this regard, specific reference is made to the headings "Employment Agreements", "Transactions with Related Parties", and "Section 16(a) Reporting Delinquencies" under the "Executive Compensation" section of the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Proxy Statement. In this regard, specific reference is made to the sections entitled "Election of Directors" and "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 will be contained in the Company's Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year covered by this Report, and is incorporated herein by reference. In this regard, specific reference is made to the section entitled "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 will be contained in the Company's Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year covered by this Report, and is incorporated herein by reference. In this regard, specific reference is made to the headings entitled "Transactions with Related Parties" and "Family Relationships" under the "Executive Compensation" section of the Proxy Statement. 54 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: (1) See Index to Financial Statements set forth at Item 8. (2) Financial Statement Schedules: None (3) Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Certificate of Incorporation of the Company(1) 3.2. -- By-Laws of the Company(1) 4.1 -- Indenture dated as of January 15, 1994, between the Company and Texas Commerce Bank National Association, including a form of Note(2) 4.1(a) -- Supplemental Indenture dated as of June 3, 1994, pursuant to which Falcon Workover Company, Inc., became a Guarantor(3) 4.1(b) -- Supplemental Indenture dated as of June 28, 1994, pursuant to which Raptor Exploration Company, Inc. and FALRIG Offshore (USA), L.P., and FALRIG Offshore Partners became Guarantors(3) 4.1(c) -- Supplemental Indenture dated as of December 30, 1994, pursuant to which Falcon Inland, Inc., Falcon Services Company, Inc. and FALRIG de Venezuela, Inc. became Guarantors(4) 4.3 -- Floating Rate Senior Note Purchase Agreement, dated as of February 23, 1994, by and between the Company and Crescent/Mach I partners, L.P., including a form of Note(5) 4.3(a) -- Joinder Agreement dated as of June 3, 1994, pursuant to which Falcon Workover Company, Inc. became a Guarantor(5) 4.3(b) -- Joinder Agreement dated as of June 28, 1994, pursuant to which Raptor Exploration Company, Inc., FALRIG Offshore (USA), L.P., and FALRIG Offshore partners became Guarantors(5) 4.3(c) -- Joinder Agreement dated as of December 30, 1994, pursuant to which Falcon Inland, Inc., Falcon Services Company, Inc. and FALRIG de Venezuela, Inc. became Guarantors(5). 4.3(d) -- Joinder Agreement dated as of March 1, 1996, pursuant to which Falcon Atlantic, Ltd., Falcon Drilling do Brasil, Ltda., Falcon Drilling de Venezuela, Inc. and Perforaciones FALRIG de Venezuela, C.A. became Guarantors(9) 4.4 -- Indenture dated as of March 15, 1995, between the Company and Texas Commerce Bank National Association, including a form of Note(6) 4.5 -- Registration Rights Agreement dated as of March 23, 1995, by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc.(6) 4.6 -- Indenture dated as of March 1, 1996, between the Company and Bank One, Texas, N. A., including a form of Note(7)
55 58
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.7 -- Registration Rights Agreement dated as of March 7, 1996, by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc.(7) The Company hereby agrees to furnish to the Commission upon its request any instrument defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries and for any of its unconsolidated subsidiaries for which financial statements are required to be filed with respect to long-term debt not being registered which does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 9 -- Voting Trust Agreement dated as of November 12, 1991, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(2) 9.1(a) -- Amendment to Voting Trust Agreement dated as of November 1, 1995(9) 9.2 -- Voting Trust Agreement dated as of November 21, 1989, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(1) 9.3 -- Voting Trust Agreement dated as of May 30, 1990, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(1) 10.1 -- Second Amended Stockholders' Agreement dated as of January 29, 1993, by and among the stockholders thereto(2) 10.2 -- Registration Rights Agreement dated as of January 29, 1993, as amended, by and among S-C Rig Investments, L.P. and the Company(2) 10.3 -- Shadow Warrant of the Company dated January 29, 1993, issued to S-C Rig Investments, L.P., together with Notice of Exercise Event Occurrence dated as of July 31, 1993, Form of Exercise dated as of July 31, 1993, Form of Notice of Exercise Form dated as of March 31, 1994 and Form of Exercise dated as of March 31, 1994(2) 10.4 -- 1992 Stock Option Plan of the Company(2) 10.5 -- Lease Agreement dated as of January 29, 1993, between the Company and Oren and Estelle Meaux Amy(3) 10.6 -- 1994 Stock Option Plan of the Company(4) 10.7 -- Employment Agreement dated January 30, 1995 between the Company and Steven A. Webster(1) 10.8 -- Credit Agreement dated as of September 12, 1994, by and among the Company and certain of its affiliates, as borrowers, and Banque Paribas and Arab Banking Corporation (B.S.C.), as co-agents(4) 10.9(a) -- First Amendment, dated as of September 28, 1994, to Credit Agreement(4) 10.9(b) -- Second Amendment, dated as of January 31, 1995, to Credit Agreement(4) 10.9(c) -- Third Amendment, dated as of March 22, 1995, to Credit Agreement(6) 10.9(d) -- Fourth Amendment, dated as of January 24, 1996, to Credit Agreement(9) 10.9(e) -- Fifth Amendment, dated as of March 4, 1996, to Credit Agreement(9) 10.10 -- Uncommitted Acquisition Credit Agreement dated as of January 24, 1996, between the Company and Banque Paribas(9) 10.10(a) -- First Amendment, dated as of March 4, 1996, to Uncommitted Acquisition Credit Agreement(9)
56 59
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.11 -- 1995 Stock Option Plan of the Company(4) 10.12 -- Purchase Agreement dated as of March 16, 1995, by and between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, including a form of Registration Rights Agreement(4) 10.13 -- Agreement of Sale, dated July 14, 1995, among the Company, Rowan Companies, Inc., and Rowan International, Inc., relating to the purchase of three barge drilling rigs by the Company(5) 10.14 -- Bank Earn-Out Agreement, dated as of December 23, 1992, by and between the Company and Whitney National Bank(5) 10.15 -- Senior Executive Incentive Compensation Agreement, dated as of December 24, 1992, by and among the Company, Robert H. Reeves, Jr., and Charles E. Reeves(5) 10.16 -- Drilling Rig Purchase Agreement dated August 14, 1995, by and among Sonat Offshore Ventures Inc. and Sonat Offshore Drilling Inc. (collectively, "Sonat") as sellers and the Company as buyer, as amended by Sales Agreement Amendment dated September 21, 1995 among Sonat, the Company and FALRIG Offshore, Inc., a wholly-owned subsidiary of the Company(8) 10.17 -- Agreement dated December 8, 1995, between UME Drilling Co., Ltd. and Falcon Drilling Company, Inc.(9) 10.18 -- Memorandum of Agreement dated February 7, 1996, among Pelerin Shipping, Ltd., Internationale de Travaux et de Materiel SARL and the Company(9) 10.19 -- Management Agreement dated February 7, 1996, between Foramer S.A. and the Company(9) 10.20 -- Purchase Agreement dated March 4, 1996, by and between Salomon Brothers Inc., and Donaldson, Lufkin & Jenrette Securities Corporation, as the initial purchasers, and the Company(9) 10.21 -- Registration Rights Agreement dated as of October 20, 1995, by and among the Company and the holders and former holders of Class B Warrants of the Company and agreed to by S-C Rig Investments, L.P.(9) 10.22 -- Agreement and Plan of Merger dated August 15, 1995, by and among the Company, Sanderling Drilling and Blake Holding Co., Inc.(9) 10.23 -- Registration Rights Agreement dated August 15, 1995, between the Company and Blake Holding Co., Inc.(9) 10.24 -- Credit Agreement dated as of November 12, 1996, among the Company, Banque Paribas and Arab Banking Corporation (B.S.C.) relating to a $25 million facility. 10.25 -- Credit Agreement dated as of November 12, 1996, among the Company, Banque Paribas and Arab Banking Corporation (B.S.C.) relating to a $40 million facility. 10.26 -- Registration Rights Agreement dated December 10, 1996, between the Company and KS Deepsea Drillships.
57 60
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.27 -- Lease and Agreement dated January 1, 1997, between W&H Ventures, L.L.C. and Double Eagle Marine, Inc. 10.28 -- Bareboat Charter Agreement dated December 10, 1996 between the Company and Hyde Offshore Limited Partnership 21 -- Subsidiaries of the Company 23 -- Consent of Arthur Andersen LLP 27 -- Financial Data Schedule. This schedule is being submitted as an exhibit only in electronic format, and shall not be deemed filed for purposes of Section 11 of the Securities Act, Section 18 of the Securities Exchange Act of 1934, or Section 323 of the Trust Indenture Act of 1939.
- --------------- (1) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on July 6, 1995 (Registration No. 33-84582). (2) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on April 29, 1994 (Registration No. 33-78369). (3) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-4 filed on June 30, 1994 (Registration No. 33-78360). (4) Incorporated by reference to the Company's Annual Report on form 10-K for the year ended December 31, 1994. (5) Incorporated by reference to Amendment No. 3 to the Company's Registration Statement of Form S-1 filed on July 19, 1995 (Registration No. 33-84582). (6) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 24, 1995 (Registration No. 33-90582). (7) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 8, 1996 (Registration No. 333-2114). (8) Incorporated by reference to the Company's Current Report on Form 8-K dated September 21, 1995. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (b) Reports on Form 8-K: No Reports on Form 8-K were filed during the fourth quarter of 1996. 58 61 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. Date: March 28, 1997 Falcon Drilling Company, Inc. (Registrant) By: /s/ STEVEN A. WEBSTER ---------------------------------- Steven A. Webster Chairman and Chief Executive Officer 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 March 28, 1997.
SIGNATURE TITLE --------- ----- /s/ STEVEN A. WEBSTER Chairman, Director, and Chief - ----------------------------------------------------- Executive Officer (Principal Steven A. Webster Executive Officer) /s/ ROBERT F. FULTON Executive Vice President - ----------------------------------------------------- (Principal Financial Officer Robert F. Fulton and Principal Accounting Officer) Director - ----------------------------------------------------- Purnendu Chatterjee /s/ DOUGLAS A.P. HAMILTON Director - ----------------------------------------------------- Douglas A.P. Hamilton Director - ----------------------------------------------------- Kenneth H. Hannan, Jr. /s/ JAMES R. LATIMER, III Director - ----------------------------------------------------- James R. Latimer, III Director - ----------------------------------------------------- Michael E. Porter /s/ WILLIAM R. ZIEGLER Director - ----------------------------------------------------- William R. Ziegler
59 62 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Certificate of Incorporation of the Company(1) 3.2. -- By-Laws of the Company(1) 4.1 -- Indenture dated as of January 15, 1994, between the Company and Texas Commerce Bank National Association, including a form of Note(2) 4.1(a) -- Supplemental Indenture dated as of June 3, 1994, pursuant to which Falcon Workover Company, Inc., became a Guarantor(3) 4.1(b) -- Supplemental Indenture dated as of June 28, 1994, pursuant to which Raptor Exploration Company, Inc. and FALRIG Offshore (USA), L.P., and FALRIG Offshore Partners became Guarantors(3) 4.1(c) -- Supplemental Indenture dated as of December 30, 1994, pursuant to which Falcon Inland, Inc., Falcon Services Company, Inc. and FALRIG de Venezuela, Inc. became Guarantors(4) 4.3 -- Floating Rate Senior Note Purchase Agreement, dated as of February 23, 1994, by and between the Company and Crescent/Mach I partners, L.P., including a form of Note(5) 4.3(a) -- Joinder Agreement dated as of June 3, 1994, pursuant to which Falcon Workover Company, Inc. became a Guarantor(5) 4.3(b) -- Joinder Agreement dated as of June 28, 1994, pursuant to which Raptor Exploration Company, Inc., FALRIG Offshore (USA), L.P., and FALRIG Offshore partners became Guarantors(5) 4.3(c) -- Joinder Agreement dated as of December 30, 1994, pursuant to which Falcon Inland, Inc., Falcon Services Company, Inc. and FALRIG de Venezuela, Inc. became Guarantors(5). 4.3(d) -- Joinder Agreement dated as of March 1, 1996, pursuant to which Falcon Atlanctic, Ltd., Falcon Drilling do Brasil, Ltda., Falcon Drilling de Venezuela, Inc. and Perforaciones FALRIG de Venezuela, C.A. became Guarantors(9) 4.4 -- Indenture dated as of March 15, 1995, between the Company and Texas Commerce Bank National Association, including a form of Note(6) 4.5 -- Registration Rights Agreement dated as of March 23, 1995, by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc.(6) 4.6 -- Indenture dated as of March 1, 1996, between the Company and Bank One, Texas, N. A., including a form of Note(7) 4.7 -- Registration Rights Agreement dated as of March 7, 1996, by and among the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc.(7) The Company hereby agrees to furnish to the Commission upon its request any instrument defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries and for any of its unconsolidated subsidiaries for which financial statements are required to be filed with respect to long-term debt not being registered which does not exceed 10% of the total assets of the Company and its subsidiaries on a onsolidated basis. 9 -- Voting Trust Agreement dated as of November 12, 1991, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(2)
63
EXHIBIT NO. DESCRIPTION ----------- ----------- 9.1(a) -- Amendment to Voting Trust Agreement dated as of November 1, 1995(9) 9.2 -- Voting Trust Agreement dated as of November 21, 1989, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(1) 9.3 -- Voting Trust Agreement dated as of May 30, 1990, between Lydia Richardson and Linda Webster as common stockholders and Steven A. Webster as voting trustee(1) 10.1 -- Second Amended Stockholders' Agreement dated as of January 29, 1993, by and among the stockholders thereto(2) 10.2 -- Registration Rights Agreement dated as of January 29, 1993, as amended, by and among S-C Rig Investments, L.P. and the Company(2) 10.3 -- Shadow Warrant of the Company dated January 29, 1993, issued to S-C Rig Investments, L.P., together with Notice of Exercise Event Occurrence dated as of July 31, 1993, Form of Exercise dated as of July 31, 1993, Form of Notice of Exercise Form dated as of March 31, 1994 and Form of Exercise dated as of March 31, 1994(2) 10.4 -- 1992 Stock Option Plan of the Company(2) 10.5 -- Lease Agreement dated as of January 29, 1993, between the Company and Oren and Estelle Meaux Amy(3) 10.6 -- 1994 Stock Option Plan of the Company(4) 10.7 -- Employment Agreement dated January 30, 1995 between the Company and Steven A. Webster(1) 10.8 -- Credit Agreement dated as of September 12, 1994, by and among the Company and certain of its affiliates, as borrowers, and Banque Paribas and Arab Banking Corporation (B.S.C.), as co-agents(4) 10.9(a) -- First Amendment, dated as of September 28, 1994, to Credit Agreement(4) 10.9(b) -- Second Amendment, dated as of January 31, 1995, to Credit Agreement(4) 10.9(c) -- Third Amendment, dated as of March 22, 1995, to Credit Agreement(6) 10.9(d) -- Fourth Amendment, dated as of January 24, 1996, to Credit Agreement(9) 10.9(e) -- Fifth Amendment, dated as of March 4, 1996, to Credit Agreement(9) 10.10 -- Uncommitted Acquisition Credit Agreement dated as of January 24, 1996, between the Company and Banque Paribas(9) 10.10(a) -- First Amendment, dated as of March 4, 1996, to Uncommitted Acquisition Credit Agreement(9) 10.11 -- 1995 Stock Option Plan of the Company(4) 10.12 -- Purchase Agreement dated as of March 16, 1995, by and between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, including a form of Registration Rights Agreement(4) 10.13 -- Agreement of Sale, dated July 14, 1995, among the Company, Rowan Companies, Inc., and Rowan International, Inc., relating to the purchase of three barge drilling rigs by the Company(5) 10.14 -- Bank Earn-Out Agreement, dated as of December 23, 1992, by and between the Company and Whitney National Bank(5) 10.15 -- Senior Executive Incentive Compensation Agreement, dated as of December 24, 1992, by and among the Company, Robert H. Reeves, Jr., and Charles E. Reeves(5)
64
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.16 -- Drilling Rig Purchase Agreement dated August 14, 1995, by and among Sonat Offshore Ventures Inc. and Sonat Offshore Drilling Inc. (collectively, "Sonat") as sellers and the Company as buyer, as amended by Sales Agreement Amendment dated September 21, 1995 among Sonat, the Company and FALRIG Offshore, Inc., a wholly-owned subsidiary of the Company(8) 10.17 -- Agreement dated December 8, 1995, between UME Drilling Co., Ltd. and Falcon Drilling Company, Inc.(9) 10.18 -- Memorandum of Agreement dated February 7, 1996, among Pelerin Shipping, Ltd., Internationale de Travaux et de Materiel SARL and the Company(9) 10.19 -- Management Agreement dated February 7, 1996, between Foramer S.A. and the Company(9) 10.20 -- Purchase Agreement dated March 4, 1996, by and between Salomon Brothers Inc., and Donaldson, Lufkin & Jenrette Securities Corporation, as the initial purchasers, and the Company(9) 10.21 -- Registration Rights Agreement dated as of October 20, 1995, by and among the Company and the holders and former holders of Class B Warrants of the Company and agreed to by S-C Rig Investments, L.P.(9) 10.22 -- Agreement and Plan of Merger dated August 15, 1995, by and among the Company, Sanderling Drilling and Blake Holding Co., Inc.(9) 10.23 -- Registration Rights Agreement dated August 15, 1995, between the Company and Blake Holding Co., Inc.(9) 10.24 -- Credit Agreement dated as of November 12, 1996, among the Company, Banque Paribas and Arab Banking Corporation (B.S.C.) relating to a $25 million facility. 10.25 -- Credit Agreement dated as of November 12, 1996, among the Company, Banque Paribas and Arab Banking Corporation (B.S.C.) relating to a $40 million facility. 10.26 -- Registration Rights Agreement dated December 10, 1996, between the Company and KS Deepsea Drillships. 10.27 -- Lease and Agreement dated January 1, 1997, between W&H Venturers, L.L.C. and Double Eagle Marine, Inc. 10.28 -- Bareboat Charter Agreement dated December 10, 1996 between the Company and Hyde Offshore Limited Partnership 21 -- Subsidiaries of the Company 23 -- Consent of Arthur Andersen LLP 27 -- Financial Data Schedule. This schedule is being submitted as an exhibit only in electronic format, and shall not be deemed filed for purposes of Section 11 of the Securities Act, Section 18 of the Securities Exchange Act of 1934, or Section 323 of the Trust Indenture Act of 1939.
- --------------- (1) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on July 6, 1995 (Registration No. 33-84582). (2) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on April 29, 1994 (Registration No. 33-78369). (3) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-4 filed on June 30, 1994 (Registration No. 33-78360). (4) Incorporated by reference to the Company's Annual Report on form 10-K for the year ended December 31, 1994. 65 (5) Incorporated by reference to Amendment No. 3 to the Company's Registration Statement of Form S-1 filed on July 19, 1995 (Registration No. 33-84582). (6) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 24, 1995 (Registration No. 33-90582). (7) Incorporated by reference to the Company's Registration Statement on Form S-4 filed on March 8, 1996 (Registration No. 333-2114). (8) Incorporated by reference to the Company's Current Report on Form 8-K dated September 21, 1995. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. EX-10.24 2 CREDIT AGREEMENT DATED - 11/12/96 $25 MIL FACILITY 1 EXHIBIT 10.24 ================================================================================ CREDIT AGREEMENT dated as of November 12, 1996 $25,000,000 REVOLVING CREDIT FACILITY FALCON DRILLING COMPANY, INC. FALCON DRILLING DE VENEZUELA, INC. FALCON DRILLING HOLDINGS, L.P. FALCON DRILLING MANAGEMENT, INC. FALCON INLAND, INC. FALCON OFFSHORE, INC. FALCON SERVICES COMPANY, INC. FALCON WORKOVER COMPANY, INC. FALRIG OFFSHORE, INC. FALRIG OFFSHORE PARTNERS FALRIG OFFSHORE (USA), L.P. KESTREL OFFSHORE, INC. and RAPTOR EXPLORATION CO., INC. as BORROWERS FALCON ATLANTIC LTD., FALCON DRILLING DO BRASIL, LTDA. and PERFORACIONES FALRIG DE VENEZUELA C.A. as Guarantors BANQUE PARIBAS as Agent and a Lender ARAB BANKING CORPORATION (B.S.C.) as Co-Agent and a Lender ================================================================================ 2 TABLE OF CONTENTS ARTICLE 1 - Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.2 Other Definitional Provisions . . . . . . . . . . . . . 29 Section 1.3 Accounting Terms and Determinations . . . . . . . . . . 30 Section 1.4 Financial Covenants and Reporting . . . . . . . . . . . 30 ARTICLE 2 - Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 2.1 Commitments. . . . . . . . . . . . . . . . . . . . . . 30 Section 2.2 Notes . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 2.3 Repayment of Loans . . . . . . . . . . . . . . . . . . 31 Section 2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . 31 Section 2.5 Borrowing Procedure . . . . . . . . . . . . . . . . . . 32 Section 2.6 Optional Prepayments, Conversions and Continuations of Loans . . . . . . . . . . . . . . . . 32 Section 2.7 Mandatory Prepayments . . . . . . . . . . . . . . . . . 32 Section 2.8 Minimum Amounts. . . . . . . . . . . . . . . . . . . . 33 Section 2.9 Certain Notices. . . . . . . . . . . . . . . . . . . . 33 Section 2.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . 33 Section 2.11 Commitment Fee and Other Fees . . . . . . . . . . . . . 34 Section 2.12 Computations. . . . . . . . . . . . . . . . . . . . . . 34 Section 2.13 Termination or Reduction of Commitments . . . . . . . . 34 Section 2.14 Letters of Credit . . . . . . . . . . . . . . . . . . . 34 ARTICLE 3 - Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 3.1 Method of Payment . . . . . . . . . . . . . . . . . . . 37 Section 3.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 38 Section 3.3 Sharing of Payments, Etc . . . . . . . . . . . . . . . 38 Section 3.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . 38 Section 3.5 Withholding Taxes . . . . . . . . . . . . . . . . . . . 39 Section 3.6 Withholding Tax Exemption . . . . . . . . . . . . . . . 40 ARTICLE 4 - Yield Protection and Illegality . . . . . . . . . . . . . . . . . 40 Section 4.1 Additional Costs . . . . . . . . . . . . . . . . . . . 40 Section 4.2 Limitation on Types of Loans . . . . . . . . . . . . . 42 Section 4.3 Illegality . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.4 Treatment of Affected Loans . . . . . . . . . . . . . . 42 Section 4.5 Compensation . . . . . . . . . . . . . . . . . . . . . 43 Section 4.6 Capital Adequacy . . . . . . . . . . . . . . . . . . . 43 Section 4.7 Additional Interest on Eurodollar Loans . . . . . . . . 44 ARTICLE 5 - Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 5.1 Collateral . . . . . . . . . . . . . . . . . . . . . . 44 Section 5.2 New Borrowers . . . . . . . . . . . . . . . . . . . . . 44 Section 5.3 Setoff . . . . . . . . . . . . . . . . . . . . . . . . 45
i 3 ARTICLE 6 - Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . 45 Section 6.1 Initial Extension of Credit . . . . . . . . . . . . . . 45 Section 6.2 All Extensions of Credit . . . . . . . . . . . . . . . 48 ARTICLE 7 - Representations and Warranties . . . . . . . . . . . . . . . . . 49 Section 7.1 Corporate Existence . . . . . . . . . . . . . . . . . . 49 Section 7.2 Financial Statements . . . . . . . . . . . . . . . . . 50 Section 7.3 Entity Action; No Breach . . . . . . . . . . . . . . . 50 Section 7.4 Operation of Business . . . . . . . . . . . . . . . . . 50 Section 7.5 Intellectual Property . . . . . . . . . . . . . . . . . 50 Section 7.6 Litigation and Judgments . . . . . . . . . . . . . . . 51 Section 7.7 Rights in Properties; Liens . . . . . . . . . . . . . . 51 Section 7.8 Enforceability . . . . . . . . . . . . . . . . . . . . 51 Section 7.9 Approvals . . . . . . . . . . . . . . . . . . . . . . . 51 Section 7.10 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 7.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 7.12 Margin Securities . . . . . . . . . . . . . . . . . . . 52 Section 7.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 7.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . 53 Section 7.15 Capitalization . . . . . . . . . . . . . . . . . . . . 53 Section 7.16 Agreements . . . . . . . . . . . . . . . . . . . . . . 54 ---------- Section 7.17 Compliance with Laws . . . . . . . . . . . . . . . . . 54 Section 7.18 Investment Company Act . . . . . . . . . . . . . . . . 54 Section 7.19 Public Utility Holding Company Act . . . . . . . . . . 54 Section 7.20 Environmental Matters . . . . . . . . . . . . . . . . . 54 Section 7.21 Labor Disputes and Acts of God . . . . . . . . . . . . 55 Section 7.22 Material Contracts . . . . . . . . . . . . . . . . . . 56 Section 7.23 Outstanding Securities . . . . . . . . . . . . . . . . 56 Section 7.24 Priority of Payment. . . . . . . . . . . . . . . . . . 56 Section 7.25 Solvency . . . . . . . . . . . . . . . . . . . . . . . 56 Section 7.26 Employee Matters . . . . . . . . . . . . . . . . . . . 56 Section 7.27 Insurance . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE 8 - Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . 57 Section 8.1 Reporting Requirements . . . . . . . . . . . . . . . . 57 Section 8.2 Maintenance of Existence; Conduct of Business . . . . . 60 Section 8.3 Maintenance of Properties . . . . . . . . . . . . . . . 60 Section 8.4 Taxes and Claims . . . . . . . . . . . . . . . . . . . 60 Section 8.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . 60 Section 8.6 Inspection Rights . . . . . . . . . . . . . . . . . . . 61 Section 8.7 Keeping Books and Records . . . . . . . . . . . . . . . 61 Section 8.8 Compliance with Laws . . . . . . . . . . . . . . . . . 61 Section 8.9 Compliance with Agreements . . . . . . . . . . . . . . 62 Section 8.10 Further Assurances . . . . . . . . . . . . . . . . . . 62 Section 8.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 8.12 Concentration Account . . . . . . . . . . . . . . . . . 62
ii 4 Section 8.13 No Consolidation in Bankruptcy . . . . . . . . . . . . 62 ARTICLE 9 - Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . 63 Section 9.1 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 9.2 Limitation on Liens . . . . . . . . . . . . . . . . . . 64 Section 9.3 Mergers, Etc . . . . . . . . . . . . . . . . . . . . . 64 Section 9.4 Restricted Payments . . . . . . . . . . . . . . . . . . 65 Section 9.5 Investments. . . . . . . . . . . . . . . . . . . . . . 66 Section 9.6 Limitation on Issuance of Capital Stock . . . . . . . . 67 Section 9.7 Transactions With Affiliates . . . . . . . . . . . . . 67 Section 9.8 Disposition of Property . . . . . . . . . . . . . . . . 68 Section 9.9 Sale and Leaseback . . . . . . . . . . . . . . . . . . 69 Section 9.10 Lines of Business . . . . . . . . . . . . . . . . . . . 69 Section 9.11 Environmental Protection . . . . . . . . . . . . . . . 69 Section 9.12 Intercompany Transactions . . . . . . . . . . . . . . . 69 Section 9.13 Consulting and Management Fees . . . . . . . . . . . . 69 Section 9.14 Modification of Other Agreements . . . . . . . . . . . 70 Section 9.15 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE 10 - Financial Covenants . . . . . . . . . . . . . . . . . . . . . . 70 Section 10.1 Consolidated Current Ratio . . . . . . . . . . . . . . 71 Section 10.2 Consolidated Tangible Net Worth . . . . . . . . . . . . 71 Section 10.3 Consolidated Interest Coverage Ratio . . . . . . . . . 71 ARTICLE 11 - Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 11.1 Events of Default . . . . . . . . . . . . . . . . . . . 71 Section 11.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . 74 Section 11.3 Cash Collateral . . . . . . . . . . . . . . . . . . . . 75 Section 11.4 Performance by the Agent . . . . . . . . . . . . . . . 75 ARTICLE 12 - The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 12.1 Appointment, Powers and Immunities . . . . . . . . . . 75 Section 12.2 Rights of Agent as a Bank . . . . . . . . . . . . . . . 76 Section 12.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . 76 Section 12.4 Indemnification . . . . . . . . . . . . . . . . . . . . 77 Section 12.5 Independent Credit Decisions . . . . . . . . . . . . . 77 Section 12.6 Several Commitments . . . . . . . . . . . . . . . . . . 78 Section 12.7 Successor Agent . . . . . . . . . . . . . . . . . . . . 78 ARTICLE 13 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 13.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . 79 Section 13.2 Indemnification . . . . . . . . . . . . . . . . . . . . 79 Section 13.3 Limitation of Liability . . . . . . . . . . . . . . . . 80 Section 13.4 No Duty . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 13.5 No Fiduciary Relationship . . . . . . . . . . . . . . . 80 Section 13.6 Equitable Relief . . . . . . . . . . . . . . . . . . . 81
iii 5 Section 13.7 No Waiver; Cumulative Remedies . . . . . . . . . . . . 81 Section 13.8 Successors and Assigns . . . . . . . . . . . . . . . . 81 Section 13.9 Survival . . . . . . . . . . . . . . . . . . . . . . . 84 Section 13.10 Entire Agreement . . . . . . . . . . . . . . . . . . . 84 Section 13.11 Amendments. . . . . . . . . . . . . . . . . . . . . . . 84 Section 13.12 Maximum Interest Rate . . . . . . . . . . . . . . . . . 85 Section 13.13 Notices . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 13.14 Governing Law; Submission to Jurisdiction; Service of Process . . . . . . . . . . . . . . . . . . 86 Section 13.15 Counterparts . . . . . . . . . . . . . . . . . . . . . 86 Section 13.16 Severability . . . . . . . . . . . . . . . . . . . . . 86 Section 13.17 Headings . . . . . . . . . . . . . . . . . . . . . . . 87 Section 13.18 Construction . . . . . . . . . . . . . . . . . . . . . 87 Section 13.19 Independence of Covenants . . . . . . . . . . . . . . . 87 Section 13.20 Confidentiality . . . . . . . . . . . . . . . . . . . . 87 Section 13.21 Waiver of Jury Trial . . . . . . . . . . . . . . . . . 87 Section 13.22 Approvals and Consent. . . . . . . . . . . . . . . . . 87 Section 13.23 Agent for Services of Process . . . . . . . . . . . . . 88 Section 13.24 Joint and Several Obligations . . . . . . . . . . . . . 88 Section 13.25 Co-Agent . . . . . . . . . . . . . . . . . . . . . . . 88
iv 6 INDEX TO EXHIBITS
Exhibit Description of Exhibit Section - ------- ---------------------- ------- "A" Form of Assignment and Acceptance 1.1 "B" Form of Borrowing Base Report 1.1 "C" Form of Note 1.1 "D" Form of Notice of Borrowings, Conversions, Continuations or Prepayments 2.9
INDEX TO SCHEDULES
Schedule Description of Schedule - -------- ----------------------- 1.1(a) Permitted Liens 1.1(b) Certain Receivables 7.6 Litigation 7.7 Drilling Rigs 7.10 Existing Debt 7.11 Taxes 7.13 Plans 7.15(b) Capitalization of Subsidiaries 7.15(c) Options, etc. 7.22 Material Contracts and Defaults 7.26 Employee Matters 7.27 Insurance 9.5 Investments 9.7 Certain Transactions with Affiliates 9.12 Intercompany Transactions
v 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of November 12, 1996, is among FALCON DRILLING COMPANY, INC., a Delaware corporation ("Falcon Drilling"), FALCON DRILLING DE VENEZUELA, INC., a Delaware corporation ("Falcon Venezuela"),FALCON DRILLING HOLDINGS, L.P., a Delaware limited partnership ("Falcon Holdings"), FALCON DRILLING MANAGEMENT, INC., a Delaware corporation ("Falcon Management"), FALCON INLAND, INC., a Delaware corporation ("Falcon Inland"), FALCON OFFSHORE, INC., a Delaware corporation ("Falcon Offshore"), FALCON SERVICES COMPANY, INC., a Delaware corporation ("Falcon Services"), FALCON WORKOVER COMPANY, INC., a Delaware corporation ("Falcon Workover"), FALRIG OFFSHORE, INC., a Delaware corporation ("FALRIG Offshore"), FALRIG OFFSHORE PARTNERS, a Texas general partnership ("FALRIG Offshore GP"), FALRIG OFFSHORE (USA), L.P., a Delaware limited partnership ("FALRIG Offshore LP"), KESTREL OFFSHORE, INC. a Delaware corporation ("Kestrel"), RAPTOR EXPLORATION CO., INC., a Delaware corporation ("Raptor") (each of Falcon Drilling, Falcon Venezuela, Falcon Holdings, Falcon Management, Falcon Inland, Falcon Offshore, Falcon Services, Falcon Workover, FALRIG Offshore, FALRIG Offshore GP, FALRIG Offshore LP, Kestrel, and Raptor, and each New Borrower, is sometimes hereinafter individually referred to as a "BORROWER" and all of such Persons are sometimes hereinafter collectively referred to as the "BORROWERS"), FALCON ATLANTIC LTD., a Cayman Islands company ("Falcon Atlantic"), FALCON DRILLING DO BRASIL, LTDA., a Brazilian limited liability company ("Falcon Brasil"), PERFORACIONES FALRIG DE VENEZUELA C.A., a Venezuelan company ("FALRIG Venezuela") (each of Falcon Atlantic, Falcon Brasil and FALRIG Venezuela is sometimes hereinafter referred to individually as a "Guarantor" and all of such Persons are sometimes hereinafter collectively referred to as the "Guarantors"), BANQUE PARIBAS, a bank organized under the laws of France acting through its Houston Agency, ARAB BANKING CORPORATION (B.S.C.), a banking corporation organized under the laws of Bahrain, each of the other banks or lending institutions which is or which may from time to time become a party hereto or any permitted successor or assignee thereof (each of Banque Paribas, Arab Banking Corporation (B.S.C.), and such other banks or lending institutions is sometimes hereinafter individually referred to as a "Bank" and all of such Persons are sometimes hereinafter collectively referred to as the "Banks"), BANQUE PARIBAS, as agent for itself and the other Banks (in such capacity, together with its successors in such capacity, the "Agent") and ARAB BANKING CORPORATION (B.S.C.), as Co-Agent for itself and the other Banks (in such capacity, together with its successors and assigns in such capacity, the "Co-Agent"). RECITALS: The BORROWERS desire that the Lenders extend a revolving credit facility to the BORROWERS to provide working capital financing for, and other funds for the general corporate purposes of, the BORROWERS, which revolving credit facility shall be guaranteed by the Guarantors. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 8 ARTICLE 1 Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "ABR" means the sum of (a) the greater of the Prime Rate or the Federal Funds Rate, plus (b) one-half of one percent per annum. "ABR Loans" means Loans that bear interest at rates based upon the ABR. "Acquisition Loans" means the "Loans" as such term is defined in the Acquisition Loans Credit Agreement. "Acquisition Loans Agent" means the "Agent" as such term is defined in the Acquisition Loans Credit Agreement. "Acquisition Loans Banks" means the "Banks" as such term is defined in the Acquisition Loans Credit Agreement. "Acquisition Loans Credit Agreement" means that certain Credit Agreement dated as of November 12, 1996, among Falcon Drilling, the banks named therein, Banque Paribas, as agent for such banks, and Arab Banking Corporation (B.S.), as co-agent for such banks. "Acquisition Loans Documents" means the "Loan Documents" as such term is defined in the Acquisition Loans Credit Agreement. "Acquisition Loans Maturity Date" means the "Maturity Date" as such term is defined in the Acquisition Loans Credit Agreement. "Acquisition Loans Obligations" means the "Obligations" as such term is defined in the Acquisition Loans Credit Agreement. "Additional Costs" means as specified in Section 4.1(a). "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by the Agent to be equal to (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period, divided by (b) the remainder of one minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (b) that directly or indirectly beneficially owns or holds ten percent or more of any class of voting stock of such Person; or (c) ten percent or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, (i) in no event shall the Agent or any Bank be deemed an Affiliate of any BORROWER or any of its Subsidiaries and (ii) for purposes of (A) clauses (m), (q) and (u) of the definition of the term "Eligible Receivables", but subject 2 9 to the proviso below, (B) the definition of the term "Net Proceeds" and (C) Sections 7.6 and 8.1(f), the Chatterjee Group shall not be deemed to be an Affiliate of Falcon Drilling or any of its Subsidiaries if (but only if) the Chatterjee Group (1) directly and indirectly beneficially owns and holds no more than 50% of the voting stock of Falcon Drilling and (2) does not directly or indirectly control the election of a majority of the directors of Falcon Drilling or any of its Subsidiaries; provided, however, that, for purposes of clause (m) of the definition of the term "Eligible Receivables", the Chatterjee Group shall be deemed to be an Affiliate of Falcon Drilling and its Subsidiaries to the extent that, but for this proviso, the Eligible Receivables as to which the Chatterjee Group is account debtor would exceed $1,000,000. "Agent" means as specified in the initial paragraph of this Agreement. "Agreement" means this Credit Agreement and any and all amendments, modifications, supplements, renewals, extension or restatements hereof. "Applicable Lending Office" means for each Bank and each Type of Loan, the Lending Office of such Bank (or of an Affiliate of such Bank) designated for such Type of Loan below its name on the signature pages hereof (or, with respect to a Bank that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it) or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the BORROWERS and the Agent as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" means (a) 0.00% per annum with respect to ABR Loans and (b) the Applicable Eurodollar Loan Margin with respect to Eurodollar Loans; provided, however, that in the event that Falcon Drilling consummates Equity Issuances of its common stock subsequent to the Closing Date as to which the aggregate Net Proceeds received by Falcon Drilling is greater than or equal to $75,000,000, then the Applicable Eurodollar Loan Margin at all times thereafter shall be 0.50% less than the percentage that is otherwise then applicable. For purposes hereof, the "Applicable Eurodollar Loan Margin" means, at any date of determination, the percentage per annum set forth in the table below that corresponds to the ratio of (A) the Outstanding Credit as of such date to (B) the aggregate amount of the Commitments in effect as of such date:
Ratio of Outstanding Applicable Credit to Aggregate Commitments Eurodollar Loan Margin ------------------------------- ---------------------- Less than 0.40 to 1.00 1.50% Less than 0.60 to 1.00 but greater than or equal to 0.40 to 1.00 1.75% Greater than or equal to 0.60 to 1.00 2.00%
"Asset Disposition" means the disposition (other than sales of Inventory in the ordinary course of business consistent with past practices, the grant of a Permitted Lien as security or the transfer of a Non-Recourse Rig) of any or all of the Property of any BORROWER or any of its Subsidiaries, whether by sale, conveyance, lease, transfer, assignment, condemnation or otherwise, but excluding (a) the issuance of Capital Stock and (b) any involuntary disposition resulting from casualty damage to Property. 3 10 "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and its Assignee and accepted by the Agent pursuant to Section 13.8(e), in substantially the form of Exhibit A hereto. "Assignee" means as specified in Section 13.8(b). "Assigning Bank" means as specified in Section 13.8(b). "Bank" and "Banks" means as specified in the initial paragraph of this Agreement. "Bank Parties" means the Agent, the Co-Agent (at any time a Co-Agent has been designated by Banque Paribas), the Banks, the Required Banks and/or any Bank. "Bankruptcy Code" means as specified in Section 11.1(e). "Basle Accord" means the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, supplemented and otherwise modified and in effect from time to time, or any replacement thereof. "BORROWER" and "BORROWERS" means as specified in the initial paragraph of this Agreement. "Borrower Member" means each of the BORROWERS and each of the Subsidiaries of any BORROWER. "Borrowing Base" means, at any date of determination, an amount equal to the remainder of the sum of (a) 80% of Eligible Receivables plus (b) 100% of the remaining balance of any cash previously deposited by the BORROWERS, other than the Non-Material Borrowers and the Guarantors, into the Borrowing Base Accounts pursuant to the Security and Assignment Agreements in which the Agent holds a perfected, first priority Lien or assignment, subject to no other Liens; provided, however, that, for purposes of clause (a) preceding, the percentage of Eligible Receivables referred to therein shall be 90% in lieu of 80% if and to the extent that the account debtor of such Receivables is an issuer of "investment grade" (as such term is defined in the last sentence of the definition of "Eligible Receivables" herein) publicly traded debt securities or preferred stock. "Borrowing Base Account" means an account maintained by any BORROWER, other than a Non-Material Borrower or a Guarantor, with the Agent or some other Bank selected by such BORROWERS and reasonably acceptable to the Agent into which there shall be deposited only cash deposits to be included in the Borrowing Base and assigned and pledged to the Agent for the benefit of the Banks pursuant to the Security and Assignment Agreement executed by such BORROWER (if such Borrowing Base Account is identified to the Agent as of the Closing Date) or pursuant to a security and assignment agreement (or any amendment to the applicable Security and Assignment Agreement) in form and substance satisfactory to the Agent (if such Borrowing Base Account is later identified). "Borrowing Base Report" means a report in substantially the form of Exhibit B attached hereto and completed and certified by a Responsible Officer of Falcon Drilling. 4 11 "Business Day" means (a) any day on which commercial banks are not authorized or required to close in Houston, Texas, or New York, New York, and (b) with respect to all borrowings, payments, Conversions, Continuations, Interest Periods and notices in connection with Eurodollar Loans, any day which is a Business Day described in clause (a) above and which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Expenditures" means, for any period, expenditures (including the aggregate amount of Capital Lease Obligations incurred during such period) made by Falcon Drilling or any of its Subsidiaries to acquire or construct fixed assets, plant or equipment (including renewals, improvements or replacements) during such period and which, in accordance with GAAP, are classified as capital expenditures. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property, which obligations are classified as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Capital Stock" means corporate stock, partnership interests and any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock or partnership interests issued by any entity (whether a corporation, a partnership or another entity) and any rights, warrants or options to acquire an equity interest in such entity. "Cash Proceeds" means, with respect to any Asset Disposition by any Person, the aggregate consideration received for such Asset Disposition by such Person in the form of cash or cash equivalents (including any amounts of insurance or other proceeds received in connection with an Asset Disposition), including payments in respect of deferred payment obligations when received in the form of cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to such Person or any subsidiary thereof). For the purposes of this definition, "cash or cash equivalents" shall be deemed to include, for a period not to exceed 12 months from the related Asset Disposition, noncash consideration received with respect to an Asset Disposition to the extent that such noncash consideration consists of (i) publicly traded debt securities of a Person, which securities are rated as "BBB-" or higher by Standard and Poor's Corporation ("S&P") and "Baa3" or higher by Moody's Investors Service, Inc. ("Moody's"), or (ii) other indebtedness of a Person if (A) the lowest rated long-term, unsecured debt obligation issued by such Person is rated "BBB-" or higher by S&P and "Baa3" or higher by Moody's or (B) in the case of other indebtedness, the payment of such other indebtedness is secured by an irrevocable letter of credit issued by a commercial bank having capital and surplus in excess of $100,000,000 and long term unsecured debt obligations rated at least "A-" by S&P and "A3" by Moody's. "Change of Control" means the existence or occurrence of any of the following: (a) a determination by Falcon Drilling or the Agent that any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than the Chatterjee Group has become the direct or indirect beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 40% of the Voting Stock of Falcon Drilling; (b) any BORROWER is merged with or into or consolidated with another corporation, and immediately after giving effect to the merger or consolidation, less than 50% of the 5 12 outstanding voting securities entitled to vote generally in the election of directors or persons who serve similar functions of the surviving or resulting entity are then beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by (i) the stockholders of Falcon Drilling immediately prior to such merger or consolidation, or (ii) if a record date has been set to determine the stockholders of such BORROWER entitled to vote on such merger or consolidation, the stockholders of Falcon Drilling as of such record date; (c) any BORROWER, either individually or in connection with one or more Subsidiaries, sells, conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or lease, all or substantially all of the assets of Falcon Drilling and its Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries of Falcon Drilling, to any Person (other than a Wholly Owned Subsidiary of Falcon Drilling); (d) the liquidation or dissolution of any BORROWER unless such BORROWER is not Falcon Drilling and, in conjunction with such liquidation or dissolution, all Properties and assets of such BORROWER become owned by one or more of the remaining BORROWERS; or (e) the first day on which a majority of the individuals who constitute the Board of Directors of Falcon Drilling are not Continuing Directors. "Chatterjee Group" means Purnendu Chatterjee and George Soros and any Person, other than any BORROWER or any Subsidiary of a Borrower, a majority of the Capital Stock of which is beneficially owned, directly or indirectly, by such individual(s), either individually or collectively. "Closing Date" means the date of this Agreement as set forth on the first page hereof. "Co-Agent" means as specified in the initial paragraph of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" means all Property of any nature whatsoever upon which a Lien is purported to be created by any Loan Document, including, without limitation, the Receivables of the BORROWERS and the Borrowing Base Accounts and all products and proceeds thereof. "Commitment" means, as to any Bank, the obligation of such Bank to make Loans and incur or participate in Letter of Credit Liabilities hereunder in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Bank on the signature pages hereto under the heading "Commitment" or, if such Bank is a party to an Assignment and Acceptance, the amount set forth in the most recent Assignment and Acceptance of such Bank, as the same may be reduced or terminated pursuant to Section 2.13 or 11.2. "Commitment Percentage" means, as to any Bank, the percentage equivalent of a fraction the numerator of which is the amount of the outstanding Commitment of such Bank (or, if such Commitment has terminated or expired, the outstanding principal amount of its Loans and Letter of Credit Liabilities) and the denominator of which is the aggregate amount of the outstanding Commitments of all of the Banks (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of all Loans and Letter of Credit Liabilities). "Concentration Account" means a concentration deposit account or accounts (as the BORROWERS may desire) into which all proceeds of Collateral shall be deposited, which account is maintained by the 6 13 BORROWERS (other than the Non-Material Borrowers and the Guarantors) with a bank (or banks) selected by such BORROWERS and reasonably acceptable to the Agent. "Concentration Account Agreement" means an agreement among the BORROWERS, the Agent and a depository bank selected by the BORROWERS and reasonably acceptable to the Agent in form and substance satisfactory to the Agent, dated the Closing Date and relating to the Concentration Account, any and all amendments, modifications, supplements, renewals, extensions, or restatements thereof. "Consolidated Current Assets" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS). "Consolidated Current Liabilities" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) and the current portion of Consolidated Funded Debt, exclusive of, in connection with any calculation of Consolidated Current Liabilities during the 12-month period immediately preceding the Maturity Date or the Acquisition Loans Maturity Date, the outstanding principal amount of the Loans or the outstanding principal amount of the Acquisition Loans, respectively. "Consolidated Current Ratio" means, at any particular time, the ratio of Consolidated Current Assets to Consolidated Current Liabilities. "Consolidated Funded Debt" means, at any particular time, (a) all Debt of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) which matures by its terms, or is renewable at the option of any BORROWER to a date, more than one year after the original creation of such Debt, (b) all other Debt which would be classified as "funded indebtedness" or "long-term indebtedness" on a consolidated balance sheet of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) as of such date in accordance with GAAP, and (c) all obligations of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) for borrowed money. "Consolidated Interest Coverage Ratio" means, for any period, the ratio of (a) EBITDA of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) for such period to (b) Consolidated Interest Expense for such period. "Consolidated Interest Expense" means, for any period, (a) all interest on Debt of the Borrowers (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) accrued during such period, including the interest portion of payments under Capital Lease Obligations, and (b) all other amounts which would be classified as interest expense on a consolidated statement of income of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not Borrowers) for such period in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income (or loss) of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS) for such period, determined on a consolidated basis in accordance with GAAP. 7 14 "Consolidated Net Worth" means, at any particular time, the sum of all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS). "Consolidated Tangible Net Worth" means, at any particular time, the remainder of (a) Consolidated Net Worth minus (b) the aggregate book value of Intangible Assets shown on a consolidated balance sheet of the BORROWERS (i.e., exclusive of any consolidated Subsidiaries of Falcon Drilling which are not BORROWERS). "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.6 of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "Continuing Director" means an individual who (a) is a member of the Board of Directors of Falcon Drilling and (b) either (i) was a member of the Board of Directors of Falcon Drilling as of the Closing Date or (ii) whose nomination for election or election to the Board of Directors of Falcon Drilling was approved by a vote of at least 66 2/3% of the directors then still in office who were either directors as of the Closing Date or whose election or nomination for election was previously so approved. "Contract Rate" means as specified in Section 13.12(a). "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.6 or Article 4 of one Type of Loan into the other Type of Loan. "Currency Hedge Agreement" means any foreign currency exchange agreement, option or future contract or other similar agreement designed to protect against or manage a Person's exposure to fluctuations in foreign currency exchange rates. "Current Date" means a date occurring no more than 30 days prior to the Closing Date or such earlier date which is reasonably acceptable to the Agent. "Debt" means as to any Person at any time (without duplication): (a) any indebtedness, liability or obligation of such Person, contingent or otherwise, for borrowed money; (b) any indebtedness, liability or obligation of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) any indebtedness, liability or obligation of such Person for all or any part of the purchase price of Property or services or for the cost of Property constructed or of improvements thereto (including any indebtedness, liability or obligation under or in connection with any letter of credit related thereto), other than accounts payable included in current liabilities incurred in respect of Property and services purchased in the ordinary course of business; (d) any indebtedness, liability or obligation of such Person upon which interest charges are customarily paid (other than accounts payable incurred in the ordinary course of business); (e) any indebtedness, liability or obligation of such Person under conditional sale or other title retention agreements relating to purchased Property; (f) any indebtedness, liability or obligation of such Person issued or assumed as the deferred purchase price of Property (other than accounts payable incurred in the ordinary course of business); (g) any Capital Lease Obligation or any obligation pursuant to any sale and lease-back transaction of such Person; (h) any indebtedness, liability or 8 15 obligation of any other Person secured by (or for which the obligee thereof has an existing right, contingent or otherwise, to be secured by) any Lien on Property owned or acquired, whether or not any indebtedness, liability or obligation secured thereby has been assumed, by such Person; (i) any indebtedness, liability or obligation of such Person in respect of any letter of credit supporting any indebtedness, liability or obligation of any other Person; (j) the maximum fixed repurchase price of any Redeemable Stock of such Person or, if such Person is a Subsidiary, any preferred stock of such Person, exclusive of any Redeemable Stock or Subsidiary preferred stock issued by a BORROWER and owned by another BORROWER; (k) any obligation of such Person under or with respect to any Interest Rate Protection Agreement or Currency Hedge Agreement; and (l) any indebtedness, liability or obligation which is in economic effect a guarantee, regardless of its characterization, with respect to any Debt of another Person, to the extent guaranteed. For purposes of the preceding sentence, the maximum fixed repurchase price of any Redeemable Stock or Subsidiary preferred stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock or Subsidiary preferred stock as if such Redeemable Stock or Subsidiary preferred stock were repurchased on any date on which Debt shall be required to be determined pursuant to the this Agreement; provided, however, that if such Redeemable Stock or Subsidiary preferred stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock or Subsidiary preferred stock. The amount of Debt of any Person at any date shall be (i) the outstanding book value at such date of all indebtedness, liabilities and obligations as described above and (ii) the maximum liability of all contingent indebtedness, liabilities and obligations at such date. "Debtor Relief Law" means any applicable liquidation, conservatorship, receivership, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law for the relief of debtors from time to time in effect and generally affecting the rights of creditors. "Default" means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default. "Default Rate" means, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by any BORROWER under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of two percent plus the Prime Rate as in effect from time to time plus the Applicable Margin for ABR Loans; provided, however, that if such amount in default is principal of a Eurodollar Loan and the due date is a day other than the last day of an Interest Period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest Period therefor, two percent plus the interest rate for such Eurodollar Loan for such Interest Period as provided in Section 2.4(a) hereof, and, thereafter, the rate provided for above in this definition. "Dollars" and "$" mean lawful money of the United States. "Drilling Rigs" means all drilling rigs or vessels owned by any of the Borrowers or Guarantors on the Closing Date. "EBITDA" means, for any period, without duplication, the sum of the following for the BORROWERS (i.e., exclusive of any consolidated Subsidiary of Falcon Drilling which is not a BORROWER) for such period determined on a consolidated basis in accordance with GAAP: (a) Consolidated Net Income, plus (b) Consolidated Interest Expense, plus (c) income and franchise taxes to the extent deducted in determining Consolidated Net Income, plus (d) depreciation and amortization expense and other non-cash 9 16 items to the extent deducted in determining Consolidated Net Income, minus (e) non-cash income to the extent included in determining Consolidated Net Income. "Eligible Assignee" means any (i) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (iii) any Affiliate of any Bank; (iv) a commercial bank organized under the laws of any other country which is a member of the 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; (v) the central bank of any country which is a member of the OECD; or (vi) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution approved by the Agent, such approval not to be unreasonably withheld. "Eligible Receivables" means, at any date of determination, without duplication, the aggregate of each Receivable of any BORROWER, other than a Non-Material Borrower or a Guarantor, created in the ordinary course of business which satisfies each of the following conditions: (a) Such Receivable complies with all applicable Governmental Requirements, including, without limitation, usury laws, the Federal Truth in Lending Act and Regulation Z of the Board of Governors of the Federal Reserve System; (b) Such Receivable is payable not more than 45 days after the original date of issuance of the invoice therefor; (c) Such Receivable has not been outstanding for more than 60 days after the date on which such Receivable was due; (d) Such Receivable was created in connection with (i) the sale of Inventory by such BORROWER in the ordinary course of business and such sale has been fully consummated and such Inventory has been shipped and delivered and received by the account debtor or (ii) the performance of services by such BORROWER in the ordinary course of business and such services have been completed and accepted by the account debtors; (e) Such Receivable represents a legal, valid and binding payment obligation of the account debtor enforceable in accordance with its terms and arising from an enforceable contract, the performance of which contract, insofar as it relates to such Receivable, has been completed by such applicable BORROWER; (f) Such Receivable does not arise from the sale of any Inventory on a bill and hold, guaranteed sale, sale or return, sale on approval, consignment or any other repurchase or return basis; 10 17 (g) Such applicable BORROWER has good and indefeasible title to such Receivable, the Agent holds a perfected, first priority Lien on such Receivable pursuant to the Security Documents, and such Receivable is not subject to any Liens except Permitted Liens specified in clause (b) or (d) of the definition of the term "Permitted Liens"; (h) Such Receivable does not arise out of a contract with, or an order from, an account debtor that, by its terms (other than terms which are invalid under applicable law), prohibits or makes void or unenforceable the grant of a security interest to the Agent in and to such Receivable; (i) The amount or portion of such Receivable included in Eligible Receivables is not subject to any setoff, counterclaim, defense, dispute, recoupment or adjustment; (j) The account debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due or suffered a receiver or trustee to be appointed for any of its assets or affairs; (k) Such Receivable is not evidenced by chattel paper or instruments unless the Agent has a perfected first priority Lien on such chattel paper or instrument; (l) The account debtor has not returned or refused to retain, or otherwise notified such applicable BORROWER of any dispute concerning, or claimed nonconformity of, any of the services relating to such Receivable; (m) Such Receivable is not owed by an Affiliate or Subsidiary of any BORROWER; (n) Such Receivable is payable in Dollars by the account debtor; (o) Such Receivable does not arise out of, and is not related to or connected with, the performance of services by one or more rigs or other equipment (i) owned by a Non-Recourse Subsidiary or (ii) not owned or leased by such a BORROWER; (p) The account debtor (or its ultimate parent with respect to account debtors of Falcon Venezuela) with respect to such Receivable is not domiciled in or organized under the laws of, and does not have its chief executive offices in, any country other than the United States or a country of the OECD, unless such Receivable is fully secured by a letter of credit issued or confirmed by a bank acceptable to the Agent and which has capital and surplus exceeding $100,000,000 and such letter of credit contains terms and conditions reasonably acceptable to the Agent; (q) Such Receivable is not owed by an account debtor and/or any Affiliate of such account debtor as to which more than (i) with respect to an account debtor that is an issuer of investment grade publicly traded debt securities or preferred stock, 35% or (ii) with respect to an account debtor that is not an issuer of investment grade publicly traded debt securities or preferred stock, 25%, of the aggregate balances then outstanding on Receivables owed by such account 11 18 debtor and/or its Affiliates to any such BORROWER are more than 75 days past due from the dates of their original invoices; (r) The account debtor with respect to such Receivable is not the United States or any department, agency or instrumentality thereof, unless, with respect to the Lien on such Receivable in favor of the Agent, to the extent applicable, the Federal Assignment of Claims Act of 1940, as amended, shall have been complied with; (s) The account debtor with respect to such Receivable is not located in Indiana, New Jersey, Minnesota, West Virginia or any other state denying creditors access to its courts in the absence of a Notice of Business Activities Report or other similar filing, unless (i) such applicable BORROWER has either qualified as a foreign corporation authorized to transact business in such state or has filed a Notice of Business Activities Report or similar appropriate filing with the applicable state agency for the then-current year or (ii) such Receivable was generated from a location of such account debtor that is not within any such state and, as a result, the laws of any such state are not applicable to such Receivable or the collection thereof; (t) Such Receivable is to be paid by the account debtor directly to the Concentration Account; (u) Such Receivable is not owed by an account debtor as to which the aggregate of all Receivables owing by such account debtor, when added to the aggregate of all Receivables owing by all Affiliates of such account debtor, exceeds (i) with respect to any two account debtors only, 20% each, (ii) with respect to an account debtor that is an issuer of "investment grade" publicly traded debt securities or preferred stock, 30%, or (iii) with respect to any other account debtor, ten percent, of the aggregate of all Eligible Receivables at such date, provided that the amount of Receivables owed by such account debtor that do not, when added to the aggregate of all Receivables owing by all Affiliates of such account debtor, exceed the percentages listed above of the aggregate of all Eligible Receivables at such date shall not be excluded pursuant to this clause (u); (v) With respect to Receivables of Falcon Venezuela, the account debtor (or its ultimate parent) with respect to such Receivables is an issuer of investment grade publicly traded debt securities or preferred stock; and (w) Such Receivable has not been rejected in whole or in part by the Agent or the Co-Agent, in the exercise of its reasonable discretion, as involving unacceptable credit risk. The amount of the Eligible Receivables owed by an account debtor to such a BORROWER shall be net of, and shall be reduced by (if and to the extent not already so reduced by virtue of the preceding clauses of this definition), the amount of all contra accounts, reserves, credits, rebates and other indebtedness, liabilities or obligations owed by such Borrower and its Wholly- Owned Subsidiaries to such account debtor (except to the extent that such contra accounts, reserves, credits, rebates and other indebtedness, liabilities or obligations could not be setoff against or otherwise reduce the amount payable with respect to any of the Eligible Receivables). For purposes of this definition, the term "investment grade" shall mean a rating 12 19 by Standard & Poor's Corporation of "BBB-" or higher or a rating by Moody's Investors Service, Inc. of "Baa3" or higher. "Environmental Law" means any federal, state, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any Permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, renewal, discharge or disposal of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986, 99-499, 100 Stat. 1613, the Resource Conservation and Recovery Act of 1976, 42 U. S. C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Emergency Planning and Community Right to Know Act, 15 U.S.C., Section 651 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 300F et seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and any state or local counterparts. "Environmental Liabilities" means, as to any Person, all indebtedness, liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability or criminal or civil statute, including any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment. "Equity Issuance" means any issuance by Falcon Drilling or any of its Subsidiaries of any Capital Stock of Falcon Drilling or any of its Subsidiaries, respectively. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of a group of entities, organizations or employers of which a Loan Party is also a member and which is treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the Code. "Eurodollar Loan" means any Loan that bears interest at a rate based upon the Eurodollar Rate or the Adjusted Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of such Interest Period for the offering by the Reference Bank to leading banks in the London interbank market of Dollar deposits in immediately available funds having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan made by the 13 20 Reference Bank to which such Interest Period relates. If the Reference Bank is not participating in any Eurodollar Loans during any Interest Period therefor (pursuant to Section 4.4 or for any other reason), the Eurodollar Rate and the Adjusted Eurodollar Rate for such Loans for such Interest Period shall be determined by reference to the amount of the Loans which the Reference Bank would have made had it been participating in such Loans. "Event of Default" has the meaning specified in Section 11.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Falcon Atlantic" means as specified in the initial paragraph of this Agreement. "Falcon Brazil" means as specified in the initial paragraph of this Agreement. "Falcon Drilling" means as specified in the initial paragraph of this Agreement. "Falcon Holdings" means as specified in the initial paragraph of this Agreement. "Falcon Inland" means as specified in the initial paragraph of this Agreement. "Falcon Management" means as specified in the initial paragraph of this Agreement. "Falcon Offshore" means as specified in the initial paragraph of this Agreement. "Falcon Services" means as specified in the initial paragraph of this Agreement. "Falcon Venezuela" means as specified in the initial paragraph of this Agreement. "Falcon Workover" means as specified in the initial paragraph of this Agreement. "FALRIG Offshore" means as specified in the initial paragraph of this Agreement. "FALRIG Offshore GP" means as specified in the initial paragraph of this Agreement. "FALRIG Offshore LP" means as specified in the initial paragraph of this Agreement. "FALRIG Venezuela" means as specified in the initial paragraph of this Agreement. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if such rate is not so published on such next succeeding Business 14 21 Day, the Federal Funds Rate for any day shall be the average rate which would be charged to the Reference Bank on such day on such transactions as determined by the Agent. "Funding Date" means the earlier to occur of the date of the making of the initial Loan or the date of the issuance of the initial Letter of Credit. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Governmental Authority" means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, Permit, certificate, license, authorization or other directive or requirement of any federal, state, county, municipal, parish, provincial or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them. "Guarantee" by any Person means any indebtedness, liability or obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other indebtedness, liability or obligation of any other Person and, without limiting the generality of the foregoing, any indebtedness, liability or obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other indebtedness, liability or obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other indebtedness, liability or obligation of the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the primary indebtedness, liability or obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum anticipated indebtedness, liability or obligation in respect thereof (assuming such Person is required to perform thereunder). "Guarantor" means Falcon Atlantic, Falcon Brasil, FALRIG Venezuela and each other Person who is or becomes a party to any agreement, document or instrument that Guarantees or secures payment or performance of the Obligations or any part thereof. "Hazardous Material" means any substance, product, waste, pollutant, chemical, contaminant, insecticide, pesticide, constituent or material which is or becomes listed, regulated or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, underground storage tanks (whether empty or containing any substance) and polychlorinated biphenyls. 15 22 "Holder" means a Person in whose name a note evidencing Senior Debt is registered. "Indenture" means that certain Indenture by and among Falcon Drilling, certain of its Subsidiaries and Texas Commerce Bank National Association, as Trustee, dated as of January 15, 1994, relating to the Senior Fixed Rate Notes, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Intangible Assets" of any Person means those assets of such Person which are (a) deferred assets, other than prepaid insurance and prepaid taxes, (b) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses and other similar assets which would be classified as intangible assets on a balance sheet of such Person prepared in accordance with GAAP, and (c) unamortized debt discount and expense. "Intellectual Property" means any United States or foreign patents, patent applications, trademarks, trade names, service marks, brand names, logos and other trade designations (including unregistered names and marks), trademark and service mark registrations and applications, copyrights and copyright registrations and applications, inventions, invention disclosures, protected formulae, formulations, processes, methods, trade secrets, computer software, computer programs, source codes, manufacturing research and similar technical information, engineering know-how, customer and supplier information, assembly and test data drawings or royalty rights. "Intercreditor Agreement" means the Intercreditor Agreement in form and substance satisfactory to the Banks and the Acquisition Loans Banks with respect to the relative priorities of Liens securing the Obligations and the Acquisition Loans Obligations. "Interest Period" means, with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or Converted from an ABR Loan or (if continued) the last day of the next preceding Interest Period with respect to such Loan, and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the BORROWERS may select as provided in Section 2.9 hereof, except that each such Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (b) any Interest Period which would otherwise extend beyond the Maturity Date shall end on the Maturity Date; (c) no more than five Interest Periods for Eurodollar Loans shall be in effect at the same time; and (d) no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be a shorter period, such Loans shall not be available hereunder. "Interest Rate Protection Agreements" means, with respect to any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person providing for the transfer or mitigation of interest rate risks either generally or under specified contingencies. "Investments" means as specified in Section 9.5. 16 23 "Issue Date" shall have the meaning specified in the Indenture. "Issuing Bank" means Banque Paribas or (if Banque Paribas does not wish to be the issuer of a particular Letter of Credit and another Bank agrees to be such issuer) such other Bank as Falcon Drilling may designate from time to time which agrees to be the issuer of such Letter of Credit. "Kestrel" means as specified in the initial paragraph of this Agreement. "Letter of Credit" means any standby letter of credit issued by the Issuing Bank for the account of the BORROWERS pursuant to this Agreement. "Letter of Credit Liabilities" means, at any time, the aggregate face amount of all outstanding Letters of Credit and all unreimbursed drawings under Letters of Credit. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law or otherwise. "Loan Documents" means this Agreement, the Notes, the Security Documents, the Term Sheet, the Letters of Credit, any Currency Hedge Agreement or Interest Rate Protection Agreement between any BORROWER and any Bank that is expressly approved by the Agent and expressly determined by the Agent (at any time) to be a Loan Document, and all other agreements, documents and instruments executed and/or delivered pursuant to or in connection with any of the foregoing, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Loan Party" means each of the BORROWERS and Guarantors and any other Person (if any) who is or becomes a party to any agreement, document or instrument that Guarantees or secures payment or performance of the Obligations or any part thereof. "Loans" means as specified in Section 2.1(a). "Material Adverse Effect" means any material adverse effect, or the occurrence of any event or the existence of any condition that could reasonably be expected to have a material adverse effect, on (a) the business or financial condition of (i) the BORROWERS, taken as a whole, (ii) Falcon Drilling and its Subsidiaries, taken as a whole, or (iii) Falcon Drilling on an individual basis, (b) the ability of Falcon Drilling or the BORROWERS to pay and perform the Obligations when due, or (c) the validity or enforceability of any of the Loan Documents, any Lien created or purported to be created by any of the Loan Documents or the rights and remedies of the Agent or the Banks under any of the Loan Documents. "Material Contracts" means, as to Falcon Drilling or any of its Subsidiaries, any material contract as such term is used or defined in item 601(b)(10) of Regulation S-K promulgated by the Securities and Exchange Commission (or in any successor regulation). "Material Subsidiary" means any Subsidiary of Falcon Drilling that engages in any material operations or that contributes or has contributed, during any fiscal quarter, 1.00% or more of the aggregate gross revenue of Falcon Drilling and its consolidated Subsidiaries on a consolidated basis. 17 24 "Maturity Date" means November 12, 1999. "Maximum Rate" means, with respect to any Bank, the maximum non-usurious interest rate (or, if the context so requires, the amount calculated at such rate), if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the Loans or on other amounts, if any, payable to such Bank pursuant to this Agreement or any other Loan Document, under laws applicable to such Bank which are presently in effect, or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the BORROWERS at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with, Article 5069-1.04, Vernon's Texas Civil Statutes or any successor or replacement statute; provided, however, that, to the extent permitted by applicable law, the Agent shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by or are required from any Loan Party or any ERISA Affiliate since 1974 and which is covered by Title IV of ERISA. "Net Proceeds" means, with respect to any Asset Disposition, (a) the gross amount of cash received by Falcon Drilling or any of its Subsidiaries from any Asset Disposition, minus (b) the amount, if any, of all taxes paid or payable by Falcon Drilling or any of its Subsidiaries directly resulting from such Asset Disposition (including the amount, if any, estimated by Falcon Drilling in good faith at the time of such Asset Disposition for taxes payable by Falcon Drilling or any of its Subsidiaries on or measured by net income or gain resulting from such Asset Disposition), minus (c) the out-of-pocket costs and expenses incurred by Falcon Drilling or such Subsidiary in connection with such Asset Disposition (including brokerage fees paid to a Person other than an Affiliate of Falcon Drilling) excluding any fees or expenses paid to an Affiliate of Falcon Drilling, minus (d) amounts applied to the repayment of indebtedness (other than the Obligations) secured by a Permitted Lien on the Property subject to the Asset Disposition. "Net Proceeds" with respect to any Asset Disposition shall also include proceeds (after deducting any amounts specified in clauses (b), (c) and (d) of the preceding sentence) of insurance with respect to any actual or constructive loss of Property, an agreed or compromised loss of Property or the taking of any Property under the power of eminent domain and condemnation awards and awards in lieu of condemnation for the taking of Property under the power of eminent domain. "Net Proceeds" means, with respect to any Equity Issuance, (i) the gross amount of cash or other consideration received from such Equity Issuance minus (ii) the out-of- pocket costs and expenses incurred by the issuer in connection with such Equity Issuance (including underwriting fees paid to a Person other than an Affiliate of Falcon Drilling) excluding any fees or expenses paid to an Affiliate of Falcon Drilling. For purposes of determining the Applicable Margin, "Net Proceeds" shall mean, with respect to an Equity Issuance of Falcon Drilling common stock in full or partial consideration for the acquisition by a BORROWER of any Property, an amount equal to the product of (A) the closing price per share of Falcon Drilling common stock on the date of such issuance (as reported by the Wall Street Journal) multiplied by (B) the number of shares so issued; provided, however, 18 25 that (1) such Equity Issuance may not be to an Affiliate of Falcon Drilling and (2) the aggregate "Net Proceeds" of all such Equity Issuances that may be considered in determining the Applicable Margin shall not exceed $25,000,000. "New Borrower" means any Subsidiary of Falcon Drilling which becomes a co-maker of the Obligations in accordance with Section 5.2. "Non-Material Borrower" means any of Falcon Holdings, Falcon Management, Kestrel or Raptor prior to the time that such BORROWER is or becomes a Material Subsidiary. "Non-Recourse Debt" means Debt or that portion of Debt (a) as to which neither Falcon Drilling nor any of its Subsidiaries (other than an Non-Recourse Subsidiary) (i) provides credit support pursuant to any guaranty, undertaking, agreement, document or instrument that would constitute Debt, (ii) is directly or indirectly liable, or (iii) constitutes the lender, and (b) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Non-Recourse Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of Falcon Drilling or any of its Subsidiaries (other than an Non-Recourse Subsidiary) to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Non-Recourse Rig" means as defined in the Indenture. "Non-Recourse Subsidiary" means a Subsidiary of Falcon Drilling (i) established for the purpose of acquiring or investing in one or more of the Non-Recourse Rigs, (ii) substantially all of the assets of which consist of one or more of the Non-Recourse Rigs, (iii) at least 67% of the equity interest in all the Capital Stock of which is owned directly, or indirectly through one or more Wholly-Owned Subsidiaries, by Falcon Drilling and, in the case of a Non- Recourse Subsidiary that has a board of directors or similar governing body, a majority of the members of which board of directors or similar governing body are nominees of Falcon Drilling or such Wholly-Owned Subsidiaries, and (iv) which shall have been designated as a Non-Recourse Subsidiary by a resolution of the Board of Directors of Falcon Drilling. Falcon Drilling may redesignate any Non-Recourse Subsidiary to be a Subsidiary other than a Non-Recourse Subsidiary by a resolution of the Board of Directors of Falcon Drilling if, after giving effect to such redesignation, Falcon Drilling could incur $1.00 of additional Debt pursuant to Section 4.16 of the Indenture (such redesignation being deemed an incurrence of Debt (other than Non-Recourse Debt)). Any Non- Recourse Subsidiary shall become a Subsidiary other than a Non-Recourse Subsidiary upon the repayment, renewal, extension, refinancing, refunding or repurchase of the Non-Recourse Debt of such Non-Recourse Subsidiary (other than Permitted Non-Recourse Subsidiary Refinancing Indebtedness, as such term is defined in the Indenture). Any indebtedness incurred to effect such renewal, extension, refinancing, refunding or repurchase shall be deemed to be incurred on the date of such renewal, extension, refinancing, refunding or repurchase. "Notes" means the promissory notes of the BORROWERS evidencing the Loans in the form of Exhibit C hereto, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof and all substitutions therefor (including promissory notes issued by the BORROWERS pursuant to Section 13.8). 19 26 "Note Purchase Agreement" means that certain agreement by and among Falcon Drilling, certain of its Subsidiaries and Crescent/Mach I Partners, L.P., dated as of February 23, 1994, relating to the Senior Floating Rate Notes, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "OECD" means the Organization for Economic Cooperation and Development. "Obligations" means (a) any and all indebtedness, liabilities and obligations of the BORROWERS and the other Loan Parties, and/or any of them, to the Agent, the Issuing Bank and/or the Banks, and/or any of them, evidenced by and/or arising pursuant to any of the Loan Documents, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, (i) the obligations of the BORROWERS to repay the Loans and the Reimbursement Obligations, to pay interest on the Loans and the Reimbursement Obligations (including, without limitation, interest accruing after any, if any, implementation of or filing under any Debtor Relief Law) and to pay all fees, indemnities, costs and expenses (including attorneys' fees) provided for in the Loan Documents, and (ii) the indebtedness constituting the Loans, the Reimbursement Obligations and such fees, indemnities, costs and expenses, and (b) the indebtedness, liabilities and obligations of any BORROWER under any and all Interest Rate Protection Agreements and Currency Hedge Agreements that it may enter into with any Bank that are expressly approved by the Agent and expressly determined by the Agent (at any time) to be Loan Documents. "Operating Lease" means, with respect to any Person, any lease, rental or other agreement for the use by that Person of any Property which is not a Capital Lease Obligation. "Outstanding Credit" means, at any particular time, the sum of (a) the outstanding principal amount of the Loans, plus (b) the Letter of Credit Liabilities. "Payor" means as specified in Section 3.4. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Pension Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA (including a Multiemployer Plan) which is subject to the funding requirements under Section 302 or 4212 of ERISA or Section 412 of the Code, in whole or in part, and which is established or maintained or contributed to currently or at any time within the six years immediately preceding the Closing Date or, in the case of a Multiemployer Plan, at any time since September 2, 1974, by any BORROWER or any ERISA Affiliate for employees of any BORROWER or any ERISA Affiliate. "Peril" means as specified in Section 8.5. "Permits" means all permits, certificates, approvals, orders, licenses and other authorizations. "Permitted Capital Expenditures" means as specified in Section 10.6. "Permitted Liens" means: 20 27 (a) Liens disclosed on Schedule 1.1(a) hereto; (b) (i) Liens in favor of the Agent for the benefit of itself and the Banks securing payment and performance of the Obligations pursuant to the Loan Documents and (ii) Liens for the benefit of the Acquisition Loans Agent and the Acquisition Loans Banks securing the payment and performance of the Acquisition Loans Obligations pursuant to the Acquisition Loans Documents; (c) Encumbrances consisting of easements, zoning restrictions or other restrictions on the use of real Property or imperfections to title that (i) do not (individually or in the aggregate) materially affect the value of the Property encumbered thereby or materially impair the ability of Falcon Drilling or its Subsidiaries to use such Property in their respective businesses, and none of which is violated in any material respect by existing or proposed structures or land use and (ii) were entered into in the ordinary course of business and could not have a Material Adverse Effect; (d) Liens for taxes, assessments or other governmental charges that are not delinquent or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established; (e) Liens of mechanics, materialmen, warehousemen, carriers, landlords, suppliers or vendors imposed by law or arising by operation of law, or Liens for master's or crew's wages imposed by law or arising by operation of law, or other similar statutory or maritime Liens, securing obligations that are not yet due and are incurred in the ordinary course of business or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established; (f) Liens resulting from good faith deposits to secure payment of workmen's compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, contracts (other than for payment of Debt), or leases, all in the ordinary course of business; (g) Liens to secure Debt incurred for the purpose of financing all or a part of the purchase price or construction cost of Property (including the cost of upgrading refurbishing rigs or drillships) acquired or constructed after the Closing Date; provided that (i) the principal amount of Debt secured by such Liens shall not exceed 66 2/3% of the lesser of cost or fair market value of the assets or Property so acquired or constructed and (ii) such Liens shall not encumber any other assets or Property of any BORROWER and shall attach to such Property within 120 days of the construction or acquisition of such assets or Property; (h) Easements, rights-of-way, restrictions and other Liens and imperfections to title that are approved by the Agent; 21 28 (i) Liens on Property of a Person existing at the time such Person is merged or consolidated with or into Falcon Drilling or any of its Subsidiaries pursuant to a transaction permitted by this Agreement (and not incurred as a result of, or in anticipation of, such transaction), provided that such Lien relates solely to such Property; (j) Liens on Property acquired after the Closing Date and existing at the time of the acquisition thereof (and not incurred as a result of, or in anticipation of, such transaction), provided that such Lien relates solely to such Property; (k) Liens securing Capital Lease Obligations not to exceed $30,000,000 in aggregate principal amount (as to all BORROWERS and their Subsidiaries) at any time outstanding; (l) any charter or lease of equipment entered into in the ordinary course of business for full and fair consideration; (m) leases or subleases of real property to other Persons in the ordinary course of business for full and fair consideration; (n) Liens on the Capital Stock of a Non-Recourse Subsidiary securing loans made to such Non-Recourse Subsidiary; (o) Liens on Property other than Collateral securing Debt in an aggregate principal amount not to exceed $20,000,000 at any time outstanding; (p) Liens securing that Debt permitted by Section 9.1 hereof; and (q) Any extension, renewal or replacement of any of the foregoing, provided that Liens permitted hereunder shall not be extended or spread to cover any additional indebtedness or Property; provided, however, that (i) none of the Permitted Liens (except those in favor of the Agent) may attach or relate to the Capital Stock of or any other ownership interest in any BORROWER or any Subsidiary (other than a Non-Recourse Subsidiary) of any BORROWER, (ii) none of the Permitted Liens, except the Permitted Liens referred to in clause (b) preceding, may attach or relate to any of the Collateral, and accordingly, without limiting the generality of the foregoing, none of the Permitted Liens referred to in clause (a) preceding may have priority equal or prior to the Liens in favor of the Agent as security for the Obligations, and (iii) none of the Permitted Liens referred to in subclause (ii) of clause (b) preceding may have priority equal or prior to the Liens in favor of the Agent as security for the Obligations except such Permitted Liens referred to in such subclause (ii) which attach or relate to the Receivables of Falcon Drilling. "Permitted Refinancing Debt" means Debt of any BORROWER or any of its Subsidiaries incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Debt of such Person which outstanding Debt was incurred in accordance with, or is otherwise permitted by, the terms of this Agreement; provided that (a) if the Debt being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment to the 22 29 Obligations or any part thereof, then such new Debt shall be pari passu with or subordinated in right of payment to, as the case may be, the Obligations (or the applicable part thereof) at least to the same extent as the Debt being renewed, extended, refinanced, refunded or repurchased, (b) such new Debt is scheduled to mature later than the Debt being renewed, extended, refinanced, refunded or repurchased, (c) such new Debt has an Average Life (as such term is defined in the Indenture) at the time such Debt is incurred that is greater than the Average Life of the Debt being renewed, extended, refinanced, refunded or repurchased, and (d) such new Debt is in an aggregate principal amount (or, if such Debt is issued at a price less than the principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Debt being renewed, extended, refinanced, refunded or repurchased (or if the Debt being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP). "Person" means any individual, corporation, trust, association, company, partnership, joint venture, Governmental Authority or other entity. "Plan" means any employee benefit plan as defined in Section 3(3) of ERISA established or maintained or contributed to by any Loan Party or any ERISA Affiliate, including any Pension Plan. "Prime Rate" means, at any time, the rate of interest per annum then most recently established by Citibank, N.A. as its highest commercial prime rate, which rate may not be the lowest rate of interest charged by Citibank, N.A. to its commercial borrowers. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate shall take effect without notice to the BORROWERS at the time of such change in the Prime Rate. "Principal Office" means the principal office of the Agent, presently located at 1200 Smith Street, Suite 3100, Houston, Texas 77002. "Prior Credit Agreements" means (a) that certain Credit Agreement dated as of September 12, 1994, among Falcon Drilling, Falcon Offshore, Turnstone Drilling, FALRIG Offshore and Perforaciones FALRIG de Venezuela, C.A. and Banque Paribas, individually and as agent, as amended, and (b) that certain Uncommitted Acquisition Credit Agreement dated as of January 24, 1996, between Falcon Drilling and Banque Paribas, individually and as agent. "Prior Obligations" means the "Obligations" as such term is defined in each of the Prior Credit Agreements. "Proforma Interest Coverage Ratio" means, as of the date of the transaction giving rise to the need to calculate such ratio (the "Transaction Date"), the ratio of (a) the aggregate EBITDA for the four fiscal quarters preceding the Transaction Date to (b) the aggregate Consolidated Interest Expense that is anticipated to accrue during the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent thereto (based upon the proforma amount and maturity of, and interest payments in respect of, Debt expected by the BORROWERS to be outstanding on the Transaction Date and reasonably anticipated by the BORROWERS to be outstanding from time to time during such period). In determining such ratio, (i) interest rates in effect on the Transaction Date shall remain in effect throughout the relevant period, except that if a BORROWER is a party to any Interest Rate Protection 23 30 Agreements that would have the effect of changing the interest rate on the Debt of such Person proposed to be incurred during a period (or portion thereof), such resulting rate shall be used for the period or portion thereof, (ii) any Consolidated Interest Expense of the BORROWERS with respect to Debt incurred or retired by the BORROWERS (excluding Non-Recourse Debt) during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Debt was so incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs, (iii) if the transaction giving rise to the need to calculate the Proforma Interest Coverage Ratio would have the effect of increasing or decreasing EBITDA in the future and if such increase or decrease is readily quantifiable and is directly attributable to such transaction, EBITDA shall be calculated on a proforma basis as if such transaction had occurred on the first day of the four fiscal quarters preceding the fiscal quarter in which the Transaction Date occurs, and (iv) if any BORROWER shall have sold any material portion of its assets during such period, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which were sold for such period calculated on a proforma basis as if such asset sale and any related retirement of Debt had occurred on the first day of such quarter. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Property" means property of all kinds, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the Closing Date. "Quarterly Date" means the last day of each March, June, September and December of each year, the first of which shall be the first such day after the Closing Date. "Raptor" means as specified in the initial paragraph of this Agreement. "Receivables" means, as at any date of determination thereof, all accounts (as such term is defined in the UCC) of the BORROWERS (i.e., exclusive of any consolidated Subsidiary of Falcon Drilling which is not a BORROWER) and includes, without limitation, the unpaid portion of the obligation, as stated on the respective invoice, or, if there is no invoice, other writing, of a customer of a BORROWER in respect of services rendered or inventory sold and shipped by such Person; provided, however, that certain of such obligations owed to certain Subsidiaries of Falcon Drilling as are specifically identified on Schedule 1.1(b), which obligations secure the existing Debt identified on such schedule, shall not be deemed to be Receivables for purposes of this definition. "Redeemable Stock" means, with respect to any Person, any equity security that, by its terms or otherwise, is required to be redeemed, purchased or paid by the issuer thereof, or is redeemable, transferable or payable at the option of the holder thereof, at any time prior to January 15, 2002, or is exchangeable into Debt of such Person or any of its Subsidiaries. "Reference Bank" means Banque Paribas. "Register" means as specified in Section 13.8(d). 24 31 "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Bank, any change after the Closing Date in United States federal, state or foreign laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Reimbursement Obligation" means the obligation of the BORROWERS to reimburse the Issuing Bank for any drawing under a Letter of Credit. "Release" means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching or migration of Hazardous Materials into the indoor or outdoor environment or into or out of Property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water or ground water. "Remedial Action" means all actions required to (a) cleanup, remove, respond to, treat or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform studies and investigations on the extent and nature of any actual or suspected contamination, the remedy or remedies to be used or health effects or risks of such contamination, or (d) perform post- remedial monitoring, care or remedy of a contaminated site. "Required Banks" means, at any date of determination, Banks having in the aggregate at least 75% (in Dollar amount) of the aggregate amount of the outstanding Commitments (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Loans and the aggregate Letter of Credit Liabilities). "Required Payment" means as specified in Section 3.4. "Replacement Asset" means a Property or asset that, as determined by the Board of Directors of Falcon Drilling as evidenced by a resolution of its Board of Directors, is used or is useful in a business related, ancillary or complementary to the business of Falcon Drilling and its Subsidiaries on the Closing Date. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Reserve Requirement" means, for any Eurodollar Loan of any Bank for any Interest Period therefor, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under any regulations of the Board of Governors of the Federal Reserve System (or any successor) by such Bank for deposits exceeding $1,000,000,000 against "Eurocurrency Liabilities" as such term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such 25 32 member banks by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate or the Adjusted Eurodollar Rate is to be determined, or (b) any category of extensions of credit or other assets which include Eurodollar Loans. "Responsible Officer" means, as to any Loan Party, the chief financial officer, vice president of finance, chief operating officer or chief executive officer of such Person. "Restricted Payment" means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for) any shares of any class of Capital Stock of Falcon Drilling or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Falcon Drilling or any of its Subsidiaries now or hereafter outstanding; (c) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement or defeasance of, or payment with respect to, any Subordinated Debt or any Senior Debt; (d) any loan, advance or payment (pursuant to a tax sharing agreement or otherwise) to any shareholder of Falcon Drilling or any of its Subsidiaries; and (e) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of Falcon Drilling or any of its Subsidiaries now or hereafter outstanding. "Security and Assignment Agreements" means the Security and Assignment Agreements in form and substance satisfactory to the Agent, dated the Closing Date or thereafter and executed by the BORROWERS (one for each BORROWER), other than the Non-Material Borrowers and the Guarantors, in favor of the Agent for the benefit of the Agent and the Banks, and any additional security agreement or similar agreement executed by any Loan Party in connection with the Loan Documents, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Security Documents" means the Security and Assignment Agreements and the Concentration Account Agreement and as they may be amended, modified, supplemented, renewed, extended or restated from time to time, and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of proceeds, assignments of income, assignments of contract rights, assignments of partnership interests, assignments of royalty interests, assignments of performance or other collateral assignments, completion or surety bonds, standby agreements, subordination agreements, undertakings and other agreements, documents, instruments and financing statements now or hereafter executed and delivered by any Loan Party in connection with or as security for, or as a Guarantee of, the payment or performance of the Obligations or any part thereof. "Senior Debt" means the Debt of Falcon Drilling under the Senior Debt Documents. "Senior Debt Documents" means the Senior Notes, the Indenture, the Series 1996 Indenture, the Note Purchase Agreement, the Subsidiary Senior Note Guaranties, all agreements, documents and instruments now or hereafter executed by Falcon Drilling or any of its Subsidiaries and/or delivered to the trustee pursuant to the Indenture or to any Holder pursuant to the Indenture, the Series 1996 Indenture, the Note Purchase Agreement or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. 26 33 "Senior Fixed Rate Notes" means the 9 3/4% Series B Notes due 2001, if any, issued by Falcon Drilling, and any and all amendments, modifications, supplements, renewals, extensions or restatements of such Senior Fixed Rate Notes. "Senior Floating Rate Notes" means the Senior Floating Rate Notes due January 15, 2001, issued by Falcon Drilling pursuant to the Note Purchase Agreement or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements of such Senior Floating Rate Notes. "Senior Note Guarantors" means Falcon Offshore, Falcon Drilling Management, Inc., Falcon Rig Management Company, Inc., Falcon Rig (Liberia), Ltd., Falcon Drilling Holdings, L.P., Turnstone Drilling, FALRIG Offshore, Kestrel Offshore, Inc., Falcon Workover Company, Inc., Raptor Exploration Company, Inc., FALRIG Offshore (USA), L.P. and FALRIG Offshore Partners and any other Subsidiary of Falcon Drilling which Guarantees Falcon Drilling's obligations with respect to any Senior Note pursuant to the terms of the Indenture, the Note Purchase Agreement or otherwise. "Senior Notes" means, collectively, the Senior Fixed Rate Notes, the Senior Floating Rate Notes and the Series 1996 Notes. "Senior Subordinated Debt" means the Debt of Falcon Drilling under the Senior Subordinated Debt Documents. "Senior Subordinated Debt Documents" means the Senior Subordinated Notes, the Senior Subordinated Notes Indenture, all agreements, documents and instruments now or hereafter executed by Falcon Drilling or any of its Subsidiaries and/or delivered to the Trustee pursuant to the Senior Subordinated Notes Indenture or to any Senior Subordinated Notes Holder pursuant to the Senior Subordinated Notes Indenture or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Senior Subordinated Notes" means those certain 12 1/2% Series B Senior Subordinated Notes due 2005 in the aggregate principal amount of $50,000,000 issued pursuant to the terms of the Senior Subordinated Notes Indenture. "Senior Subordinated Notes Indenture" means that certain Indenture by and between Falcon Drilling, as Issuer and Texas Commerce Bank National Association, as Trustee, dated as of March 15, 1995, relating to the Senior Subordinated Notes. "Senior Subordinated Notes Holder" means a Person in whose name a Senior Subordinated Note is registered. "Series B Notes" means the 9 3/4% Series B Notes due 2001, if any, issued by Falcon Drilling pursuant to the Indenture or otherwise. "Series 1996 Indenture" means the Indenture dated as of March 1, 1996, between Falcon Drilling and Bank One, Texas, N.A., pursuant to which the Series 1996 Notes have been issued. 27 34 "Series 1996 Notes" means the 8 7/8% Series B Noes due 2003 issued by Falcon Drilling pursuant to the Series 1996 Indenture, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Solvent" means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present fair saleable value) is greater than the total liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Debt" means any Debt of any BORROWER or any of its Subsidiaries which is, by its terms, subordinated in any manner (as to payment or collection) to any other Debt of any such Person and includes, without limitation, the Senior Subordinated Debt. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the outstanding shares of stock, partnership interests or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation, partnership or entity (irrespective of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries. "Subsidiary Senior Note Guaranties" means the obligations of the Senior Note Guarantors under the Indenture and the Note Purchase Agreement pursuant to which the Senior Note Guarantors guarantee payment of the Senior Fixed Rate Notes and the Senior Floating Rates. "Term Sheet" means that certain letter agreement dated September 26, 1996, containing a "Summary of Terms" as executed by Banque Paribas and agreed to and accepted by Falcon Drilling as of September 26, 1996. "Turnstone Drilling" means Turnstone Drilling Company, Inc., a Delaware corporation. "Type" means any type of Loan (i.e., an ABR Loan or an Eurodollar Loan). 28 35 "UCC" means the Uniform Commercial Code as in effect in the State of New York, Texas, Louisiana or any other jurisdiction, as may be applicable to or in connection with any Lien on any Property created pursuant to any Security Document. "UCP" means as specified in Section 2.14(b). "United States" means the United States of America. "Voting Stock" means, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holders thereof (whether at all times or at the times that such class of Capital Stock has voting power by reason of the happening of any contingency) to vote in the election of members of the board of directors or comparable body of such Person. "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of such Person all of whose outstanding Capital Stock (other than directors' qualifying shares, if any) shall at the time be owned by such Person and/or one or more of its Wholly-Owned Subsidiaries. Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. Section 1.3 Accounting Terms and Determinations. (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a). All financial information delivered to the Agent pursuant to Section 8.1 shall be prepared in accordance with GAAP applied on a basis consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a) or in accordance with Section 8.7. (b) Falcon Drilling shall deliver to the Agent and the Banks at the same time as the delivery of any annual, quarterly or monthly financial statement under Section 8.1 (i) a description in reasonable detail of any material variation between the application of GAAP employed in the preparation of the next preceding annual, quarterly or monthly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above, and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in this Agreement (including Article 10 hereof), Falcon Drilling will not change the last day of its fiscal year from December 31, or the last days of the first three fiscal quarters in each of its fiscal years from that existing on the Closing Date. 29 36 Section 1.4 Financial Covenants and Reporting. The financial covenants contained in Article 10 shall be calculated on a consolidated basis for the BORROWERS (i.e., exclusive of any consolidated Subsidiary of Falcon Drilling which is not a BORROWER) notwithstanding anything to the contrary contained in this Agreement. ARTICLE 2 Loans Section 2.1 Commitments. (a) Revolving Credit Loans. Subject to the terms and conditions of this Agreement, each Bank severally agrees to make one or more loans (the "Loans") to the BORROWERS from time to time from and including the Closing Date to but excluding the Maturity Date up to but not exceeding the amount of such Bank's Commitment as then in effect; provided, however, that the Outstanding Credit shall not at any time exceed the lesser of the Borrowing Base or the Commitments. Subject to the foregoing limitations and the other terms and conditions of this Agreement, the BORROWERS may borrow, repay and reborrow the Loans hereunder. (b) Continuation and Conversion of Loans. Subject to the terms and conditions of this Agreement, the Borrowers may borrow the Loans as ABR Loans or Eurodollar Loans and, until the applicable Maturity Date, the BORROWERS may Continue Eurodollar Loans or Convert Loans of one Type into Loans of the other Type. (c) Lending Offices. Loans of each Type made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type. (d) Rationale for Co-Obligors. The Banks and the BORROWERS acknowledge and agree that the Banks are willing to make the Loans to, and issue the Letters of Credit for the account of, any BORROWER only if the other BORROWERS are liable for payment thereof and reimbursement therefor, respectively. Accordingly, and in order to avoid the necessity of the issuance of a separate Note or Letter of Credit for each BORROWER the payment of or reimbursement for which would be guaranteed by each of the other BORROWERS, each of the BORROWERS desires to be a co-borrower of, and jointly and severally liable for, payment of the Loans and reimbursement for the Letters of Credit. None of the BORROWERS is a co-borrower with respect to any Loan or is executing any Note as a co-maker thereof, or is the co-account party with respect to any Letter of Credit, as a condition to or otherwise in connection with any Loan to or any Letter of Credit issued for the account of such BORROWER, other than a Loan or Letter of Credit the proceeds of which are used by such BORROWER Section 2.2 Notes. The Loans made by each Bank shall be evidenced by a single promissory note jointly and severally made by the BORROWERS in substantially the form of Exhibit C hereto, dated the Closing Date, payable to the order of such Bank in a principal amount equal to its Commitment as originally in effect and otherwise duly completed. Each Bank is hereby authorized by the BORROWERS to endorse on the schedule (or a continuation thereof) attached to the Note of such Bank, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Bank to the BORROWERS hereunder and the amount of each payment or prepayment of principal of such Loan received 30 37 by such Bank, provided that any failure by such Bank to make any such endorsement shall not affect the obligations of the BORROWERS under such Note or this Agreement in respect of such Loan. Section 2.3 Repayment of Loans. The BORROWERS shall pay to the Agent for the account of each Bank the outstanding principal of the Loans (and the outstanding principal of the Loans shall be due and payable) on the Maturity Date. Section 2.4 Interest. (a) Interest Rate. The BORROWERS shall pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (i) during the periods such Loan is an ABR Loan, the ABR Rate plus the Applicable Margin; and (ii) during the periods such Loan is a Eurodollar Loan, the Eurodollar Rate plus the Applicable Margin. (b) Payment Dates. Accrued interest on the Loans shall be due and payable as follows: (i) in the case of ABR Loans, on each Quarterly Date; (ii) in the case of each Eurodollar Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period; (iii) upon the payment or prepayment of any Loan or the Conversion of any Loan to a Loan of the other Type (but only on the principal amount so paid, prepaid, or Converted); and (iv) on the Maturity Date. (c) Default Interest. Notwithstanding the foregoing, the BORROWERS will pay to the Agent for the account of each Bank interest at the applicable Default Rate on any principal of any Loan made by such Bank, any Reimbursement Obligation and (to the fullest extent permitted by law) on any other amount payable by any BORROWER (including, without limitation, an amount required to be prepaid pursuant to Section 2.7, but excluding unmatured interest) under this Agreement or any other Loan Document to or for the account of such Bank, which is not paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand. Section 2.5 Borrowing Procedure. The BORROWERS shall give the Agent notice of each borrowing hereunder in accordance with Section 2.9. Not later than 11:00 a.m. (Houston, Texas time) 31 38 on the date specified for each borrowing hereunder, each Bank will make available the amount of the Loan to be made by it on such date to the Agent, at the Principal Office, in immediately available funds, for the account of the BORROWERS. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the BORROWERS by wire transfer of immediately available funds to the Borrowing Base Account (or to another account of the BORROWERS specified by them which is acceptable to the Agent) no later than 1:00 p.m. Section 2.6 Optional Prepayments, Conversions and Continuations of Loans. Subject to Section 2.7, the BORROWERS shall have the right from time to time to prepay the Loans, or to Convert all or part of a Loan of one Type into a Loan of another Type or to Continue Eurodollar Loans; provided that: (a) the BORROWERS shall give the Agent notice of each such prepayment, Conversion or Continuation as provided in Section 2.9, (b) Eurodollar Loans may only be Converted on the last day of the Interest Period, (c) except for Conversions of Eurodollar Loans into ABR Loans, no Conversions or Continuations shall be made while a Default has occurred and is continuing, and (d) no prepayment of any of the principal of the Loans may be made by the BORROWERS at any time any Acquisition Loans or Letters of Credit are outstanding under the Acquisition Loans Credit Agreement. Section 2.7 Mandatory Prepayments. If at anytime the Outstanding Credit exceeds an amount equal to the lesser of the Borrowing Base or the Commitments at such time, within seven days after the occurrence thereof the Borrowers shall pay to the Agent the amount of such excess as a prepayment of the Loans. Section 2.8 Minimum Amounts. Except for Conversions and prepayments pursuant to Section 2.7 and Article 4, each borrowing, each Conversion and each prepayment of principal of the Loans shall be in an amount at least equal to $250,000 or an integral multiple thereof (borrowings, prepayments or Conversions of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings, prepayments and Conversions for purposes of the foregoing, one for each Type, or Interest Period), provided, that no minimum prepayment amount shall exist with respect to the Loans. Section 2.9 Certain Notices. Notices by the BORROWERS to the Agent of terminations or reductions of Commitments, of borrowings, Conversions, Continuations and prepayments of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. (Houston, Texas, time) on the Business Day prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below:
Number of Business Notice Days Prior ------ ---------- Termination or reductions of Commitments 3 Borrowing of Loans which are ABR Loans 1 Borrowing of Loans which are Eurodollar Loans 3 Conversions or Continuations of Loans 3 Prepayments of Revolving Credit Loans 1
32 39 Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 2.8 hereof) and Type of the Loans to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loans to result from such Conversion) and the date of borrowing, Conversion, Continuation or prepayment (which shall be a Business Day). Notices of borrowings, Conversions, Continuations or prepayments shall be in the form of Exhibit D hereto, appropriately completed as applicable. Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall promptly notify the Banks of the contents of each such notice. In the event the BORROWERS fail to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 2.9, such Loan (if outstanding as an Eurodollar Loan) will be automatically Converted into an ABR Loan on the last day of the preceding Interest Period for such Loan or (if outstanding as an ABR Loan) will remain as, or (if not then outstanding) will be made as, an ABR Loan. The BORROWERS may not borrow any Eurodollar Loans, Convert any Loans into Eurodollar Loans or Continue any Loans as Eurodollar Loans if the interest rate for such Eurodollar Loans would exceed the Maximum Rate. Section 2.10 Use of Proceeds. The proceeds of the Loans shall be used by the BORROWERS for working capital and general corporate purposes. None of the proceeds of any Loan will be used to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. Section 2.11 Commitment Fee and Other Fees. The BORROWERS agree to pay to the Agent for the account of each Bank a commitment fee on the daily average unused amount of such Bank's Commitment for the period from and including the Closing Date to and including the Maturity Date, at the rate of 0.375% per annum based on a 365 day year and the actual number of days elapsed. Accrued commitment fees shall be payable in arrears on each Quarterly Date beginning on December 31, 1996, and on the Maturity Date. Furthermore, the BORROWERS agree to pay to the Agent the additional fees specified in the Term Sheet. Section 2.12 Computations. Interest payable by the BORROWERS hereunder and under the other Loan Documents on all Eurodollar Loans shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) occurring in the period for which payable unless in the case of interest such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Interest payable by the BORROWERS hereunder and under the other Loan Documents on ABR Loans and all fees payable hereunder and under the Loan Documents shall be computed on the basis of a year of 365 or 366 days, as the case may be. Section 2.13 Termination or Reduction of Commitments. The BORROWERS shall have the right to terminate or reduce in part the unused portion of the Commitments at any time and from time to time, provided that: (a) the BORROWERS shall give notice of each such termination or reduction as provided in 33 40 Section 2.9; and (b) each partial reduction shall be in an aggregate amount at least equal to $500,000. The Commitments may not be reinstated after they have been terminated or reduced. Section 2.14 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, the BORROWERS may utilize the Commitments by requesting that the Issuing Bank issue Letters of Credit; provided, that the aggregate amount of outstanding Letter of Credit Liabilities shall not at any time exceed $10,000,000. Upon the date of issue 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. (b) The BORROWERS shall give the Issuing Bank (with a copy to the Agent) at least five Business Days irrevocable prior notice (effective upon receipt) specifying the date of each Letter of Credit and the nature of the transactions to be supported thereby. Upon receipt of such notice the Issuing Bank shall promptly notify each Bank of the contents thereof and of such Bank's Commitment Percentage of the amount of the proposed Letter of Credit. Each Letter of Credit shall have an expiration date that does not exceed one year from the date of issuance and that does not extend beyond the Maturity Date, shall be payable in Dollars, shall support a transaction entered into in connection with and reasonably related to BORROWERS' existing business, shall be satisfactory in form and substance to the Issuing Bank and shall be issued pursuant to such agreements, documents and instruments (including a letter of credit application and reimbursement agreement) as the Issuing Bank may reasonably require, none of which shall be inconsistent with this Section 2.14; provided, however, that Letters of Credit having an aggregate face amount not to exceed $2,500,000 at any time outstanding may have expiration dates that extend beyond one year from the date of issuance (but not to extend beyond the Maturity Date) with the prior written consent of the Agent, which consent shall not be unreasonably withheld. Each Letter of Credit shall (i) provide for the payment of drafts presented for, on or thereunder by the beneficiary, in accordance with the terms thereof, when such drafts are accompanied by the documents described in the Letter of Credit, if any, and (ii) to the extent not inconsistent with the terms hereof or any applicable letter of credit application, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revision thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of New York. (c) The BORROWERS agree to pay to the Agent for the account of each Bank, in arrears on each Quarterly Date following the Closing Date (beginning on December 31, 1996) and on the Maturity Date, if such Letter of Credit was outstanding at any time during any portion of the quarterly period (or, with respect to the December 31, 1996 Quarterly Date, the period from Closing Date through such Quarterly Date) immediately preceding such Quarterly Date or the Maturity Date, a nonrefundable letter of credit fee with respect to each Letter of Credit issued in an amount equal to (i) the rate per annum equal to the Applicable Margin for Eurodollar Loans in effect on the date of issuance of such Letter of Credit (with respect to the fee due on the first 34 41 Quarterly Date after issuance) or on the first day of the applicable quarterly or other period beginning after the quarter during which the issuance of such Letter of Credit occurred (with respect to the fee due on each subsequent Quarterly Date or on the Maturity Date) minus 0.25%, multiplied by (ii) the daily average face amount of the Letter of Credit in effect during the applicable period. The Agent agrees to pay to each Bank, promptly after receiving any payment of letter of credit fees referred to above in this Section 2.14(c), such Bank's Commitment Percentage of such fees. The BORROWERS agree to pay to the Issuing Bank for its own account, in arrears on each Quarterly Date following the Closing Date (beginning on December 31, 1996) and on the Maturity Date, if such Letter of Credit was outstanding at any time during any portion of the quarterly period (or, with respect to the December 31, 1996 Quarterly Date, the period from the Closing Date through such Quarterly Date) immediately preceding such Quarterly Date or the Maturity Date, a nonrefundable letter of credit fee with respect to each Letter of Credit issued by the Issuing Bank hereunder in an amount equal to the greater of (A) (1) 0.25% per annum multiplied by (2) the daily average face amount of the Letter of Credit in effect during such period, or (B) $300.00. In addition to the foregoing fees, the BORROWERS shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses, including, without limitation, administrative, issuance, amendment, payment and negotiation charges, as are incurred or charged by the Issuing Bank in issuing, effecting payment under, amending, or otherwise administering any Letter of Credit. (d) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the Issuing Bank shall promptly notify the BORROWERS and each Bank as to the amount to be paid as a result of such demand or drawing and the payment date. If at any time the Issuing Bank shall make a payment to a beneficiary of a Letter of Credit pursuant to a drawing under such Letter of Credit, each Bank will pay to the Issuing Bank, immediately upon the Issuing Bank's demand at any time commencing after such payment until reimbursement therefor in full by the BORROWERS, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the date of such payment to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate. (e) The BORROWERS shall be irrevocably and unconditionally obligated, without presentment, demand, protest or other formalities of any kind, to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit on or before the second Business Day after such drawing. The Issuing Bank will pay to each such Bank such Bank's Commitment Percentage of all amounts received from or on behalf of the BORROWERS for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to Section 2.14(d). Outstanding Reimbursement Obligations shall bear interest (i) at the rate then applicable to ABR Loans to and including the fifth day after such Reimbursement Obligations become outstanding and (ii) at the Default Rate thereafter, and such interest shall be payable on demand. (f) The Reimbursement Obligations of the BORROWERS under this Agreement and the other Loan Documents shall be absolute, unconditional and irrevocable, and shall be performed 35 42 strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances whatsoever, including, without limitation, the following circumstances: (i) Any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (ii) Any amendment or waiver of or any consent to departure from any Loan Document; (iii) The existence of any claim, setoff, counterclaim, defense or other right which any Loan Party or other Person may have at any time against any beneficiary of any Letter of Credit, the Agent, the Issuing Bank, the Banks or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction; (iv) Any statement, draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) Payment by the Issuing Bank under any Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, provided, that such payment shall not have constituted gross negligence or willful misconduct of the Issuing Bank; and (vi) Any other circumstance whatsoever, whether or not similar to any of the foregoing, provided that such other circumstance or event shall not have been the result of the gross negligence or willful misconduct of the Issuing Bank. (g) The BORROWERS assume all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Agent, the Issuing Bank, the Banks nor any of their respective officers or directors shall have any responsibility or liability to the BORROWERS or any other Person for: (i) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit, or the failure of any Person to note the amount of any instrument on any Letter of Credit; (ii) errors, omissions, interruptions or delays in transmission or delivery of any messages; (iii) the validity, sufficiency or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect; (iv) the payment by the Issuing Bank to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit; or (v) any other circumstance whatsoever in making or failing to make any payment under a Letter of Credit; provided, however, that, notwithstanding the foregoing, the BORROWERS shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the BORROWERS, to the extent of any direct, but not indirect or consequential, damages suffered by the BORROWERS which the BORROWERS prove in a final nonappealable judgment were caused by (A) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (B) the Issuing Bank's willful failure to pay under any Letter of Credit after presentation to it of 36 43 documents strictly complying with the terms and conditions of such Letter of Credit. The Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. ARTICLE 3 Payments Section 3.1 Method of Payment. All payments of principal, interest and other amounts to be made by any Borrower under this Agreement and the other Loan Documents shall be made to the Agent at the Principal Office for the account of each Bank's Applicable Lending Office in Dollars and in immediately available funds, without setoff, deduction or counterclaim, not later than 11:00 a.m. (Houston, Texas time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Such BORROWER shall, at the time of making each such payment, specify to the Agent the sums payable by such BORROWER under this Agreement and the other Loan Documents to which such payment is to be applied (and in the event that such BORROWER fails to so specify, or if an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order and manner as the Agent may elect, subject to Section 3.2). Upon the occurrence and during the continuation of an Event of Default, all proceeds of any Collateral, and all funds from time to time on deposit in the Concentration Account, may be applied by the Agent to the Obligations in such order and manner as the Agent may elect, subject to Section 3.2. Each payment received by the Agent under this Agreement or any other Loan Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds, for the account of such Bank's Applicable Lending Office. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be. Section 3.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each Loan shall be made by the Banks under Section 2.1, each payment of commitment fees under Section 2.11 shall be made for the account of the Banks and each termination or reduction of the Commitments under Section 2.13 shall be applied to the Commitments of the Banks on a pro rata basis; (b) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 4.4) shall be made pro rata among the Banks holding Loans of such Type in accordance with their respective Commitment Percentages; (c) each payment and prepayment by the BORROWERS of principal of or interest on Loans of a particular Type shall be made to the Agent for the account of the Banks holding Loans of such Type pro rata in accordance with the respective unpaid principal amounts of such Loans held by such Banks; (d) Interest Periods for Eurodollar Loans shall be allocated among the Banks holding Eurodollar Loans pro rata according to the respective principal amounts held by such Banks; and (e) the Banks (other than the Issuing Bank) shall purchase participations in the Letters of Credit pro rata in accordance with their respective Commitment Percentages. Section 3.3 Sharing of Payments, Etc. If a Bank shall obtain payment of any principal of or interest on any of the Obligations due to such Bank hereunder through the exercise of any right of setoff, banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Banks participations in the Obligations held by the other Banks in such amounts and make such adjustments from 37 44 time to time as shall be equitable to the end that all the Banks shall share pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them. To such end, all of the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if all or any portion of such excess payment is thereafter rescinded or must otherwise be restored. The BORROWERS agree, to the fullest extent they may effectively do so under applicable law, that any Bank so purchasing a participation in the Obligations by the other Banks may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any BORROWER. Section 3.4 Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or the applicable BORROWER (the "Payor") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or such BORROWER is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such period. Section 3.5 Withholding Taxes. (a) All payments by the BORROWERS (or any BORROWER) of principal of and interest on the Loans and the Letter of Credit Liabilities and of all fees and other amounts payable under the Loan Documents shall be made free and clear of, and without deduction by reason of, any present or future taxes, duties, imposts, assessments or other charges levied or imposed by any Governmental Authority (other than taxes on the overall net income or gross receipts of the Agent or any Bank). If any such taxes, duties, imposts, assessments or other charges are so levied or imposed, the BORROWERS will (i) make additional payments in such amounts so that every net payment of principal of and interest on the Loans and the Letter of Credit Liabilities and of all other amounts payable by it under the Loan Documents, after withholding or deduction for or on account of any such present or future taxes, duties, imposts, assessments or other charges (including, without limitation, any tax imposed on or measured by net income or gross receipts of the Agent or a Bank attributable to payments made to or on behalf of the Agent or a Bank pursuant to this Section 3.5 and any penalties or interest attributable to such payments), will not be less than the amount provided for herein or therein absent such withholding or deduction (provided that the BORROWERS shall have no obligation to pay such additional amounts to the Agent or any Bank to the extent that such taxes, duties, imposts, assessments or other charges are levied or imposed by reason of the failure of the Agent or such Bank to comply with the provisions of Section 3.6), (ii) make such withholding or deduction, and (ii) remit the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law. Without limiting the generality of the foregoing, the BORROWERS will, upon written request of any Bank, reimburse each such Bank for the amount of (A) such taxes, levies, duties, imports, assessments or other charges so levied or imposed by any Governmental Authority and paid by such Bank as a result of payments made by the BORROWERS under or with respect to the Loans and Letter of Credit Liabilities other than such taxes, levies, duties, imports, 38 45 assessments and other charges previously withheld or deducted by the BORROWERS which have previously resulted in the payment of the required additional amount to such Bank, and (B) such taxes, levies, duties, assessments and other charges so levied or imposed with respect to any Bank reimbursement under the foregoing clause (A), so that the net amount received by such Bank (net of payments made under or with respect to the Loans and the Letter of Credit Liabilities) after such reimbursement will not be less than the net amount such Bank would have received if such taxes, levies, duties, assessments and other charges on such reimbursement had not been levied or imposed. The BORROWERS shall furnish promptly to the Agent for distribution to each affected Bank, as the case may be, upon request of such Bank, official receipts evidencing any such withholding or reduction. (b) The Borrowers will indemnify the Agent and each Bank (without duplication) against, and reimburse the Agent and each Bank for, all present and future taxes, duties, imposts, assessments or other charges (including interest and penalties) levied or collected (whether or not legally or correctly imposed, assessed, levied or collected), excluding, however, any taxes imposed on the overall net income or gross receipts of the Agent or such Bank, on or in respect of this Agreement, any of the Loan Documents or the Obligations or any portion thereof (the "reimbursable taxes"). Any such indemnification shall be on an after-tax basis, taking into account any such reimbursable taxes imposed on the amounts paid as indemnity. (c) Without prejudice to the survival of any other term or provision of this Agreement, the obligations of the BORROWERS under this Section 3.5 shall survive the payment of the Loans, the Letter of Credit Liabilities and the other Obligations and termination of the Commitments Section 3.6 Withholding Tax Exemption. Each Bank that is originally a party to this Agreement as of the Closing Date and that is not incorporated under the laws of the United States or a state thereof agrees that it will deliver to the BORROWERS and the Agent two duly completed copies of United States Internal Revenue Service Form 1001, 4224 or W-8, as appropriate, certifying in any case that such Bank is entitled to receive payments from the BORROWERS under any Loan Document without deduction or withholding of any United States federal income taxes. Each other Bank that is not incorporated under the laws of the United States or a state thereof and which is eligible to deliver a Form 1001, 4224 or W-8, as applicable, undertakes to deliver to the BORROWERS and the Agent two duly completed copies of such form promptly upon its becoming a Bank under this Agreement. Each Bank which initially so delivers a Form 1001, 4224 or W-8 pursuant to this Section 3.6 further undertakes to deliver to the BORROWERS and the Agent two additional copies of such form (or a successor form) on or before the date such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the BORROWERS or the Agent, in each case certifying that such Bank is entitled to receive payments from the BORROWERS under any Loan Document without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the BORROWERS and the Agent that it is not capable of receiving such payments without any deduction or withholding of United States federal income tax. 39 46 ARTICLE 4 Yield Protection and Illegality Section 4.1 Additional Costs. (a) The BORROWERS shall pay directly to each Bank from time to time, promptly upon the request of such Bank, the reasonable costs incurred by such Bank which such Bank determines are attributable to its making or maintaining of any Eurodollar Loans hereunder or its obligation to make any of such Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans (other than taxes imposed on the overall net income or gross receipts of such Bank or its Applicable Lending Office for any of such Loans by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); (ii) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank (including any of such Loans or any deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof, but excluding the Reserve Requirement to the extent it is included in the calculation of the Adjusted Eurodollar Rate); or (iii) imposes any other condition affecting this Agreement or the Notes or any of such extensions of credit or liabilities or commitments. Each Bank will notify the BORROWERS (with a copy to the Agent) of any event occurring after the Closing Date which will entitle such Bank to compensation pursuant to this Section 4.1(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by the BORROWERS) will designate a different Applicable Lending Office for the Eurodollar Loans of such Bank if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, violate any law, rule or regulation or be in any way disadvantageous to such Bank, provided that such Bank shall have no obligation to so designate an Applicable Lending Office located in the United States. Each Bank will furnish the BORROWERS with a certificate setting forth the basis and the amount of each request of such Bank for compensation under this Section 4.1(a). If any Bank requests compensation from the BORROWERS under this Section 4.1(a), the BORROWERS may, by notice to such Bank (with a copy to the Agent), suspend the obligation of such Bank to make or Continue making, or Convert ABR Loans into, Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (b) Without limiting the effect of the foregoing provisions of this Section 4.1, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based 40 47 on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the BORROWERS (with a copy to the Agent), the obligation of such Bank to make or Continue making, or Convert ABR Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (c) Determinations and allocations by any Bank for purposes of this Section 4.1 of the effect of any Regulatory Change on its costs of maintaining its obligation to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive in the absence of manifest error, provided that such determinations and allocations are made on a reasonable basis. Section 4.2 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if with respect to any Eurodollar Loans for any Interest Period therefor: (a) The Agent determines (which determination shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof are not being provided in the relative amounts or for the relative maturities for purposes of determining the rate of interest for such Loans as provided in this Agreement; or (b) Required Banks determine (which determination shall be conclusive absent manifest error) and notify the Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" or "Adjusted Eurodollar Rate" in Section 1.1 hereof on the basis of which the rate of interest for such Loans for such Interest Period is to be determined do not accurately reflect the cost to the Banks of making or maintaining such Loans for such Interest Period; then the Agent shall give the BORROWERS prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans or to Convert ABR Loans into Eurodollar Loans and the BORROWERS shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into ABR Loans in accordance with the terms of this Agreement. Section 4.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to (a) honor its obligation to make Eurodollar Loans hereunder or (b) maintain Eurodollar Loans hereunder, then such Bank shall promptly notify the BORROWERS (with a copy to the Agent) thereof and such Bank's obligation to make or maintain Eurodollar Loans and to Convert ABR Loans into Eurodollar Loans hereunder shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans (in which case the provisions of Section 4.4 hereof shall be applicable). 41 48 Section 4.4 Treatment of Affected Loans. If the obligation of any Bank to make or Continue, or to Convert ABR Loans into, Eurodollar Loans is suspended pursuant to Section 4.1 or 4.3 hereof, such Bank's Eurodollar Loans shall be automatically Converted into ABR Loans on the last day(s) of the then current Interest Period(s) for the Eurodollar Loans (or, in the case of a Conversion required by Section 4.1(b) or 4.3 hereof, on such earlier date as such Bank may specify to the BORROWERS with a copy to the Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to such Conversion no longer exist: (a) To the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its ABR Loans; and (b) All Loans which would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made as or Converted into ABR Loans and all Loans of such Bank which would otherwise be Converted into Eurodollar Loans shall be Converted instead into (or shall remain as) ABR Loans. If such Bank gives notice to the BORROWERS (with a copy to the Agent) that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 4.4 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans are outstanding, such Bank's ABR Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Banks holding Eurodollar Loans and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 4.5 Compensation. The BORROWERS shall pay to the Agent for the account of each Bank, promptly upon the request of such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense incurred by it as a result of: (a) Any payment, prepayment or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the outstanding Loans pursuant to Section 11.2) on a date other than the last day of an Interest Period for such Loan; or (b) Any failure by the BORROWERS for any reason (including, without limitation, the failure of any conditions precedent specified in Article 6 to be satisfied) to borrow, Convert or prepay a Eurodollar Loan on the date for such borrowing, Conversion, or prepayment specified in the relevant notice of borrowing, prepayment, or Conversion under this Agreement. Section 4.6 Capital Adequacy. If, after the Closing Date, any Bank shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital adequacy (including, without limitation, any law, rule or regulation implementing the Basle Accord), or any change therein, or any change 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 its parent) with any guideline, request or directive regarding capital adequacy (whether or not 42 49 having the force of law) of any central bank or other Governmental Authority (including, without limitation, any guideline or other requirement implementing the Basle Accord), has or would have the effect of reducing the rate of return on such Bank's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which such Bank (or its parent) could have achieved but for such adoption, implementation, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within ten Business Days after demand by such Bank (with a copy to the Agent), the BORROWERS shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its parent) for such reduction. A certificate of such Bank claiming compensation under this Section 4.6 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, such Bank may use any reasonable averaging and attribution methods. Section 4.7 Additional Interest on Eurodollar Loans. The BORROWERS shall pay, directly to each Bank from time to time, additional interest on the unpaid principal amount of each Eurodollar Loan held by such Bank, from the date of the making of such Eurodollar Loan until such principal amount is paid in full, at an interest rate per annum determined by such Bank in good faith equal to the positive remainder (if any) of (a) the Adjusted Eurodollar Rate applicable to such Eurodollar Loan minus (b) the Eurodollar Rate applicable to such Eurodollar Loan. Each payment of additional interest pursuant to this Section 4.7 shall be payable by the BORROWERS on each date upon which interest is payable on such Eurodollar Loan pursuant to Section 2.4(b); provided, however, that the BORROWERS shall not be obligated to make any such payment of additional interest until the first Business Day after the date when the BORROWERS have been informed (i) that such Bank is subject to a Reserve Requirement and (ii) of the amount of such Reserve Requirement (after which time the BORROWERS shall be obligated to make all such payments of additional interest, including, without limitation, such payments of additional interest that otherwise would have been payable by the BORROWERS on or prior to such time had the BORROWERS been earlier informed). ARTICLE 5 Security Section 5.1 Collateral. To secure the full and complete payment and performance of the Obligations, each of the BORROWERS, other than the Non- Material Borrowers and the Guarantors, will grant to the Agent, for the ratable benefit of itself and the Banks, a perfected, first priority Lien or assignment, as appropriate, on all of its right, title and interest in and to the following Property, whether now owned or hereafter acquired, pursuant to the Security Documents: (a) all Receivables of such BORROWERS and all products and proceeds thereof; and (b) the Borrowing Base Account (including, without limitation, any cash from time to time deposited or held in such account), and all products and proceeds thereof. Section 5.2 New Borrowers. If, after the Closing Date, any (a) BORROWER or any Subsidiary of a BORROWER acquires or creates a Subsidiary which is not a BORROWER or (b) any Non-Material Borrower is or becomes a Material Subsidiary, then the BORROWERS shall: 43 50 (i) cause each such Subsidiary referred to in clause (a) or clause (b) preceding to guaranty the payment and performance of the entirety of Obligations by executing and delivering to the Agent a guaranty in form and substance satisfactory to the Agent (or, if the Agent so desires, cause each such Subsidiary to become a co-maker of the Obligations by executing and delivering such agreements, documents and instruments as the Agent may request); and (ii) cause each such Subsidiary referred to in clause (a) or clause (b) preceding to execute and deliver to the Agent a Security and Assignment Agreement and such other Security Documents (including, without limitation, financing statements) as the Agent may reasonably request to grant the Agent for the ratable benefit of itself and the Banks a perfected, first priority Lien or assignment, as appropriate, on all Receivables of such Subsidiary and the Borrowing Base Account of such Subsidiary (if any) and all products and proceeds thereof, which Receivables and Borrowing Base Account shall not be subject to any Liens except Permitted Liens specified in clause (b) or (d) of the definition of the term "Permitted Liens". Section 5.3 Setoff. If an Event of Default shall have occurred and be continuing, each Bank is hereby authorized at any time and from time to time, without notice to any BORROWER (any such notice being hereby expressly waived by each BORROWER), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of such BORROWER against any and all of the Obligations of such Borrower now or hereafter existing under this Agreement, any of such Bank's Notes or any other Loan Document, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement or any of such Bank's Note or such other Loan Document and although such Obligations may be unmatured. Each Bank agrees promptly to notify the applicable BORROWER (with a copy to the Agent) after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights and remedies of each Bank hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Bank may have. ARTICLE 6 Conditions Precedent Section 6.1 Initial Extension of Credit. The obligation of each Bank to make its initial Loan and the obligation of the Issuing Bank to issue the initial Letter of Credit are subject to the condition precedent that the Agent shall have received, on or before the Funding Date, all of the following, each dated (unless otherwise indicated or otherwise agreed by the Agent) as of the Closing Date, in form and substance satisfactory to the Agent and, in the case of actions to be taken, evidence that the following required actions have been taken to the satisfaction of the Agent: (a) Resolutions. Resolutions of the Board of Directors of each Loan Party certified by its Secretary or an Assistant Secretary which authorize the execution, delivery and performance by such Loan Party of the Loan Documents to which it is or is to be a party; 44 51 (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each Loan Party certifying the name of each officer of such Loan Party (i) who is authorized to sign the Loan Documents to which such Loan Party is or is to be a party (including any certificates contemplated therein), together with specimen signatures of each such officer, and (ii) who will, until replaced by other officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Loan Documents and the transactions contemplated thereby; (c) Articles or Certificates of Incorporation. The articles or certificates of incorporation of each Loan Party certified by the Secretary of State of the state of incorporation of such Loan Party and dated as of a Current Date; (d) Bylaws. The bylaws of each Loan Party certified by the Secretary or an Assistant Secretary of such Loan Party; (e) Governmental Certificates. Certificates of appropriate officials as to the existence and good standing of each Loan Party in their respective jurisdictions of incorporation and any and all jurisdictions where such Loan Party is qualified to do business as a foreign corporation, each such certificate to be dated as of a Current Date; (f) Notes. The Notes duly completed and executed by the BORROWERS; (g) Security and Assignment Agreements. A Security and Assignment Agreement executed by each of the BORROWERS; (h) Insurance Policies. Certificates of insurance with respect to all insurance policies required by this Agreement and the other Loan Documents, all in form and substance satisfactory to the Agent; (i) Financing Statements. UCC-1 financing statements and all other requisite filing documents executed by the Loan Parties necessary to perfect the Liens created pursuant to the Security Documents; (j) Lien Releases. Duly executed releases or assignments of Liens and UCC-3 financing statements in recordable form, as may be necessary to reflect that the Liens created by the Security Documents are perfected, first priority Liens; (k) UCC Searches. UCC searches in the names of each of the BORROWERS (and all corporate names under which any of them have done business within the last five years) in each jurisdiction where each such Person maintains an office or has Property, showing no financing statements or other Lien instruments of record except for Permitted Liens; (l) Solvency Certificate. A certificate executed by a Responsible Officer of each of the BORROWERS (with respect to the BORROWERS) and its Subsidiaries (with respect to such 45 52 Subsidiaries) to the effect that, before and after giving effect to the Loans, each of the BORROWERS and its Subsidiaries will be Solvent, both on a consolidated and consolidating basis; (m) Other Consents. Copies of all material consents necessary for the execution, delivery and performance by each of the Loan Parties of the Loan Documents to which it is a party, including, without limitation, any consents or waivers in connection with the grant of a security interest pursuant to the Security Documents, which consents shall be certified by a Responsible Officer of the BORROWERS as true and correct copies of such consents as of the Closing Date; (n) Permits. Copies of all material Permits of Falcon Drilling or any of its Subsidiaries and all material permits relating to any of the Properties owned or leased by any of them (except for certificates of class of the American Shipping Bureau and certificates of documentation or inspection of the United States Coast Guard and except to the extent that the Agent may inform the BORROWERS that copies of certain of such Permits shall not be required to be delivered); and evidence satisfactory to the Agent that Falcon Drilling and its Subsidiaries have taken appropriate action to ensure that Falcon Drilling and its Subsidiaries are able to conduct their businesses with the use of such Permits in full force and effect; (o) Payment of Fees and Expenses. The BORROWERS shall have paid all fees due on the Closing Date as specified in the Term Sheet and all fees and expenses of or incurred by the Agent and its counsel to the extent billed as of the Closing Date and payable pursuant to this Agreement; (p) Regulatory Approvals. Evidence satisfactory to the Agent that all filings, consents, or approvals with or of Governmental Authorities necessary to consummate the transactions contemplated by the Loan Documents, if any, have been obtained; (q) Compliance with Laws. On the Closing Date, each Person that is a party to this Agreement or any of the other Loan Documents shall have complied with all Governmental Requirements necessary to consummate the transactions contemplated by this Agreement and the other Loan Documents; (r) No Prohibitions. No Governmental Requirement shall prohibit the consummation of the transactions contemplated by this Agreement or any other Loan Document, and no order, judgment or decree of any Governmental Authority or arbitrator shall, and no litigation or other proceeding shall be pending or threatened which would, enjoin, prohibit, restrain or otherwise adversely affect the consummation of the transactions contemplated by this Agreement or the other Loan Documents or otherwise have a Material Adverse Effect; (s) Material Adverse Change. No material adverse change shall have occurred with respect to the financial condition, business, operations, capitalization or liabilities of Falcon Drilling, or of Falcon Drilling and its Subsidiaries taken as a whole, since June 30, 1996; (t) Wiring Instructions. A letter of direction from the BORROWERS to the Agent with respect to the disbursement of the proceeds of the Loans on the Funding Date; 46 53 (u) Bank Accounts. The BORROWERS, other than the Non-Material Borrowers and the Guarantors, shall have established the Concentration Account into which all proceeds (except for any cash deposited into the Borrowing Base Account pursuant to the Security Documents) of the Collateral shall be directed, which account shall be governed by the Concentration Account Agreement; (v) Financial Statements. Copies of each of the financial statements referred to in Section 7.2, including, without limitation, the most recent audited financial statements of Falcon Drilling and its Subsidiaries; (w) Opinion of Counsel. A favorable opinion of each of New York, Delaware (with respect to the Loan Parties incorporated or organized under Delaware law) and foreign counsel acceptable to the Agent (with respect to the Loan Parties incorporated or organized under foreign law) counsel for the Loan Parties reasonably acceptable to the Agent, each in form and substance (and covering such matters as are) satisfactory to the Agent; (x) Notice of Borrowing or Issuance of Letter of Credit. A notice of borrowing in accordance with Section 2.9 (with respect to a Loan) or a notice of request for the issuance of a Letter of Credit in accordance with Section 2.14 (with respect to a Letter of Credit); (y) Borrowing Base Report. A Borrowing Base Report dated as of October 21, 1996, or as of another recent date acceptable to the Agent which evidences that, after giving effect to the Loans and/or Letters of Credit requested to be made and/or issued, respectively, on the Funding Date, the Outstanding Credit shall not exceed an amount equal to the lesser of the Borrowing Base or the Commitments at such time; (z) Intercreditor Agreement. The Intercreditor Agreement shall have been executed by the Banks and the Acquisition Loans Banks; and (aa) Repayment of Prior Obligations and Release of Prior Liens. The Prior Obligations shall have been paid in full and all Liens securing the Prior Obligations shall have been released. The BORROWERS shall deliver, or cause to be delivered, to the Agent sufficient counterparts of each document to be received by the Agent under this Section 6.1 to permit the Agent to distribute a copy of such document to the Banks. Section 6.2 All Extensions of Credit. The obligation of each Bank to make any Loan (including the initial Loan) and the obligation of the Issuing Bank to issue any Letter of Credit (including the initial Letter of Credit) are subject to the following additional conditions precedent: (a) No Default. No Default shall have occurred and be continuing, or would result from such Loan or Letter of Credit; (b) Representations and Warranties. All of the representations and warranties of the BORROWERS and the other Loan Parties contained in Article 7 hereof and in the other Loan 47 54 Documents (a) shall be true and correct when made and (b) shall be deemed to be repeated on and as of the date of such Loan or Letter of Credit and shall be true and correct in all respects on and as of such date, except in the case of representations and warranties which expressly and specifically relate only to an earlier date; (c) Additional Documentation. The Agent shall have received all notices and other agreements, documents and instruments as may be required under this Agreement as a condition to such Loan or Letter of Credit in compliance with this Agreement (including, without limitation, the notice required under Section 2.9 with respect to a Loan and the notice required under Section 2.14 with respect to a Letter of Credit) and such additional approvals, opinions, agreements, documents and instruments as the Agent may reasonably request; (d) Borrowing Base. After giving effect to the Loans and/or Letters of Credit requested to be made and/or issued, respectively, the Outstanding Credit shall not exceed an amount equal to the lesser of the Borrowing Base or the Commitments at such time; and (e) No Material Adverse Effect. Both before and after giving effect to the Loans and/or Letters of Credit requested to be made and/or issued, respectively, no Material Adverse Effect shall have occurred and shall be continuing. Each notice of borrowing or request for the issuance of a Letter of Credit by the BORROWERS hereunder shall constitute a representation and warranty by the BORROWERS that the conditions precedent set forth in this Section 6.2 (other than the Agent's receipt of any additional documentation that it may, at its option, request pursuant to Section 6.2(c) preceding) have been satisfied (both as of the date of such notice and, unless the BORROWERS otherwise notifies the Agent prior to the date of such borrowing or Letter of Credit, as of the date of such borrowing or Letter of Credit). ARTICLE 7 Representations and Warranties The BORROWERS and the Guarantors jointly and severally represent and warrant to the Agent and the Banks that the following statements are true, correct and complete: Section 7.1 Corporate Existence. Each Loan Party (a) is a corporation or other entity (as specified in the initial paragraph of this Agreement) duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite entity power and authority to own its Properties and carry on its business as now being or as proposed to be conducted, and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. Each Loan Party has the corporate power and authority and legal right to execute, deliver and perform its obligations under the Loan Documents to which it is or may become a party. The chief executive office and principal place of business of each of the Loan Parties, other than the Guarantors whose chief executive offices and principal places of business are located in their respective jurisdictions of incorporation or organization, is located in either the State of Texas or the State of Louisiana, as specified in the Security and Assignment Agreement executed by such BORROWER (if applicable). 48 55 Section 7.2 Financial Statements. The BORROWERS have delivered to the Agent and the Banks the Form 10-K of Falcon Drilling for the fiscal year ended December 31, 1995, and the Forms 10-Q of Falcon Drilling for the fiscal quarters ended March 31, 1996, and June 30, 1996, which contain audited (with respect to the Form 10-K ) and unaudited (with respect to the Forms 10-Q) consolidated (and certain audited and unaudited consolidating) balance sheets and statements of operations and statements of cash flow of Falcon Drilling and its consolidated Subsidiaries (including, without limitation, each of the BORROWERS) as of or for (as applicable) the fiscal year or fiscal quarter (as applicable) ended December 31, 1995, March 31, 1996, and June 30, 1996. To the BORROWERS' knowledge, such financial statements are true and correct, have been prepared in accordance with GAAP and fairly and accurately present, on a consolidated and consolidating (where applicable) basis, the financial condition of Falcon Drilling and its consolidated Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. There has been no material adverse change in the business, condition (financial or otherwise), operations or Properties of Falcon Drilling, or of Falcon Drilling and its consolidated Subsidiaries taken as a whole, since the effective date of the financial statements referred to in this Section 7.2(a). Section 7.3 Entity Action; No Breach. The execution, delivery and performance by each Loan Party of the Loan Documents to which it is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate action on the part of the Loan Parties and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles or certificates of incorporation or bylaws of any Loan Party or the partnership agreement or certificate of limited partnership or other constitutional document of any Loan Party, (ii) any Governmental Requirement or any order, writ, injunction or decree of any Governmental Authority or arbitrator, or (iii) any material agreement, document or instrument to which any Loan Party is a party or by which any Loan Party or any of its Property is bound or subject, or (b) constitute a default under any such material agreement, document or instrument, or result in the creation or imposition of any Lien (except under the Security Documents as provided in Article 5) upon any of the revenues or Property of any Loan Party. Section 7.4 Operation of Business. The Loan Parties possess all Permits, franchises, licenses and authorizations necessary to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted except where the failure to so possess would not cause a Material Adverse Effect. None of such Persons is in material violation of any such Permits, franchises, licenses or authorizations required to be possessed pursuant to this Section 7.4. Section 7.5 Intellectual Property. The Loan Parties own or possess (or will be licensed or have the full right to use) all Intellectual Property which is necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted, without any known conflict with the rights of others. The consummation of the transactions contemplated by this Agreement and the other Loan Documents will not materially alter or impair, individually or in the aggregate, any of such rights of such Persons. No product of the Loan Parties infringes upon any Intellectual Property owned by any other Person, and no claim or litigation is pending or, to the knowledge of any BORROWER, threatened against any Loan Party or any such Person contesting its right to use any product or material which could have a Material Adverse Effect. There is no violation by any Loan Party of any right of such Loan Party with respect to any material Intellectual Property owned or used by such Loan Party. 49 56 Section 7.6 Litigation and Judgments. Each material action, suit, investigation or proceeding before or by any Governmental Authority or arbitrator pending or, to the knowledge of any BORROWER, threatened against or affecting any Loan Party as of the date of this Agreement is disclosed on Schedule 7.6 hereto or in the Form 10-K of Falcon Drilling for the fiscal year ended December 31, 1995, or in the Form 10-Q of Falcon Drilling for the fiscal quarter ended March 31, 1996, or June 30, 1996 except for suits for personal injury, death or property damage which are adequately covered by insurance (subject to any deductibles, all of which deductibles are customary for the industry in which the BORROWERS are engaged). None of such actions, suits, investigations or proceedings (a) could be reasonably expected to be adversely determined or (b) if and to the extent the same could be reasonably expected to be adversely determined, could be reasonably expected to have a Material Adverse Effect. On the date of this Agreement, there are no outstanding judgments against any Loan Party or any of their Subsidiaries or Affiliates. No Loan Party has received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed to any liability or disadvantage that could have a Material Adverse Effect. Section 7.7 Rights in Properties; Liens. Except as expressly stated to the contrary on Schedule 1.1(a), each of the Loan Parties has good and indefeasible title to, or valid leasehold interests in, its Properties and assets, real and personal, including the Properties, assets and leasehold interests reflected in the financial statements described in Section 7.2(a), and none of the Properties or leasehold interests of any Loan Party or any of its Subsidiaries is subject to any Lien, except Permitted Liens. Each of the Eligible Receivables will be derived or generated from Properties or assets owned or leased by a Borrower. As of the Closing Date, each of the Drilling Rigs is owned, of record and beneficially, by one or more of the BORROWERS as specified on Schedule 7.7. Section 7.8 Enforceability. The Loan Documents have been duly and validly executed and delivered by each of the Loan Parties that is a party thereto and constitute the legal, valid and binding obligations of the Loan Parties, enforceable against the Loan Parties in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. Section 7.9 Approvals. No authorization, approval or consent of, and no filing or registration with or notice to, any Governmental Authority or third party is or will be necessary for the execution, delivery or performance by any Loan Party of any of the Loan Documents to which it is a party or for the validity or enforceability thereof, except for such consents, approvals and filings as have been validly obtained or made and are in full force and effect. None of the Loan Parties has failed to obtain any material governmental consent, approval, license, Permit, franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business. Section 7.10 Debt. As of the Closing Date and after giving effect to the payment of the Prior Obligations (as required by Section 6.1(aa)), Falcon Drilling and its consolidated Subsidiaries have no Debt except for (a) the Obligations and the Acquisition Loans Obligations, (b) the Debt disclosed in the financial statements including in the Form 10-Q of Falcon Drilling for the fiscal quarter ended June 30, 1996, and (c) the Debt disclosed with respect to such Person on Schedule 7.10 hereto. Section 7.11 Taxes. The Loan Parties have filed all tax returns (federal, state and local) required to be filed, including all income, franchise, employment, Property and sales tax returns, and have 50 57 paid all of their respective liabilities for taxes, assessments, governmental charges and other levies that are due and payable. None of the BORROWERS is aware of any pending investigation by any taxing authority of any Loan Party or any of its Subsidiaries or of any pending but unassessed tax liability of any Loan Party or any of its Subsidiaries. No tax Liens have been filed and, except as disclosed on Schedule 7.11, no claims are being asserted against any Loan Party or any of its Subsidiaries with respect to any taxes. Except as disclosed on Schedule 7.11 hereto, as of the Closing Date, none of the United States income tax returns of the Loan Parties and any of their respective Subsidiaries are under audit. The charges, accruals and reserves on the books of the Loan Parties in respect of taxes or other governmental charges are in accordance with GAAP. Section 7.12 Margin Securities. None of the Loan Parties or any of their respective Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 7.13 ERISA. (a) Each Plan of each Loan Party and of each Borrower Member is in compliance in all material respects with all applicable provisions of ERISA and the Code. Neither a Reportable Event nor a Prohibited Transaction has occurred within the last 60 months with respect to any Plan of any Loan Party or any Borrower Member. No notice of intent to terminate a Pension Plan of any Loan Party or any Borrower Member has been filed, nor has any Pension Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Pension Plan of any Loan Party or any Borrower Member, nor has the PBGC instituted any such proceedings. Neither any of the Loan Parties nor any Borrower Member has completely or partially withdrawn from a Multiemployer Plan. Each Loan Party and each Borrower Member has met its minimum funding requirements under ERISA and the Code with respect to all of its Plans subject to such requirements, and, as of the Closing Date except as specified on Schedule 7.13, the present value of all vested benefits under each funded Plan (exclusive of any Multiemployer Plan) does not exceed the fair market value of all such Plan assets allocable to such benefits, as determined on the most recent valuation date of such Plan and in accordance with ERISA. Neither any of the Loan Parties nor any Borrower Member has incurred any liability to the PBGC under ERISA. No litigation is pending or threatened concerning or involving any Plan of any Loan Party or any Borrower Member. There are no unfunded or unreserved liabilities relating to any Plan of any Loan Party or any Borrower Member that could, individually or in the aggregate, have a Material Adverse Effect if such Loan Party or Borrower Member were required to fund or reserve such liability in full. As of the Closing Date, no funding waivers have been requested or granted under Section 412 of the Code with respect to any Plan of any Loan Party or Borrower Member. As of the Closing Date, no unfunded or unreserved liability for benefits under any Plan or Plans of any Loan Party or any Borrower Member (exclusive of any Multiemployer Plans) exceeds $1,000,000 with respect to any such Plan or $3,000,000 with respect to all such Plans in the aggregate. 51 58 (b) No ERISA Affiliate has incurred any liability to the PBGC or has withdrawn from a Multiemployer Plan. Neither any BORROWER nor any ERISA Affiliate has received a demand letter from the PBGC (i) for the payment of minimum funding contributions under Section 302 of ERISA which exceed $1,000,000 with respect to any Pension Plan or $3,000,000 with respect to all Pension Plans in the aggregate or (ii) for the payment of employer liabilities under Section 4062, 4063 or 4064 of ERISA which exceeds $1,000,000 with respect to any Pension Plan or $3,000,000 with respect to all Pension Plans in the aggregate. The PBGC has not filed or perfected any Lien under Section 302(f)(1) or 4068(a) of ERISA against any BORROWER or any ERISA Affiliate. Neither BORROWER nor any ERISA Affiliate has received a notice of complete or partial withdrawal from a Multiemployer Plan in which the amount of the liability asserted exceeds $1,000,000 with respect to any Multiemployer Plan or $3,000,000 with respect to all Multiemployer Plans in the aggregate. Section 7.14 Disclosure. No written statement, information, report, representation or warranty made by any Loan Party in any Loan Document, or furnished to the Agent or any Bank by any Loan Party in connection with the Loan Documents, or made in connection with any transaction contemplated hereby or thereby, contains (as of the date when made) any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to any BORROWER which has had a Material Adverse Effect, and there is no fact known to any BORROWER which might in the future have a Material Adverse Effect, except as may have been disclosed in writing to the Agent and the Banks. Section 7.15 Capitalization. (a) As of June 30, 1996, the capitalization of Falcon Drilling and its consolidated Subsidiaries was as set forth in the Form 10-Q of Falcon Drilling for the fiscal quarter ended June 30, 1996. (b) On and as of the Closing Date, Falcon Drilling directly or indirectly owns (legally and beneficially) all of the issued and outstanding Capital Stock of each BORROWER other than Falcon Drilling. On and as of the Closing Date, none of the Subsidiaries of Falcon Drilling has authorized or issued any Redeemable Stock. Falcon Drilling and its Subsidiaries (including, without limitation, the BORROWERS) are members of an affiliated and integrated group of entities and are engaged in related businesses and supporting lines of business and each Subsidiary of Falcon Drilling (including, without limitation, each BORROWER other than Falcon Drilling) will receive a direct and indirect material benefit from the Loans and Letters of Credit and the other transactions evidenced by and contemplated in this Agreement and the other Loan Documents. Each of the BORROWERS will receive reasonably equivalent value in exchange for the Note and Collateral being provided by it as evidence and security for the payment and performance, respectively, of the Obligations. (c) All of the outstanding common stock of the BORROWERS and their Subsidiaries has been validly issued, is fully paid and is nonassessable. Since June 30, 1996, no Borrower other than Falcon Drilling, has issued any subscriptions, options, warrants, calls or rights (including preemptive rights) to acquire, or securities or instruments convertible into, Capital Stock of the BORROWERS. 52 59 Section 7.16 Agreements. None of the Loan Parties is a party to any indenture, loan, credit agreement, stock purchase agreement, lease or other agreement, document or instrument, or subject to any charter, corporate, partnership or similar restriction, that could reasonably be expected to have a Material Adverse Effect. Except as disclosed on Schedule 7.22, none of the Loan Parties is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, document or instrument binding on it or its Properties, except for instances of noncompliance that, individually or in the aggregate, could not have a Material Adverse Effect. Section 7.17 Compliance with Laws. None of the Loan Parties is in violation of any Governmental Requirement, except for instances of non- compliance that, individually or in the aggregate, could not have a Material Adverse Effect. Section 7.18 Investment Company Act. None of the Loan Parties is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.19 Public Utility Holding Company Act. None of the Loan Parties is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.20 Environmental Matters. (a) Except for instances of noncompliance with or exceptions to any of the following representations and warranties that could not have, individually or in the aggregate, a Material Adverse Effect: (i) The Loan Parties and all of their respective Properties and operations are in full compliance with all Environmental Laws. None of the BORROWERS is aware of, and no BORROWER has received written notice of, any past, present or future conditions, events, activities, practices or incidents which may interfere with or prevent the compliance or continued compliance by any Loan Party with all Environmental Laws; (ii) The Loan Parties have obtained all Permits that are required under applicable Environmental Laws, and all such Permits are in good standing and all such Persons are in compliance with all of the terms and conditions thereof; (iii) No Hazardous Materials exist on, about or within or have been (to any BORROWER's knowledge) or are being used, generated, stored, transported, disposed of on or Released from any of the Properties of the Loan Parties except in compliance with applicable Environmental Laws. The use which the Loan Parties make and intend to make of their respective Properties will not result in the use, generation, storage, transportation, accumulation, disposal or Release of any Hazardous Material on, in or from any of their Properties except in compliance with applicable Environmental Laws; (iv) Neither the Loan Parties nor any of their respective Subsidiaries currently or previously owned or leased Properties or operations is subject to any outstanding or, to the best of any BORROWER's knowledge, threatened order from or agreement with any 53 60 Governmental Authority or other Person or subject to any judicial or administrative proceeding with respect to (A) any failure to comply with Environmental Laws, (B) any Remedial Action, or (C) any Environmental Liabilities; (v) There are no conditions or circumstances associated with the currently or previously owned or leased Properties or operations of the Loan Parties that could reasonably be expected to give rise to any Environmental Liabilities or claims resulting in any Environmental Liabilities. None of the Loan Parties is subject to, or has received written notice of any claim from any Person alleging that any of the Loan Parties is or will be subject to, any Environmental Liabilities; (vi) None of the Properties of the Loan Parties is a treatment facility (except for the recycling of Hazardous Materials generated onsite and the treatment of liquid wastes subject to the Clean Water Act), storage facility (except for temporary storage of Hazardous Materials generated onsite prior to their disposal offsite) or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or any comparable provision of state law. The Loan Parties and their Subsidiaries are compliance with all applicable financial responsibility requirements of all Environmental Laws; and (vii) None of the Loan Parties has failed to file any notice required under applicable Environmental Law reporting a Release. (b) No Lien arising under any Environmental Law that could have, individually or in the aggregate, a Material Adverse Effect has attached to any Property or revenues of any Loan Party. Section 7.21 Labor Disputes and Acts of God. Neither the business nor the Properties of any Loan Party are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that is having or could have a Material Adverse Effect. Section 7.22 Material Contracts. Except as may be disclosed on Schedule 7.22, (a) all of the Material Contracts of each Loan Party are in full force and effect, (b) there are no defaults under any Material Contracts (which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect), and (c) to the best of each BORROWER's knowledge after due inquiry, no other Person that is a party thereto is in default under any of the Material Contracts. None of the Material Contracts, and no other agreement, document or instrument to which any Loan Party is a party or by which any Loan Party or any of its Property is based or subject, prohibits the transactions contemplated under the Loan Documents. Section 7.23 Outstanding Securities. As of the Closing Date, all outstanding securities (as defined in the Securities Act of 1933, as amended, or any successor thereto, and the rules and regulations of the Securities and Exchange Commission thereunder) of the Loan Parties have been offered, issued, sold and delivered in compliance with all applicable Governmental Requirements. 54 61 Section 7.24 Priority of Payment. The Debt evidenced by the Notes and all other Obligations of the BORROWERS to the Agent and the Banks under the Loan Documents (a) constitutes "Permitted Indebtedness" (as such term is defined in the Indenture and the Note Purchase Agreement) of the BORROWERS, (b) is pari passu in right of payment with the Senior Debt, except that the Debt and the other Obligations are secured by the Collateral while the Senior Debt is wholly unsecured (subject to the contractual right of the holders of the Senior Fixed Rate Notes to obtain security in the future under certain circumstances as provided in Section 4.10 of the Indenture), and (c) shall in no event be subordinate in any respect (including, without limitation, right of payment) to any other Debt of Falcon Drilling or any of its Subsidiaries, exclusive of the effect of any Permitted Liens. Section 7.25 Solvency. Each of the Borrowers and each of its consolidated Subsidiaries, other than the Non-Material Borrowers and the Guarantors as to which no representation or warranty is made, as a separate entity and on a consolidated basis, is Solvent, both before and after giving effect to the Loans and the other transactions contemplated by the Loan Documents. Section 7.26 Employee Matters. Except as set forth on Schedule 7.26, as of the Closing Date (a) none of the Loan Parties nor any of their respective Subsidiaries, nor any of their respective employees, is subject to any collective bargaining agreement, and (b) no petition for certification or union election is pending with respect to the employees of any Loan Party or any of their respective Subsidiaries, and no union or collection bargaining unit has sought such certification or recognition with respect to the employees of any of the Loan Parties or any of their respective Subsidiaries. There are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of each BORROWER after due inquiry, threatened against, any of the Loan Parties or any of their respective Subsidiaries or their respective employees which could have, either individually or in the aggregate, a Material Adverse Effect. Section 7.27 Insurance. Borrowers have furnished to the Agent a true and complete summary of all insurance that will be in effect as of the Closing Date for the BORROWERS. No notice of cancellation has been received for such insurance and the BORROWERS and their Subsidiaries are in substantial compliance with all of the terms and conditions of the policies providing such insurance. ARTICLE 8 Affirmative Covenants The BORROWERS jointly and severally covenant and agree that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, the BORROWERS will perform and observe, or cause to be performed and observed, the following covenants: Section 8.1 Reporting Requirements. The BORROWERS and the Guarantors will furnish to the Agent and each Bank: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of Falcon Drilling, beginning with the fiscal year ending December 31, 1996, (i) a copy of the annual audit report of Falcon Drilling and its consolidated Subsidiaries as of the end of and for such fiscal year then ended containing, on a consolidated basis 55 62 and with unaudited consolidating schedules attached, balance sheets and statements of income, retained earnings and cash flow, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited by Arthur Andersen & Co. or other independent certified public accountants of recognized national standing, to the effect that such report has been prepared in accordance with GAAP and (ii) a letter from such independent certified public accountants to the Agent (A) stating that nothing has come to its attention during its auditing procedures which indicates that a Default has occurred and is continuing or, if in its opinion a Default has occurred and is continuing, stating the nature thereof, and (B) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith; (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the end of each of the quarters of each fiscal year of Falcon Drilling, beginning with the fiscal quarter ending September 30, 1996, a copy of an unaudited financial report of Falcon Drilling and its consolidated Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended containing, on a consolidated basis, balance sheets and statements of income, retained earnings and cash flow, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year all in reasonable detail certified by a Responsible Officer of the BORROWERS to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operation of Falcon Drilling and its consolidated Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein; (c) Monthly Financial Statements. As soon as available, a copy of any monthly financial report or statement of Falcon Drilling or any of its Subsidiaries as may be prepared by or for the directors of any such Person; (d) Certificate of No Default. Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) or 8.1(b), a certificate of a Responsible Officer of the BORROWERS (i) stating that, to the best of such officer's knowledge, no Default has occurred and is continuing or, if a Default has occurred and is continuing, stating the nature thereof and the action that is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Article 10; (e) Borrowing Base Reports and Agings. As soon as available and in any event within 25 days after the end of each month, and, in any event from time to time upon the request of the Agent, (i) a Borrowing Base Report duly completed and prepared as of the end of such month, and (ii) an aged trial balance of all then-existing Receivables; (f) Rig Reports. As soon as available, a copy of any periodic report(s) of Falcon Drilling or any of its Subsidiaries as may be prepared by or for the directors of any such Person pertaining to the status of any rig(s) (e.g., the location of, the operator of, the contract terms with respect to and the average day rate or utilization of any rig) owned and/or operated by any such Person or any Affiliate of any such Person; (g) Budget; Projections. As soon as available, a copy of any budget or projections of Falcon Drilling or any of its Subsidiaries as may be prepared by or for the directors of any such 56 63 Person and, in any event with 30 days after the end of each fiscal year, a copy of a budget and projections of Falcon Drilling and its consolidated Subsidiaries for the then current fiscal year, which budget and projections shall including consolidating schedules containing information exclusively as to the BORROWERS; (h) Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to any Loan Party by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects or Properties of such Loan Party; (i) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any Governmental Authority or arbitrator affecting any Loan Party which, if determined adversely to such Loan Party, could have a Material Adverse Effect; (j) Notice of Default. As soon as possible and in any event immediately upon any Borrower's knowledge of the occurrence of any Default, a written notice setting forth the details of such Default and the action that such BORROWER has taken and proposes to take with respect thereto; (k) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Loan Party or any Borrower Member files with or receives from the PBGC or the U.S. Department of Labor under ERISA; as soon as possible and in any event within five days after any such Person knows or has reason to know that any Pension Plan is insolvent, or that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or Multiemployer Plan, or that the PBGC, any Loan Party or any Borrower Member has instituted or will institute proceedings under ERISA to terminate or withdraw from or reorganize any Pension Plan, a certificate of a Responsible Officer of the BORROWERS setting forth the details as to such insolvency, withdrawal, Reportable Event, Prohibited Transaction or termination and the action that the BORROWERS propose to take with respect thereto; and promptly after the receipt thereof, a copy of each demand letter or notice which would have been described in Section 7.13(b) if it had been received on or prior to the Closing Date. (l) Reports to Other Creditors. Promptly after the furnishing thereof, a copy of any statement or report furnished by any Loan Party to any other party pursuant to the terms of any indenture, loan, stock purchase or credit or similar agreement relating to any Consolidated Funded Debt and not otherwise required to be furnished to the Agent and the Banks pursuant to any other clause of this Section 8.1; (m) Notice of Material Adverse Effect. Within five Business Days after any BORROWER becomes aware thereof, written notice of any matter that could reasonably be expected to have a Material Adverse Effect; (n) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by any Loan Party to its stockholders generally and one copy of each regular, periodic or special report, registration statement or prospectus filed by any Loan Party with any securities exchange or the Securities and Exchange Commission or any successor 57 64 agency, and of all press releases and other statements made by any of the Loan Parties to the public containing material developments in its business; (o) Notices regarding Subsidiaries and Transfers of Drilling Rigs. (i) Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) and 8.1(b), notice of the creation or acquisition of any Subsidiary by any BORROWER after the Closing Date and subsequent to the last delivery of such information, (ii) promptly upon the occurrence thereof, notice of any sale, transfer or other disposition of any Drilling Rig by any BORROWER and information concerning the identity of the Drilling Rig affected thereby, the identity of the transferee thereof and the date of such sale, transfer or other disposition, (iii) promptly upon the occurrence thereof, notice of the creation or acquisition of any Material Subsidiary of any BORROWER, or of the existence of any Material Subsidiary of the BORROWER, after the Closing Date and subsequent to the last delivery of such information; and (iv) promptly upon the occurrence thereof, notice of any Non-Material Borrower being or becoming a Material Subsidiary (p) Insurance. Within 60 days prior to the end of each fiscal year of Falcon Drilling, a report in form and substance reasonably satisfactory to the Agent summarizing all material insurance coverage maintained by the BORROWERS and their Subsidiaries as of the date of such report and all material insurance coverage planned to be maintained by such Persons in the subsequent fiscal year; (q) Environmental Assessments and Notices. Promptly after the receipt thereof, a copy of each environmental assessment (including any analysis relating thereto) involving an amount in excess of $50,000 prepared with respect to any real Property of any Loan Party and each notice sent by any Governmental Authority relating to any failure or alleged failure of a material nature to comply with any Environmental Law or any liability with respect thereto; (r) Collateral Audit Report. Within 90 days following the end of each fiscal year of Falcon Drilling, and within 90 days following any request therefor by the Agent, a collateral audit report, prepared by Arthur Andersen & Co. or other independent certified public accountants of recognized standing acceptable to the Agent, with respect to the Eligible Receivables and the calculation of the Borrowing Base then in effect; (s) Notices relating to the Senior Debt. Promptly after the delivery or receipt thereof by any BORROWER, a copy of each notice, demand or other written information given or received by any BORROWER under or in connection with any of the Senior Debt (including, without limitation, any notice of a default or of any redemption, purchase or repayment); and (t) General Information. Promptly, such other information concerning the Loan Parties and their respective Subsidiaries, the creditworthiness of the Loan Parties and their respective Subsidiaries and/or the Collateral as the Agent or any Bank may from time to time reasonably request. Section 8.2 Maintenance of Existence; Conduct of Business. Each of the BORROWERS will, and will cause each of its Subsidiaries (other than Non- Recourse Subsidiaries) to, preserve and maintain its corporate or partnership (as applicable) existence (except as permitted by Section 9.3) and all of its material leases, privileges, licenses, Permits, franchises, qualifications and rights that are necessary in the 58 65 ordinary conduct of its business; provided, however, that a BORROWER may merge with another BORROWER in accordance with Section 9.3 and a BORROWER other than Falcon Drilling may dissolve in accordance with Section 9.3. Each of the BORROWERS will, and will cause each of its Subsidiaries to, conduct its business in an orderly and efficient manner in accordance with good business practices. Section 8.3 Maintenance of Properties. Each of the BORROWERS will, and will cause each of its Subsidiaries to, maintain, keep and preserve all of its Properties necessary in the proper conduct of its business in good repair, working order and condition (ordinary wear and tear excepted) and make all necessary repairs, renewals, replacements, betterments and improvements thereof; provided, however, that nothing in this Section 8.3 shall prevent any BORROWER or any of its Subsidiaries from discontinuing the operation or maintenance of any of its Properties if such discontinuance is, in the judgment of such BORROWER, desirable in the conduct of its business or the business of any Subsidiary. Section 8.4 Taxes and Claims. Each of the BORROWERS will, and will cause each of its Subsidiaries to, pay or discharge at or before maturity or before becoming delinquent (a) all taxes, levies, assessments and governmental charges imposed on it or its income or profits or any of its Property, and (b) all lawful claims for labor, material and supplies which, if unpaid, might become a Lien upon any of its Property; provided, however, that neither any BORROWER nor any of its Subsidiaries shall be required to pay or discharge any tax, levy, assessment or governmental charge or claim for labor, material or supplies whose amount, applicability or validity is being contested in good faith by appropriate proceedings being diligently pursued and for which adequate reserves have been established under GAAP. Section 8.5 Insurance. Each of the BORROWERS will, and will cause each of its Subsidiaries to, keep insured by financially sound and reputable insurers all Property of a character usually insured by responsible corporations engaged in the same or a similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such entities and carry such other insurance as is usually carried by such entities. Such insurance shall be written by financially responsible companies selected by such BORROWER which are reasonably acceptable to the Required Banks. Each policy of insurance shall provide that it will not be canceled, amended or reduced except after not less than ten days' prior written notice to the Agent. Each of the BORROWERS will advise the Agent promptly of any policy cancellation, reduction or amendment. Section 8.6 Inspection Rights. Each of the BORROWERS will, and will cause each of its Subsidiaries to, permit representatives and agents of the Agent and each Bank, during normal business hours and upon reasonable notice to such BORROWER, to examine, copy and make extracts from its books and records, to visit and inspect its rigs and other Properties and to discuss its business, operations and financial condition with its officers and independent certified public accountants (provided that Agent and Bank shall provide BORROWERS reasonable opportunity to participate in any such discussions between or among (a) Agent and Banks and (b) the independent certified public accountants of BORROWERS and their Subsidiaries). Each of the BORROWERS shall authorize each of its Subsidiaries to authorize their accountants in writing (with a copy to the Agent) to comply with this Section 8.6. The Agent or its representatives may (at the Borrowers' expense after the occurrence of a Default or at any other time during which, due to the occurrence or possible occurrence of some event or circumstance, or the existence or possible existence of some condition, reasonable cause for such verification exists) conduct field exams to verify the Borrowing Base and at such other times as the Agent may reasonably request. 59 66 Section 8.7 Keeping Books and Records. Each of BORROWERS will, and will cause each of its Subsidiaries to, maintain appropriate books of record and account in accordance with GAAP consistently applied in which true, full and correct entries will be made of all their respective dealings and business affairs. If any changes in accounting principles from those used in the preparation of the financial statements referenced in Section 8.1 are hereafter required or permitted by GAAP and are adopted by Falcon Drilling or any of its Subsidiaries with the concurrence of its independent certified public accountants and such changes in GAAP result in a change in the method of calculation or the interpretation of any of the financial covenants, standards or terms found in Section 8.1 or Article 10 or any other provision of this Agreement, the BORROWERS and the Required Banks agree to amend any such affected terms and provisions so as to reflect such changes in GAAP with the result that the criteria for evaluating the BORROWERS' or such Subsidiaries' financial condition shall be the same after such changes in GAAP as if such changes in GAAP had not been made; provided, that until any necessary amendments have been made, the certificate required to be delivered under Section 8.1(d) hereof demonstrating compliance with Article 10 shall include calculations setting forth the adjustments from the relevant items as shown in the current financial statements based on the changes to GAAP to the corresponding items based on GAAP as used in the financial statements referenced in Section 7.2(a), in order to demonstrate how such financial covenant compliance was derived from the current financial statements. Section 8.8 Compliance with Laws. Each of BORROWERS will, and will cause each of its Subsidiaries to, comply with all applicable Governmental Requirements, except for instances of noncompliance that could not have, individually or in the aggregate, a Material Adverse Effect. Section 8.9 Compliance with Agreements. Each of BORROWERS will, and will cause each of its Subsidiaries to, comply in all material respects with all agreements, contracts and instruments binding on it or affecting its Properties or business. Each of BORROWERS will comply with all terms and provisions of the Senior Debt Documents and Senior Subordinated Debt Documents which are intended to benefit the holders of any "Permitted Indebtedness" and the Agent and the Banks as beneficiaries of "Permitted Liens" (as such terms are defined in the Indenture and the Note Purchase Agreement, respectively), including, without limitation, the terms and provisions of Sections 4.16 and 4.10 of the Indenture and Sections 8.13 and 8.07 of the Note Purchase Agreement. Section 8.10 Further Assurances. Each of the BORROWERS will, and will cause each of its Subsidiaries to, execute and deliver such further agreements, documents and instruments and take such further action as may be requested by the Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents, to evidence the Obligations and to create, preserve, maintain and perfect the Liens of the Agent for the benefit of itself and the Banks in the Collateral. Section 8.11 ERISA. Each of the BORROWERS will, and will cause each of the Borrower Members to, comply with all minimum funding requirements and all other material requirements of ERISA, if applicable, so as not to give rise to any liability thereunder. Section 8.12 Concentration Account. Each of BORROWERS, other than the Non-Material Borrowers and the Guarantors, will deposit, or cause to be deposited, into the Concentration Account all proceeds of all its Receivables, which proceeds shall be subject to the Concentration Account Agreement. Such BORROWERS shall maintain in effect, at all times during the term of this Agreement, the Concentration Account Agreement (or a similar agreement in form and substance satisfactory to the Agent with a depository bank or banks satisfactory to the Agent). With respect to all Receivables of Falcon Venezuela 60 67 which constitute Eligible Receivables, Falcon Venezuela shall send a written notice to the applicable account debtors, in form and substance reasonably satisfactory to the Agent, which shall direct such account debtors to make all payments with respect thereto directly into the Concentration Account or into another account located in the United States which may be approved by the Agent in its discretion from time to time. Section 8.13 No Consolidation in Bankruptcy. Each of the Borrowers will, and will cause each of its Subsidiaries to, (a) maintain corporate or partnership (as applicable) records and books of account separate from those of any other BORROWER, Subsidiary or Affiliate, (b) not commingle its funds or assets with those of any other Borrower, Subsidiary or Affiliate, except that the Borrowers, other than the Non-Material Borrowers and the Guarantors, may (if they desire to do so) commingle proceeds of Receivables in the Concentration Account, and (c) except for consents or meetings to approve the transactions contemplated by this Agreement and the Acquisition Loans Credit Agreement, provide that its board of directors or, with respect to any partnership, analogous managing body will hold all appropriate meetings which will not be jointly held with any other BORROWER, Subsidiary or Affiliate. The BORROWERS will ensure that the Concentration Account contains only proceeds of Collateral and, e.g., does not include any monies of a Non-Material Borrower or a Guarantor in which the Agent, for the benefit of itself and the Banks, does not have a perfected, first priority security interest. Section 8.14 Dissolution of FALRIG Venezuela Falcon Drilling will cause FALRIG Venezuela to be dissolved and its assets, if any, distributed to Falcon Drilling within ninety (90) days after the Closing Date. ARTICLE 9 Negative Covenants The BORROWERS and the Guarantors jointly and severally covenant and agree that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, the BORROWERS and the Guarantors will perform and observe, or cause to be performed and observed, the following covenants: Section 9.1 Debt. Each of the Borrowers will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, incur, create, assume or permit to exist any Debt, except: (a) Debt of the BORROWERS and its Subsidiaries to the Banks pursuant to the Loan Documents and Debt of Falcon Drilling to the Acquisition Loans Banks pursuant to the Acquisition Loans Documents; (b) Existing Debt identified in the Form 10-Q of Falcon Drilling for the quarter ended June 30, 1996, and renewals, extensions or refinancings of any of such Debt referred to in this Section 9.1(b) which do not increase the outstanding principal amount of such Debt and the terms and provisions of which are not materially more onerous than the terms and conditions of such Debt on the Closing Date; 61 68 (c) Purchase money Debt secured by purchase money Liens, which Debt and Liens are permitted under and meet all of the requirements of clause (g) of the definition of Permitted Liens; (d) (i) Intercompany Debt between the BORROWERS incurred in the ordinary course of business or consistent with prudent business practices; provided, however, that any and all of the Debt permitted pursuant to this Section 9.1(d) shall be unsecured, and, if evidenced by instruments, shall be evidenced by instruments satisfactory to the Agent which will be pledged to the Agent for the benefit of the Banks pursuant to a security agreement in form and substance satisfactory to the Agent (except if and to the extent that such a pledge would give the holders of the Senior Notes the contract right to also obtain the benefit of such a pledge); (e) Debt under Currency Hedge Agreements and Interest Rate Protection Agreements, provided that (i) each counterparty shall be rated in one of the two highest rating categories of Standard and Poor's Corporation or Moody's Investors Service, Inc. and (ii) the aggregate notional amount (as to all BORROWERS and their Subsidiaries, other than Non-Recourse Subsidiaries) of all Currency Hedge Agreements and Interest Rate Protection Agreements to which any BORROWER or any of its Subsidiaries is a party shall not exceed $10,000,000 at any time outstanding; (f) Debt of any BORROWER or any of its Subsidiaries incurred in the ordinary course of business in respect of performance bonds, surety bonds and appeal bonds in an aggregate principal amount (as to all BORROWERS and their Subsidiaries) not to exceed $5,000,000 at any time outstanding; (g) Debt of a Person who becomes a Subsidiary of Falcon Drilling pursuant to a transaction permitted by this Agreement occurring after the Closing Date, which Debt was outstanding prior to the date on which such Subsidiary was acquired (other than Debt incurred as a result of, or in anticipation of, such transaction); (h) Permitted Refinancing Debt; and (i) Debt the incurrence of which, after giving proforma effect to such incurrence, would not result in the Proforma Interest Coverage Ratio exceeding 2.50 to 1.00; provided, however, that, other than loans by a Subsidiary of Borrower to Borrower or any other Subsidiary of Borrower, no Debt described in clause (c), (d), (g), (h) or (i) preceding may be incurred if a Default exists at the time of such incurrence or would result therefrom. For purposes of clause (d) of this Section 9.1, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.2 Limitation on Liens. Each of the BORROWERS will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, incur, create, assume or permit to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, except Permitted Liens. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, incur, create, assume 62 69 or permit to exist any Lien upon any Capital Stock, whether now outstanding or hereafter issued, of any Subsidiary of Falcon Drilling (other than a Non- Recourse Subsidiary). Section 9.3 Mergers, Etc. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, become a party to a merger or consolidation, or wind-up, dissolve or liquidate itself; provided, that, so long as no Default exists at such time or would result therefrom (a) any of the Subsidiaries of Falcon Drilling, other than any of the BORROWERS, may merge or consolidate with any of the other Subsidiaries of Falcon Drilling, other than any of the BORROWERS, so long as a Wholly-Owned Subsidiary of Falcon Drilling other than a Non-Recourse Subsidiary is the surviving entity, (b) any of the Subsidiaries of a BORROWER may merge with such BORROWER so long as such BORROWER is the surviving entity, (c) any of the BORROWERS other than Falcon Drilling may merge with Falcon Drilling so long as Falcon Drilling is the surviving entity, (d) any BORROWER other than Falcon Drilling may merge with any BORROWER other than Falcon Drilling so long as the surviving entity is a corporation organized under the laws of a state of the United States, and (e) any BORROWER other than Falcon Drilling or any Subsidiary may dissolve or liquidate pursuant to a transaction in which all of its Properties and assets are transferred, expressly subject to the Liens existing in favor of the Agent for the benefit of itself and the Banks, to Falcon Drilling or the BORROWER that is the parent entity of such dissolving or liquidating BORROWER or Subsidiary, provided, however, that such transferee BORROWER may not be a Non- Material Borrower or a Guarantor. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, purchase or acquire all or a substantial part of the business, assets or Properties of any Person if such purchase or acquisition (i) could reasonably be expected to cause or result in the occurrence of a Default or (ii) could reasonably be expected to have a material adverse effect upon the financial position or performance of such BORROWER. Section 9.4 Restricted Payments. Each of the BORROWERS will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, make any Restricted Payments, except: (a) Any BORROWER other than Falcon Drilling and any Subsidiary of a BORROWER may make Restricted Payments to any BORROWER; (b) Payroll advances in the ordinary course of business not to exceed an aggregate amount of $1,000,000 at any one time; (c) Other advances and loans to officers, employees or shareholders of any BORROWER or any of its Subsidiaries, so long as the aggregate principal amount (as to all BORROWERS and their Subsidiaries) of any such advances and loans does not exceed $500,000 at any time outstanding; (d) Payments of accrued interest and expenses with respect to the Senior Debt and the Senior Subordinated Debt when due in accordance with the Senior Debt Documents and the Senior Subordinated Debt Documents, respectively, and regularly scheduled payments of principal and accrued interest with respect to the Senior Floating Rate Notes and Senior Subordinated Debt when due in accordance with the terms of the Senior Floating Rate Notes and Senior Subordinated Debt Documents, respectively; 63 70 (e) Repayment of Debt permitted pursuant to Section 9.1, which repayment occurs pursuant to a refinancing transaction in which the resulting Debt constitutes Permitted Refinancing Debt; (f) Restricted Payments not exceeding $2,000,000 in aggregate amount (as to all BORROWERS and Subsidiaries) during any fiscal year; (g) Restricted Payments made to redeem any preferred stock or Redeemable Stock issued after the Closing Date at a price not exceeding the issue price thereof; (h) Payment of dividends on any preferred stock issued after the Closing Date; and (i) Investments permitted pursuant to Section 9.5; provided, however, that no such Restricted Payments otherwise permitted pursuant to this Section 9.4 may be made to any Person other than a BORROWER if a Default exists at the time of such Restricted Payment or would result therefrom or may be made if an Event of Default exists at the time of such Restricted Payment or would result therefrom. For purposes of clause (a) of this Section 9.4, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.5 Investments. Each of the BORROWERS will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, make or permit to remain outstanding any advance, loan, extension of credit or capital contribution to or investment in any Person, or purchase or own any stock, bonds, notes, debentures or other securities of any Person, or be or become a joint venturer with or partner of any Person (all such transactions being herein called "Investments"), except: (a) Investments in obligations or securities received in settlement of debts (created in the ordinary course of business) owing to such BORROWER or any of its Subsidiaries; (b) Investments existing as of the Closing Date identified on Schedule 9.5 hereto; (c) Investments in securities issued or guaranteed by the United States or any agency thereof with maturities of four years or less from the date of acquisition; (d) Investments in certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any Bank or with any domestic commercial bank having capital and surplus in excess of $100,000,000; (e) Investments in repurchase obligations with a term of not more than seven days for securities of the types described in clause (c) above with any Bank or with any domestic commercial bank having capital and surplus in excess of $100,000,000; 64 71 (f) Investments in commercial paper of a domestic issuer rated A-1 or better or P-1 or better by Standard & Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition; (g) Investments in shares of money market mutual or similar funds having assets in excess of $100,000,000; (h) Investments in a BORROWER; (i) Advances and loans to officers and employees of a BORROWER or any of its Subsidiaries, so long as the aggregate principal amount (as to all BORROWERS and their Subsidiaries) of such advances and loans does not exceed $1,000,000 at any time outstanding; (j) Investments represented by that portion of the proceeds from Asset Dispositions permitted pursuant to Section 9.8, which proceeds are either not Cash Proceeds or are deemed to be Cash Proceeds pursuant to the second sentence of the definition of "Cash Proceeds"; (k) The contribution of the Non-Recourse Rigs to the Non- Recourse Subsidiaries; (l) Debt permitted pursuant to Section 9.3 and Restricted Payments permitted pursuant to Section 9.4; and (m) Other Investments in an aggregate amount (as to all BORROWERS and their Subsidiaries) not to exceed the sum of the following at any time outstanding: (i) $15,000,000, plus (ii) 50% of the aggregate net cash proceeds received by Falcon Drilling after the Closing Date from the issuance or sale of shares of Capital Stock to any Person other than a Subsidiary of Falcon Drilling, minus (iii) the aggregate amount paid by the BORROWERS and their Subsidiaries after the Closing Date in redemption of preferred stock or Redeemable Stock. provided, however, that no Investments may be made by Falcon Drilling pursuant to clause (h) preceding or by any BORROWER pursuant to clauses (i), (j), (k), (l) or (m) preceding if a Default exists at the time of such Investment or would result therefrom. For purposes of clause (h) of this Section 9.5, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.6 Limitation on Issuance of Capital Stock. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, at any time on or after the Closing Date issue, sell, assign or otherwise dispose of (a) any of its Capital Stock, (b) any securities exchangeable for or convertible into or carrying any rights to acquire any of its Capital Stock or (c) any option, warrant or other right to acquire any of its Capital Stock; provided, however, that, if and to the extent not otherwise prohibited by this Agreement or the other Loan Documents (i) Falcon Drilling may issue additional shares of its Capital Stock or such securities, options, warrants or other rights, other than Redeemable Stock, for full and fair consideration, (ii) subject to Section 9.5, any Subsidiary of Falcon Drilling may issue additional shares of its Capital Stock, or such securities, options, warrants or other rights to Falcon Drilling or another Subsidiary of Falcon Drilling (iii) any Non-Recourse Subsidiary of a BORROWER may issue, sell, assign or 65 72 otherwise dispose of shares of its Capital Stock or such securities, options, warrants or other rights to any Person for full and fair consideration, (iv) the BORROWERS may issue stock in accordance with the terms of options and warrants that were outstanding on June 30, 1996, and (v) the BORROWERS may grant compensatory stock options in the ordinary course of business consistent with past practices and issue shares upon the exercise of such options. For purposes of clause (c)(ii) of this Section 9.6, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.7 Transactions With Affiliates. Except for (a) the payment of salaries in the ordinary course of business consistent with prudent business practices, (b) the furnishing of employment benefits in the ordinary course of business consistent with prudent business practices, (c) the transactions permitted by Section 9.13, and (d) the transactions specified in Schedule 9.7, each of the BORROWERS will not, and will not permit any of its Subsidiaries to, enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate of such BORROWER or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of such BORROWER's or such Subsidiary's business and upon fair and reasonable terms no less favorable to such BORROWER or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate of such BORROWER or such Subsidiary. Section 9.8 Disposition of Property. Each of the Borrowers will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, enter into an Asset Disposition, directly or indirectly, except: (a) Asset Dispositions pursuant to which (i) such BORROWER or its Subsidiary, as the case may be, receives consideration at the time of such disposition at least equal to the fair market value of such Property, except in the case of (A) a Bargain Purchase Contract (as such term is defined in the Indenture) entered into in the ordinary course of business, (B) a transfer of a drilling rig or rigs and related equipment between Borrowers if no Default exists at the time of such transfer or would result therefrom, or (C) an Asset Disposition resulting from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss; (ii) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Debt of such BORROWER or such Subsidiary relating to the Capital Stock or Property that was the subject of such disposition and the release of such BORROWER or such Subsidiary from such indebtedness); and (iii) after giving effect to such disposition, the total noncash consideration from all dispositions held by Falcon Drilling and its Subsidiaries, including noncash consideration described in the second sentence of the definition of "Cash Proceeds" which is not converted into cash within 12 months after the related dispositions, then outstanding is not greater than $25,000,000; (b) the sale of drill-string components, inventory (other than drilling rigs) and obsolete and worn-out equipment in the ordinary course of business; (c) any drilling contract, charter (bareboat or otherwise) or other lease of property entered into by any BORROWER or any Subsidiary (including, without limitation, bareboat charters by any BORROWER to any Subsidiary other than any Non-Recourse Subsidiary) in the ordinary 66 73 course of business; provided, however, that (i) any such contract, charter or other lease affecting any drilling rig securing the Acquisition Loans Obligations shall be for full and fair consideration payable to Falcon Drilling, shall be in form and substance satisfactory to the Agent and shall expressly include terms and provisions in form and substance satisfactory to the Agent to the effect that the parties thereto acknowledge the existing Lien on such drilling rig securing the Acquisition Loans Obligations and agree that such Lien securing such obligations is prior to, and will not in any way be affected by, such contract, charter or other lease and (ii) none of the BORROWERS nor any Subsidiary shall enter into any such contract, charter or lease with a Non-Recourse Subsidiary. (d) a Restricted Payment permitted under Section 9.4 or any Investment permitted under Section 9.5; (e) the transfer of the Non-Recourse Rigs to one or more Non- Recourse Subsidiaries; (f) the conveyance, transfer or other disposition of rigs pursuant to which such rigs are exchanged for rigs of a like kind, i.e. barge rigs may be exchanged for barge rigs and jackup rigs may be exchanged for jackup rigs, having an equivalent value; and (g) issuances or dispositions of Capital Stock permitted under Section 9.6. Section 9.9 Sale and Leaseback. Except for transactions in the ordinary course of business involving real or personal Property having an aggregate fair market value of $30,000,000 or less and providing for annual lease payments in an annual aggregate amount not to exceed $3,000,000, each of the BORROWERS will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, enter into any arrangement with any Person pursuant to which it leases from such Person real or personal Property that has been or is to be sold or transferred, directly or indirectly, by it to such Person. Section 9.10 Lines of Business. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, engage in any line or lines of business activity other than the businesses in which they are engaged on the Closing Date and lines of business reasonably related thereto. Section 9.11 Environmental Protection. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any of its Properties for the handling, processing, storage, transportation or disposal of any Hazardous Material except in compliance with applicable Environmental Laws, (b) generate any Hazardous Material except in compliance with applicable Environmental Laws, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material in violation of any Environmental Law, or (d) otherwise conduct any activity or use any of its Properties in any manner that violates or is likely to violate any Environmental Law or create any Environmental Liabilities for which any BORROWER or any of its Subsidiaries would be responsible, except for circumstances or events described in clauses (a) through (d) preceding that could not have, individually or in the aggregate, a Material Adverse Effect. Section 9.12 Intercompany Transactions. Except as may be expressly permitted or required by the Loan Documents or except as may be expressly permitted or required by the Senior Debt Documents 67 74 or the Senior Subordinated Debt Documents as summarized on Schedule 9.12, each of the BORROWERS will not, and will not permit any of its Subsidiaries to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary (other than a Non-Recourse Subsidiary) to (a) pay dividends or make any other distribution to such BORROWER or any of its Subsidiaries (other than Non- Recourse Subsidiaries) in respect of such Subsidiary's Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Debt owed to such BORROWER or any of its Subsidiaries (other than Non-Recourse Subsidiaries), (c) make any loan or advance to such BORROWER or any of its Subsidiaries (other than Non-Recourse Subsidiaries), or (d) sell, lease or transfer any of its Property to such BORROWER or any of its Subsidiaries (other Non-Recourse Subsidiaries). Nothing contained in this Section 9.12 shall be deemed to constitute an encumbrance or restriction prohibited by Section 4.12 of the Indenture or Section 8.09 of the Note Purchase Agreement. Section 9.13 Consulting and Management Fees. Other than reasonable consulting fees paid to Affiliates of Falcon Drilling on an arm's-length basis for specific services rendered not to exceed $750,000 in the aggregate during any calendar year, each of the BORROWERS will not, and will not permit any of its Subsidiaries to, pay any management, consulting or similar fees (excluding directors' fees and legal fees) to any Affiliate of such BORROWER or to any director, officer or employee of such BORROWER or any Affiliate of such Borrower. Section 9.14 Modification of Other Agreements. Each of the BORROWERS will not, and will not permit any of its Subsidiaries to, consent to or implement any termination, amendment, modification, supplement or waiver of (a) the Senior Debt Documents, (b) the Senior Subordinated Debt Documents, (c) the certificate of incorporation or bylaws or partnership agreement or certificate of limited partnership or analogous constitutional documents of such BORROWER or any of its Subsidiaries if the same could have a Material Adverse Effect, or (d) any other Material Contract to which it is a party or any Permit which it possesses if the same could have a Material Adverse Effect. Without limiting the generality of and in addition to the foregoing, each of the BORROWERS will not consent to or implement any termination, amendment, modification, supplement or waiver of the Senior Debt Documents or Senor Subordinated Debt Documents (i) to increase the principal amount of any Senior Debt or Senor Subordinated Debt, (ii) to shorten the maturity of, or any date for the payment of any principal of or interest on, any Senior Debt or Senior Subordinated Debt, (iii) to increase the rate of interest on or with respect to any Senior Debt or Senior Subordinated Debt, (iv) to otherwise amend or modify the payment or subordination terms of any Senior Debt or Senior Subordinated Debt, (v) to increase any cost, fee or expense payable by such BORROWER or any its Subsidiaries, (vi) to provide any Collateral or security for payment or collection of any Senior Debt or Senior Subordinated Debt without the written consent of Required Banks, or (vii) in any other respect that could be materially adverse to Falcon Drilling or any other BORROWER or to Falcon Drilling and its Subsidiaries taken as a whole. Section 9.15 ERISA. Each of the BORROWERS will not: (a) allow, or take (or permit any Borrower Member to take) any action which would cause, any unfunded or unreserved liability for benefits under any Plan (exclusive of any Multiemployer Plan) to exist or to be created that exceeds $4,000,000 with respect to any such Plan or $8,000,000 with respect to all such Plans in the aggregate; or 68 75 (b) with respect to any Multiemployer Plan, allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Multiemployer Plan to exist or to be created, either individually as to any such Plan or in the aggregate as to all such Plans, that could, upon any partial or complete withdrawal from or termination of any such Multiemployer Plan or Plans, have a Material Adverse Effect. ARTICLE 10 Financial Covenants The BORROWERS and the Guarantors jointly and severally covenant and agree that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, the BORROWERS and the Guarantors will perform and observe the following covenants: Section 10.1 Consolidated Current Ratio. Falcon Drilling will at all times maintain a Consolidated Current Ratio of not less than 1.00 to 1.00. Section 10.2 Consolidated Tangible Net Worth. Falcon Drilling will at all times maintain Consolidated Tangible Net Worth in an amount not less than the sum of (a) $95,000,000, plus (b) 50% of cumulative Consolidated Net Income during any fiscal quarter ending after the Closing Date if, but only if, such Consolidated Net Income during such fiscal quarter is positive, plus (c) 75% of all Net Proceeds of each Equity Issuance after the Closing Date. Section 10.3 Consolidated Interest Coverage Ratio. The BORROWERS will not permit the Consolidated Interest Coverage Ratio, calculated as of the end of each fiscal quarter of Falcon Drilling commencing with the fiscal quarter ending September 30, 1996, for the four fiscal quarters of Falcon Drilling then most recently ended, to be less than 2.50 to 1.00. ARTICLE 11 Default Section 11.1 Events of Default. Each of the following shall be deemed an "Event of Default": (a) The BORROWERS or any other Loan Party (i) shall fail to pay, repay or prepay when due any amount of principal owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document, (ii) shall fail to pay within one day of the date when due any amount of accrued interest owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document, or (iii) or shall fail to pay within five days of the date when due any fee or other amount or other Obligation (other than principal or interest) owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document. (b) Any representation or warranty made or deemed made by any BORROWER or any Loan Party in any Loan Document or in any certificate, report, notice or financial statement 69 76 furnished at any time in connection with this Agreement or any other Loan Document shall be false, misleading or erroneous in any material respect when made or deemed to have been made. (c) Any BORROWER or any Loan Party shall fail to perform, observe or comply with any other covenant, agreement or term contained in this Agreement or any other Loan Document (other than covenants to pay the Obligations) and such failure is not remedied or waived within 15 days after the Agent or any Bank shall have notified the BORROWERS of such failure or, if a different grace period is expressly made applicable in such other Loan Documents, within such applicable grace period. (d) Any of the Loan Parties shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due. (e) Any Loan Party shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of itself or of all or any substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect, the "Bankruptcy Code"), (iv) institute any proceeding or file a petition seeking to take advantage of any other Debtor Relief Law, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing. (f) A proceeding or case shall be commenced, without the application, approval or consent of any of the Loan Parties in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of any of the Loan Parties or of all or any substantial part of its Property, or (iii) similar relief in respect of any of the Loan Parties under any Debtor Relief Law, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against any of the Loan Parties shall be entered in an involuntary case under the Bankruptcy Code. (g) Any of the Loan Parties shall fail to discharge (or fail to have continually stayed until subsequently discharged) within a period of 30 days after the commencement thereof any attachment, sequestration, forfeiture or similar proceeding or proceedings involving an aggregate amount in excess of $3,000,000 against any of its Properties. (h) A final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall be rendered by a court or courts against the Loan Parties or any of them on claims not covered by insurance or as to which the insurance carrier has denied responsibility and the same shall not be discharged, or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Loan Parties shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. 70 77 (i) Any of the Loan Parties shall fail to pay when due (including any applicable grace period) any principal of or interest on any Debt or Debts (other than the Obligations or any Non-Recourse Debt) having a principal amount of at least $3,000,000 individually, or $5,000,000 in the aggregate, or the maturity of any such Debt or Debts shall have been accelerated, or any such Debt or Debts shall have been required to be prepaid prior to the stated maturity thereof. (j) Any event shall have occurred (and shall not have been waived or otherwise cured) that permits any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity of such Debt or require prepayment of such Debt. (k) Any event shall have occurred (and shall not have been waived or otherwise cured) that, with the giving of notice or lapse of time or both, would permit any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity of such Debt or require the prepayment of such Debt, and such default shall have continued for a period of 30 days after a Responsible Officer of Falcon Drilling obtains actual knowledge of such default. (l) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Loan Party or any of its shareholders, or any Loan Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien created by the Loan Documents shall for any reason cease to be a valid, first priority perfected Lien (except for Permitted Liens) upon any of the Collateral purported to be covered thereby. (m) Any of the following events shall occur or exist with respect to any Loan Party or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Pension Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Pension Plan or the termination of any Pension Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Pension Plan, or the institution by the PBGC of any such proceedings; (v) any "accumulated funding deficiency" (as defined in Section 406 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any Plan; or (vi) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Plan or the reorganization, insolvency, or termination of any Pension Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of the Agent subject any Loan Party or any ERISA Affiliate to any tax, penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $3,000,000. (n) The occurrence of a Change of Control; (o) If, at any time, the Senior Debt shall (i) cease to be either pari passu with, or subordinate in right of payment to, the Notes or the Obligations, (ii) become superior in right of payment to the Notes or the Obligations, or (iii) otherwise have a right to any payment or any security superior to that of the Notes or the Obligations; or if, at any time, the Senior 71 78 Subordinated Debt shall (A) cease to be subordinate in right of payment to the Notes or the Obligations, (B) become equal or superior in right of payment to the Notes or the Obligations, or (C) otherwise have a right to payment or any security equal or superior to that of the Notes or the Obligations; (p) The occurrence of (i) a "Default" (as such term is used or defined in any of the Senior Debt Documents or the Senior Subordinated Debt Documents) under any of the Senior Debt Documents or the Senior Subordinated Debt Documents, unless (A) within 30 days after a Responsible Officer of Falcon Drilling obtains or should have obtained actual knowledge of such Default, such Default has been waived, cured or consented to in accordance with such documents, (B) the maturity of the Loans has not been accelerated, and (C) such waiver or consent is not made in connection with any amendment or modification of any such documents in violation of Section 9.14 hereof or in violation of any of the Senior Debt Documents or the Senior Subordinated Debt Documents or in connection with any payment to the holders of any Senior Debt or any Senior Subordinated Debt, (ii) an "Event of Default" (as such term is used or defined in any of the Senior Debt Documents or Senior Subordinated Debt Documents) under any of the Senior Debt Documents or Senior Subordinated Debt Documents, or (iii) any acceleration of the maturity of any Senior Debt or Senior Subordinated Debt. (q) If, at any time, (i) Falcon Drilling or any of its Subsidiaries shall make, or shall be required to make, any redemption, purchase or prepayment (whether optional or mandatory) with respect to any of the Senior Debt or Senior Subordinated Debt, (ii) any event or circumstance shall occur which gives any party to the Senior Debt Documents or Senior Subordinated Debt Documents or any holder of any Senior Debt or Senior Subordinated Debt the right to request or require Falcon Drilling or any of its Subsidiaries, as the case may be, to redeem, purchase or prepay the Senior Debt or Senor Subordinated Debt, as the case may be (including, without limitation (A) the making of, or the obligation of Falcon Drilling or any of its Subsidiaries to make, an Asset Sale Offer (as such term is defined in the Indenture) or a Senior Notes Assets Sale Offer (as such term is defined in the Note Purchase Agreement) or (B) the occurrence of a Change of Control (as such term is defined in the Indenture or the Note Purchase Agreement), or (iii) Falcon Drilling or any of its Subsidiaries shall initiate or give (A) any election or notice relating to any redemption, purchase or prepayment (whether optional or mandatory) of any of the Senior Debt or Senior Subordinated Debt or (B) any election or notice relating to any defeasance of the Senior Debt or Senior Subordinated Debt. Section 11.2 Remedies. If any Event of Default shall occur and be continuing, the Agent may and, if directed by the Required Banks, the Agent shall do any one or more of the following: (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Loans and the other Obligations and all other amounts payable by any BORROWER or other Loan Party under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived by the BORROWERS and Guarantors; 72 79 (b) Termination of Commitments. Terminate the Commitments (including, without limitation, the obligation of the Issuing Bank to issue Letters of Credit) without notice to the BORROWERS or any other Loan Party; (c) Judgment. Reduce any claim to judgment; (d) Foreclosure. Foreclose or otherwise enforce any Lien granted to the Agent for the benefit of itself and the Banks to secure payment and performance of the Obligations in accordance with the terms of the Loan Documents; or (e) Rights. Exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction, by any of the Loan Documents, by equity or otherwise against any or all of the Loan Parties or any other Person; provided, however, that upon the occurrence of an Event of Default under Section 11.1(e) or Section 11.1(f), the Commitments of all of the Banks (including, without limitation, the obligation of the Issuing Bank to issue Letters of Credit) shall immediately and automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Loans and the other Obligations and all other amounts payable by any BORROWER or other Loan Party under the Loan Documents shall thereupon become immediately and automatically due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived by the BORROWERS and the Guarantors. Section 11.3 Cash Collateral. If (a) an Event of Default shall have occurred and be continuing or (b) any Letter of Credit shall, for whatever reason, remain outstanding after all Loans and Reimbursement Obligations have been paid in full and all Commitments have expired or terminated, then the BORROWERS shall, if requested by the Agent or the Required Banks, pledge to the Agent as security for the Obligations, pursuant to a security agreement or assignment in form and substance satisfactory to the Agent, an amount in immediately available funds (in excess of any funds already pledged or assigned by the BORROWERS to the Agent as of the date of the occurrence of such Event of Default) equal to the then outstanding Letter of Credit Liabilities, such funds to be held in a cash collateral account satisfactory to the Agent without any right of withdrawal by the BORROWERS. Section 11.4 Performance by the Agent. If any BORROWER shall fail to perform any covenant or agreement in accordance with the terms of the Loan Documents, the Agent may, at the direction of the Required Banks, perform or attempt to perform such covenant or agreement on behalf of such BORROWER. In such event, the BORROWERS shall, at the request of the Agent, promptly pay any amount expended by the Agent or the Banks in connection with such performance or attempted performance to the Agent at the Principal Office, together with interest thereon at the applicable Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that neither the Agent nor any Bank shall have any liability or responsibility for the performance of any obligation of any BORROWER under this Agreement or any of the other Loan Documents. 73 80 ARTICLE 12 The Agent Section 12.1 Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Neither the Agent, the Co-Agent, nor any of their respective Affiliates, officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct or the wrongful failure of the Agent or Co-Agent, in their capacities as a Bank, to fund their own respective Commitment pursuant to the terms of this Agreement. Without limiting the generality of the preceding sentence, the Agent (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Bank; (c) shall not be required to initiate any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Banks; (d) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of its obligations hereunder or thereunder; (e) may consult with legal counsel (including counsel for the BORROWERS or any other Loan Party), 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; and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing reasonably believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks; provided, however, that the Agent shall not be required to take any action which exposes the Agent to liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 12.2 Rights of Agent as a Bank. With respect to its Commitment, the Loan made by it and the Note issued to it, Banque Paribas (and any successor acting as Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, act as trustee under indentures of, provide merchant banking services to and generally engage in any kind of banking, trust or other business with the Loan Parties or any of their Affiliates, and any other Person who may do business with or own securities of the Loan Parties or any of their Affiliates, all as if it were not acting as the Agent and without any duty to account therefor to the Banks. 74 81 Section 12.3 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on the Loans or of commitment fees) unless the Agent has received notice from a Bank or the BORROWERS specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 12.1) take such action with respect to such Default as shall be directed by the Required Banks, provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall seem advisable and in the best interest of the Banks. SECTION 12.4 INDEMNIFICATION. THE BANKS HEREBY AGREE TO INDEMNIFY THE AGENT AND THE CO-AGENT FROM AND HOLD THE AGENT AND THE CO-AGENT HARMLESS AGAINST (TO THE EXTENT NOT PROMPTLY REIMBURSED UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWERS AND GUARANTORS UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENT PERCENTAGES, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT OR THE CO-AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE AGENT OR THE CO-AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY THE AGENT'S OR THE CO-AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE BANKS THAT THE AGENT AND THE CO-AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT OR THE CO-AGENT (EXCEPT TO THE EXTENT THE SAME ARE CAUSED BY THE AGENT'S OR THE CO-AGENT'S [AS APPLICABLE] OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT). WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION 12.4, EACH BANK AGREES TO REIMBURSE THE AGENT AND THE CO-AGENT PROMPTLY UPON DEMAND FOR ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE COMMITMENTS) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEYS' FEES) INCURRED BY THE AGENT OR THE CO-AGENT 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, THE LOAN DOCUMENTS, TO THE EXTENT THAT THE AGENT OR THE CO-AGENT, AS 75 82 APPLICABLE, IS NOT PROMPTLY REIMBURSED FOR SUCH EXPENSES BY THE BORROWERS. Section 12.5 Independent Credit Decisions. Each Bank agrees that it has independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the BORROWERS and Guarantors and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself informed as to the performance or observance by any Loan Party of this Agreement or any other Loan Document or to inspect the Properties or books of any Loan Party. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other financial information concerning the affairs, financial condition or business of any Loan Party (or any of their Affiliates) which may come into the possession of the Agent or any of its Affiliates. Section 12.6 Several Commitments. The Commitments and other obligations of the Banks under this Agreement are several. The default by any Bank in making a Loan in accordance with its Commitment shall not relieve the other Banks of their obligations under this Agreement. In the event of any default by any Bank in making any Loan, each nondefaulting Bank shall be obligated to make its Loan but shall not be obligated to advance the amount which the defaulting Bank was required to advance hereunder. In no event shall any Bank be required to advance an amount or amounts with respect to any of the Loans which would in the aggregate exceed such Bank's Commitment with respect to such Loans. No Bank shall be responsible for any act or omission of any other Bank. Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents, any Bank that fails to make available to the Agent its pro rata share of any Loan or to purchase its pro rata share of any Letter of Credit as, when and to the full extent required by the provisions of this Agreement, shall be deemed delinquent (a "Non-Funding Bank") and shall be deemed a Non-Funding Bank until such time as such delinquency is satisfied. A Non-Funding Bank shall be deemed to have assigned any and all payments due to it from the Loan Parties, whether on account of outstanding Loans, the Letter of Credit, interest, fees or otherwise, to the remaining non-delinquent Banks for application to, and reduction of, their respective pro rata shares of all outstanding Loans, Letters of Credit, fees and/or otherwise. As among the Banks, a Non-Funding Bank shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans, etc. of the non-delinquent Banks, the Banks' respective pro rata shares of all outstanding Loans and Letters of Credit have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Section 12.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Borrowers. Upon any such resignation, the Required Banks will have the right, after notice to and consultation with Falcon Drilling if (but only if) no Default has then occurred and is continuing, to appoint another Bank as a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States or any state thereof and 76 83 having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any Agent's resignation as Agent, the provisions of this Article 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was the Agent. ARTICLE 13 Miscellaneous Section 13.1 Expenses. Whether or not the transactions contemplated hereby are consummated, the BORROWERS and Guarantors hereby agree, on demand, to pay or reimburse the Agent and each of the Banks for paying (as the Agent may request): (a) all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents and any and all (actual or proposed) amendments, modifications, renewals, extensions and supplements thereof and thereto, and the syndication of the Loans, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent, (b) all reasonable out-of-pocket costs and expenses of the Agent and the Banks in connection with any Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent and the Banks, (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement or any other Loan Document, and (e) all reasonable out-of- pocket costs and expenses incurred by the Agent in connection with due diligence, computer services, copying, appraisals, environmental audits, collateral audits, field exams, insurance, consultants and search reports. SECTION 13.2 INDEMNIFICATION. THE BORROWERS AND GUARANTORS SHALL INDEMNIFY THE AGENT, THE CO-AGENT AND EACH BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' AND CONSULTANTS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY LOAN PARTY OF ANY REPRESENTATION, WARRANTY, COVENANT OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE USE OR PROPOSED USE OF ANY LOAN OR LETTER OF CREDIT, (E) ANY AND ALL TAXES, LEVIES, DEDUCTIONS AND CHARGES IMPOSED ON THE AGENT, THE ISSUING BANK OR ANY BANK (OTHER THAN TAXES IMPOSED ON THE OVERALL NET INCOME OR GROSS RECEIPTS OF THE AGENT, THE CO-AGENT, THE ISSUING BANK OR ANY OTHER BANK) IN RESPECT OF ANY LETTER OF CREDIT, (F) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL OR 77 84 CLEANUP OF ANY HAZARDOUS MATERIAL OR THE EXISTENCE OF ANY UNDERGROUND STORAGE TANK LOCATED ON, ABOUT, WITHIN OR AFFECTING ANY OF THE PROPERTIES OF ANY LOAN PARTY, OR OTHERWISE ATTRIBUTABLE TO ANY LOAN PARTY IN CONNECTION WITH ANY OTHER SITE, OR (G) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING; BUT EXCLUDING ANY OF THE FOREGOING TO THE EXTENT DIRECTLY CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION 13.2 SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. WITHOUT PREJUDICE TO THE SURVIVAL OF ANY OTHER TERM OR PROVISION OF THIS AGREEMENT, THE OBLIGATIONS OF THE BORROWERS AND GUARANTORS UNDER THIS SECTION 13.2 SHALL SURVIVE THE REPAYMENT OF THE LOANS AND LETTER OF CREDIT LIABILITIES AND OTHER OBLIGATIONS AND TERMINATION OF THE COMMITMENTS. Section 13.3 Limitation of Liability. None of the Agent, the Co-Agent, any Bank or any Affiliate, officer, director, employee, attorney or agent thereof shall be liable to any BORROWER or any other Loan Party for any error of judgment or act done in good faith, or be otherwise liable or responsible under any circumstances whatsoever (including such Person's negligence), except for such Person's gross negligence or willful misconduct. None of the Agent, the Co-Agent, any Bank, or any Affiliate, officer, director, employee, attorney or agent thereof shall have any liability with respect to, and the BORROWERS and Guarantors hereby waive, release and agree not to sue any of them upon, any claim for any special, indirect, incidental or consequential damages suffered or incurred by any BORROWER or any other Loan Party in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. The Borrowers and Guarantors hereby waive, release and agree not to sue the Agent, the Co-Agent or any Bank or any of their respective Affiliates, officers, directors, employees, attorneys or agents for exemplary or punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 13.4 No Duty. All attorneys, accountants, appraisers and other professional Persons and consultants retained by the Agent, the Co-Agent and the Banks shall have the right to act exclusively in the interest of the Agent, the Co-Agent and the Banks and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to the BORROWERS, any of the Borrowers' shareholders, any other Loan Party or any other Person. Section 13.5 No Fiduciary Relationship. The relationship between each BORROWER and each other Loan Party and each Bank is solely that of debtor and creditor, and neither the Agent, the Co-Agent nor any Bank has any fiduciary or other special relationship with any BORROWER or any other Loan Party, 78 85 and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between any BORROWER and any other Loan Party and any Bank, or any other Loan Party and any Bank, to be other than that of debtor and creditor. No joint venture or partnership is created by this Agreement among the Banks or between any BORROWER or any other Loan Party and any Bank. Section 13.6 Equitable Relief. The BORROWERS and Guarantors recognize that in the event the BORROWERS or Guarantors fail to pay, perform, observe or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to the Agent and the Banks. The BORROWERS and Guarantors therefore agree that the Agent and the Banks, if the Agent or the Banks so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 13.8 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The BORROWERS and Guarantors may not assign or transfer any of their rights or obligations hereunder without the prior written consent of the Agent and the Banks. Any Bank may sell participations to one or more banks or other institutions in or to all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the Loan owing to it); provided, however, that (i) such Bank's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment) shall remain unchanged, (ii) such Bank shall remain solely responsible to the BORROWERS for the performance of such obligations, (iii) such Bank shall remain the holder of its Note for all purposes of this Agreement, (iv) the BORROWERS and Guarantors 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 (v) such Bank shall not sell a participation that conveys to the participant the right to vote or give or withhold consents under this Agreement or any other Loan Document, other than the right to vote upon or consent to (A) any increase of such Bank's Commitment, (B) any reduction of the principal amount of, or interest to be paid on, the Loan of such Bank, (C) any reduction of any commitment fee or other amount payable to such Bank under any Loan Document, (D) any postponement of any date for the payment of any amount payable in respect of the Loan of such Bank, (E) any release of a material portion of the Collateral from the Liens created by the Security Documents and not otherwise expressly authorized by the Loan Documents, and (F) any release of any Loan Party from liability under the Loan Documents. Each holder of a participation interest in this Agreement shall be entitled to the benefits of the provisions of Section 3.5, 4.6, 4.7 and 13.2 of this Agreement as if and to the same extent as if it were a Bank hereunder. 79 86 (b) The BORROWERS and the Banks agree that any Bank (the "Assigning Bank") may at any time assign to one or more Eligible Assignees all, or a proportionate part of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment, Loans and Letter of Credit Liabilities) (each an "Assignee"); provided, however, that (i) each such assignment shall be of a consistent, and not a varying, percentage of all of the Assigning Bank's rights and obligations under this Agreement and the other Loan Documents, (ii) except in the case of an assignment of all of a Bank's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitment, Loans and Letter of Credit Liabilities of the Assigning Bank being assigned pursuant to each assignment (determined as of the date of the Assignment Acceptance with respect to such assignment) shall in no event be less than an amount equal to $5,000,000, and (iii) the parties to each such assignment shall execute and deliver to the Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, or, if so specified in such Assignment and Acceptance, the date of acceptance thereof by the Agent, (A) the Assignee thereunder shall be a party hereto as a "Bank" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and under the Loan Documents and (B) the Assigning Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Bank's rights and obligations under the Loan Documents, such Bank shall cease to be a party thereto). Notwithstanding anything to the contrary contained herein, each Assigning Bank shall, concurrently with each assignment to an Assignee referred to in this Section 13.8(b), also assign to such Assignee an identical interest in such Assigning Bank's Acquisition Loans and commitments thereunder. (For example, if an Assigning Bank assigns 50% of its Commitment or its Obligations to an Assignee, such Assigning Bank shall also, concurrently therewith, assign 50% of its commitment relating to the Acquisition Loans or its Acquisition Loans Obligations, respectively, to such Assignee.) (c) 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 and enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (ii) such Assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of its obligations under the Loan Documents; (iii) such Assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial statements referred to in Section 7.2 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 80 87 will, independently and without reliance upon the Agent or 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 and the other Loan Documents; (v) such Assignee confirms that it is an Eligible Assignee; (vi) such Assignee appoints and authorizes the Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to the Agent 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 the Loan Documents are required to be performed by it as a Bank. (d) The Agent shall maintain at its Principal Office 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 Commitments 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 BORROWERS, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by the BORROWERS or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assigning Bank and Assignee representing that it is an Eligible Assignee, together with the Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to the BORROWERS. Within five Business Days after its receipt of such notice the BORROWERS, at their expense, shall execute and deliver to the Agent in exchange for each surrendered Note a new Note in an amount equal to the Commitment assumed by it (or, if the Commitments have terminated or expired, the Loans assigned to it) pursuant to such Assignment and Acceptance and, if the Assigning Bank has retained any Loan or Letter of Credit Liability, the Commitment retained by it (or, if the Commitments have terminated or expired, the Loans retained by it) (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit C hereto. (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.8, disclose to the Assignee or participant, or proposed Assignee or participant, any information relating to any BORROWER or any Subsidiary or Affiliate of any BORROWER furnished to such Bank by or on behalf of any BORROWEr or any Subsidiary or Affiliate of any BORROWEr; provided that each such actual or proposed Assignee or participant shall agree to be bound by the provisions of Section 13.20. (g) Any Bank may assign and pledge all or part of the Note held by it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve System and/or Federal Reserve Bank; provided, that any payment made by the BORROWERS for the benefit of such assigning and/or pledging Bank in accordance with the terms 81 88 of the Loan Documents shall satisfy the BORROWERS' obligations under the Loan Documents in respect thereof to the extent of such payment. No such assignment and/or pledge shall release the assigning and/or pledging Bank from its obligations hereunder. Section 13.9 Survival. All representations and warranties made or deemed made in this Agreement or any other Loan Document or in any document, statement or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and the issuance of the Letters of Credit, and no investigation by the Agent or any Bank or any closing shall affect the representations and warranties or the right of the Agent or any Bank to rely upon them. Without prejudice to the survival of any other obligation of the BORROWERS or Guarantors hereunder, the obligations of the Borrowers and Guarantors under Article 4 and Sections 13.1 and 13.2 shall survive repayment of the Notes and termination of the Commitments. SECTION 13.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND (EXCEPT AS PROVIDED IN THIS SECTION 13.10 WITH RESPECT TO THE TERM SHEET) SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. Notwithstanding the foregoing, the Term Sheet shall continue in full force and effect as it relates to fees as provided in Section 2.11. Section 13.11 Amendments. No amendment or waiver of any provision of this Agreement, the Notes or any other Loan Document to which any BORROWER or other Loan Party is a party, nor any consent to any departure by any BORROWER or other Loan Party therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and the BORROWERS, or other Loan Party as appropriate, in writing, and each 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 all of the Banks and the BORROWERS, do any of the following: (a) increase the Commitments of the Banks or subject the Banks to any additional obligations; (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (c) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (d) waive any of the conditions precedent specified in Article 6; (e) change the Commitment Percentages or the aggregate unpaid principal amount of the Notes or the percentage of the Banks which shall be required for the Banks or any of them to take any action under this Agreement; (f) change any provision contained in Section 9.14 or this Section 13.11 or modify the definition of "Borrowing Base", "Eligible Receivables" or "Required Banks" contained in Section 1.1; or (g) release any Collateral from any of the Liens created by the Security Documents; and provided further, however, that no amendment, waiver or consent relating to Sections 12.1, 12.2, 12.3, 12.4 or 12.5 shall require the agreement of any Loan Party. Notwithstanding anything to the contrary contained in this Section 13.11, no amendment, waiver or consent shall be made with respect to Article 12 hereof without the prior written consent of the Agent. 82 89 Section 13.12 Maximum Interest Rate. (a) No interest rate specified in this Agreement or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the interest rate (the "Contract Rate") for any Obligation shall exceed the Maximum Rate, thereby causing the interest accruing on such Obligation to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate for such Obligation shall not reduce the rate of interest on such Obligation below the Maximum Rate until the aggregate amount of interest accrued on such Obligation equals the aggregate amount of interest which would have accrued on such Obligation if the Contract Rate for such Obligation had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, none of the terms and provisions of this Agreement or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate; and neither the Agent nor any Bank shall ever charge, receive, take, collect, reserve or apply, as interest on the Obligations, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other obligation provided for in this Agreement or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 13.12(b), or (ii) an amount, which when added to all other interest payable under this Agreement and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, the Agent or any Bank ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Obligations and treated hereunder as such; and if the Obligations, or applicable portions thereof, are paid in full, any remaining excess shall promptly be paid to the BORROWERS (or other appropriate Person). In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, the BORROWERS, the Agent and the Banks shall, to the maximum extent permitted by applicable law, (A) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (B) exclude voluntary prepayments and the effects thereof, and (C) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Obligations, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Obligations; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, the Agent and/or the Banks, as appropriate, shall refund to the BORROWERS (or other appropriate Person) the amount of such excess and, in such event, the Agent and the Banks shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. (c) Pursuant to Article 15.10(b) of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas 1925, as amended, the BORROWERS agree that such Chapter 15 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not govern or in any manner apply to the Obligations. 83 90 Section 13.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which any BORROWER is a party shall be given or made by telecopy or in writing and telecopied, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (or, with respect to a Bank that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it); or, as to any party, at such other address as shall be designated by such party in a notice to each other party given in accordance with this Section 13.13. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that notices to the Agent shall be deemed given when received by the Agent. SECTION 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. EXCEPT AS MAY BE EXPRESSLY STATED TO THE CONTRARY IN CERTAIN LOAN DOCUMENTS, THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE LAWS OF THE UNITED STATES. EACH OF THE BORROWERS AND GUARANTORS HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF EACH OF (A) ANY UNITED STATES DISTRICT COURT OF NEW YORK, (B) THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS, (C) ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK, AND (D) ANY TEXAS STATE COURT SITTING IN HOUSTON, TEXAS, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH OF THE BORROWERS AND GUARANTORS IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH BORROWER OR GUARANTOR AT ITS ADDRESS SET FORTH UNDERNEATH ITS SIGNATURE HERETO. EACH OF THE BORROWERS AND GUARANTORS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORM. Section 13.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13.16 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 13.17 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. 84 91 Section 13.18 Construction. Each of the BORROWERS, the Guarantors, the Agent, and the Banks acknowledges that it has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the parties hereto. Section 13.19 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists. Section 13.20 Confidentiality. Each Bank agrees to exercise its best efforts to keep any information delivered or made available by any Loan Party to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank from disclosing such information (a) to the Agent, the Co-Agent or any other Bank, (b) to any Person if reasonably incidental to the administration of the Loans or Letter of Credit Liabilities, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (e) which has been publicly disclosed, (f) in connection with any litigation to which the Agent, any Bank or their respective Affiliates may be a party, (g) to the extent reasonably required in connection with the exercise of any remedy under the Loan Documents, (h) to such Bank's legal counsel and independent auditors, and (i) to any actual or proposed participant or Assignee of all or part of its rights hereunder, so long as such actual or proposed participant or Assignee agrees to be bound by the provisions of this Section 13.20. SECTION 13.21 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF THE AGENT OR ANY BANK IN THE NEGOTIATION, ADMINISTRATION OR ENFORCEMENT THEREOF. Section 13.22 Approvals and Consent. Except as may be expressly provided to the contrary in this Agreement or in the other Loan Documents (as applicable), in any instance under this Agreement or the other Loan Documents where the approval, consent or exercise of judgment of any Bank Party is requested or required, (a) the granting or denial of such approval or consent and the exercise of such judgment shall be within the sole discretion of such Bank Party, and such Bank Party shall not, for any reason or to any extent, be required to grant such approval or consent or to exercise such judgment in any particular manner, regardless of the reasonableness of the request or the action or judgment of such Bank Party, and (b) no approval or consent of any Bank Party shall in any event be effective unless the same shall be in writing and the same shall be effective only in the specific instance and for the specific purpose for which given. Section 13.23 Agent for Services of Process. Each of the BORROWERS and Guarantors hereby irrevocably designates Edwin T. Markham with offices at 666 Third Avenue, 9th Floor, New York, New 85 92 York, 10017 to receive for and on behalf of such BORROWER and Guarantor service of process in New York. In the event that Ms. Riordan resigns or ceases to serve as the BORROWERS' and Guarantors' agent for service of process hereunder, the BORROWERS and Guarantors agree forthwith (a) to designate another agent for service of process in New York, New York and (b) to give prompt written notice to the Agent of the name and address of such agent. Each of the BORROWERS and Guarantors agrees that the failure of its agent for service of process to give any notice of any such service of process to such BORROWER and Guarantor shall not impair or affect the validity of such service or of any judgment based thereon. If, despite the foregoing, there is for any reason no agent for service of process of any BORROWER or Guarantor available to be served, then such BORROWER or Guarantor further irrevocably consents to the service of process by the mailing thereof by the Agent or the Required Banks by registered or certified mail, postage prepaid, to such BORROWER or Guarantor at its address listed on the signature pages hereof. Nothing in this Section 13.23 shall affect the right of the Agent or the Banks to serve legal process in any other manner permitted by law or affect the right of the Agent or any Bank to bring any action or proceeding against any BORROWER or Guarantor or its Property in the court of any jurisdiction. Section 13.24 Joint and Several Obligations. Each and every representation, warranty, covenant, agreement, indebtedness, liability or obligation of the BORROWERS and Guarantors under this Agreement or any other Loan Document shall be, and shall be deemed to be, the joint and several representation, warranty, covenant, agreement, indebtedness, liability or obligation, respectively, of each BORROWER and all of the Borrowers and Guarantors. Section 13.25 Co-Agent. All of the privileges and immunities created by Articles 12 and 13 of this Agreement in favor of the Agent in its capacity as such shall be equally applicable to the Co-Agent in its capacity as such. 86 93 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWERS: --------- FALCON DRILLING COMPANY, INC., FALCON DRILLING DE VENEZUELA, INC., FALCON DRILLING MANAGEMENT, INC., FALCON INLAND, INC., FALCON OFFSHORE, INC., FALCON SERVICES COMPANY, INC., FALCON WORKOVER COMPANY, INC., FALRIG OFFSHORE, INC., KESTREL OFFSHORE, INC. and RAPTOR EXPLORATION CO., INC. By: /s/ LEIGHTON E. MOSS -------------------------------------- Name: Leighton E. Moss (on behalf of each of the Borrowers named above) Title: Vice President and General Counsel (of each of the Borrowers named above) Address for Notices: ------------------- 1900 West Loop South, Suite 1800 Houston, Texas 77027 Telecopy No.: 713-623-8103 Telephone No.: 713-623-8984 Attention: Don P. Rodney FALCON DRILLING HOLDINGS, L.P., FALRIG OFFSHORE PARTNERS, FALRIG OFFSHORE (USA), L.P. By: /s/ LEIGHTON E. MOSS --------------------------------------- Name: Leighton E. Moss (on behalf of each of the Borrowers named above) Title: Agent (of each of the Borrowers named above) S - 1 94 Address for Notices: ------------------- 1900 West Loop South, Suite 1800 Houston, Texas 77027 Telecopy No.: 713-623-8103 Telephone No.: 713-623-8984 Attention: Don P. Rodney GUARANTORS: ---------- FALCON ATLANTIC LTD. By: /s/ LEIGHTON E. MOSS ------------------------------------- Name: Leighton E. Moss Title: Vice President Address for Notices: ------------------- 1900 West Loop South, Suite 1800 Houston, Texas 77027 Telecopy No.: 713-623-8103 Telephone No.: 713-623-8984 Attention: Don P. Rodney FALCON DRILLING DO BRASIL, LTDA. and PERFORACIONES FALRIG DE VENEZUELA C.A. By: /s/ LEIGHTON E. MOSS --------------------------------------- Name: Leighton E. Moss Title: Agent Address for Notices: ------------------- 1900 West Loop South, Suite 1800 Houston, Texas 77027 Telecopy No.: 713-623-8103 Telephone No.: 713-623-8984 Attention: Don P. Rodney S - 2 95 AGENT: ----- BANQUE PARIBAS By: /s/ BRIAN MALONE --------------------------------------- Name: Brian Malone ------------------------------------- Title: Vice President ------------------------------------ By: /s/ LARRY ROBINSON --------------------------------------- Name: Larry Robinson ------------------------------------- Title: Vice President ------------------------------------ Address for Notices: ------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: 713-659-3832 Telephone No.: 713-659-4811 Attention: Mr. Brian M. Malone Vice President BANKS: ----- BANQUE PARIBAS By: /s/ BRIAN MALONE --------------------------------------- Commitment: Name: Brian Malone - ---------- ------------------------------------- Title: Vice President ------------------------------------ $17,307,692.31 By: /s/ LARRY ROBINSON --------------------------------------- Name: Larry Robinson ------------------------------------- Title: Vice President ------------------------------------ S - 3 96 Address for Notices: ------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: 713-659-3832 Telephone No.: 713-659-4811 Attention: Mr. Brian M. Malone Vice President Lending Office for ABR Loans: ---------------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Leah Evans Operations Officer Lending Office for Eurodollar Loans: ----------------------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Leah Evans Operations Officer ARAB BANKING CORPORATION (B.S.C.) By: /s/ STEPHEN A. PLAUCHE -------------------------------------- Commitment: Name: Stephen A. Plauche - ---------- ----------------------------------- Title: Vice President ---------------------------------- $7,692,307.69 Address for Notices: ------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager S - 4 97 With copies to: Arab Banking Corporation (B.S.C.) 600 Travis Street, Suite 1900 Houston, Texas 77002 Telecopy No.: (713) 227-6507 Telephone No.: (713) 227-8444 Attention: Mr. Stephen A. Plauche Vice President Lending Office for ABR Loans: ---------------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager Lending Office for Eurodollar Loans: ----------------------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager S - 5 EX-10.25 3 CREDIT AGREEMENT DATED - 11/12/96 $40 MIL FACILITY 1 EXHIBIT 10.25 ================================================================================ CREDIT AGREEMENT dated as of November 12, 1996 $40,000,000 ACQUISITION LOANS CREDIT FACILITY FALCON DRILLING COMPANY, INC. as BORROWER BANQUE PARIBAS as Agent and a Lender ARAB BANKING CORPORATION (B.S.C.) as Co-Agent and a Lender ================================================================================ 2 TABLE OF CONTENTS ARTICLE 1- Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Other Definitional Provisions . . . . . . . . . . . . . 25 Section 1.3 Accounting Terms and Determinations . . . . . . . . . . 26 Section 1.4 Financial Covenants and Reporting . . . . . . . . . . . 26 ARTICLE 2 - Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 2.1 Commitments. . . . . . . . . . . . . . . . . . . . . . 26 Section 2.2 Notes . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 2.3 Repayment of Loans . . . . . . . . . . . . . . . . . . 27 Section 2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . 27 Section 2.5 Borrowing Procedure . . . . . . . . . . . . . . . . . . 28 Section 2.6 Optional Prepayments, Conversions and Continuations of Loans . . . . . . . . . . . . . . . . 28 Section 2.7 Mandatory Prepayments . . . . . . . . . . . . . . . . . 28 Section 2.8 Minimum Amounts. . . . . . . . . . . . . . . . . . . . 28 Section 2.9 Certain Notices. . . . . . . . . . . . . . . . . . . . 29 Section 2.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . 29 Section 2.11 Commitment Fee and Other Fees . . . . . . . . . . . . . 29 Section 2.12 Computations. . . . . . . . . . . . . . . . . . . . . . 30 Section 2.13 Termination or Reduction of Commitments . . . . . . . . 30 Section 2.14 Letters of Credit . . . . . . . . . . . . . . . . . . . 30 ARTICLE 3 - Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 3.1 Method of Payment . . . . . . . . . . . . . . . . . . . 33 Section 3.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 34 Section 3.3 Sharing of Payments, Etc . . . . . . . . . . . . . . . 34 Section 3.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . 34 Section 3.5 Withholding Taxes . . . . . . . . . . . . . . . . . . . 34 Section 3.6 Withholding Tax Exemption . . . . . . . . . . . . . . . 35 ARTICLE 4 - Yield Protection and Illegality . . . . . . . . . . . . . . . . . 36 Section 4.1 Additional Costs . . . . . . . . . . . . . . . . . . . 36 Section 4.2 Limitation on Types of Loans . . . . . . . . . . . . . 37 Section 4.3 Illegality . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.4 Treatment of Affected Loans . . . . . . . . . . . . . . 38 Section 4.5 Compensation . . . . . . . . . . . . . . . . . . . . . 39 Section 4.6 Capital Adequacy . . . . . . . . . . . . . . . . . . . 39 Section 4.7 Additional Interest on Eurodollar Loans . . . . . . . . 39 ARTICLE 5 - Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 5.1 Collateral . . . . . . . . . . . . . . . . . . . . . . 40 Section 5.2 Substitute Collateral . . . . . . . . . . . . . . . . . 40 Section 5.3 Setoff . . . . . . . . . . . . . . . . . . . . . . . . 40
i 3 ARTICLE 6 - Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . 41 Section 6.1 Initial Extension of Credit . . . . . . . . . . . . . . 41 Section 6.2 All Extensions of Credit . . . . . . . . . . . . . . . 44 ARTICLE 7 - Representations and Warranties . . . . . . . . . . . . . . . . . 45 Section 7.1 Corporate Existence . . . . . . . . . . . . . . . . . . 45 Section 7.2 Financial Statements . . . . . . . . . . . . . . . . . 45 Section 7.3 Entity Action; No Breach . . . . . . . . . . . . . . . 45 Section 7.4 Operation of Business . . . . . . . . . . . . . . . . . 46 Section 7.5 Intellectual Property . . . . . . . . . . . . . . . . . 46 Section 7.6 Litigation and Judgments . . . . . . . . . . . . . . . 46 Section 7.7 Rights in Properties; Liens . . . . . . . . . . . . . . 46 Section 7.8 Enforceability . . . . . . . . . . . . . . . . . . . . 46 Section 7.9 Approvals . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.10 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.12 Margin Securities . . . . . . . . . . . . . . . . . . . 47 Section 7.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 7.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . 48 Section 7.15 Capitalization . . . . . . . . . . . . . . . . . . . . 48 Section 7.16 Agreements . . . . . . . . . . . . . . . . . . . . . . 49 Section 7.17 Compliance with Laws . . . . . . . . . . . . . . . . . 49 Section 7.18 Investment Company Act . . . . . . . . . . . . . . . . 49 Section 7.19 Public Utility Holding Company Act . . . . . . . . . . 49 Section 7.20 Environmental Matters . . . . . . . . . . . . . . . . . 49 Section 7.21 Labor Disputes and Acts of God . . . . . . . . . . . . 50 Section 7.22 Material Contracts . . . . . . . . . . . . . . . . . . 51 Section 7.23 Outstanding Securities . . . . . . . . . . . . . . . . 51 Section 7.24 Priority of Payment. . . . . . . . . . . . . . . . . . 51 Section 7.25 Solvency . . . . . . . . . . . . . . . . . . . . . . . 51 Section 7.26 Employee Matters . . . . . . . . . . . . . . . . . . . 51 Section 7.27 Insurance . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE 8 - Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . 52 Section 8.1 Reporting Requirements . . . . . . . . . . . . . . . . 52 Section 8.2 Maintenance of Existence; Conduct of Business . . . . . 55 Section 8.3 Maintenance of Properties . . . . . . . . . . . . . . . 55 Section 8.4 Taxes and Claims . . . . . . . . . . . . . . . . . . . 55 Section 8.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . 56 Section 8.6 Inspection Rights . . . . . . . . . . . . . . . . . . . 56 Section 8.7 Keeping Books and Records . . . . . . . . . . . . . . . 56 Section 8.8 Compliance with Laws . . . . . . . . . . . . . . . . . 56 Section 8.9 Compliance with Agreements . . . . . . . . . . . . . . 57 Section 8.10 Further Assurances . . . . . . . . . . . . . . . . . . 57
ii 4 Section 8.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 8.12 Concentration Account . . . . . . . . . . . . . . . . . 57 Section 8.13 No Consolidation in Bankruptcy . . . . . . . . . . . . 57 ARTICLE 9 - Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . 58 Section 9.1 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 9.2 Limitation on Liens . . . . . . . . . . . . . . . . . . 59 Section 9.3 Mergers, Etc . . . . . . . . . . . . . . . . . . . . . 59 Section 9.4 Restricted Payments . . . . . . . . . . . . . . . . . . 59 Section 9.5 Investments. . . . . . . . . . . . . . . . . . . . . . 60 Section 9.6 Limitation on Issuance of Capital Stock . . . . . . . . 61 Section 9.7 Transactions With Affiliates . . . . . . . . . . . . . 62 Section 9.8 Disposition of Property . . . . . . . . . . . . . . . . 62 Section 9.9 Sale and Leaseback . . . . . . . . . . . . . . . . . . 63 Section 9.10 Lines of Business . . . . . . . . . . . . . . . . . . . 63 Section 9.11 Environmental Protection . . . . . . . . . . . . . . . 64 Section 9.12 Intercompany Transactions . . . . . . . . . . . . . . . 64 Section 9.13 Consulting and Management Fees . . . . . . . . . . . . 64 Section 9.14 Modification of Other Agreements . . . . . . . . . . . 64 Section 9.15 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 9.16 Drilling Rig Location. . . . . . . . . . . . . . . . . 65 ARTICLE 10 - Financial Covenants . . . . . . . . . . . . . . . . . . . . . . 65 Section 10.1 Consolidated Current Ratio . . . . . . . . . . . . . . 65 Section 10.2 Consolidated Tangible Net Worth . . . . . . . . . . . . 65 Section 10.3 Consolidated Interest Coverage Ratio . . . . . . . . . 65 ARTICLE 11 - Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 11.1 Events of Default . . . . . . . . . . . . . . . . . . . 66 Section 11.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . 69 Section 11.3 Cash Collateral . . . . . . . . . . . . . . . . . . . . 69 Section 11.4 Performance by the Agent . . . . . . . . . . . . . . . 70 ARTICLE 12 - The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 12.1 Appointment, Powers and Immunities . . . . . . . . . . 70 Section 12.2 Rights of Agent as a Bank . . . . . . . . . . . . . . . 71 Section 12.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . 71 Section 12.4 Indemnification . . . . . . . . . . . . . . . . . . . . 71 Section 12.5 Independent Credit Decisions . . . . . . . . . . . . . 72 Section 12.6 Several Commitments . . . . . . . . . . . . . . . . . . 72 Section 12.7 Successor Agent . . . . . . . . . . . . . . . . . . . . 73 ARTICLE 13 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 13.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . 73 Section 13.2 Indemnification . . . . . . . . . . . . . . . . . . . . 74
iii 5 Section 13.3 Limitation of Liability . . . . . . . . . . . . . . . . 75 Section 13.4 No Duty . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 13.5 No Fiduciary Relationship . . . . . . . . . . . . . . . 75 Section 13.6 Equitable Relief . . . . . . . . . . . . . . . . . . . 75 Section 13.7 No Waiver; Cumulative Remedies . . . . . . . . . . . . 75 Section 13.8 Successors and Assigns . . . . . . . . . . . . . . . . 76 Section 13.9 Survival . . . . . . . . . . . . . . . . . . . . . . . 78 Section 13.10 Entire Agreement . . . . . . . . . . . . . . . . . . . 79 Section 13.11 Amendments. . . . . . . . . . . . . . . . . . . . . . . 79 Section 13.12 Maximum Interest Rate . . . . . . . . . . . . . . . . . 79 Section 13.13 Notices . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 13.14 Governing Law; Submission to Jurisdiction; Service of Process . . . . . . . . . . . . . . . . . . 81 Section 13.15 Counterparts . . . . . . . . . . . . . . . . . . . . . 81 Section 13.16 Severability . . . . . . . . . . . . . . . . . . . . . 81 Section 13.17 Headings . . . . . . . . . . . . . . . . . . . . . . . 81 Section 13.18 Construction . . . . . . . . . . . . . . . . . . . . . 81 Section 13.19 Independence of Covenants . . . . . . . . . . . . . . . 81 Section 13.20 Confidentiality . . . . . . . . . . . . . . . . . . . . 81 Section 13.21 Waiver of Jury Trial . . . . . . . . . . . . . . . . . 82 Section 13.22 Approvals and Consent. . . . . . . . . . . . . . . . . 82 Section 13.23 Agent for Services of Process . . . . . . . . . . . . . 82 Section 13.24 Joint and Several Obligations . . . . . . . . . . . . . 83 Section 13.25 Co-Agent . . . . . . . . . . . . . . . . . . . . . . . 83
iv 6 INDEX TO EXHIBITS
Exhibit Description of Exhibit Section - ------- ---------------------- ------- "A" Form of Assignment and Acceptance 1.1 "B" Form of Note 1.1 "C" Form of Notice of Borrowings, Conversions, Continuations or Prepayments 2.9
INDEX TO SCHEDULES
Schedule Description of Schedule - -------- ----------------------- 1.1(a) Permitted Liens 1.1(b) Certain Receivables 7.6 Litigation 7.7 Drilling Rigs 7.10 Existing Debt 7.11 Taxes 7.13 Plans 7.15(b) Capitalization of Subsidiaries 7.15(c) Options, etc. 7.22 Material Contracts and Defaults 7.26 Employee Matters 7.27 Insurance 9.5 Investments 9.7 Certain Transactions with Affiliates 9.12 Intercompany Transactions
v 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of November 12, 1996, is among FALCON DRILLING COMPANY, INC., a Delaware corporation ("Falcon Drilling" or "Borrower"), BANQUE PARIBAS, a bank organized under the laws of France acting through its Houston Agency, ARAB BANKING CORPORATION (B.S.C.), a banking corporation organized under the laws of Bahrain, each of the other banks or lending institutions which is or which may from time to time become a party hereto or any permitted successor or assignee thereof (each of Banque Paribas, Arab Banking Corporation (B.S.C.), and such other banks or lending institutions is sometimes hereinafter individually referred to as a "Bank" and all of such Persons are sometimes hereinafter collectively referred to as the "Banks"), BANQUE PARIBAS, as agent for itself and the other Banks (in such capacity, together with its successors in such capacity, the "Agent") and ARAB BANKING CORPORATION (B.S.C.), as Co-Agent for itself and the other Banks (in such capacity, together with its successors and assigns in such capacity, the "Co- Agent"). RECITALS: BORROWER desires that the Lenders extend a revolving credit facility to BORROWER to provide working capital financing for, and other funds for the general corporate purposes of, BORROWER. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "ABR" means the sum of (a) the greater of the Prime Rate or the Federal Funds Rate, plus (b) one-half of one percent per annum. "ABR Loans" means Loans that bear interest at rates based upon the ABR. "Additional Costs" means as specified in Section 4.1(a). "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by the Agent to be equal to (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period, divided by (b) the remainder of one minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Affiliate" means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control 8 with, such Person; (b) that directly or indirectly beneficially owns or holds ten percent or more of any class of voting stock of such Person; or (c) ten percent or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding the foregoing, (i) in no event shall the Agent or any Bank be deemed an Affiliate of BORROWER or any of its Subsidiaries and (ii) for purposes of (A) the definition of the term "Net Proceeds" and (B) Sections 7.6 and 8.1(f), the Chatterjee Group shall not be deemed to be an Affiliate of Falcon Drilling or any of its Subsidiaries if (but only if) the Chatterjee Group (1) directly and indirectly beneficially owns and holds no more than 50% of the voting stock of Falcon Drilling and (2) does not directly or indirectly control the election of a majority of the directors of Falcon Drilling or any of its Subsidiaries. "Agent" means as specified in the initial paragraph of this Agreement. "Agreement" means this Credit Agreement and any and all amendments, modifications, supplements, renewals, extension or restatements hereof. "Applicable Lending Office" means for each Bank and each Type of Loan, the Lending Office of such Bank (or of an Affiliate of such Bank) designated for such Type of Loan below its name on the signature pages hereof (or, with respect to a Bank that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it) or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to BORROWER and the Agent as the office by which its Loans of such Type are to be made and maintained. "Applicable Margin" means (a) 0.50% per annum with respect to ABR Loans and (b) 2.50% per annum with respect to Eurodollar Loans; provided, however, that in the event that Falcon Drilling consummates Equity Issuances of its common stock subsequent to the Closing Date as to which the aggregate Net Proceeds received by Falcon Drilling is greater than or equal to $75,000,000, then the Applicable Margin with respect to Eurodollar Loans shall at all times thereafter be 2.00% per annum. "Asset Disposition" means the disposition (other than sales of Inventory in the ordinary course of business consistent with past practices or the grant of a Permitted Lien as security or the transfer of a Non-Recourse Rig) of any or all of the Property of BORROWER or any of its Subsidiaries, whether by sale, conveyance, lease, transfer, assignment, condemnation or otherwise, but excluding (a) the issuance of Capital Stock and (b) any involuntary disposition resulting from casualty damage to Property. "Assignee" means as specified in Section 13.8(b). "Assigning Bank" means as specified in Section 13.8(b). 2 9 "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and its Assignee and accepted by the Agent pursuant to Section 13.8(e), in substantially the form of Exhibit A hereto. "Bank" and "Banks" means as specified in the initial paragraph of this Agreement. "Bank Parties" means the Agent, the Co-Agent (at any time a Co-Agent has been designated by Banque Paribas), the Banks, the Required Banks and/or any Bank. "Bankruptcy Code" means as specified in Section 11.1(e). "Basle Accord" means the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, supplemented and otherwise modified and in effect from time to time, or any replacement thereof. "BORROWER" means as specified in the initial paragraph of this Agreement. "Borrower Member" means [add definition]. "Borrowing Base" means, at the time of determination, an amount equal to 40% of the lesser of (i) the fair market value of the Drilling Rigs and (ii) the appraised value of the Drilling Rigs as set forth in the most recent appraisal by a Qualified Appraiser that has been furnished to the Agent pursuant hereto. "Business Day" means (a) any day on which commercial banks are not authorized or required to close in Houston, Texas, or New York, New York, and (b) with respect to all borrowings, payments, Conversions, Continuations, Interest Periods and notices in connection with Eurodollar Loans, any day which is a Business Day described in clause (a) above and which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Expenditures" means, for any period, expenditures (including the aggregate amount of Capital Lease Obligations incurred during such period) made by Falcon Drilling or any of its Subsidiaries to acquire or construct fixed assets, plant or equipment (including renewals, improvements or replacements) during such period and which, in accordance with GAAP, are classified as capital expenditures. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property, which obligations are classified as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP. 3 10 "Capital Stock" means corporate stock, partnership interests and any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock or partnership interests issued by any entity (whether a corporation, a partnership or another entity) and any rights, warrants or options to acquire an equity interest in such entity. "Cash Proceeds" means, with respect to any Asset Disposition by any Person, the aggregate consideration received for such Asset Disposition by such Person in the form of cash or cash equivalents (including any amounts of insurance or other proceeds received in connection with an Asset Disposition), including payments in respect of deferred payment obligations when received in the form of cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to such Person or any subsidiary thereof). For the purposes of this definition, "cash or cash equivalents" shall be deemed to include, for a period not to exceed 12 months from the related Asset Disposition, noncash consideration received with respect to an Asset Disposition to the extent that such noncash consideration consists of (i) publicly traded debt securities of a Person, which securities are rated as "BBB-" or higher by Standard and Poor's Corporation ("S&P") and "Baa3" or higher by Moody's Investors Service, Inc. ("Moody's"), or (ii) other indebtedness of a Person if (A) the lowest rated long-term, unsecured debt obligation issued by such Person is rated "BBB-" or higher by S&P and "Baa3" or higher by Moody's or (B) in the case of other indebtedness, the payment of such other indebtedness is secured by an irrevocable letter of credit issued by a commercial bank having capital and surplus in excess of $100,000,000 and long term unsecured debt obligations rated at least "A-" by S&P and "A3" by Moody's. "Change of Control" means the existence or occurrence of any of the following: (a) a determination by Falcon Drilling or the Agent that any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than the Chatterjee Group has become the direct or indirect beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than 40% of the Voting Stock of Falcon Drilling; (b) BORROWER is merged with or into or consolidated with another corporation, and immediately after giving effect to the merger or consolidation, less than 50% of the outstanding voting securities entitled to vote generally in the election of directors or persons who serve similar functions of the surviving or resulting entity are then beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by (i) the stockholders of Falcon Drilling immediately prior to such merger or consolidation, or (ii) if a record date has been set to determine the stockholders of BORROWER entitled to vote on such merger or consolidation, the stockholders of Falcon Drilling as of such record date; (c) BORROWER, either individually or in connection with one or more Subsidiaries, sells, conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or lease, all or substantially all of the assets of Falcon Drilling and its Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries of Falcon Drilling, to any Person (other than a Wholly Owned Subsidiary of Falcon Drilling); (d) the liquidation or dissolution of Borrower; or (d) the first day on which a majority of the individuals who constitute the Board of Directors of Falcon Drilling on the date hereof are not Continuing Directors. 4 11 "Chatterjee Group" means Purnendu Chatterjee and George Soros and any Person, other than BORROWER or any Subsidiary of a Borrower, a majority of the Capital Stock of which is beneficially owned, directly or indirectly, by such individual(s), either individually or collectively. "Closing Date" means the date of this Agreement as set forth on the first page hereof. "Co-Agent" means as specified in the initial paragraph of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Collateral" means all Property of any nature whatsoever upon which a Lien is purported to be created by any Loan Document, including, without limitation, the Drilling Rigs and the Receivables of BORROWER. "Collateral Option" means the option of Banque Paribas to purchase common stock of Borrower pursuant to the Collateral Option Agreement. "Collateral Option Agreement" means that certain Collateral Stock Option Agreement dated as of November 12, 1996, between Borrower and Banque Paribas. "Commitment" means, as to any Bank, the obligation of such Bank to make Loans and incur or participate in Letter of Credit Liabilities hereunder in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Bank on the signature pages hereto under the heading "Commitment" or, if such Bank is a party to an Assignment and Acceptance, the amount set forth in the most recent Assignment and Acceptance of such Bank, as the same may be reduced or terminated pursuant to Section 2.13 or 11.2. "Commitment Percentage" means, as to any Bank, the percentage equivalent of a fraction the numerator of which is the amount of the outstanding Commitment of such Bank (or, if such Commitment has terminated or expired, the outstanding principal amount of its Loans and Letter of Credit Liabilities) and the denominator of which is the aggregate amount of the outstanding Commitments of all of the Banks (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of all Loans and Letter of Credit Liabilities). "Concentration Account" means a concentration deposit account or accounts (as BORROWER may desire) into which all proceeds of Collateral that is Receivables shall be deposited, which account is maintained by BORROWER and certain of its Subsidiaries (other than the Non-Material Subsidiaries and the Foreign Subsidiaries) with a bank (or banks) selected by BORROWER and reasonably acceptable to the Agent. "Concentration Account Agreement" means an agreement among BORROWER, the Agent and a depository bank selected by BORROWER and reasonably acceptable to the Agent in form and substance satisfactory to the Agent, dated the Closing Date and relating to the Concentration 5 12 Account, any and all amendments, modifications, supplements, renewals, extensions, or restatements thereof. "Consolidated Current Assets" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of BORROWER. "Consolidated Current Liabilities" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of BORROWER and the current portion of Consolidated Funded Debt, exclusive of, in connection with any calculation of Consolidated Current Liabilities during the 12-month period immediately preceding the Maturity Date or the Revolving Loans Maturity Date, the outstanding principal amount of the Loans or the outstanding principal amount of the Revolving Loans, respectively. "Consolidated Current Ratio" means, at any particular time, the ratio of Consolidated Current Assets to Consolidated Current Liabilities. "Consolidated Funded Debt" means, at any particular time, (a) all Debt of BORROWER and its consolidated subsidiaries which matures by its terms, or is renewable at the option of the obligor to a date, more than one year after the original creation of such Debt, (b) all other Debt which would be classified as "funded indebtedness" or "long-term indebtedness" on a consolidated balance sheet of BORROWER as of such date in accordance with GAAP, and (c) all obligations of BORROWER for borrowed money. "Consolidated Interest Coverage Ratio" means, for any period, the ratio of (a) EBITDA of BORROWER for such period to (b) Consolidated Interest Expense for such period. "Consolidated Interest Expense" means, for any period, (a) all interest on Debt of BORROWER and its consolidated subsidiaries accrued during such period, including the interest portion of payments under Capital Lease Obligations, and (b) all other amounts which would be classified as interest expense on a consolidated statement of income of BORROWER for such period in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income (or loss) of BORROWER for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Worth" means, at any particular time, the sum of all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of BORROWER. "Consolidated Tangible Net Worth" means, at any particular time, the remainder of (a) Consolidated Net Worth minus (b) the aggregate book value of Intangible Assets shown on a consolidated balance sheet of BORROWER. 6 13 "Continue", "Continuation" and "Continued" shall refer to the continuation pursuant to Section 2.6 of a Eurodollar Loan as a Eurodollar Loan from one Interest Period to the next Interest Period. "Continuing Director" means an individual who (a) is a member of the Board of Directors of Falcon Drilling and (b) either (i) was a member of the Board of Directors of Falcon Drilling as of the Closing Date or (ii) whose nomination for election or election to the Board of Directors of Falcon Drilling was approved by a vote of at least 66 2/3% of the directors then still in office who were either directors as of the Closing Date or whose election or nomination for election was previously so approved. "Contract Rate" means as specified in Section 13.12(a). "Convert", "Conversion" and "Converted" shall refer to a conversion pursuant to Section 2.6 or Article 4 of one Type of Loan into the other Type of Loan. "Currency Hedge Agreement" means any foreign currency exchange agreement, option or future contract or other similar agreement designed to protect against or manage a Person's exposure to fluctuations in foreign currency exchange rates. "Current Date" means a date occurring no more than 30 days prior to the Closing Date or such earlier date which is reasonably acceptable to the Agent. "Debt" means as to any Person at any time (without duplication): (a) any indebtedness, liability or obligation of such Person, contingent or otherwise, for borrowed money; (b) any indebtedness, liability or obligation of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) any indebtedness, liability or obligation of such Person for all or any part of the purchase price of Property or services or for the cost of Property constructed or of improvements thereto (including any indebtedness, liability or obligation under or in connection with any letter of credit related thereto), other than accounts payable included in current liabilities incurred in respect of Property and services purchased in the ordinary course of business; (d) any indebtedness, liability or obligation of such Person upon which interest charges are customarily paid (other than accounts payable incurred in the ordinary course of business); (e) any indebtedness, liability or obligation of such Person under conditional sale or other title retention agreements relating to purchased Property; (f) any indebtedness, liability or obligation of such Person issued or assumed as the deferred purchase price of Property (other than accounts payable incurred in the ordinary course of business); (g) any Capital Lease Obligation or any obligation pursuant to any sale and lease-back transaction of such Person; (h) any indebtedness, liability or obligation of any other Person secured by (or for which the obligee thereof has an existing right, contingent or otherwise, to be secured by) any Lien on Property owned or acquired, whether or not any indebtedness, liability or obligation secured thereby has been assumed, by such Person; (i) any indebtedness, liability or obligation of such Person in respect of any letter of credit supporting any indebtedness, liability or obligation of any other Person; (j) the maximum fixed repurchase price of any Redeemable Stock of such Person or, if such Person is a Subsidiary, any preferred stock of such Person, exclusive of any Redeemable Stock or Subsidiary preferred stock 7 14 issued by a Subsidiary of BORROWER and owned by BORROWER; (k) any obligation of such Person under or with respect to any Interest Rate Protection Agreement or Currency Hedge Agreement; and (l) any indebtedness, liability or obligation which is in economic effect a guarantee, regardless of its characterization, with respect to any Debt of another Person, to the extent guaranteed. For purposes of the preceding sentence, the maximum fixed repurchase price of any Redeemable Stock or Subsidiary preferred stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock or Subsidiary preferred stock as if such Redeemable Stock or Subsidiary preferred stock were repurchased on any date on which Debt shall be required to be determined pursuant to the this Agreement; provided, however, that if such Redeemable Stock or Subsidiary preferred stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock or Subsidiary preferred stock. The amount of Debt of any Person at any date shall be (i) the outstanding book value at such date of all indebtedness, liabilities and obligations as described above and (ii) the maximum liability of all contingent indebtedness, liabilities and obligations at such date. "Debtor Relief Law" means any applicable liquidation, conservatorship, receivership, bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law for the relief of debtors from time to time in effect and generally affecting the rights of creditors. "Default" means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default. "Default Rate" means, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount payable by BORROWER under this Agreement or any other Loan Document which is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of 2.00% plus the Prime Rate as in effect from time to time plus the Applicable Margin for ABR Loans; provided, however, that if such amount in default is principal of a Eurodollar Loan and the due date is a day other than the last day of an Interest Period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest Period therefor, 2.00% plus the interest rate for such Eurodollar Loan for such Interest Period as provided in Section 2.4(a) hereof, and, thereafter, the rate provided for above in this definition. "Dollars" and "$" mean lawful money of the United States. "Drilling Rigs" means such drilling rigs or drilling vessels as are from time to time owned by Borrower and as to which there is a valid first priority ship mortgage for the benefit of the Banks securing the Obligations. As of the Closing Date, the Drilling Rigs shall consist of the PHOENIX II (U.S. Official No. 643906), the PHOENIX III (U.S. Official No. 644283), the PHOENIX IV (U.S. Official No. 634728), the FALRIG 85 (U.S. Official No. 604568), and the FALRIG 86 (U.S. Official No. 624764). "EBITDA" means, for any period, without duplication, the sum of the following for BORROWER for such period determined on a consolidated basis in accordance with GAAP: 8 15 (a) Consolidated Net Income, plus (b) Consolidated Interest Expense, plus (c) income and franchise taxes to the extent deducted in determining Consolidated Net Income, plus (d) depreciation and amortization expense and other non-cash items to the extent deducted in determining Consolidated Net Income, minus (e) non-cash income to the extent included in determining Consolidated Net Income. "Eligible Assignee" means any (i) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof or the District of Columbia, and having a net worth of at least $100,000,000, calculated in accordance with generally accepted accounting principles; (iii) any Affiliate of any Bank; (iv) a commercial bank organized under the laws of any other country which is a member of the 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; (v) the central bank of any country which is a member of the OECD; or (vi) if, but only if, any Event of Default has occurred and is continuing, any other bank, insurance company, commercial finance company or other financial institution approved by the Agent, such approval not to be unreasonably withheld. "Environmental Law" means any federal, state, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any Permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, renewal, discharge or disposal of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986, 99-499, 100 Stat. 1613, the Resource Conservation and Recovery Act of 1976, 42 U. S. C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Emergency Planning and Community Right to Know Act, 15 U.S.C., Section 651 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 300F et seq., and the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and any state or local counterparts. "Environmental Liabilities" means, as to any Person, all indebtedness, liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability or criminal or civil statute, including any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment. 9 16 "Equity Issuance" means any issuance by Falcon Drilling or any of its Subsidiaries of any Capital Stock of Falcon Drilling or any of its Subsidiaries, respectively. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of a group of entities, organizations or employers of which a Loan Party is also a member and which is treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the Code. "Eurodollar Loan" means any Loan that bears interest at a rate based upon the Eurodollar Rate or the Adjusted Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by the Reference Bank at approximately 11:00 a.m. London time (or as soon thereafter as practicable) two Business Days prior to the first day of such Interest Period for the offering by the Reference Bank to leading banks in the London interbank market of Dollar deposits in immediately available funds having a term comparable to such Interest Period and in an amount comparable to the principal amount of the Eurodollar Loan made by the Reference Bank to which such Interest Period relates. If the Reference Bank is not participating in any Eurodollar Loans during any Interest Period therefor (pursuant to Section 4.4 or for any other reason), the Eurodollar Rate and the Adjusted Eurodollar Rate for such Loans for such Interest Period shall be determined by reference to the amount of the Loans which the Reference Bank would have made had it been participating in such Loans. "Event of Default" has the meaning specified in Section 11.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Falcon Atlantic" means Falcon Atlantic Ltd., a Cayman Islands company. "Falcon Brazil" means Falcon Drilling do Brasil, Ltda., a Brazilian limited liability company. "Falcon Drilling" means as specified in the initial paragraph of this Agreement. "Falcon Holdings" means Falcon Drilling Holdings, L.P., a Delaware limited partnership. "Falcon Inland" means Falcon Inland, Inc., a Delaware corporation. "Falcon Management" means Falcon Drilling Management, Inc., a Delaware corporation. "Falcon Offshore" means Falcon Offshore, Inc., a Delaware corporation. 10 17 "Falcon Services" means Falcon Services Company, Inc., a Delaware corporation. "Falcon Venezuela" means Falcon Drilling de Venezuela, Inc., a Delaware corporation. "Falcon Workover" means Falcon Workover Company, Inc., a Delaware corporation. "FALRIG Offshore" means FALRIG Offshore, Inc., a Delaware corporation. "FALRIG Offshore GP" means FALRIG Offshore Partners, a Texas general partnership. "FALRIG Offshore LP" means FALRIG Offshore (USA), L.P., a Delaware limited partnership. "FALRIG Venezuela" means Perforaciones Falrig de Venezuela C.A., a Venezuelan company. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if such rate is not so published on such next succeeding Business Day, the Federal Funds Rate for any day shall be the average rate which would be charged to the Reference Bank on such day on such transactions as determined by the Agent. "Foreign Subsidiary" means Falcon Atlantic, Falcon Brasil, FALRIG Venezuela or any other Subsidiary of BORROWER which is incorporated, organized or otherwise existing under the laws of a country other than the United States. "Funding Date" means the earlier to occur of the date of the making of the initial Loan or the date of the issuance of the initial Letter of Credit. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. "Governmental Authority" means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 11 18 "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, Permit, certificate, license, authorization or other directive or requirement of any federal, state, county, municipal, parish, provincial or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them. "Guarantee" by any Person means any indebtedness, liability or obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other indebtedness, liability or obligation of any other Person and, without limiting the generality of the foregoing, any indebtedness, liability or obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other indebtedness, liability or obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other indebtedness, liability or obligation of the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the primary indebtedness, liability or obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum anticipated indebtedness, liability or obligation in respect thereof (assuming such Person is required to perform thereunder). "Hazardous Material" means any substance, product, waste, pollutant, chemical, contaminant, insecticide, pesticide, constituent or material which is or becomes listed, regulated or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, underground storage tanks (whether empty or containing any substance) and polychlorinated biphenyls. "Holder" means a Person in whose name a note evidencing Senior Debt is registered. "Indenture" means that certain Indenture by and among Borrower, certain of its Subsidiaries and Texas Commerce Bank National Association, as Trustee, dated as of January 15, 1994, relating to the Senior Fixed Rate Notes, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Intangible Assets" of any Person means those assets of such Person which are (a) deferred assets, other than prepaid insurance and prepaid taxes, (b) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses and other similar assets which would be classified as intangible assets on a balance sheet of such Person prepared in accordance with GAAP, and (c) unamortized debt discount and expense. "Intellectual Property" means any United States or foreign patents, patent applications, trademarks, trade names, service marks, brand names, logos and other trade designations (including unregistered names and marks), trademark and service mark registrations and 12 19 applications, copyrights and copyright registrations and applications, inventions, invention disclosures, protected formulae, formulations, processes, methods, trade secrets, computer software, computer programs, source codes, manufacturing research and similar technical information, engineering know-how, customer and supplier information, assembly and test data drawings or royalty rights. "Intercreditor Agreement" means the Intercreditor Agreement in form and substance satisfactory to the Banks and the Revolving Loans Banks with respect to the relative priorities of Liens securing the Obligations and the Revolving Loans Obligations. "Interest Period" means, with respect to any Eurodollar Loan, each period commencing on the date such Loan is made or Converted from an ABR Loan or (if continued) the last day of the next preceding Interest Period with respect to such Loan, and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as BORROWERS may select as provided in Section 2.9 hereof, except that each such Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); (b) any Interest Period which would otherwise extend beyond the Maturity Date shall end on the Maturity Date; (c) no more than five Interest Periods for Eurodollar Loans shall be in effect at the same time; and (d) no Interest Period shall have a duration of less than one month and, if the Interest Period for any Eurodollar Loans would otherwise be a shorter period, such Loans shall not be available hereunder. "Interest Rate Protection Agreements" means, with respect to any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person providing for the transfer or mitigation of interest rate risks either generally or under specified contingencies. "Investments" means as specified in Section 9.5. "Issue Date" shall have the meaning specified in the Indenture. "Issuing Bank" means Banque Paribas or (if Banque Paribas does not wish to be the issuer of a particular Letter of Credit and another Bank agrees to be such issuer) such other Bank as Borrower may designate from time to time which agrees to be the issuer of such Letter of Credit. "Kestrel" means Kestrel Offshore, Inc., a Delaware corporation. "Letter of Credit" means any standby letter of credit issued by the Issuing Bank for the account of BORROWER pursuant to this Agreement. "Letter of Credit Liabilities" means, at any time, the aggregate face amount of all outstanding Letters of Credit and all unreimbursed drawings under Letters of Credit. 13 20 "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law or otherwise. "Loan Documents" means this Agreement, the Notes, the Security Documents, the Master Vessel Trust Agreement, the Term Sheet, the Letters of Credit, any Currency Hedge Agreement or Interest Rate Protection Agreement between BORROWER and any Bank that is expressly approved by the Agent and expressly determined by the Agent (at any time) to be a Loan Document, and all other agreements, documents and instruments executed and/or delivered pursuant to or in connection with any of the foregoing, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Loan Party" means BORROWER and any other Person (if any) who is or becomes a party to any agreement, document or instrument that Guarantees or secures payment or performance of the Obligations or any part thereof. "Loans" means as specified in Section 2.1(a). "Master Vessel Trust Agreement" means that certain Master Vessel Trust Agreement dated as of November 12, 1996, by and between Bank One, Texas, N.A., as Trustee, and the Agent, and any and all amendments, modifications, supplements, renewals, extensions, restatements or replacements thereof. "Material Adverse Effect" means any material adverse effect, or the occurrence of any event or the existence of any condition that could reasonably be expected to have a material adverse effect, on (a) the business or financial condition of (i) Borrower and its Subsidiaries, taken as a whole, or (ii) Borrower on an individual basis, (b) the ability of Borrower to pay and perform the Obligations when due, or (c) the validity or enforceability of any of the Loan Documents, any Lien created or purported to be created by any of the Loan Documents or the rights and remedies of the Agent or the Banks under any of the Loan Documents. "Material Contracts" means, as to Borrower or any of its Subsidiaries, any material contract as such term is used or defined in item 601(b)(10) of Regulation S-K promulgated by the Securities and Exchange Commission (or in any successor regulation). "Material Subsidiary" means any Subsidiary of Borrower that engages in any material operations or that contributes or has contributed, during any fiscal quarter, 1% or more of the aggregate gross revenue of Borrower and its consolidated Subsidiaries on a consolidated basis. "Maturity Date" means November 12, 1998. "Maximum Rate" means, with respect to any Bank, the maximum non-usurious interest rate (or, if the context so requires, the amount calculated at such rate), if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the 14 21 Loans or on other amounts, if any, payable to such Bank pursuant to this Agreement or any other Loan Document, under laws applicable to such Bank which are presently in effect, or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to BORROWERS at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with, Article 5069-1.04, Vernon's Texas Civil Statutes or any successor or replacement statute; provided, however, that, to the extent permitted by applicable law, the Agent shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by or are required from any Loan Party or any ERISA Affiliate since 1974 and which is covered by Title IV of ERISA. "Net Proceeds" means, with respect to any Asset Disposition, (a) the gross amount of cash received by Borrower or any of its Subsidiaries from any Asset Disposition, minus (b) the amount, if any, of all taxes paid or payable by Borrower or any of its Subsidiaries directly resulting from such Asset Disposition (including the amount, if any, estimated by Borrower in good faith at the time of such Asset Disposition for taxes payable by Borrower or any of its Subsidiaries on or measured by net income or gain resulting from such Asset Disposition), minus (c) the out-of-pocket costs and expenses incurred by Borrower or such Subsidiary in connection with such Asset Disposition (including brokerage fees paid to a Person other than an Affiliate of Borrower) excluding any fees or expenses paid to an Affiliate of Borrower, minus (d) amounts applied to the repayment of indebtedness (other than the Obligations) secured by a Permitted Lien on the Property subject to the Asset Disposition. "Net Proceeds" with respect to any Asset Disposition shall also include proceeds (after deducting any amounts specified in clauses (b), (c) and (d) of the preceding sentence) of insurance with respect to any actual or constructive loss of Property, an agreed or compromised loss of Property or the taking of any Property under the power of eminent domain and condemnation awards and awards in lieu of condemnation for the taking of Property under the power of eminent domain. "Net Proceeds" means, with respect to any Equity Issuance, (i) the gross amount of cash or other consideration received from such Equity Issuance minus (ii) the out-of-pocket costs and expenses incurred by the issuer in connection with such Equity Issuance (including underwriting fees paid to a Person other than an Affiliate of Borrower) excluding any fees or expenses paid to an Affiliate of Borrower. For purposes of determining the Applicable Margin, "Net Proceeds" shall mean, with respect to an Equity Issuance of Borrower common stock in full or partial consideration for the acquisition by BORROWER of any Property, an amount equal to the product of (A) the closing price per share of Borrower common stock on the date of such issuance (as reported by the Wall Street Journal) multiplied by (B) the number of shares so issued; provided, however, that (1) such Equity Issuance may not be to an Affiliate of 15 22 Borrower and (2) the aggregate "Net Proceeds" of all such Equity Issuances that may be considered in determining the Applicable Margin shall not exceed $25,000,000. "Non-Material Subsidiary" means any of Falcon Holdings, Falcon Management, Kestrel or Raptor prior to the time that such entity is or becomes a Material Subsidiary. "Non-Recourse Debt" means Debt or that portion of Debt (a) as to which neither Borrower nor any of its Subsidiaries (other than an Non-Recourse Subsidiary) (i) provides credit support pursuant to any guaranty, undertaking, agreement, document or instrument that would constitute Debt, (ii) is directly or indirectly liable, or (iii) constitutes the lender, and (b) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Non-Recourse Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of Borrower or any of its Subsidiaries (other than an Non-Recourse Subsidiary) to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Non-Recourse Rig" means as defined in the Indenture. "Non-Recourse Subsidiary" means a Subsidiary of Borrower (i) established for the purpose of acquiring or investing in one or more of the Non-Recourse Rigs, (ii) substantially all of the assets of which consist of one or more of the Non-Recourse Rigs, (iii) at least 67% of the equity interest in all the Capital Stock of which is owned directly, or indirectly through one or more Wholly-Owned Subsidiaries, by Borrower and, in the case of a Non-Recourse Subsidiary that has a board of directors or similar governing body, a majority of the members of which board of directors or similar governing body are nominees of Borrower or such Wholly-Owned Subsidiaries, and (iv) which shall have been designated as a Non-Recourse Subsidiary by a resolution of the Board of Directors of Borrower. Borrower may redesignate any Non-Recourse Subsidiary to be a Subsidiary other than a Non-Recourse Subsidiary by a resolution of the Board of Directors of Borrower if, after giving effect to such redesignation, Borrower could incur $1.00 of additional Debt pursuant to Section 4.16 of the Indenture (such redesignation being deemed an incurrence of Debt (other than Non-Recourse Debt)). Any Non-Recourse Subsidiary shall become a Subsidiary other than a Non-Recourse Subsidiary upon the repayment, renewal, extension, refinancing, refunding or repurchase of the Non-Recourse Debt of such Non- Recourse Subsidiary (other than Permitted Non-Recourse Subsidiary Refinancing Indebtedness, as such term is defined in the Indenture). Any indebtedness incurred to effect such renewal, extension, refinancing, refunding or repurchase shall be deemed to be incurred on the date of such renewal, extension, refinancing, refunding or repurchase. "Notes" means the promissory notes of BORROWER evidencing the Loans in the form of Exhibit C hereto, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof and all substitutions therefor (including promissory notes issued by BORROWER pursuant to Section 13.8). "Note Purchase Agreement" means that certain agreement by and among Borrower, certain of its Subsidiaries and Crescent/Mach I Partners, L.P., dated as of February 23, 1994, relating 16 23 to the Senior Floating Rate Notes, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "OECD" means the Organization for Economic Cooperation and Development. "Obligations" means (a) any and all indebtedness, liabilities and obligations of BORROWER and the other Loan Parties, and/or any of them, to the Agent, the Issuing Bank and/or the Banks, and/or any of them, evidenced by and/or arising pursuant to any of the Loan Documents, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, (i) the obligations of BORROWER to repay the Loans and the Reimbursement Obligations, to pay interest on the Loans and the Reimbursement Obligations (including, without limitation, interest accruing after any, if any, implementation of or filing under any Debtor Relief Law) and to pay all fees, indemnities, costs and expenses (including attorneys' fees) provided for in the Loan Documents, and (ii) the indebtedness constituting the Loans, the Reimbursement Obligations and such fees, indemnities, costs and expenses, and (b) the indebtedness, liabilities and obligations of BORROWER under any and all Interest Rate Protection Agreements and Currency Hedge Agreements that it may enter into with any Bank that are expressly approved by the Agent and expressly determined by the Agent (at any time) to be Loan Documents. "Operating Lease" means, with respect to any Person, any lease, rental or other agreement for the use by that Person of any Property which is not a Capital Lease Obligation. "Outstanding Credit" means, at any particular time, the sum of (a) the outstanding principal amount of the Loans, plus (b) the Letter of Credit Liabilities. "Payor" means as specified in Section 3.4. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Pension Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA (including a Multiemployer Plan) which is subject to the funding requirements under Section 302 or 4212 of ERISA or Section 412 of the Code, in whole or in part, and which is established or maintained or contributed to currently or at any time within the six years immediately preceding the Closing Date or, in the case of a Multiemployer Plan, at any time since September 2, 1974, by BORROWER or any ERISA Affiliate for employees of BORROWER or any ERISA Affiliate. "Peril" means as specified in Section 8.5. "Permits" means all permits, certificates, approvals, orders, licenses and other authorizations. "Permitted Capital Expenditures" means as specified in Section 10.6. 17 24 "Permitted Liens" means: (a) Liens disclosed on Schedule 1.1(a) hereto; (b) (i) Liens in favor of the Agent for the benefit of itself and the Banks securing payment and performance of the Obligations pursuant to the Loan Documents and (ii) Liens for the benefit of the Revolving Loans Agent and the Revolving Loans Banks securing the payment and performance of the Revolving Loans Obligations pursuant to the Revolving Loans Documents; (c) Encumbrances consisting of easements, zoning restrictions or other restrictions on the use of real Property or imperfections to title that (i) do not (individually or in the aggregate) materially affect the value of the Property encumbered thereby or materially impair the ability of Borrower or its Subsidiaries to use such Property in their respective businesses, and none of which is violated in any material respect by existing or proposed structures or land use and (ii) were entered into in the ordinary course of business and could not have a Material Adverse Effect; (d) Liens for taxes, assessments or other governmental charges that are not delinquent or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established; (e) Liens of mechanics, materialmen, warehousemen, carriers, landlords, suppliers or vendors imposed by law or arising by operation of law, or Liens for master's or crew's wages imposed by law or arising by operation of law, or other similar statutory or maritime Liens, securing obligations that are not yet due and are incurred in the ordinary course of business or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves have been established; (f) Liens resulting from good faith deposits to secure payment of workmen's compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, contracts (other than for payment of Debt), or leases, all in the ordinary course of business; (g) Liens to secure Debt incurred for the purpose of financing all or a part of the purchase price or construction cost of Property (including the cost of upgrading refurbishing rigs or drillships) acquired or constructed after the Closing Date; provided that (i) the principal amount of Debt secured by such Liens shall not exceed 66 2/3% of the lesser of cost or fair market value of the assets or Property so acquired or constructed and (ii) such Liens shall not encumber any other assets or Property of BORROWER and shall attach to such Property within 120 days of the construction or acquisition of such assets or Property; 18 25 (h) Easements, rights-of-way, restrictions and other Liens and imperfections to title that are approved by the Agent; (i) Liens on Property of a Person existing at the time such Person is merged or consolidated with or into Borrower or any of its Subsidiaries pursuant to a transaction permitted by this Agreement (and not incurred as a result of, or in anticipation of, such transaction), provided that such Lien relates solely to such Property; (j) Liens on Property acquired after the Closing Date and existing at the time of the acquisition thereof (and not incurred as a result of, or in anticipation of, such transaction), provided that such Lien relates solely to such Property; (k) Liens securing Capital Lease Obligations not to exceed $30,000,000 in aggregate principal amount (as to BORROWER and its Subsidiaries) at any time outstanding; (l) any charter or lease of equipment entered into in the ordinary course of business for full and fair consideration; (m) leases or subleases of real property to other Persons in the ordinary course of business for full and fair consideration; (n) Liens on the Capital Stock of a Non-Recourse Subsidiary securing loans made to such Non-Recourse Subsidiary; (o) Liens on Property other than Collateral securing Debt in an aggregate principal amount not to exceed $20,000,000 at any time outstanding; (p) Liens securing that Debt permitted by Section 9.1 hereof; and (q) Any extension, renewal or replacement of any of the foregoing, provided that Liens permitted hereunder shall not be extended or spread to cover any additional indebtedness or Property; provided, however, that (i) none of the Permitted Liens (except those in favor of the Agent) may attach or relate to the Capital Stock of or any other ownership interest in BORROWER or any Subsidiary (other than a Non-Recourse Subsidiary) of BORROWER, (ii) none of the Permitted Liens, except the Permitted Liens referred to in clauses (b), (d) and (e) preceding, may attach or relate to any of the Collateral, and (iii) none of the Permitted Liens referred to in subclause (ii) of clause (b) preceding may have priority equal or prior to the Liens in favor of the Agent as security for the Obligations except such Permitted Liens referred to in such subclause (ii) which attach or relate to the Receivables of Borrower. "Permitted Refinancing Debt" means Debt of BORROWER or any of its Subsidiaries incurred in exchange for, or the net proceeds of which are used to renew, extend, refinance, refund or repurchase, outstanding Debt of such Person which outstanding Debt was incurred in accordance 19 26 with, or is otherwise permitted by, the terms of this Agreement; provided that (a) if the Debt being renewed, extended, refinanced, refunded or repurchased is pari passu with or subordinated in right of payment to the Obligations or any part thereof, then such new Debt shall be pari passu with or subordinated in right of payment to, as the case may be, the Obligations (or the applicable part thereof) at least to the same extent as the Debt being renewed, extended, refinanced, refunded or repurchased, (b) such new Debt is scheduled to mature later than the Debt being renewed, extended, refinanced, refunded or repurchased, (c) such new Debt has an Average Life (as such term is defined in the Indenture) at the time such Debt is incurred that is greater than the Average Life of the Debt being renewed, extended, refinanced, refunded or repurchased, and (d) such new Debt is in an aggregate principal amount (or, if such Debt is issued at a price less than the principal amount thereof, the aggregate amount of gross proceeds therefrom is) not in excess of the aggregate principal amount then outstanding of the Debt being renewed, extended, refinanced, refunded or repurchased (or if the Debt being renewed, extended, refinanced, refunded or repurchased was issued at a price less than the principal amount thereof, then not in excess of the amount of liability in respect thereof determined in accordance with GAAP). "Person" means any individual, corporation, trust, association, company, partnership, joint venture, Governmental Authority or other entity. "Plan" means any employee benefit plan as defined in Section 3(3) of ERISA established or maintained or contributed to by any Loan Party or any ERISA Affiliate, including any Pension Plan. "Preferred Ship Mortgages" means (a) that certain First Preferred Fleet Mortgage dated as of November 12, 1996, executed by Borrower, as owner and mortgagor, to and in favor of BANK ONE, TEXAS, N.A., as mortgagee, which creates a Lien on certain of the Drilling Rigs as security for the Obligations, and any and all amendments, modifications, and supplements, renewals, extensions, or restatements thereof, and (b) and any other mortgage or other security agreement which creates a Lien on any Drilling Rig as security for the Obligations. "Prime Rate" means, at any time, the rate of interest per annum then most recently established by Citibank, N.A. as its highest commercial prime rate, which rate may not be the lowest rate of interest charged by Citibank, N.A. to its commercial borrowers. Each change in any interest rate provided for herein based upon the Prime Rate resulting from a change in the Prime Rate shall take effect without notice to BORROWER at the time of such change in the Prime Rate. "Principal Office" means the principal office of the Agent, presently located at 1200 Smith Street, Suite 3100, Houston, Texas 77002. "Prior Credit Agreements" means (a) that certain Credit Agreement dated as of September 12, 1994, among Borrower, Falcon Offshore, Turnstone Drilling, FALRIG Offshore and FALRIG Venezuela and Banque Paribas, individually and as agent, as amended, and (b) that certain Uncommitted Acquisition Credit Agreement dated as of January 24, 1996, between Borrower and Banque Paribas, individually and as agent. 20 27 "Prior Obligations" means the "Obligations" as such term is defined in each of the Prior Credit Agreements. "Proforma Interest Coverage Ratio" means, as of the date of the transaction giving rise to the need to calculate such ratio (the "Transaction Date"), the ratio of (a) the aggregate EBITDA for the four fiscal quarters preceding the Transaction Date to (b) the aggregate Consolidated Interest Expense that is anticipated to accrue during the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent thereto (based upon the proforma amount and maturity of, and interest payments in respect of, Debt expected by BORROWER to be outstanding on the Transaction Date and reasonably anticipated by BORROWER to be outstanding from time to time during such period). In determining such ratio, (i) interest rates in effect on the Transaction Date shall remain in effect throughout the relevant period, except that if BORROWER is a party to any Interest Rate Protection Agreements that would have the effect of changing the interest rate on the Debt of such Person proposed to be incurred during a period (or portion thereof), such resulting rate shall be used for the period or portion thereof, (ii) any Consolidated Interest Expense of BORROWER with respect to Debt incurred or retired by BORROWER (excluding Non-Recourse Debt) during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Debt was so incurred or retired on the first day of the fiscal quarter in which the Transaction Date occurs, (iii) if the transaction giving rise to the need to calculate the Proforma Interest Coverage Ratio would have the effect of increasing or decreasing EBITDA in the future and if such increase or decrease is readily quantifiable and is directly attributable to such transaction, EBITDA shall be calculated on a proforma basis as if such transaction had occurred on the first day of the four fiscal quarters preceding the fiscal quarter in which the Transaction Date occurs, and (iv) if BORROWER shall have sold any material portion of its assets during such period, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA (if negative), directly attributable to the assets which were sold for such period calculated on a proforma basis as if such asset sale and any related retirement of Debt had occurred on the first day of such quarter. As used in this definition, "BORROWER" shall mean Borrower and its consolidated Subsidiaries, excluding any Non-Recourse Subsidiaries. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Property" means property of all kinds, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the Closing Date. "Qualified Appraiser" means a nationally or internationally recognized appraiser of Property of the same type as the Rig Collateral, which appraiser shall be designated by Borrower and approved by Agent, which approval shall not be unreasonably withheld. "Quarterly Date" means the last day of each March, June, September and December of each year, the first of which shall be the first such day after the Closing Date. 21 28 "Raptor" means Raptor Exploration Co., Inc., a Delaware corporation. "Receivables" means, as at any date of determination thereof, all accounts (as such term is defined in the UCC) of BORROWER and includes, without limitation, the unpaid portion of the obligation, as stated on the respective invoice, or, if there is no invoice, other writing, of a customer of BORROWER in respect of services rendered or inventory sold and shipped by such Person. "Redeemable Stock" means, with respect to any Person, any equity security that, by its terms or otherwise, is required to be redeemed, purchased or paid by the issuer thereof, or is redeemable, transferable or payable at the option of the holder thereof, at any time prior to January 15, 2002, or is exchangeable into Debt of such Person or any of its Subsidiaries. "Reference Bank" means Banque Paribas. "Register" means as specified in Section 13.8(d). "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Bank, any change after the Closing Date in United States federal, state or foreign laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "Reimbursement Obligation" means the obligation of BORROWER to reimburse the Issuing Bank for any drawing under a Letter of Credit. "Release" means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching or migration of Hazardous Materials into the indoor or outdoor environment or into or out of Property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water or ground water. "Remedial Action" means all actions required to (a) cleanup, remove, respond to, treat or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform studies and investigations on the extent and nature of any actual or suspected contamination, the remedy or remedies to be used or health effects or risks of such contamination, or (d) perform post- remedial monitoring, care or remedy of a contaminated site. 22 29 "Required Banks" means, at any date of determination, Banks having in the aggregate at least 75% (in Dollar amount) of the aggregate amount of the outstanding Commitments (or, if such Commitments have terminated or expired, the aggregate outstanding principal amount of the Loans and the aggregate Letter of Credit Liabilities). "Required Payment" means as specified in Section 3.4. "Replacement Asset" means a Property or asset that, as determined by the Board of Directors of Borrower as evidenced by a resolution of its Board of Directors, is used or is useful in a business related, ancillary or complementary to the business of Borrower and its Subsidiaries on the Closing Date. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Reserve Requirement" means, for any Eurodollar Loan of any Bank for any Interest Period therefor, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under any regulations of the Board of Governors of the Federal Reserve System (or any successor) by such Bank for deposits exceeding $1,000,000,000 against "Eurocurrency Liabilities" as such term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate or the Adjusted Eurodollar Rate is to be determined, or (b) any category of extensions of credit or other assets which include Eurodollar Loans. "Responsible Officer" means, as to any Loan Party, the chief financial officer, vice president of finance, chief operating officer or chief executive officer of such Person. "Restricted Payment" means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for) any shares of any class of Capital Stock of Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Borrower or any of its Subsidiaries now or hereafter outstanding; (c) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement or defeasance of, or payment with respect to, any Subordinated Debt or any Senior Debt; (d) any loan, advance or payment (pursuant to a tax sharing agreement or otherwise) to any shareholder of Borrower or any of its Subsidiaries; and (e) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Capital Stock of Borrower or any of its Subsidiaries now or hereafter outstanding. "Revolving Loans" means the "Loans" as such term is defined in the Revolving Loans Credit Agreement. 23 30 "Revolving Loans Agent" means the "Agent" as such term is defined in the Revolving Loans Credit Agreement. "Revolving Loans Banks" means the "Banks" as such term is defined in the Revolving Loans Credit Agreement. "Revolving Loans Credit Agreement" means that certain Credit Agreement dated as of November 12, 1996, among Borrower, certain Subsidiaries of Borrower, the banks named therein, Banque Paribas, as agent for such banks, and Arab Banking Corporation (B.S.), as co-agent for such banks. "Revolving Loans Documents" means the "Loan Documents" as such term is defined in the Revolving Loans Credit Agreement. "Revolving Loans Maturity Date" means the "Maturity Date" as such term is defined in the Revolving Loans Credit Agreement. "Revolving Loans Obligations" means the "Obligations" as such term is defined in the Revolving Loans Credit Agreement. "Security and Assignment Agreements" means the Security and Assignment Agreements in form and substance satisfactory to the Agent, dated the Closing Date or thereafter and executed by BORROWER in favor of the Agent for the benefit of the Agent and the Banks, and any additional security agreement or similar agreement executed by any Loan Party in connection with the Loan Documents, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Security Documents" means the Preferred Ship Mortgages, the Security and Assignment Agreements, the Collateral Option Agreement, the Concentration Account Agreement, as they may be amended, modified, supplemented, renewed, extended or restated from time to time, and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of proceeds, assignments of income, assignments of contract rights, assignments of partnership interests, assignments of royalty interests, assignments of performance or other collateral assignments, completion or surety bonds, standby agreements, subordination agreements, undertakings and other agreements, documents, instruments and financing statements now or hereafter executed and delivered by any Loan Party in connection with or as security for, or as a Guarantee of, the payment or performance of the Obligations or any part thereof. "Senior Debt" means the Debt of Borrower under the Senior Debt Documents. "Senior Debt Documents" means the Senior Notes, the Indenture, the Series 1996 Indenture, the Note Purchase Agreement, the Subsidiary Senior Note Guaranties, all agreements, documents and instruments now or hereafter executed by Borrower or any of its Subsidiaries and/or delivered to the trustee pursuant to the Indenture or to any Holder pursuant to the 24 31 Indenture, the Series 1996 Indenture, the Note Purchase Agreement or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Senior Fixed Rate Notes" means the 9 3/4% Series B Notes due 2001, if any, issued by Borrower, and any and all amendments, modifications, supplements, renewals, extensions or restatements of such Senior Fixed Rate Notes. "Senior Floating Rate Notes" means the Senior Floating Rate Notes due January 15, 2001, issued by Borrower pursuant to the Note Purchase Agreement or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements of such Senior Floating Rate Notes. "Senior Note Guarantors" means Falcon Offshore, Falcon Drilling Management, Inc., Falcon Rig Management Company, Inc., Falcon Rig (Liberia), Ltd., Falcon Drilling Holdings, L.P., FALRIG Offshore, Kestrel Offshore, Inc., Falcon Workover Company, Inc., Raptor Exploration Company, Inc., FALRIG Offshore (USA), L.P. and FALRIG Offshore Partners and any other Subsidiary of Borrower which Guarantees Borrower's obligations with respect to any Senior Note pursuant to the terms of the Indenture, the Note Purchase Agreement or otherwise. "Senior Notes" means, collectively, the Senior Fixed Rate Notes, the Senior Floating Rate Notes and the Series 1996 Notes. "Senior Subordinated Debt" means the Debt of Borrower under the Senior Subordinated Debt Documents. "Senior Subordinated Debt Documents" means the Senior Subordinated Notes, the Senior Subordinated Notes Indenture, all agreements, documents and instruments now or hereafter executed by Borrower or any of its Subsidiaries and/or delivered to the Trustee pursuant to the Senior Subordinated Notes Indenture or to any Senior Subordinated Notes Holder pursuant to the Senior Subordinated Notes Indenture or otherwise, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Senior Subordinated Notes" means those certain 12 1/2% Series B Senior Subordinated Notes due 2005 in the aggregate principal amount of $50,000,000 issued pursuant to the terms of the Senior Subordinated Notes Indenture. "Senior Subordinated Notes Holder" means a Person in whose name a Senior Subordinated Note is registered. "Senior Subordinated Notes Indenture" means that certain Indenture by and between Borrower, as Issuer and Texas Commerce Bank National Association, as Trustee, dated as of March 15, 1995, relating to the Senior Subordinated Notes. "Series B Notes" means the 9 3/4% Series B Notes due 2001, if any, issued by Borrower pursuant to the Indenture or otherwise. 25 32 "Series 1996 Indenture" means the Indenture dated as of March 1, 1996, between Borrower and Bank One, Texas, N.A., pursuant to which the Series 1996 Notes have been issued. "Series 1996 Notes" means the 8 7/8% Series B Notes due 2003 issued by Borrower pursuant to the Series 1996 Indenture, and any and all amendments, modifications, supplements, renewals, extensions or restatements thereof. "Solvent" means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present fair saleable value) is greater than the total liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Debt" means any Debt of BORROWER or any of its Subsidiaries which is, by its terms, subordinated in any manner (as to payment or collection) to any other Debt of any such Person and includes, without limitation, the Senior Subordinated Debt. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the outstanding shares of stock, partnership interests or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation, partnership or entity (irrespective of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries. "Subsidiary Senior Note Guaranties" means the obligations of the Senior Note Guarantors under the Indenture and the Note Purchase Agreement pursuant to which the Senior Note Guarantors guarantee payment of the Senior Fixed Rate Notes and the Senior Floating Rates. "Term Sheet" means that certain letter agreement dated September 26, 1996, containing a "Summary of Terms" as executed by Banque Paribas and agreed to and accepted by Borrower as of September 26, 1996. 26 33 "Type" means any type of Loan (i.e., an ABR Loan or an Eurodollar Loan). "UCC" means the Uniform Commercial Code as in effect in the State of New York, Texas, Louisiana or any other jurisdiction, as may be applicable to or in connection with any Lien on any Property created pursuant to any Security Document. "UCP" means as specified in Section 2.14(b). "United States" means the United States of America. "Voting Stock" means, with respect to any Person, securities of any class or classes of Capital Stock in such Person entitling the holders thereof (whether at all times or at the times that such class of Capital Stock has voting power by reason of the happening of any contingency) to vote in the election of members of the board of directors or comparable body of such Person. "Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of such Person all of whose outstanding Capital Stock (other than directors' qualifying shares, if any) shall at the time be owned by such Person and/or one or more of its Wholly-Owned Subsidiaries. Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof", "herein", and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. Section 1.3 Accounting Terms and Determinations. (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a). All financial information delivered to the Agent pursuant to Section 8.1 shall be prepared in accordance with GAAP applied on a basis consistent with such accounting principles applied in the preparation of the audited financial statements referred to in Section 7.2(a) or in accordance with Section 8.7. (b) Borrower shall deliver to the Agent and the Banks at the same time as the delivery of any annual, quarterly or monthly financial statement under Section 8.1 (i) a description in reasonable detail of any material variation between the application of GAAP employed in the preparation of the next preceding annual, quarterly or monthly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above, and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. 27 34 (c) To enable the ready and consistent determination of compliance with the covenants set forth in this Agreement (including Article 10 hereof), Borrower will not change the last day of its fiscal year from December 31, or the last days of the first three fiscal quarters in each of its fiscal years from that existing on the Closing Date. Section 1.4 Financial Covenants and Reporting. The financial covenants contained in Article 10 (including the defined terms used therein) shall be calculated on a consolidated basis for BORROWER exclusive of any Non- Recourse Subsidiary, notwithstanding anything to the contrary contained in this Agreement. ARTICLE 2 Loans Section 2.1 Commitments. (a) Loans. Subject to the terms and conditions of this Agreement, each Bank severally agrees to make one or more loans (the "Loans") to BORROWER from time to time from and including the Closing Date to but excluding the Maturity Date up to but not exceeding the amount of such Bank's Commitment as then in effect; provided, however, that the Outstanding Credit shall not at any time exceed the lesser of the Borrowing Base or the Commitments. Subject to the foregoing limitations and the other terms and conditions of this Agreement, BORROWER may borrow, repay and reborrow the Loans hereunder. (b) Continuation and Conversion of Loans. Subject to the terms and conditions of this Agreement, Borrowers may borrow the Loans as ABR Loans or Eurodollar Loans and, until the applicable Maturity Date, BORROWER may Continue Eurodollar Loans or Convert Loans of one Type into Loans of the other Type. (c) Lending Offices. Loans of each Type made by each Bank shall be made and maintained at such Bank's Applicable Lending Office for Loans of such Type. (d) Limitations. Notwithstanding any other provision of this Agreement, Borrower shall not be entitled to make any borrowing hereunder or in any way utilize the Commitments hereunder unless the "Outstanding Credit" as defined in the Revolving Loans Credit Agreement equals $25,000,000. Section 2.2 Notes. The Loans made by each Bank shall be evidenced by a single promissory note made by BORROWER in substantially the form of Exhibit B hereto, dated the Closing Date, payable to the order of such Bank in a principal amount equal to its Commitment as originally in effect and otherwise duly completed. Each Bank is hereby authorized by BORROWER to endorse on the schedule (or a continuation thereof) attached to the Note of such Bank, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Bank to BORROWER hereunder and the amount of each payment or prepayment of principal of such Loan received by such Bank, provided that any failure by such Bank to make any 28 35 such endorsement shall not affect the obligations of BORROWER under such Note or this Agreement in respect of such Loan. Section 2.3 Repayment of Loans. BORROWER shall pay to the Agent for the account of each Bank the outstanding principal of the Loans (and the outstanding principal of the Loans shall be due and payable) on the Maturity Date. Section 2.4 Interest. (a) Interest Rate. BORROWER shall pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (i) during the periods such Loan is an ABR Loan, the ABR Rate plus the Applicable Margin; and (ii) during the periods such Loan is a Eurodollar Loan, the Eurodollar Rate plus the Applicable Margin. (b) Payment Dates. Accrued interest on the Loans shall be due and payable as follows: (i) in the case of ABR Loans, on each Quarterly Date; (ii) in the case of each Eurodollar Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period; (iii) upon the payment or prepayment of any Loan or the Conversion of any Loan to a Loan of the other Type (but only on the principal amount so paid, prepaid, or Converted); and (iv) on the Maturity Date. (c) Default Interest. Notwithstanding the foregoing, BORROWER will pay to the Agent for the account of each Bank interest at the applicable Default Rate on any principal of any Loan made by such Bank, any Reimbursement Obligation and (to the fullest extent permitted by law) on any other amount payable by BORROWER (including, without limitation, an amount required to be prepaid pursuant to Section 2.7, but excluding unmatured interest) under this Agreement or any other Loan Document to or for the account of such Bank, which is not paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Interest payable at the Default Rate shall be payable from time to time on demand. 29 36 Section 2.5 Borrowing Procedure. BORROWER shall give the Agent notice of each borrowing hereunder in accordance with Section 2.9. Not later than 11:00 a.m. (Houston, Texas time) on the date specified for each borrowing hereunder, each Bank will make available the amount of the Loan to be made by it on such date to the Agent, at the Principal Office, in immediately available funds, for the account of BORROWER. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to BORROWER by wire transfer of immediately available funds to the Borrowing Base Account (or to another account of BORROWER specified by them which is acceptable to the Agent) no later than 1:00 p.m. Section 2.6 Optional Prepayments, Conversions and Continuations of Loans. Subject to Section 2.7, BORROWER shall have the right from time to time to prepay the Loans, or to Convert all or part of a Loan of one Type into a Loan of another Type or to Continue Eurodollar Loans; provided that: (a) BORROWER shall give the Agent notice of each such prepayment, Conversion or Continuation as provided in Section 2.9, (b) Eurodollar Loans may only be Converted on the last day of the Interest Period, and (c) except for Conversions of Eurodollar Loans into ABR Loans, no Conversions or Continuations shall be made while a Default has occurred and is continuing. Section 2.7 Mandatory Prepayments. If at anytime the Outstanding Credit exceeds an amount equal to the lesser of the Borrowing Base or the Commitments at such time, within seven days after the occurrence thereof BORROWER shall pay to the Agent the amount of such excess as a prepayment of the Loans. Section 2.8 Minimum Amounts. Except for Conversions and prepayments pursuant to Section 2.7 and Article 4, each borrowing, each Conversion and each prepayment of principal of the Loans shall be in an amount at least equal to $250,000 or an integral multiple thereof (borrowings, prepayments or Conversions of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder shall be deemed separate borrowings, prepayments and Conversions for purposes of the foregoing, one for each Type, or Interest Period), provided, that no minimum prepayment amount shall exist with respect to the Loans. Section 2.9 Certain Notices. Notices by BORROWER to the Agent of terminations or reductions of Commitments, of borrowings, Conversions, Continuations and prepayments of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. (Houston, Texas, time) on the Business Day prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: 30 37
Number of Business Notice Days Prior ------ ---------- Termination or reductions of Commitments 3 Borrowing of Loans which are ABR Loans 1 Borrowing of Loans which are Eurodollar Loans 3 Conversions or Continuations of Loans 3 Prepayments of Revolving Credit Loans 1
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or prepayment shall specify the Loans to be borrowed, Converted, Continued or prepaid and the amount (subject to Section 2.8 hereof) and Type of the Loans to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loans to result from such Conversion) and the date of borrowing, Conversion, Continuation or prepayment (which shall be a Business Day). Notices of borrowings, Conversions, Continuations or prepayments shall be in the form of Exhibit D hereto, appropriately completed as applicable. Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall promptly notify the Banks of the contents of each such notice. In the event BORROWER fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 2.9, such Loan (if outstanding as an Eurodollar Loan) will be automatically Converted into an ABR Loan on the last day of the preceding Interest Period for such Loan or (if outstanding as an ABR Loan) will remain as, or (if not then outstanding) will be made as, an ABR Loan. BORROWER may not borrow any Eurodollar Loans, Convert any Loans into Eurodollar Loans or Continue any Loans as Eurodollar Loans if the interest rate for such Eurodollar Loans would exceed the Maximum Rate. Section 2.10 Use of Proceeds. The proceeds of the Loans shall be used by BORROWER for general corporate purposes, including asset acquisition and capital expenditure financing. None of the proceeds of any Loan will be used to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. Section 2.11 Commitment Fee and Other Fees. BORROWER agrees to pay to the Agent for the account of each Bank a commitment fee on the daily average unused amount of such Bank's Commitment for the period from and including the Closing Date to and including the Maturity Date, at the rate of 0.50% per annum based on a 365 day year and the actual number of days elapsed. Accrued commitment fees shall be payable in arrears on each Quarterly Date beginning on December 31, 1996, and on the Maturity Date. Furthermore, BORROWER agrees to pay to the Agent the additional fees specified in the Term Sheet. Section 2.12 Computations. Interest payable by BORROWER hereunder and under the other Loan Documents on all Eurodollar Loans shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) occurring in 31 38 the period for which payable unless in the case of interest such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Interest payable by BORROWER hereunder and under the other Loan Documents on ABR Loans and all fees payable hereunder and under the Loan Documents shall be computed on the basis of a year of 365 or 366 days, as the case may be. Section 2.13 Termination or Reduction of Commitments. BORROWER shall have the right to terminate or reduce in part the unused portion of the Commitments at any time and from time to time, provided that: (a) BORROWER shall give notice of each such termination or reduction as provided in Section 2.9; and (b) each partial reduction shall be in an aggregate amount at least equal to $500,000. The Commitments may not be reinstated after they have been terminated or reduced. Section 2.14 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, BORROWER may utilize the Commitments by requesting that the Issuing Bank issue Letters of Credit; provided, that the aggregate amount of outstanding Letter of Credit Liabilities shall not at any time exceed $1,000. Upon the date of issue 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. (b) BORROWER shall give the Issuing Bank (with a copy to the Agent) at least five Business Days irrevocable prior notice (effective upon receipt) specifying the date of each Letter of Credit and the nature of the transactions to be supported thereby. Upon receipt of such notice the Issuing Bank shall promptly notify each Bank of the contents thereof and of such Bank's Commitment Percentage of the amount of the proposed Letter of Credit. Each Letter of Credit shall have an expiration date that does not exceed one year from the date of issuance and that does not extend beyond the Maturity Date, shall be payable in Dollars, shall support a transaction entered into in connection with and reasonably related to BORROWER's existing business, shall be satisfactory in form and substance to the Issuing Bank and shall be issued pursuant to such agreements, documents and instruments (including a letter of credit application and reimbursement agreement) as the Issuing Bank may reasonably require, none of which shall be inconsistent with this Section 2.14; provided, however, that Letters of Credit having an aggregate face amount not to exceed $1,000 at any time outstanding may have expiration dates that extend beyond one year from the date of issuance (but not to extend beyond the Maturity Date) with the prior written consent of the Agent, which consent shall not be unreasonably withheld. Each Letter of Credit shall (i) provide for the payment of drafts presented for, on or thereunder by the beneficiary, in accordance with the terms thereof, when such drafts are accompanied by the documents described in the Letter of Credit, if any, and (ii) to the extent not inconsistent with the terms hereof or any applicable letter of credit application, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), 32 39 International Chamber of Commerce Publication No. 500 (together with any subsequent revision thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Bank, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of New York. (c) BORROWER agrees to pay to the Agent for the account of each Bank, in arrears on each Quarterly Date following the Closing Date (beginning on December 31, 1996) and on the Maturity Date, if such Letter of Credit was outstanding at any time during any portion of the quarterly period (or, with respect to the December 31, 1996 Quarterly Date, the period from Closing Date through such Quarterly Date) immediately preceding such Quarterly Date or the Maturity Date, a nonrefundable letter of credit fee with respect to each Letter of Credit issued in an amount equal to (i) the rate per annum equal to the Applicable Margin for Eurodollar Loans in effect on the date of issuance of such Letter of Credit (with respect to the fee due on the first Quarterly Date after issuance) or on the first day of the applicable quarterly or other period beginning after the quarter during which the issuance of such Letter of Credit occurred (with respect to the fee due on each subsequent Quarterly Date or on the Maturity Date) minus 0.25%, multiplied by (ii) the daily average face amount of the Letter of Credit in effect during the applicable period. The Agent agrees to pay to each Bank, promptly after receiving any payment of letter of credit fees referred to above in this Section 2.14(c), such Bank's Commitment Percentage of such fees. BORROWER agrees to pay to the Issuing Bank for its own account, in arrears on each Quarterly Date following the Closing Date (beginning on December 31, 1996) and on the Maturity Date, if such Letter of Credit was outstanding at any time during any portion of the quarterly period (or, with respect to the December 31, 1996 Quarterly Date, the period from the Closing Date through such Quarterly Date) immediately preceding such Quarterly Date or the Maturity Date, a nonrefundable letter of credit fee with respect to each Letter of Credit issued by the Issuing Bank hereunder in an amount equal to the greater of (A) (1) 0.25% per annum multiplied by (2) the daily average face amount of the Letter of Credit in effect during such period, or (B) $300.00. In addition to the foregoing fees, BORROWER shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses, including, without limitation, administrative, issuance, amendment, payment and negotiation charges, as are incurred or charged by the Issuing Bank in issuing, effecting payment under, amending, or otherwise administering any Letter of Credit. (d) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment or other drawing under such Letter of Credit, the Issuing Bank shall promptly notify BORROWER and each Bank as to the amount to be paid as a result of such demand or drawing and the payment date. If at any time the Issuing Bank shall make a payment to a beneficiary of a Letter of Credit pursuant to a drawing under such Letter of Credit, each Bank will pay to the Issuing Bank, immediately upon the Issuing Bank's demand at any time commencing after such payment until reimbursement therefor in full by BORROWER, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the date of such payment to the date of payment 33 40 by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate. (e) BORROWER shall be irrevocably and unconditionally obligated, without presentment, demand, protest or other formalities of any kind, to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit on or before the second Business Day after such drawing. The Issuing Bank will pay to each such Bank such Bank's Commitment Percentage of all amounts received from or on behalf of BORROWER for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to Section 2.14(d). Outstanding Reimbursement Obligations shall bear interest (i) at the rate then applicable to ABR Loans to and including the fifth day after such Reimbursement Obligations become outstanding and (ii) at the Default Rate thereafter, and such interest shall be payable on demand. (f) The Reimbursement Obligations of BORROWER under this Agreement and the other Loan Documents shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances whatsoever, including, without limitation, the following circumstances: (i) Any lack of validity or enforceability of any Letter of Credit or any other Loan Document; (ii) Any amendment or waiver of or any consent to departure from any Loan Document; (iii) The existence of any claim, setoff, counterclaim, defense or other right which any Loan Party or other Person may have at any time against any beneficiary of any Letter of Credit, the Agent, the Issuing Bank, the Banks or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction; (iv) Any statement, draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) Payment by the Issuing Bank under any Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, provided, that such payment shall not have constituted gross negligence or willful misconduct of the Issuing Bank; and 34 41 (vi) Any other circumstance whatsoever, whether or not similar to any of the foregoing, provided that such other circumstance or event shall not have been the result of the gross negligence or willful misconduct of the Issuing Bank. (g) BORROWER assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Agent, the Issuing Bank, the Banks nor any of their respective officers or directors shall have any responsibility or liability to BORROWER or any other Person for: (i) the failure of any draft to bear any reference or adequate reference to any Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Letter of Credit or to send documents apart from drafts as required by the terms of any Letter of Credit, or the failure of any Person to note the amount of any instrument on any Letter of Credit; (ii) errors, omissions, interruptions or delays in transmission or delivery of any messages; (iii) the validity, sufficiency or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent or forged or any statement therein is untrue or inaccurate in any respect; (iv) the payment by the Issuing Bank to the beneficiary of any Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Letter of Credit; or (v) any other circumstance whatsoever in making or failing to make any payment under a Letter of Credit; provided, however, that, notwithstanding the foregoing, BORROWER shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to BORROWER, to the extent of any direct, but not indirect or consequential, damages suffered by BORROWER which BORROWER proves in a final nonappealable judgment were caused by (A) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit complied with the terms thereof or (B) the Issuing Bank's willful failure to pay under any Letter of Credit after presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit. The Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. ARTICLE 3 Payments Section 3.1 Method of Payment. All payments of principal, interest and other amounts to be made by BORROWER under this Agreement and the other Loan Documents shall be made to the Agent at the Principal Office for the account of each Bank's Applicable Lending Office in Dollars and in immediately available funds, without setoff, deduction or counterclaim, not later than 11:00 a.m. (Houston, Texas time) on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). BORROWER shall, at the time of making each such payment, specify to the Agent the sums payable by BORROWER under this Agreement and the other Loan Documents to which such payment is to be applied (and in the event that BORROWER fails to so specify, or if an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order and manner as the Agent may elect, subject to Section 3.2). Upon the 35 42 occurrence and during the continuation of an Event of Default, all proceeds of any Collateral, and all funds from time to time on deposit in the Concentration Account, may be applied by the Agent to the Obligations in such order and manner as the Agent may elect, subject to Section 3.2. Each payment received by the Agent under this Agreement or any other Loan Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds, for the account of such Bank's Applicable Lending Office. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be. Section 3.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each Loan shall be made by the Banks under Section 2.1, each payment of commitment fees under Section 2.11 shall be made for the account of the Banks and each termination or reduction of the Commitments under Section 2.13 shall be applied to the Commitments of the Banks on a pro rata basis; (b) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 4.4) shall be made pro rata among the Banks holding Loans of such Type in accordance with their respective Commitment Percentages; (c) each payment and prepayment by BORROWER of principal of or interest on Loans of a particular Type shall be made to the Agent for the account of the Banks holding Loans of such Type pro rata in accordance with the respective unpaid principal amounts of such Loans held by such Banks; (d) Interest Periods for Eurodollar Loans shall be allocated among the Banks holding Eurodollar Loans pro rata according to the respective principal amounts held by such Banks; and (e) the Banks (other than the Issuing Bank) shall purchase participations in the Letters of Credit pro rata in accordance with their respective Commitment Percentages. Section 3.3 Sharing of Payments, Etc. If a Bank shall obtain payment of any principal of or interest on any of the Obligations due to such Bank hereunder through the exercise of any right of setoff, banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Banks participations in the Obligations held by the other Banks in such amounts and make such adjustments from time to time as shall be equitable to the end that all the Banks shall share pro rata in accordance with the unpaid principal and interest on the Obligations then due to each of them. To such end, all of the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if all or any portion of such excess payment is thereafter rescinded or must otherwise be restored. BORROWER agrees, to the fullest extent it may effectively do so under applicable law, that any Bank so purchasing a participation in the Obligations by the other Banks may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of BORROWER. Section 3.4 Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or BORROWER (the "Payor") prior to the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or BORROWER is to 36 43 make a payment to the Agent for the account of one or more of the Banks, as the case may be (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment shall, on demand, pay to the Agent the amount made available to it together with interest thereon in respect of the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such period. Section 3.5 Withholding Taxes. (a) All payments by BORROWERS of principal of and interest on the Loans and the Letter of Credit Liabilities and of all fees and other amounts payable under the Loan Documents shall be made free and clear of, and without deduction by reason of, any present or future taxes, duties, imposts, assessments or other charges levied or imposed by any Governmental Authority (other than taxes on the overall net income or gross receipts of the Agent or any Bank). If any such taxes, duties, imposts, assessments or other charges are so levied or imposed, BORROWER will (i) make additional payments in such amounts so that every net payment of principal of and interest on the Loans and the Letter of Credit Liabilities and of all other amounts payable by it under the Loan Documents, after withholding or deduction for or on account of any such present or future taxes, duties, imposts, assessments or other charges (including, without limitation, any tax imposed on or measured by net income or gross receipts of the Agent or a Bank attributable to payments made to or on behalf of the Agent or a Bank pursuant to this Section 3.5 and any penalties or interest attributable to such payments), will not be less than the amount provided for herein or therein absent such withholding or deduction (provided that BORROWER shall have no obligation to pay such additional amounts to the Agent or any Bank to the extent that such taxes, duties, imposts, assessments or other charges are levied or imposed by reason of the failure of the Agent or such Bank to comply with the provisions of Section 3.6), (ii) make such withholding or deduction, and (ii) remit the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law. Without limiting the generality of the foregoing, BORROWER will, upon written request of any Bank, reimburse each such Bank for the amount of (A) such taxes, levies, duties, imports, assessments or other charges so levied or imposed by any Governmental Authority and paid by such Bank as a result of payments made by BORROWER under or with respect to the Loans and Letter of Credit Liabilities other than such taxes, levies, duties, imports, assessments and other charges previously withheld or deducted by BORROWER which have previously resulted in the payment of the required additional amount to such Bank, and (B) such taxes, levies, duties, assessments and other charges so levied or imposed with respect to any Bank reimbursement under the foregoing clause (A), so that the net amount received by such Bank (net of payments made under or with respect to the Loans and the Letter of Credit Liabilities) after such reimbursement will not be less than the net amount such Bank would have received if such taxes, levies, duties, assessments and other charges on such reimbursement had not been levied or imposed. BORROWER shall furnish promptly to the Agent for distribution to each affected Bank, as the case may be, upon request of such Bank, official receipts evidencing any such withholding or reduction. 37 44 (b) BORROWER will indemnify the Agent and each Bank (without duplication) against, and reimburse the Agent and each Bank for, all present and future taxes, duties, imposts, assessments or other charges (including interest and penalties) levied or collected (whether or not legally or correctly imposed, assessed, levied or collected), excluding, however, any taxes imposed on the overall net income or gross receipts of the Agent or such Bank, on or in respect of this Agreement, any of the Loan Documents or the Obligations or any portion thereof (the "reimbursable taxes"). Any such indemnification shall be on an after-tax basis, taking into account any such reimbursable taxes imposed on the amounts paid as indemnity. (c) Without prejudice to the survival of any other term or provision of this Agreement, the obligations of BORROWER under this Section 3.5 shall survive the payment of the Loans, the Letter of Credit Liabilities and the other Obligations and termination of the Commitments Section 3.6 Withholding Tax Exemption. Each Bank that is originally a party to this Agreement as of the Closing Date and that is not incorporated under the laws of the United States or a state thereof agrees that it will deliver to BORROWER and the Agent two duly completed copies of United States Internal Revenue Service Form 1001, 4224 or W-8, as appropriate, certifying in any case that such Bank is entitled to receive payments from BORROWER under any Loan Document without deduction or withholding of any United States federal income taxes. Each other Bank that is not incorporated under the laws of the United States or a state thereof and which is eligible to deliver a Form 1001, 4224 or W-8, as applicable, undertakes to deliver to BORROWER and the Agent two duly completed copies of such form promptly upon its becoming a Bank under this Agreement. Each Bank which initially so delivers a Form 1001, 4224 or W-8 pursuant to this Section 3.6 further undertakes to deliver to BORROWER and the Agent two additional copies of such form (or a successor form) on or before the date such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by BORROWER or the Agent, in each case certifying that such Bank is entitled to receive payments from BORROWER under any Loan Document without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises BORROWER and the Agent that it is not capable of receiving such payments without any deduction or withholding of United States federal income tax. ARTICLE 4 Yield Protection and Illegality Section 4.1 Additional Costs. (a) BORROWER shall pay directly to each Bank from time to time, promptly upon the request of such Bank, the reasonable costs incurred by such Bank which such Bank determines are attributable to its making or maintaining of any Eurodollar Loans hereunder 38 45 or its obligation to make any of such Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans (other than taxes imposed on the overall net income or gross receipts of such Bank or its Applicable Lending Office for any of such Loans by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); (ii) imposes or modifies any reserve, special deposit, minimum capital, capital ratio or similar requirement relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank (including any of such Loans or any deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof, but excluding the Reserve Requirement to the extent it is included in the calculation of the Adjusted Eurodollar Rate); or (iii) imposes any other condition affecting this Agreement or the Notes or any of such extensions of credit or liabilities or commitments. Each Bank will notify BORROWER (with a copy to the Agent) of any event occurring after the Closing Date which will entitle such Bank to compensation pursuant to this Section 4.1(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by BORROWER) will designate a different Applicable Lending Office for the Eurodollar Loans of such Bank if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, violate any law, rule or regulation or be in any way disadvantageous to such Bank, provided that such Bank shall have no obligation to so designate an Applicable Lending Office located in the United States. Each Bank will furnish BORROWER with a certificate setting forth the basis and the amount of each request of such Bank for compensation under this Section 4.1(a). If any Bank requests compensation from BORROWER under this Section 4.1(a), BORROWER may, by notice to such Bank (with a copy to the Agent), suspend the obligation of such Bank to make or Continue making, or Convert ABR Loans into, Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (b) Without limiting the effect of the foregoing provisions of this Section 4.1, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a 39 46 category of liabilities or assets which it may hold, then, if such Bank so elects by notice to BORROWER (with a copy to the Agent), the obligation of such Bank to make or Continue making, or Convert ABR Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.4 hereof shall be applicable). (c) Determinations and allocations by any Bank for purposes of this Section 4.1 of the effect of any Regulatory Change on its costs of maintaining its obligation to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive in the absence of manifest error, provided that such determinations and allocations are made on a reasonable basis. Section 4.2 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if with respect to any Eurodollar Loans for any Interest Period therefor: (a) The Agent determines (which determination shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.1 hereof are not being provided in the relative amounts or for the relative maturities for purposes of determining the rate of interest for such Loans as provided in this Agreement; or (b) Required Banks determine (which determination shall be conclusive absent manifest error) and notify the Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" or "Adjusted Eurodollar Rate" in Section 1.1 hereof on the basis of which the rate of interest for such Loans for such Interest Period is to be determined do not accurately reflect the cost to the Banks of making or maintaining such Loans for such Interest Period; then the Agent shall give BORROWER prompt notice thereof and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans or to Convert ABR Loans into Eurodollar Loans and BORROWER shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into ABR Loans in accordance with the terms of this Agreement. Section 4.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to (a) honor its obligation to make Eurodollar Loans hereunder or (b) maintain Eurodollar Loans hereunder, then such Bank shall promptly notify BORROWER (with a copy to the Agent) thereof and such Bank's obligation to make or maintain Eurodollar Loans and to Convert ABR Loans into Eurodollar Loans hereunder shall be suspended until such time as such Bank may again make and maintain Eurodollar Loans (in which case the provisions of Section 4.4 hereof shall be applicable). Section 4.4 Treatment of Affected Loans. If the obligation of any Bank to make or Continue, or to Convert ABR Loans into, Eurodollar Loans is suspended pursuant to Section 4.1 40 47 or 4.3 hereof, such Bank's Eurodollar Loans shall be automatically Converted into ABR Loans on the last day(s) of the then current Interest Period(s) for the Eurodollar Loans (or, in the case of a Conversion required by Section 4.1(b) or 4.3 hereof, on such earlier date as such Bank may specify to BORROWER with a copy to the Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to such Conversion no longer exist: (a) To the extent that such Bank's Eurodollar Loans have been so Converted, all payments and prepayments of principal which would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its ABR Loans; and (b) All Loans which would otherwise be made or Continued by such Bank as Eurodollar Loans shall be made as or Converted into ABR Loans and all Loans of such Bank which would otherwise be Converted into Eurodollar Loans shall be Converted instead into (or shall remain as) ABR Loans. If such Bank gives notice to BORROWER (with a copy to the Agent) that the circumstances specified in Section 4.1 or 4.3 hereof which gave rise to the Conversion of such Bank's Eurodollar Loans pursuant to this Section 4.4 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans are outstanding, such Bank's ABR Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Banks holding Eurodollar Loans and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 4.5 Compensation. BORROWER shall pay to the Agent for the account of each Bank, promptly upon the request of such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense incurred by it as a result of: (a) Any payment, prepayment or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the outstanding Loans pursuant to Section 11.2) on a date other than the last day of an Interest Period for such Loan; or (b) Any failure by BORROWER for any reason (including, without limitation, the failure of any conditions precedent specified in Article 6 to be satisfied) to borrow, Convert or prepay a Eurodollar Loan on the date for such borrowing, Conversion, or prepayment specified in the relevant notice of borrowing, prepayment, or Conversion under this Agreement. Section 4.6 Capital Adequacy. If, after the Closing Date, any Bank shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital adequacy (including, without limitation, any law, rule or regulation implementing the Basle Accord), or any change therein, or any change in the interpretation or administration thereof by 41 48 any central bank or other Governmental Authority charged with the interpretation or administration thereof, or compliance by such Bank (or its parent) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any central bank or other Governmental Authority (including, without limitation, any guideline or other requirement implementing the Basle Accord), has or would have the effect of reducing the rate of return on such Bank's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which such Bank (or its parent) could have achieved but for such adoption, implementation, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within ten Business Days after demand by such Bank (with a copy to the Agent), BORROWER shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its parent) for such reduction. A certificate of such Bank claiming compensation under this Section 4.6 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, such Bank may use any reasonable averaging and attribution methods. Section 4.7 Additional Interest on Eurodollar Loans. BORROWER shall pay, directly to each Bank from time to time, additional interest on the unpaid principal amount of each Eurodollar Loan held by such Bank, from the date of the making of such Eurodollar Loan until such principal amount is paid in full, at an interest rate per annum determined by such Bank in good faith equal to the positive remainder (if any) of (a) the Adjusted Eurodollar Rate applicable to such Eurodollar Loan minus (b) the Eurodollar Rate applicable to such Eurodollar Loan. Each payment of additional interest pursuant to this Section 4.7 shall be payable by BORROWER on each date upon which interest is payable on such Eurodollar Loan pursuant to Section 2.4(b); provided, however, that BORROWER shall not be obligated to make any such payment of additional interest until the first Business Day after the date when BORROWER have been informed (i) that such Bank is subject to a Reserve Requirement and (ii) of the amount of such Reserve Requirement (after which time BORROWER shall be obligated to make all such payments of additional interest, including, without limitation, such payments of additional interest that otherwise would have been payable by BORROWER on or prior to such time had BORROWER been earlier informed). ARTICLE 5 Security Section 5.1 Collateral. To secure the full and complete payment and performance of the Obligations, BORROWER will grant to the Agent, for the ratable benefit of itself and the Banks, a perfected first priority Lien (except as stated in clause (a) succeeding) or assignment, as appropriate, on all of its right, title and interest in and to the following Property, whether now owned or hereafter acquired, pursuant to the Security Documents: (a) all Receivables of BORROWER and of each "Borrower" other than the "Non-Material Subsidiaries" (as such terms are defined in the Revolving Loans Credit Agreement) and all products and proceeds thereof; provided however that the Lien with 42 49 respect to all such Receivables shall be junior and subordinate to the Lien granted to secure the Revolving Loans Obligations; and (b) its interest in the Concentration Account (including, without limitation, any cash from time to time deposited or held in such account), and all products and proceeds thereof; and (c) the Drilling Rigs. Section 5.2 Substitute Collateral. If the Banks, in the exercise of reasonable discretion, determine that any drilling rig mortgaged by Borrower as security for the Loans does not constitute appropriate collateral, Banks may give written notice to that effect to the Borrower, whereupon any such drilling rig shall cease to be a Drilling Rig on the thirtieth day following such notice. In such event, Banks agree to act in good faith to accept as collateral for the Loans other drilling rigs proposed by Borrower. Section 5.3 Setoff. If an Event of Default shall have occurred and be continuing, each Bank is hereby authorized at any time and from time to time, without notice to BORROWER (any such notice being hereby expressly waived by BORROWER), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of BORROWER against any and all of the Obligations of such Borrower now or hereafter existing under this Agreement, any of such Bank's Notes or any other Loan Document, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement or any of such Bank's Note or such other Loan Document and although such Obligations may be unmatured. Each Bank agrees promptly to notify BORROWER (with a copy to the Agent) after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights and remedies of each Bank hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Bank may have. ARTICLE 6 Conditions Precedent Section 6.1 Initial Extension of Credit. The obligation of each Bank to make its initial Loan and the obligation of the Issuing Bank to issue the initial Letter of Credit are subject to the condition precedent that the Agent shall have received, on or before the Funding Date, all of the following, each dated (unless otherwise indicated or otherwise agreed by the Agent) as of the Closing Date, in form and substance satisfactory to the Agent and, in the case of actions to be taken, evidence that the following required actions have been taken to the satisfaction of the Agent: (a) Resolutions. Resolutions of the Board of Directors of each Loan Party certified by its Secretary or an Assistant Secretary which authorize the execution, delivery and performance by such Loan Party of the Loan Documents to which it is or is to be a party; 43 50 (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of each Loan Party certifying the name of each officer of such Loan Party (i) who is authorized to sign the Loan Documents to which such Loan Party is or is to be a party (including any certificates contemplated therein), together with specimen signatures of each such officer, and (ii) who will, until replaced by other officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Loan Documents and the transactions contemplated thereby; (c) Articles or Certificates of Incorporation. The articles or certificates of incorporation of each Loan Party certified by the Secretary of State of the state of incorporation of such Loan Party and dated as of a Current Date; (d) Bylaws. The bylaws of each Loan Party certified by the Secretary or an Assistant Secretary of such Loan Party; (e) Governmental Certificates. Certificates of appropriate officials as to the existence and good standing of each Loan Party in its respective jurisdiction of incorporation and any and all jurisdictions where such Loan Party is qualified to do business as a foreign corporation, each such certificate to be dated as of a Current Date; (f) Notes. The Notes duly completed and executed by BORROWER; (g) Security Documents. The Security Documents executed by BORROWER; (h) Insurance Policies. Certificates of insurance with respect to all insurance policies required by this Agreement and the other Loan Documents, all in form and substance satisfactory to the Agent; (i) Financing Statements. UCC-1 financing statements and all other requisite filing documents executed by the Loan Parties necessary to perfect the Liens created pursuant to the Security Documents; (j) Lien Releases. Duly executed releases or assignments of Liens and UCC-3 financing statements in recordable form, as may be necessary to reflect that the Liens created by the Security Documents are perfected Liens having the priorities required by this Agreement and the Security Documents; (k) UCC Searches. UCC searches in the names of each of BORROWER (and all corporate names under which it has done business within the last five years) in each jurisdiction where each such Person maintains an office or has Property, showing no financing statements or other Lien instruments of record except for Permitted Liens; (l) Solvency Certificate. A certificate executed by a Responsible Officer of BORROWER and its Subsidiaries (with respect to such Subsidiaries) to the effect that, before 44 51 and after giving effect to the Loans, BORROWER and its Subsidiaries will be Solvent, both on a consolidated and consolidating basis; (m) Other Consents. Copies of all material consents necessary for the execution, delivery and performance by each of the Loan Parties of the Loan Documents to which it is a party, including, without limitation, any consents or waivers in connection with the grant of a security interest pursuant to the Security Documents, which consents shall be certified by a Responsible Officer of BORROWER as true and correct copies of such consents as of the Closing Date; (n) Permits. Copies of all material Permits of Borrower or any of its Subsidiaries and all material permits relating to any of the Properties owned or leased by any of them (except for certificates of class of the American Shipping Bureau and certificates of documentation or inspection of the United States Coast Guard and except to the extent that the Agent may inform BORROWER that copies of certain of such Permits shall not be required to be delivered); and evidence satisfactory to the Agent that Borrower and its Subsidiaries have taken appropriate action to ensure that Borrower and its Subsidiaries are able to conduct their businesses with the use of such Permits in full force and effect; (o) Payment of Fees and Expenses. BORROWER shall have paid all fees due on the Closing Date as specified in the Term Sheet and all fees and expenses of or incurred by the Agent and its counsel to the extent billed as of the Closing Date and payable pursuant to this Agreement; (p) Regulatory Approvals. Evidence satisfactory to the Agent that all filings, consents, or approvals with or of Governmental Authorities necessary to consummate the transactions contemplated by the Loan Documents, if any, have been obtained; (q) Compliance with Laws. On the Closing Date, each Person that is a party to this Agreement or any of the other Loan Documents shall have complied with all Governmental Requirements necessary to consummate the transactions contemplated by this Agreement and the other Loan Documents; (r) No Prohibitions. No Governmental Requirement shall prohibit the consummation of the transactions contemplated by this Agreement or any other Loan Document, and no order, judgment or decree of any Governmental Authority or arbitrator shall, and no litigation or other proceeding shall be pending or threatened which would, enjoin, prohibit, restrain or otherwise adversely affect the consummation of the transactions contemplated by this Agreement or the other Loan Documents or otherwise have a Material Adverse Effect; (s) Material Adverse Change. No material adverse change shall have occurred with respect to the financial condition, business, operations, capitalization or liabilities of Borrower, or of Borrower and its Subsidiaries taken as a whole, since June 30, 1996; 45 52 (t) Wiring Instructions. A letter of direction from BORROWER to the Agent with respect to the disbursement of the proceeds of the Loans on the Funding Date; (u) Bank Accounts. BORROWER shall have established the Concentration Account into which all proceeds (except for any cash deposited into the Borrowing Base Account pursuant to the Security Documents) of the Collateral shall be directed, which account shall be governed by the Concentration Account Agreement; (v) Financial Statements. Copies of each of the financial statements referred to in Section 7.2, including, without limitation, the most recent audited financial statements of Borrower and its Subsidiaries; (w) Opinion of Counsel. A favorable opinion of counsel for BORROWER reasonably acceptable to the Agent, each in form and substance (and covering such matters as are) satisfactory to the Agent; (x) Notice of Borrowing or Issuance of Letter of Credit. A notice of borrowing in accordance with Section 2.9 (with respect to a Loan) or a notice of request for the issuance of a Letter of Credit in accordance with Section 2.14 (with respect to a Letter of Credit); (y) Preferred Ship Mortgage. A valid, perfected, first priority ship mortgage on the Drilling Rigs shall exist in favor of a trustee (approved by Agent) for the benefit of the Banks, securing the Loans; (z) Appraisal. The Agent shall have received from a Qualified Appraiser an appraisal of the Drilling Rigs in form and substance satisfactory to Agent; and (aa) Intercreditor Agreement. The Agent shall have received the Intercreditor Agreement executed by all parties thereto. (bb) Repayment of Prior Obligations and Release of Prior Liens. The Prior Obligations shall have been paid in full and all Liens securing the Prior Obligations shall have been released. BORROWER shall deliver, or cause to be delivered, to the Agent sufficient counterparts of each document to be received by the Agent under this Section 6.1 to permit the Agent to distribute a copy of such document to the Banks. Section 6.2 All Extensions of Credit. The obligation of each Bank to make any Loan (including the initial Loan) and the obligation of the Issuing Bank to issue any Letter of Credit (including the initial Letter of Credit) are subject to the following additional conditions precedent: (a) No Default. No Default shall have occurred and be continuing, or would result from such Loan or Letter of Credit; 46 53 (b) Representations and Warranties. All of the representations and warranties of BORROWER and the other Loan Parties contained in Article 7 hereof and in the other Loan Documents (a) shall be true and correct when made and (b) shall be deemed to be repeated on and as of the date of such Loan or Letter of Credit and shall be true and correct in all respects on and as of such date, except in the case of representations and warranties which expressly and specifically relate only to an earlier date; (c) Additional Documentation. The Agent shall have received all notices and other agreements, documents and instruments as may be required under this Agreement as a condition to such Loan or Letter of Credit in compliance with this Agreement (including, without limitation, the notice required under Section 2.9 with respect to a Loan and the notice required under Section 2.14 with respect to a Letter of Credit) and such additional approvals, opinions, agreements, documents and instruments as the Agent may reasonably request; (d) Borrowing Base. After giving effect to the Loans and/or Letters of Credit requested to be made and/or issued, respectively, the Outstanding Credit shall not exceed an amount equal to the lesser of the Borrowing Base or the Commitments at such time; and (e) No Material Adverse Effect. Both before and after giving effect to the Loans and/or Letters of Credit requested to be made and/or issued, respectively, no Material Adverse Effect shall have occurred and shall be continuing. Each notice of borrowing or request for the issuance of a Letter of Credit by BORROWER hereunder shall constitute a representation and warranty by BORROWER that the conditions precedent set forth in this Section 6.2 (other than the Agent's receipt of any additional documentation that it may, at its option, request pursuant to Section 6.2(c) preceding) have been satisfied (both as of the date of such notice and, unless BORROWER otherwise notifies the Agent prior to the date of such borrowing or Letter of Credit, as of the date of such borrowing or Letter of Credit). ARTICLE 7 Representations and Warranties BORROWER represents and warrants to the Agent and the Banks that the following statements are true, correct and complete: Section 7.1 Corporate Existence. Each Loan Party (a) is a corporation or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (b) has all requisite entity power and authority to own its Properties and carry on its business as now being or as proposed to be conducted, and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. Each Loan Party has the corporate power and authority and legal right to execute, deliver and perform its obligations under 47 54 the Loan Documents to which it is or may become a party. The chief executive office and principal place of business of BORROWER is located in the State of Texas. Section 7.2 Financial Statements. BORROWER has delivered to the Agent and the Banks the Form 10-K of Borrower for the fiscal year ended December 31, 1995, and the Forms 10-Q of Borrower for the fiscal quarters ended March 31, 1996, and June 30, 1996, which contain audited (with respect to the Form 10-K ) and unaudited (with respect to the Forms 10-Q) consolidated (and certain audited and unaudited consolidating) balance sheets and statements of operations and statements of cash flow of Borrower and its consolidated Subsidiaries as of or for (as applicable) the fiscal year or fiscal quarter (as applicable) ended December 31, 1995, March 31, 1996, and June 30, 1996. To BORROWER's knowledge, such financial statements are true and correct, have been prepared in accordance with GAAP and fairly and accurately present, on a consolidated and consolidating (where applicable) basis, the financial condition of Borrower and its consolidated Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. There has been no material adverse change in the business, condition (financial or otherwise), operations or Properties of Borrower, or of Borrower and its consolidated Subsidiaries taken as a whole, since the effective date of the financial statements referred to in this Section 7.2(a). Section 7.3 Entity Action; No Breach. The execution, delivery and performance by each Loan Party of the Loan Documents to which it is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate action on the part of the Loan Parties and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles or certificates of incorporation or bylaws of any Loan Party or the partnership agreement or certificate of limited partnership or other constitutional document of any Loan Party, (ii) any Governmental Requirement or any order, writ, injunction or decree of any Governmental Authority or arbitrator, or (iii) any material agreement, document or instrument to which any Loan Party is a party or by which any Loan Party or any of its Property is bound or subject, or (b) constitute a default under any such material agreement, document or instrument, or result in the creation or imposition of any Lien (except under the Security Documents as provided in Article 5) upon any of the revenues or Property of any Loan Party. Section 7.4 Operation of Business. The Loan Parties possess all Permits, franchises, licenses and authorizations necessary to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted except where the failure to so possess would not cause a Material Adverse Effect. None of such Persons is in material violation of any such Permits, franchises, licenses or authorizations required to be possessed pursuant to this Section 7.4. Section 7.5 Intellectual Property. The Loan Parties own or possess (or will be licensed or have the full right to use) all Intellectual Property which is necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted, without any known conflict with the rights of others. The consummation of the transactions contemplated by this Agreement and the other Loan Documents will not materially alter or impair, individually or in 48 55 the aggregate, any of such rights of such Persons. No product of the Loan Parties infringes upon any Intellectual Property owned by any other Person, and no claim or litigation is pending or, to the knowledge of BORROWER, threatened against any Loan Party or any such Person contesting its right to use any product or material which could have a Material Adverse Effect. There is no violation by any Loan Party of any right of such Loan Party with respect to any material Intellectual Property owned or used by such Loan Party. Section 7.6 Litigation and Judgments. Each material action, suit, investigation or proceeding before or by any Governmental Authority or arbitrator pending or, to the knowledge of BORROWER, threatened against or affecting any Loan Party as of the date of this Agreement is disclosed on Schedule 7.6 hereto or in the Form 10-K of Borrower for the fiscal year ended December 31, 1995, or in the Form 10-Q of Borrower for the fiscal quarter ended March 31, 1996, or June 30, 1996 except for suits for personal injury, death or property damage which are adequately covered by insurance (subject to any deductibles, all of which deductibles are customary for the industry in which BORROWER are engaged). None of such actions, suits, investigations or proceedings (a) could be reasonably expected to be adversely determined or (b) if and to the extent the same could be reasonably expected to be adversely determined, could be reasonably expected to have a Material Adverse Effect. On the date of this Agreement, there are no outstanding judgments against any Loan Party or any of their Subsidiaries or Affiliates. No Loan Party has received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed to any liability or disadvantage that could have a Material Adverse Effect. Section 7.7 Rights in Properties; Liens. Except as expressly stated to the contrary on Schedule 1.1(a), each of the Loan Parties has good and indefeasible title to, or valid leasehold interests in, its Properties and assets, real and personal, including the Properties, assets and leasehold interests reflected in the financial statements described in Section 7.2(a), and none of the Properties or leasehold interests of any Loan Party or any of its Subsidiaries is subject to any Lien, except Permitted Liens. Each of the Eligible Receivables will be derived or generated from Properties or assets owned or leased by a Borrower. As of the Closing Date, each of the Drilling Rigs purported to be owned by Borrower is owned, of record and beneficially, by BORROWER, except for the Phoenix II Drilling Rig which is to be transferred from FALRIG Offshore (USA), L.P. to Borrower free of all liens, mortgages and encumbrances in connection with the Closing. Section 7.8 Enforceability. The Loan Documents have been duly and validly executed and delivered by each of the Loan Parties that is a party thereto and constitute the legal, valid and binding obligations of the Loan Parties, enforceable against the Loan Parties in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. Section 7.9 Approvals. No authorization, approval or consent of, and no filing or registration with or notice to, any Governmental Authority or third party is or will be necessary for the execution, delivery or performance by any Loan Party of any of the Loan Documents to which it is a party or for the validity or enforceability thereof, except for such consents, approvals and filings as have been validly obtained or made and are in full force and effect. None of the Loan Parties has failed to obtain any material governmental consent, approval, license, Permit, 49 56 franchise or other governmental authorization necessary for the ownership of any of its Properties or the conduct of its business. Section 7.10 Debt. As of the Closing Date and after giving effect to the payment of the Prior Obligations (as required by Section 6.1(aa)), Borrower and its consolidated Subsidiaries have no Debt except for (a) the Obligations and the Acquisition Loans Obligations, (b) the Debt disclosed in the financial statements including in the Form 10-Q of Borrower for the fiscal quarter ended June 30, 1996, and (c) the Debt disclosed with respect to such Person on Schedule 7.10 hereto. Section 7.11 Taxes. The Loan Parties have filed all tax returns (federal, state and local) required to be filed, including all income, franchise, employment, Property and sales tax returns, and have paid all of their respective liabilities for taxes, assessments, governmental charges and other levies that are due and payable. BORROWER is not aware of any pending investigation by any taxing authority of any Loan Party or any of its Subsidiaries or of any pending but unassessed tax liability of any Loan Party or any of its Subsidiaries. No tax Liens have been filed and, except as disclosed on Schedule 7.11, no claims are being asserted against any Loan Party or any of its Subsidiaries with respect to any taxes. Except as disclosed on Schedule 7.11 hereto, as of the Closing Date, none of the United States income tax returns of the Loan Parties and any of their respective Subsidiaries are under audit. The charges, accruals and reserves on the books of the Loan Parties in respect of taxes or other governmental charges are in accordance with GAAP. Section 7.12 Margin Securities. None of the Loan Parties or any of their respective Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 7.13 ERISA. (a) Each Plan of each Loan Party and of each Borrower Member is in compliance in all material respects with all applicable provisions of ERISA and the Code. Neither a Reportable Event nor a Prohibited Transaction has occurred within the last 60 months with respect to any Plan of any Loan Party or any Borrower Member. No notice of intent to terminate a Pension Plan of any Loan Party or any Borrower Member has been filed, nor has any Pension Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Pension Plan of any Loan Party or any Borrower Member, nor has the PBGC instituted any such proceedings. Neither any of the Loan Parties nor any Borrower Member has completely or partially withdrawn from a Multiemployer Plan. Each Loan Party and each Borrower Member has met its minimum funding requirements under ERISA and the Code with respect to all of its Plans subject to such requirements, and, as of the Closing Date except as specified on Schedule 7.13, the present value of all vested benefits under each funded Plan (exclusive of any Multiemployer Plan) does not exceed 50 57 the fair market value of all such Plan assets allocable to such benefits, as determined on the most recent valuation date of such Plan and in accordance with ERISA. Neither any of the Loan Parties nor any Borrower Member has incurred any liability to the PBGC under ERISA. No litigation is pending or threatened concerning or involving any Plan of any Loan Party or any Borrower Member. There are no unfunded or unreserved liabilities relating to any Plan of any Loan Party or any Borrower Member that could, individually or in the aggregate, have a Material Adverse Effect if such Loan Party or Borrower Member were required to fund or reserve such liability in full. As of the Closing Date, no funding waivers have been requested or granted under Section 412 of the Code with respect to any Plan of any Loan Party or Borrower Member. As of the Closing Date, no unfunded or unreserved liability for benefits under any Plan or Plans of any Loan Party or any Borrower Member (exclusive of any Multiemployer Plans) exceeds $1,000,000 with respect to any such Plan or $3,000,000 with respect to all such Plans in the aggregate. (b) No ERISA Affiliate has incurred any liability to the PBGC or has withdrawn from a Multiemployer Plan. Neither BORROWER nor any ERISA Affiliate has received a demand letter from the PBGC (i) for the payment of minimum funding contributions under Section 302 of ERISA which exceed $1,000,000 with respect to any Pension Plan or $3,000,000 with respect to all Pension Plans in the aggregate or (ii) for the payment of employer liabilities under Section 4062, 4063 or 4064 of ERISA which exceeds $1,000,000 with respect to any Pension Plan or $3,000,000 with respect to all Pension Plans in the aggregate. The PBGC has not filed or perfected any Lien under Section 302(f)(1) or 4068(a) of ERISA against BORROWER or any ERISA Affiliate. Neither BORROWER nor any ERISA Affiliate has received a notice of complete or partial withdrawal from a Multiemployer Plan in which the amount of the liability asserted exceeds $1,000,000 with respect to any Multiemployer Plan or $3,000,000 with respect to all Multiemployer Plans in the aggregate. Section 7.14 Disclosure. No written statement, information, report, representation or warranty made by any Loan Party in any Loan Document, or furnished to the Agent or any Bank by any Loan Party in connection with the Loan Documents, or made in connection with any transaction contemplated hereby or thereby, contains (as of the date when made) any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to BORROWER which has had a Material Adverse Effect, and there is no fact known to BORROWER which might in the future have a Material Adverse Effect, except as may have been disclosed in writing to the Agent and the Banks. Section 7.15 Capitalization. (a) As of June 30, 1996, the capitalization of Borrower and its consolidated Subsidiaries was as set forth in the Form 10-Q of Borrower for the fiscal quarter ended June 30, 1996. (b) On and as of the Closing Date, Borrower directly or indirectly owns (legally and beneficially) all of the issued and outstanding Capital Stock of each of its consolidated 51 58 Subsidiaries. On and as of the Closing Date, none of the Subsidiaries of Borrower has authorized or issued any Redeemable Stock. (c) All of the outstanding common stock of BORROWER and its Subsidiaries has been validly issued, is fully paid and is nonassessable. Since June 30, 1996, no Subsidiary has issued any subscriptions, options, warrants, calls or rights (including preemptive rights) to acquire, or securities or instruments convertible into, Capital Stock of such Subsidiary. Section 7.16 Agreements. None of the Loan Parties is a party to any indenture, loan, credit agreement, stock purchase agreement, lease or other agreement, document or instrument, or subject to any charter, corporate, partnership or similar restriction, that could reasonably be expected to have a Material Adverse Effect. Except as disclosed on Schedule 7.22, none of the Loan Parties is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, document or instrument binding on it or its Properties, except for instances of noncompliance that, individually or in the aggregate, could not have a Material Adverse Effect. Section 7.17 Compliance with Laws. None of the Loan Parties is in violation of any Governmental Requirement, except for instances of non- compliance that, individually or in the aggregate, could not have a Material Adverse Effect. Section 7.18 Investment Company Act. None of the Loan Parties is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 7.19 Public Utility Holding Company Act. None of the Loan Parties is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 7.20 Environmental Matters. (a) Except for instances of noncompliance with or exceptions to any of the following representations and warranties that could not have, individually or in the aggregate, a Material Adverse Effect: (i) The Loan Parties and all of their respective Properties and operations are in full compliance with all Environmental Laws. BORROWER is not aware of, and BORROWER has received no written notice of, any past, present or future conditions, events, activities, practices or incidents which may interfere with or prevent the compliance or continued compliance by any Loan Party with all Environmental Laws; 52 59 (ii) The Loan Parties have obtained all Permits that are required under applicable Environmental Laws, and all such Permits are in good standing and all such Persons are in compliance with all of the terms and conditions thereof; (iii) No Hazardous Materials exist on, about or within or have been (to BORROWER's knowledge) or are being used, generated, stored, transported, disposed of on or Released from any of the Properties of the Loan Parties except in compliance with applicable Environmental Laws. The use which the Loan Parties make and intend to make of their respective Properties will not result in the use, generation, storage, transportation, accumulation, disposal or Release of any Hazardous Material on, in or from any of their Properties except in compliance with applicable Environmental Laws; (iv) Neither the Loan Parties nor any of their respective Subsidiaries currently or previously owned or leased Properties or operations is subject to any outstanding or, to the best of BORROWER's knowledge, threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or administrative proceeding with respect to (A) any failure to comply with Environmental Laws, (B) any Remedial Action, or (C) any Environmental Liabilities; (v) There are no conditions or circumstances associated with the currently or previously owned or leased Properties or operations of the Loan Parties that could reasonably be expected to give rise to any Environmental Liabilities or claims resulting in any Environmental Liabilities. None of the Loan Parties is subject to, or has received written notice of any claim from any Person alleging that any of the Loan Parties is or will be subject to, any Environmental Liabilities; (vi) None of the Properties of the Loan Parties is a treatment facility (except for the recycling of Hazardous Materials generated onsite and the treatment of liquid wastes subject to the Clean Water Act), storage facility (except for temporary storage of Hazardous Materials generated onsite prior to their disposal offsite) or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., regulations thereunder or any comparable provision of state law. The Loan Parties and their Subsidiaries are compliance with all applicable financial responsibility requirements of all Environmental Laws; and (vii) None of the Loan Parties has failed to file any notice required under applicable Environmental Law reporting a Release. (b) No Lien arising under any Environmental Law that could have, individually or in the aggregate, a Material Adverse Effect has attached to any Property or revenues of any Loan Party. 53 60 Section 7.21 Labor Disputes and Acts of God. Neither the business nor the Properties of any Loan Party are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that is having or could have a Material Adverse Effect. Section 7.22 Material Contracts. Except as may be disclosed on Schedule 7.22, (a) all of the Material Contracts of each Loan Party are in full force and effect, (b) there are no defaults under any Material Contracts (which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect), and (c) to the best of BORROWER's knowledge after due inquiry, no other Person that is a party thereto is in default under any of the Material Contracts. None of the Material Contracts, and no other agreement, document or instrument to which any Loan Party is a party or by which any Loan Party or any of its Property is based or subject, prohibits the transactions contemplated under the Loan Documents. Section 7.23 Outstanding Securities. As of the Closing Date, all outstanding securities (as defined in the Securities Act of 1933, as amended, or any successor thereto, and the rules and regulations of the Securities and Exchange Commission thereunder) of the Loan Parties have been offered, issued, sold and delivered in compliance with all applicable Governmental Requirements. Section 7.24 Priority of Payment. The Debt evidenced by the Notes and all other Obligations of BORROWER to the Agent and the Banks under the Loan Documents (a) constitutes "Permitted Indebtedness" (as such term is defined in the Indenture and the Note Purchase Agreement) of BORROWER, (b) is pari passu in right of payment with the Senior Debt, except that the Debt evidenced by the Notes and the other Obligations are secured by the Collateral while the Senior Debt is wholly unsecured (subject to the contractual right of the holders of the Senior Fixed Rate Notes to obtain security in the future under certain circumstances as provided in Section 4.10 of the Indenture), and (c) shall in no event be subordinate in any respect (including, without limitation, right of payment) to any other Debt of Borrower or any of its Subsidiaries, exclusive of the effect of any Permitted Liens. Section 7.25 Solvency. Borrower and each of its consolidated Subsidiaries, as a separate entity and on a consolidated basis, is Solvent, both before and after giving effect to the Loans and the other transactions contemplated by the Loan Documents. Section 7.26 Employee Matters. Except as set forth on Schedule 7.26, as of the Closing Date (a) none of the Loan Parties nor any of their respective Subsidiaries, nor any of their respective employees, is subject to any collective bargaining agreement, and (b) no petition for certification or union election is pending with respect to the employees of any Loan Party or any of their respective Subsidiaries, and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any of the Loan Parties or any of their respective Subsidiaries. There are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of BORROWER after due inquiry, threatened against, any of the Loan Parties or any of their respective Subsidiaries or their respective employees which could have, either individually or in the aggregate, a Material Adverse Effect. 54 61 Section 7.27 Insurance. BORROWER has delivered to the Agent a true and complete summary of the insurance that will be in effect as of the Closing Date for BORROWER. No notice of cancellation has been received for such insurance and BORROWER and its Subsidiaries are in substantial compliance with all of the terms and conditions of the policies providing such insurance. ARTICLE 8 Affirmative Covenants BORROWER covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, BORROWER will perform and observe, or cause to be performed and observed, the following covenants: Section 8.1 Reporting Requirements. BORROWER will furnish to the Agent and each Bank: (a) Annual Financial Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of Borrower, beginning with the fiscal year ending December 31, 1996, (i) a copy of the annual audit report of Borrower and its consolidated Subsidiaries as of the end of and for such fiscal year then ended containing, on a consolidated basis and with unaudited consolidating schedules attached, balance sheets and statements of income, retained earnings and cash flow, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited by Arthur Andersen & Co. or other independent certified public accountants of recognized national standing, to the effect that such report has been prepared in accordance with GAAP and (ii) a letter from such independent certified public accountants to the Agent (A) stating that nothing has come to its attention during its auditing procedures which indicates that a Default has occurred and is continuing or, if in its opinion a Default has occurred and is continuing, stating the nature thereof, and (B) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith; (b) Quarterly Financial Statements. As soon as available, and in any event within 45 days after the end of each of the quarters of each fiscal year of Borrower, beginning with the fiscal quarter ending September 30, 1996, a copy of an unaudited financial report of Borrower and its consolidated Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended containing, on a consolidated basis, balance sheets and statements of income, retained earnings and cash flow, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year all in reasonable detail certified by a Responsible Officer of BORROWER to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operation of Borrower and its consolidated Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein; 55 62 (c) Monthly Financial Statements. As soon as available, a copy of any monthly financial report or statement of Borrower or any of its Subsidiaries as may be prepared by or for the directors of any such Person; (d) Certificate of No Default. Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) or 8.1(b), a certificate of a Responsible Officer of BORROWER (i) stating that, to the best of such officer's knowledge, no Default has occurred and is continuing or, if a Default has occurred and is continuing, stating the nature thereof and the action that is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Article 10; (e) Appraisals. At such times as may be requested by Agent, an appraisal of the Rig Collateral prepared by a Qualified Appraiser; provided, if the Agent requests more than three appraisals during any twelve month period, the cost of additional appraisals shall be for the account of the Banks; (f) Rig Reports. As soon as available, a copy of any periodic report(s) of Borrower or any of its Subsidiaries as may be prepared by or for the directors of any such Person pertaining to the status of any rig(s) (e.g., the location of, the operator of, the contract terms with respect to and the average day rate or utilization of any rig) owned and/or operated by any such Person or any Affiliate of any such Person; (g) Budget; Projections. As soon as available, a copy of any budget or projections of Borrower or any of its Subsidiaries as may be prepared by or for the directors of any such Person and, in any event with 30 days after the end of each fiscal year, a copy of a budget and projections of Borrower and its consolidated Subsidiaries for the then current fiscal year, which budget and projections shall including consolidating schedules containing information exclusively as to BORROWER; (h) Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to any Loan Party by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects or Properties of such Loan Party; (i) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any Governmental Authority or arbitrator affecting any Loan Party which, if determined adversely to such Loan Party, could have a Material Adverse Effect; (j) Notice of Default. As soon as possible and in any event immediately upon any Borrower's knowledge of the occurrence of any Default, a written notice setting forth the details of such Default and the action that BORROWER has taken and proposes to take with respect thereto; 56 63 (k) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Loan Party or any Borrower Member files with or receives from the PBGC or the U.S. Department of Labor under ERISA; as soon as possible and in any event within five days after any such Person knows or has reason to know that any Pension Plan is insolvent, or that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or Multiemployer Plan, or that the PBGC, any Loan Party or any Borrower Member has instituted or will institute proceedings under ERISA to terminate or withdraw from or reorganize any Pension Plan, a certificate of a Responsible Officer of BORROWER setting forth the details as to such insolvency, withdrawal, Reportable Event, Prohibited Transaction or termination and the action that BORROWER proposes to take with respect thereto; and promptly after the receipt thereof, a copy of each demand letter or notice which would have been described in Section 7.13(b) if it had been received on or prior to the Closing Date. (l) Reports to Other Creditors. Promptly after the furnishing thereof, a copy of any statement or report furnished by any Loan Party to any other party pursuant to the terms of any indenture, loan, stock purchase or credit or similar agreement relating to any Consolidated Funded Debt and not otherwise required to be furnished to the Agent and the Banks pursuant to any other clause of this Section 8.1; (m) Notice of Material Adverse Effect. Within five Business Days after BORROWER becomes aware thereof, written notice of any matter that could reasonably be expected to have a Material Adverse Effect; (n) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by any Loan Party to its stockholders generally and one copy of each regular, periodic or special report, registration statement or prospectus filed by any Loan Party with any securities exchange or the Securities and Exchange Commission or any successor agency, and of all press releases and other statements made by any of the Loan Parties to the public containing material developments in its business; (o) Notices regarding Subsidiaries and Transfers of Drilling Rigs. (i) Concurrently with the delivery of each of the financial statements referred to in Sections 8.1(a) and 8.1(b), notice of the creation or acquisition of any Subsidiary by BORROWER after the Closing Date and subsequent to the last delivery of such information, (ii) promptly upon the occurrence thereof, notice of any sale, transfer or other disposition of any Drilling Rig by BORROWER and information concerning the identity of the Drilling Rig affected thereby, the identity of the transferee thereof and the date of such sale, transfer or other disposition, (iii) promptly upon the occurrence thereof, notice of the creation or acquisition of any Material Subsidiary of BORROWER, or of the existence of any Material Subsidiary of BORROWER, after the Closing Date and subsequent to the last delivery of such information; and (iv) promptly upon the occurrence thereof, notice of any Non- Material Subsidiary being or becoming a Material Subsidiary 57 64 (p) Insurance. Within 60 days prior to the end of each fiscal year of Borrower, a report in form and substance reasonably satisfactory to the Agent summarizing all material insurance coverage maintained by BORROWER and their Subsidiaries as of the date of such report and all material insurance coverage planned to be maintained by such Persons in the subsequent fiscal year; (q) Environmental Assessments and Notices. Promptly after the receipt thereof, a copy of each environmental assessment (including any analysis relating thereto) involving an amount in excess of $50,000 prepared with respect to any real Property of any Loan Party and each notice sent by any Governmental Authority relating to any failure or alleged failure of a material nature to comply with any Environmental Law or any liability with respect thereto; (r) Notices relating to the Senior Debt. Promptly after the delivery or receipt thereof by BORROWER, a copy of each notice, demand or other written information given or received by BORROWER under or in connection with any of the Senior Debt (including, without limitation, any notice of a default or of any redemption, purchase or repayment); (s) Notice relating to Drilling Rig Revenues. Within thirty days after the end of each calendar quarter, a report setting forth the following information for each Drilling Rig: the revenues earned by such Drilling Rig during the preceding calendar quarter and the current contract status of such Drilling Rig; (t) Notice relating to Drilling Rig Damage. Promptly, upon the occurrence of any material damage to a Drilling Rig a report describing such damage, the estimated cost of, and time to, repair such damage, and the proposed plan for repairing such damage; and (u) General Information. Promptly, such other information concerning the Loan Parties and their respective Subsidiaries, the creditworthiness of the Loan Parties and their respective Subsidiaries and/or the Collateral as the Agent or any Bank may from time to time reasonably request. Section 8.2 Maintenance of Existence; Conduct of Business. BORROWER will, and will cause each of its Subsidiaries to, preserve and maintain its corporate existence and all of its material leases, privileges, licenses, Permits, franchises, qualifications and rights that are necessary in the ordinary conduct of its business. BORROWER will, and will cause each of its Subsidiaries to, conduct its business in an orderly and efficient manner in accordance with good business practices. Section 8.3 Maintenance of Properties. BORROWER will, and will cause each of its Subsidiaries to, maintain, keep and preserve all of its Properties necessary in the proper conduct of its business in good repair, working order and condition (ordinary wear and tear excepted) and make all necessary repairs, renewals, replacements, betterments and improvements thereof; provided, however, that nothing in this Section 8.3 shall prevent BORROWER or any of its Subsidiaries from discontinuing the operation or maintenance of any of its Properties if such 58 65 discontinuance is, in the judgment of BORROWER, desirable in the conduct of its business or the business of any Subsidiary. Section 8.4 Taxes and Claims. BORROWER will, and will cause each of its Subsidiaries to, pay or discharge at or before maturity or before becoming delinquent (a) all taxes, levies, assessments and governmental charges imposed on it or its income or profits or any of its Property, and (b) all lawful claims for labor, material and supplies which, if unpaid, might become a Lien upon any of its Property; provided, however, that neither BORROWER nor any of its Subsidiaries shall be required to pay or discharge any tax, levy, assessment or governmental charge or claim for labor, material or supplies whose amount, applicability or validity is being contested in good faith by appropriate proceedings being diligently pursued and for which adequate reserves have been established under GAAP. Section 8.5 Insurance. BORROWER will, and will cause each of its Subsidiaries to, keep insured by financially sound and reputable insurers all Property of a character usually insured by responsible corporations engaged in the same or a similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such entities and carry such other insurance as is usually carried by such entities. Such insurance shall be written by financially responsible companies selected by BORROWER which are reasonably acceptable to the Required Banks. Each policy of insurance shall provide that it will not be canceled, amended or reduced except after not less than ten days' prior written notice to the Agent. BORROWER will advise the Agent promptly of any policy cancellation, reduction or amendment. Section 8.6 Inspection Rights. BORROWER will, and will cause each of its Subsidiaries to, permit representatives and agents of the Agent and each Bank, during normal business hours and upon reasonable notice to BORROWER, to examine, copy and make extracts from its books and records, to visit and inspect its rigs and other Properties and to discuss its business, operations and financial condition with its officers and independent certified public accountants (provided that Agent and Bank shall provide BORROWER reasonable opportunity to participate in any such discussions between or among (a) Agent and Banks and (b) the independent certified public accountants of BORROWER and their Subsidiaries). BORROWER shall authorize each of its Subsidiaries to authorize their accountants in writing (with a copy to the Agent) to comply with this Section 8.6. The Agent or its representatives may (at Borrower' expense after the occurrence of a Default or at any other time during which, due to the occurrence or possible occurrence of some event or circumstance, or the existence or possible existence of some condition, reasonable cause for such verification exists) conduct field exams to verify the Borrowing Base and at such other times as the Agent may reasonably request. Section 8.7 Keeping Books and Records. BORROWER will, and will cause each of its Subsidiaries to, maintain appropriate books of record and account in accordance with GAAP consistently applied in which true, full and correct entries will be made of all their respective dealings and business affairs. If any changes in accounting principles from those used in the preparation of the financial statements referenced in Section 8.1 are hereafter required or permitted by GAAP and are adopted by Borrower or any of its Subsidiaries with the concurrence of its independent certified public accountants and such changes in GAAP result in a change in the 59 66 method of calculation or the interpretation of any of the financial covenants, standards or terms found in Section 8.1 or Article 10 or any other provision of this Agreement, BORROWER and the Required Banks agree to amend any such affected terms and provisions so as to reflect such changes in GAAP with the result that the criteria for evaluating BORROWER's or such Subsidiaries' financial condition shall be the same after such changes in GAAP as if such changes in GAAP had not been made; provided, that until any necessary amendments have been made, the certificate required to be delivered under Section 8.1(d) hereof demonstrating compliance with Article 10 shall include calculations setting forth the adjustments from the relevant items as shown in the current financial statements based on the changes to GAAP to the corresponding items based on GAAP as used in the financial statements referenced in Section 7.2(a), in order to demonstrate how such financial covenant compliance was derived from the current financial statements. Section 8.8 Compliance with Laws. BORROWER will, and will cause each of its Subsidiaries to, comply with all applicable Governmental Requirements, except for instances of noncompliance that could not have, individually or in the aggregate, a Material Adverse Effect. Section 8.9 Compliance with Agreements. BORROWER will, and will cause each of its Subsidiaries to, comply in all material respects with all agreements, contracts and instruments binding on it or affecting its Properties or business. BORROWER will comply with all terms and provisions of the Senior Debt Documents and Senior Subordinated Debt Documents which are intended to benefit the holders of any "Permitted Indebtedness" and the Agent and the Banks as beneficiaries of "Permitted Liens" (as such terms are defined in the Indenture and the Note Purchase Agreement, respectively), including, without limitation, the terms and provisions of Sections 4.16 and 4.10 of the Indenture and Sections 8.13 and 8.07 of the Note Purchase Agreement. Section 8.10 Further Assurances. BORROWER will, and will cause each of its Subsidiaries to, execute and deliver such further agreements, documents and instruments and take such further action as may be requested by the Agent to carry out the provisions and purposes of this Agreement and the other Loan Documents, to evidence the Obligations and to create, preserve, maintain and perfect the Liens of the Agent for the benefit of itself and the Banks in the Collateral. Section 8.11 ERISA. BORROWER will, and will cause each of Borrower Members to, comply with all minimum funding requirements and all other material requirements of ERISA, if applicable, so as not to give rise to any liability thereunder. Section 8.12 Concentration Account. BORROWER will deposit, or cause to be deposited, into the Concentration Account all proceeds of all its Receivables, which proceeds shall be subject to the Concentration Account Agreement. BORROWER shall maintain in effect, at all times during the term of this Agreement, the Concentration Account Agreement (or a similar agreement in form and substance satisfactory to the Agent with a depository bank or banks satisfactory to the Agent). Section 8.13 No Consolidation in Bankruptcy. BORROWER will, and will cause each of its Subsidiaries to, (a) maintain corporate or partnership (as applicable) records and books of account separate from those of any other ENTITY, (b) not commingle its funds or assets with those 60 67 of any other entity, except that BORROWER may commingle proceeds of Receivables in the Concentration Account, and (c) except for consents or meetings to approve the transactions contemplated by this Agreement and the Revolving Loans Credit Agreement, provide that its board of directors or, with respect to any partnership, analogous managing body will hold all appropriate meetings which will not be jointly held with any Subsidiary or Affiliate. BORROWER will ensure that the Concentration Account contains only proceeds of Collateral and, e.g., does not include any monies of a Non-Material Subsidiary or a Foreign Subsidiary in which the Agent, for the benefit of itself and the Banks, does not have a perfected, first priority security interest. Section 8.14 Dissolution of FALRIG Venezuela Falcon Drilling will cause FALRIG Venezuela to be dissolved and its assets, if any, distributed to Falcon Drilling within ninety (90) days after the Closing Date. ARTICLE 9 Negative Covenants BORROWER covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, BORROWER will perform and observe, or cause to be performed and observed, the following covenants: Section 9.1 Debt. Borrower will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, incur, create, assume or permit to exist any Debt, except: (a) Debt pursuant hereto and Debt of BORROWER and its Subsidiaries to the Revolving Loans Banks pursuant to the Revolving Loans Documents; (b) Existing Debt identified in the Form 10-Q of Borrower for the quarter ended June 30, 1996, and renewals, extensions or refinancings of any of such Debt referred to in this Section 9.1(b) which do not increase the outstanding principal amount of such Debt and the terms and provisions of which are not materially more onerous than the terms and conditions of such Debt on the Closing Date; (c) Purchase money Debt secured by purchase money Liens, which Debt and Liens are permitted under and meet all of the requirements of clause (g) of the definition of Permitted Liens; (d) Intercompany Debt between BORROWER and any of its Subsidiaries incurred in the ordinary course of business or consistent with prudent business practices; provided, however, that any and all of the Debt permitted pursuant to this Section 9.1(d) shall be unsecured, and, if evidenced by instruments, shall be evidenced by instruments satisfactory to the Agent which will be pledged to the Agent for the benefit of the Banks pursuant to a security agreement in form and substance satisfactory to the Agent (except if and to the 61 68 extent that such a pledge would give the holders of the Senior Notes the contract right to also obtain the benefit of such a pledge); (e) Debt under Currency Hedge Agreements and Interest Rate Protection Agreements, provided that (i) each counterparty shall be rated in one of the two highest rating categories of Standard and Poor's Corporation or Moody's Investors Service, Inc. and (ii) the aggregate notional amount (as to BORROWER and its Subsidiaries, other than Non- Recourse Subsidiaries) of all Currency Hedge Agreements and Interest Rate Protection Agreements to which BORROWER or any of its Subsidiaries is a party shall not exceed $10,000,000 at any time outstanding; (f) Debt of BORROWER or any of its Subsidiaries incurred in the ordinary course of business in respect of performance bonds, surety bonds and appeal bonds in an aggregate principal amount (as to BORROWER and its Subsidiaries) not to exceed $5,000,000 at any time outstanding; (g) Debt of a Person who becomes a Subsidiary of Borrower pursuant to a transaction permitted by this Agreement occurring after the Closing Date, which Debt was outstanding prior to the date on which such Subsidiary was acquired (other than Debt incurred as a result of, or in anticipation of, such transaction); (h) Permitted Refinancing Debt; and (i) Debt the incurrence of which, after giving proforma effect to such incurrence, would not result in the Proforma Interest Coverage Ratio exceeding 2.50 to 1.00; provided, however, that, other than loans by a Subsidiary of Borrower to Borrower or any other Subsidiary of Borrower, no Debt described in clause (c), (d), (g), (h) or (i) preceding may be incurred if a Default exists at the time of such incurrence or would result therefrom. For purposes of clause (d) of this Section 9.1, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.2 Limitation on Liens. BORROWER will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, incur, create, assume or permit to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, except Permitted Liens. BORROWER will not, and will not permit any of its Subsidiaries to, incur, create, assume or permit to exist any Lien upon any Capital Stock, whether now outstanding or hereafter issued, of any Subsidiary of Borrower (other than a Non-Recourse Subsidiary). Section 9.3 Mergers, Etc. BORROWER will not become a party to a merger or consolidation, or wind-up, dissolve or liquidate itself. BORROWER will not, and will not permit any of its Subsidiaries to, purchase or acquire all or a substantial part of the business, assets or Properties of any Person if such purchase or acquisition (i) could reasonably be expected to cause 62 69 or result in the occurrence of a Default or (ii) could reasonably be expected to have a material adverse effect upon the financial position or performance of BORROWER. Section 9.4 Restricted Payments. BORROWER will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, make any Restricted Payments, except: (a) Payroll advances in the ordinary course of business not to exceed an aggregate amount of $1,000,000 at any one time; (b) Other advances and loans to officers, employees or shareholders of BORROWER or any of its Subsidiaries, so long as the aggregate principal amount (as to BORROWER and all of its Subsidiaries) of any such advances and loans does not exceed $500,000 at any time outstanding; (c) Payments of accrued interest and expenses with respect to the Senior Debt and the Senior Subordinated Debt when due in accordance with the Senior Debt Documents and the Senior Subordinated Debt Documents, respectively, and regularly scheduled payments of principal and accrued interest with respect to the Senior Floating Rate Notes and Senior Subordinated Debt when due in accordance with the terms of the Senior Floating Rate Notes and Senior Subordinated Debt Documents, respectively; (d) Repayment of Debt permitted pursuant to Section 9.1, which repayment occurs pursuant to a refinancing transaction in which the resulting Debt constitutes Permitted Refinancing Debt; (e) Restricted Payments not exceeding $2,000,000 in aggregate amount (as to BORROWER and all of its Subsidiaries) during any fiscal year; (f) Restricted Payments made to redeem any preferred stock or Redeemable Stock issued after the Closing Date at a price not exceeding the issue price thereof; (g) Payment of dividends on any preferred stock issued after the Closing Date; (h) Investments permitted pursuant to Section 9.5; and (i) Loans by a Subsidiary of Borrower to Borrower or any other Subisdiary of Borrower; provided, however, that, except for loans described in clause (i) above, no such Restricted Payments otherwise permitted pursuant to this Section 9.4 may be made to any Person if a Default exists at the time of such Restricted Payment or would result therefrom or may be made if an Event of Default exists at the time of such Restricted Payment or would result therefrom. For purposes of clause (a) of this Section 9.4, the term "Borrower" shall include the Guarantors to the 63 70 extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.5 Investments. BORROWER will not, and will not permit any of its Subsidiaries to make or permit to remain outstanding any advance, loan, extension of credit or capital contribution to or investment in any Person, or purchase or own any stock, bonds, notes, debentures or other securities of any Person, or be or become a joint venturer with or partner of any Person (all such transactions being herein called "Investments"), except: (a) Investments in obligations or securities received in settlement of debts (created in the ordinary course of business) owing to BORROWER; (b) Investments existing as of the Closing Date identified on Schedule 9.5 hereto; (c) Investments in securities issued or guaranteed by the United States or any agency thereof with maturities of four years or less from the date of acquisition; (d) Investments in certificates of deposit and Eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case with any Bank or with any domestic commercial bank having capital and surplus in excess of $100,000,000; (e) Investments in repurchase obligations with a term of not more than seven days for securities of the types described in clause (c) above with any Bank or with any domestic commercial bank having capital and surplus in excess of $100,000,000; (f) Investments in commercial paper of a domestic issuer rated A-1 or better or P-1 or better by Standard & Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition; (g) Investments in shares of money market mutual or similar funds having assets in excess of $100,000,000; (h) Investments in a Subsidiary of BORROWER that is an obligor on the Revolving Loans; (i) Advances and loans to officers and employees of BORROWER or any of its Subsidiaries, so long as the aggregate principal amount (as to BORROWER and all of its Subsidiaries) of such advances and loans does not exceed $500,000 at any time outstanding; (j) Investments represented by that portion of the proceeds from Asset Dispositions permitted pursuant to Section 9.8, which proceeds are either not Cash 64 71 Proceeds or are deemed to be Cash Proceeds pursuant to the second sentence of the definition of "Cash Proceeds"; (k) The contribution of the Non-Recourse Rigs to the Non- Recourse Subsidiaries; (l) Debt permitted pursuant to Section 9.3 and Restricted Payments permitted pursuant to Section 9.4; and (m) Other Investments in an aggregate amount (as to BORROWER and all of its Subsidiaries) not to exceed the sum of the following at any time outstanding: (i) $15,000,000, plus (ii) 50% of the aggregate net cash proceeds received by Borrower after the Closing Date from the issuance or sale of shares of Capital Stock to any Person other than a Subsidiary of Borrower, minus (iii) the aggregate amount paid by BORROWER and all of its Subsidiaries after the Closing Date in redemption of preferred stock or Redeemable Stock. provided, however, that no Investments may be made by BORROWER pursuant to clauses (h), (i), (j), (k), (l) or (m) preceding if a Default exists at the time of such Investment or would result therefrom. For purposes of clause (h) of this Section 9.5, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.6 Limitation on Issuance of Capital Stock. BORROWER will not at any time on or after the Closing Date issue, sell, assign or otherwise dispose of (a) any of its Capital Stock, (b) any securities exchangeable for or convertible into or carrying any rights to acquire any of its Capital Stock or (c) any option, warrant or other right to acquire any of its Capital Stock; provided, however, that, if and to the extent not otherwise prohibited by this Agreement or the other Loan Documents (i) Borrower may issue additional shares of its Capital Stock or such securities, options, warrants or other rights, other than Redeemable Stock, for full and fair consideration, (ii) BORROWER may issue stock in accordance with the terms of options and warrants that were outstanding on June 30, 1996, and (iii) BORROWER may grant compensatory stock options in the ordinary course of business consistent with past practices and issue shares upon the exercise of such options. For purposes of clause (c)(ii) of this Section 9.6, the term "Borrower" shall include the Guarantors to the extent necessary so that the requirements of Section 4.12 of the Indenture and Section 8.09 of the Note Purchase Agreement are not violated by the Borrower and the Guarantors. Section 9.7 Transactions With Affiliates. Except for (a) the payment of salaries in the ordinary course of business consistent with prudent business practices, (b) the furnishing of employment benefits in the ordinary course of business consistent with prudent business practices, (c) the transactions permitted by Section 9.13, and (d) the transactions specified in Schedule 9.7, BORROWER will not, and will not permit any of its Subsidiaries to, enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any 65 72 service, with any Affiliate of BORROWER or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of BORROWER's or such Subsidiary's business and upon fair and reasonable terms no less favorable to BORROWER or such Subsidiary than would be obtained in a comparable arms- length transaction with a Person not an Affiliate of BORROWER or such Subsidiary. Section 9.8 Disposition of Property. BORROWER will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, enter into an Asset Disposition, directly or indirectly, except: (a) Asset Dispositions pursuant to which (i) BORROWER or its Subsidiary, as the case may be, receives consideration at the time of such disposition at least equal to the fair market value of such Property, except in the case of (A) a Bargain Purchase Contract (as such term is defined in the Indenture) entered into in the ordinary course of business, (B) a transfer of a drilling rig or rigs and related equipment between Borrower and one of its Subsidiaries if no Default exists at the time of such transfer or would result therefrom, or (C) an Asset Disposition resulting from the requisition of title to, seizure or forfeiture of any Property or assets or any actual or constructive total loss or an agreed or compromised total loss; (ii) at least 75% of such consideration consists of Cash Proceeds (or the assumption of Debt of BORROWER or such Subsidiary relating to the Capital Stock or Property that was the subject of such disposition and the release of BORROWER or such Subsidiary from such indebtedness); and (iii) after giving effect to such disposition, the total noncash consideration from all dispositions held by Borrower and its Subsidiaries, including noncash consideration described in the second sentence of the definition of "Cash Proceeds" which is not converted into cash within 12 months after the related dispositions, then outstanding is not greater than $25,000,000; (b) the sale of drill-string components, inventory (other than drilling rigs) and obsolete and worn-out equipment in the ordinary course of business; (c) any drilling contract, charter (bareboat or otherwise) or other lease of property entered into by BORROWER or any Subsidiary (including, without limitation, bareboat charters by BORROWER to any Subsidiary other than any Non-Recourse Subsidiary) in the ordinary course of business; provided, however, that (i) any such contract, charter or other lease affecting any Drilling Rig shall be for full and fair consideration payable to Borrower, and with respect to such contracts, charters or other leases other than drilling contracts entered into in the ordinary course of business, shall be in form and substance satisfactory to the Agent and shall expressly include terms and provisions in form and substance satisfactory to the Agent to the effect that the parties thereto acknowledge the existing Lien on such Drilling Rig securing the Acquisition Loans Obligations and agree that such Lien securing such obligations is prior to, and will not in any way be affected by, such contract, charter or other lease and (ii) neither BORROWER nor any of its Subsidiaries shall enter into any such contract, charter or lease with a Non-Recourse Subsidiary. 66 73 (d) a Restricted Payment permitted under Section 9.4 or any Investment permitted under Section 9.5; (e) the transfer of the Non-Recourse Rigs to one or more Non- Recourse Subsidiaries; (f) the conveyance, transfer or other disposition of rigs pursuant to which such rigs are exchanged for rigs of a like kind, i.e. barge rigs may be exchanged for barge rigs and jackup rigs may be exchanged for jackup rigs, having an equivalent value; and (g) issuances or dispositions of Capital Stock permitted under Section 9.6. Provided, in no event shall Borrower sell, transfer, encumber or otherwise dispose of any Drilling Rig, except for: (a) Permitted Liens; (b) Drilling Contracts entered into in the ordinary course of business; and (c) Disposition of Drilling Rig components that have been replaced by components of equal or better quality. Section 9.9 Sale and Leaseback. Except for transactions in the ordinary course of business involving real or personal Property having an aggregate fair market value of $30,000,000 or less and providing for annual lease payments in an annual aggregate amount not to exceed $3,000,000, BORROWER will not, and will not permit any of its Subsidiaries (other than Non-Recourse Subsidiaries) to, enter into any arrangement with any Person pursuant to which it leases from such Person real or personal Property that has been or is to be sold or transferred, directly or indirectly, by it to such Person. Section 9.10 Lines of Business. BORROWER will not, and will not permit any of its Subsidiaries to, engage in any line or lines of business activity other than the businesses in which they are engaged on the Closing Date and lines of business reasonably related thereto. Section 9.11 Environmental Protection. BORROWER will not, and will not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any of its Properties for the handling, processing, storage, transportation or disposal of any Hazardous Material except in compliance with applicable Environmental Laws, (b) generate any Hazardous Material except in compliance with applicable Environmental Laws, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material in violation of any Environmental Law, or (d) otherwise conduct any activity or use any of its Properties in any manner that violates or is likely to violate any Environmental Law or create any Environmental Liabilities for which BORROWER or any of its Subsidiaries would be responsible, except for circumstances or events described in clauses (a) through (d) preceding that could not have, individually or in the aggregate, a Material Adverse Effect. 67 74 Section 9.12 Intercompany Transactions. Except as may be expressly permitted or required by the Loan Documents or except as may be expressly permitted or required by the Senior Debt Documents or the Senior Subordinated Debt Documents as summarized on Schedule 9.12, BORROWER will not, and will not permit any of its Subsidiaries to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary (other than a Non-Recourse Subsidiary) to (a) pay dividends or make any other distribution to BORROWER or any of its Subsidiaries (other than Non-Recourse Subsidiaries) in respect of such Subsidiary's Capital Stock or with respect to any other interest or participation in, or measured by, its profits, (b) pay any Debt owed to BORROWER or any of its Subsidiaries (other than Non-Recourse Subsidiaries), (c) make any loan or advance to BORROWER or any of its Subsidiaries (other than Non-Recourse Subsidiaries), or (d) sell, lease or transfer any of its Property to BORROWER or any of its Subsidiaries (other Non-Recourse Subsidiaries). Nothing contained in this Section 9.12 shall be deemed to constitute an encumbrance or restriction prohibited by Section 4.12 of the Indenture or Section 8.09 of the Note Purchase Agreement. Section 9.13 Consulting and Management Fees. Other than reasonable consulting fees paid to Affiliates of Borrower on an arm's-length basis for specific services rendered not to exceed $750,000 in the aggregate during any calendar year, BORROWER will not, and will not permit any of its Subsidiaries to, pay any management, consulting or similar fees (excluding directors' fees and legal fees) to any Affiliate of BORROWER or to any director, officer or employee of BORROWER or any Affiliate of BORROWER. Section 9.14 Modification of Other Agreements. BORROWER will not, and will not permit any of its Subsidiaries to, consent to or implement any termination, amendment, modification, supplement or waiver of (a) the Senior Debt Documents, (b) the Senior Subordinated Debt Documents, (c) the certificate of incorporation or bylaws or partnership agreement or certificate of limited partnership or analogous constitutional documents of BORROWER or any of its Subsidiaries if the same could have a Material Adverse Effect, or (d) any other Material Contract to which it is a party or any Permit which it possesses if the same could have a Material Adverse Effect. Without limiting the generality of and in addition to the foregoing, BORROWER will not consent to or implement any termination, amendment, modification, supplement or waiver of the Senior Debt Documents or Senor Subordinated Debt Documents (i) to increase the principal amount of any Senior Debt or Senor Subordinated Debt, (ii) to shorten the maturity of, or any date for the payment of any principal of or interest on, any Senior Debt or Senior Subordinated Debt, (iii) to increase the rate of interest on or with respect to any Senior Debt or Senior Subordinated Debt, (iv) to otherwise amend or modify the payment or subordination terms of any Senior Debt or Senior Subordinated Debt, (v) to increase any cost, fee or expense payable by BORROWER or any its Subsidiaries, (vi) to provide any Collateral or security for payment or collection of any Senior Debt or Senior Subordinated Debt without the written consent of Required Banks, or (vii) in any other respect that could be materially adverse to Borrower and its Subsidiaries taken as a whole. 68 75 Section 9.15 ERISA. BORROWER will not: (a) allow, or take (or permit any Borrower Member to take) any action which would cause, any unfunded or unreserved liability for benefits under any Plan (exclusive of any Multiemployer Plan) to exist or to be created that exceeds $4,000,000 with respect to any such Plan or $8,000,000 with respect to all such Plans in the aggregate; or (b) with respect to any Multiemployer Plan, allow, or take (or permit any ERISA Affiliate to take) any action which would cause, any unfunded or unreserved liability for benefits under any Multiemployer Plan to exist or to be created, either individually as to any such Plan or in the aggregate as to all such Plans, that could, upon any partial or complete withdrawal from or termination of any such Multiemployer Plan or Plans, have a Material Adverse Effect. Section 9.16 Drilling Rig Location. BORROWER will not allow any Drilling Rig to be removed from the United States Gulf of Mexico. ARTICLE 10 Financial Covenants BORROWER covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Bank has any Commitment hereunder or any Letter of Credit remains outstanding, BORROWER will perform and observe the following covenants: Section 10.1 Consolidated Current Ratio. Borrower will at all times maintain a Consolidated Current Ratio of not less than 1.00 to 1.00. Section 10.2 Consolidated Tangible Net Worth. Borrower will at all times maintain Consolidated Tangible Net Worth in an amount not less than the sum of (a) $95,000,000, plus (b) 50% of cumulative Consolidated Net Income during any fiscal quarter ending after the Closing Date if, but only if, such Consolidated Net Income during such fiscal quarter is positive, plus (c) 75% of all Net Proceeds of each Equity Issuance after the Closing Date. Section 10.3 Consolidated Interest Coverage Ratio. BORROWER will not permit the Consolidated Interest Coverage Ratio, calculated as of the end of each fiscal quarter of Borrower commencing with the fiscal quarter ending September 30, 1996, for the four fiscal quarters of Borrower then most recently ended, to be less than 2.50 to 1.00. ARTICLE 11 Default Section 11.1 Events of Default. Each of the following shall be deemed an "Event of Default": 69 76 (a) BORROWER (i) shall fail to pay, repay or prepay when due any amount of principal owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document, (ii) shall fail to pay within one day of the date when due any amount of accrued interest owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document, or (iii) or shall fail to pay within five days of the date when due any fee or other amount or other Obligation (other than principal or interest) owing to the Agent or any Bank pursuant to this Agreement or any other Loan Document. (b) Any representation or warranty made or deemed made by BORROWER or any Loan Party in any Loan Document or in any certificate, report, notice or financial statement furnished at any time in connection with this Agreement or any other Loan Document shall be false, misleading or erroneous in any material respect when made or deemed to have been made. (c) BORROWER or any Loan Party shall fail to perform, observe or comply with any other covenant, agreement or term contained in this Agreement or any other Loan Document (other than covenants to pay the Obligations) and such failure is not remedied or waived within 15 days after the Agent or any Bank shall have notified BORROWER of such failure or, if a different grace period is expressly made applicable in such other Loan Documents, within such applicable grace period. (d) Any of the Loan Parties shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due. (e) Any Loan Party shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of itself or of all or any substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect, the "Bankruptcy Code"), (iv) institute any proceeding or file a petition seeking to take advantage of any other Debtor Relief Law, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing. (f) A proceeding or case shall be commenced, without the application, approval or consent of any of the Loan Parties in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of any of the Loan Parties or of all or any substantial part of its Property, or (iii) similar relief in respect of any of the Loan Parties under any Debtor Relief Law, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against any of the Loan Parties shall be entered in an involuntary case under the Bankruptcy Code. 70 77 (g) Any of the Loan Parties shall fail to discharge (or fail to have continually stayed until subsequently discharged) within a period of 30 days after the commencement thereof any attachment, sequestration, forfeiture or similar proceeding or proceedings involving an aggregate amount in excess of $3,000,000 against any of its Properties. (h) A final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall be rendered by a court or courts against the Loan Parties or any of them on claims not covered by insurance or as to which the insurance carrier has denied responsibility and the same shall not be discharged, or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Loan Parties shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (i) Any of the Loan Parties shall fail to pay when due (including any applicable grace period) any principal of or interest on any Debt or Debts (other than the Obligations or any Non-Recourse Debt) having a principal amount of at least $3,000,000 individually, or $5,000,000 in the aggregate, or the maturity of any such Debt or Debts shall have been accelerated, or any such Debt or Debts shall have been required to be prepaid prior to the stated maturity thereof. (j) Any event shall have occurred (and shall not have been waived or otherwise cured) that permits any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity of such Debt or require prepayment of such Debt. (k) Any event shall have occurred (and shall not have been waived or otherwise cured) that, with the giving of notice or lapse of time or both, would permit any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity of such Debt or require the prepayment of such Debt, and such default shall have continued for a period of 30 days after a Responsible Officer of Borrower obtains actual knowledge of such default. (l) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Loan Party or any of its shareholders, or any Loan Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any Lien created by the Loan Documents shall for any reason cease to be a valid, first priority perfected Lien (except for Permitted Liens) upon any of the Collateral purported to be covered thereby. (m) Any of the following events shall occur or exist with respect to any Loan Party or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Pension Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Pension Plan or the termination of any 71 78 Pension Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Pension Plan, or the institution by the PBGC of any such proceedings; (v) any "accumulated funding deficiency" (as defined in Section 406 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any Plan; or (vi) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Plan or the reorganization, insolvency, or termination of any Pension Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of the Agent subject any Loan Party or any ERISA Affiliate to any tax, penalty or other liability to a Plan, a Multiemployer Plan, the PBGC or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $3,000,000. (n) The occurrence of a Change of Control; (o) If, at any time, the Senior Debt shall (i) cease to be either pari passu with, or subordinate in right of payment to, the Notes or the Obligations, (ii) become superior in right of payment to the Notes or the Obligations, or (iii) otherwise have a right to any payment or any security superior to that of the Notes or the Obligations; or if, at any time, the Senior Subordinated Debt shall (A) cease to be subordinate in right of payment to the Notes or the Obligations, (B) become equal or superior in right of payment to the Notes or the Obligations, or (C) otherwise have a right to payment or any security equal or superior to that of the Notes or the Obligations; (p) The occurrence of (i) a "Default" (as such term is used or defined in any of the Senior Debt Documents or the Senior Subordinated Debt Documents) under any of the Senior Debt Documents or the Senior Subordinated Debt Documents, unless (A) within 30 days after a Responsible Officer of Borrower obtains or should have obtained actual knowledge of such Default, such Default has been waived, cured or consented to in accordance with such documents, (B) the maturity of the Loans has not been accelerated, and (C) such waiver or consent is not made in connection with any amendment or modification of any such documents in violation of Section 9.14 hereof or in violation of any of the Senior Debt Documents or the Senior Subordinated Debt Documents or in connection with any payment to the holders of any Senior Debt or any Senior Subordinated Debt, (ii) an "Event of Default" (as such term is used or defined in any of the Senior Debt Documents or Senior Subordinated Debt Documents) under any of the Senior Debt Documents or Senior Subordinated Debt Documents, or (iii) any acceleration of the maturity of any Senior Debt or Senior Subordinated Debt. (q) If, at any time, (i) Borrower or any of its Subsidiaries shall make, or shall be required to make, any redemption, purchase or prepayment (whether optional or mandatory) with respect to any of the Senior Debt or Senior Subordinated Debt, (ii) any event or circumstance shall occur which gives any party to the Senior Debt Documents or Senior Subordinated Debt Documents or any holder of any Senior Debt or Senior Subordinated Debt the right to request or require Borrower or any of its Subsidiaries, as 72 79 the case may be, to redeem, purchase or prepay the Senior Debt or Senor Subordinated Debt, as the case may be (including, without limitation (A) the making of, or the obligation of Borrower or any of its Subsidiaries to make, an Asset Sale Offer (as such term is defined in the Indenture) or a Senior Notes Assets Sale Offer (as such term is defined in the Note Purchase Agreement) or (B) the occurrence of a Change of Control (as such term is defined in the Indenture or the Note Purchase Agreement), or (iii) Borrower or any of its Subsidiaries shall initiate or give (A) any election or notice relating to any redemption, purchase or prepayment (whether optional or mandatory) of any of the Senior Debt or Senior Subordinated Debt or (B) any election or notice relating to any defeasance of the Senior Debt or Senior Subordinated Debt. (r) If at any time, there shall have occurred and be continuing an "Event of Default" as that term is used in the Revolving Loans Credit Agreement. Section 11.2 Remedies. If any Event of Default shall occur and be continuing, the Agent may and, if directed by the Required Banks, the Agent shall do any one or more of the following: (a) Acceleration. Declare all outstanding principal of and accrued and unpaid interest on the Loans and the other Obligations and all other amounts payable by BORROWER under the Loan Documents immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived by BORROWER; (b) Termination of Commitments. Terminate the Commitments (including, without limitation, the obligation of the Issuing Bank to issue Letters of Credit) without notice to BORROWER; (c) Judgment. Reduce any claim to judgment; (d) Foreclosure. Foreclose or otherwise enforce any Lien granted to the Agent for the benefit of itself and the Banks to secure payment and performance of the Obligations in accordance with the terms of the Loan Documents; or (e) Rights. Exercise any and all rights and remedies afforded by the laws of the State of Texas or any other jurisdiction, by any of the Loan Documents, by equity or otherwise against any or all of the Loan Parties or any other Person; provided, however, that upon the occurrence of an Event of Default under Section 11.1(e) or Section 11.1(f), the Commitments of all of the Banks (including, without limitation, the obligation of the Issuing Bank to issue Letters of Credit) shall immediately and automatically terminate, and the outstanding principal of and accrued and unpaid interest on the Loans and the other Obligations and all other amounts payable by BORROWER under the Loan Documents shall thereupon become immediately and automatically due and payable without notice, demand, presentment, notice of 73 80 dishonor, notice of acceleration, notice of intent to accelerate, protest or other formalities of any kind, all of which are hereby expressly waived by BORROWER. Section 11.3 Cash Collateral. If (a) an Event of Default shall have occurred and be continuing or (b) any Letter of Credit shall, for whatever reason, remain outstanding after all Loans and Reimbursement Obligations have been paid in full and all Commitments have expired or terminated, then BORROWER shall, if requested by the Agent or the Required Banks, pledge to the Agent as security for the Obligations, pursuant to a security agreement or assignment in form and substance satisfactory to the Agent, an amount in immediately available funds (in excess of any funds already pledged or assigned by BORROWER to the Agent as of the date of the occurrence of such Event of Default) equal to the then outstanding Letter of Credit Liabilities, such funds to be held in a cash collateral account satisfactory to the Agent without any right of withdrawal by BORROWER. Section 11.4 Performance by the Agent. If BORROWER shall fail to perform any covenant or agreement in accordance with the terms of the Loan Documents, the Agent may, at the direction of the Required Banks, perform or attempt to perform such covenant or agreement on behalf of BORROWER. In such event, BORROWER shall, at the request of the Agent, promptly pay any amount expended by the Agent or the Banks in connection with such performance or attempted performance to the Agent at the Principal Office, together with interest thereon at the applicable Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that neither the Agent nor any Bank shall have any liability or responsibility for the performance of any obligation of BORROWER under this Agreement or any of the other Loan Documents. ARTICLE 12 The Agent Section 12.1 Appointment, Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Neither the Agent, the Co-Agent, nor any of their respective Affiliates, officers, directors, employees, attorneys or agents shall be liable for any action taken or omitted to be taken by any of them hereunder or otherwise in connection with this Agreement or any of the other Loan Documents except for its or their own gross negligence or willful misconduct or the wrongful failure of the Agent or Co-Agent, in their capacities as a Bank, to fund their own respective Commitment pursuant to the terms of this Agreement. Without limiting the generality of the preceding sentence, the Agent (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee or fiduciary for any Bank; (c) shall not be required to initiate any litigation or collection proceedings hereunder or under any other Loan 74 81 Document except to the extent requested by the Required Banks; (d) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Person to perform any of its obligations hereunder or thereunder; (e) may consult with legal counsel (including counsel for 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; and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing reasonably believed by it to be genuine and signed or sent by the proper party or parties. As to any matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks; provided, however, that the Agent shall not be required to take any action which exposes the Agent to liability or which is contrary to this Agreement or any other Loan Document or applicable law. Section 12.2 Rights of Agent as a Bank. With respect to its Commitment, the Loan made by it and the Note issued to it, Banque Paribas (and any successor acting as Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, act as trustee under indentures of, provide merchant banking services to and generally engage in any kind of banking, trust or other business with the Loan Parties or any of their Affiliates, and any other Person who may do business with or own securities of the Loan Parties or any of their Affiliates, all as if it were not acting as the Agent and without any duty to account therefor to the Banks. Section 12.3 Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default (other than the non-payment of principal of or interest on the Loans or of commitment fees) unless the Agent has received notice from a Bank or BORROWER specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 12.1) take such action with respect to such Default as shall be directed by the Required Banks, provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall seem advisable and in the best interest of the Banks. SECTION 12.4 INDEMNIFICATION. THE BANKS HEREBY AGREE TO INDEMNIFY THE AGENT AND THE CO-AGENT FROM AND HOLD THE AGENT AND 75 82 THE CO-AGENT HARMLESS AGAINST (TO THE EXTENT NOT PROMPTLY REIMBURSED UNDER SECTIONS 13.1 AND 13.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF BORROWER UNDER SECTIONS 13.1 AND 13.2), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENT PERCENTAGES, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT OR THE CO-AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE AGENT OR THE CO-AGENT UNDER OR IN RESPECT OF ANY OF THE LOAN DOCUMENTS; PROVIDED, FURTHER, THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF THE FOREGOING TO THE EXTENT CAUSED BY THE AGENT'S OR THE CO-AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, IT IS THE EXPRESS INTENTION OF THE BANKS THAT THE AGENT AND THE CO-AGENT SHALL BE INDEMNIFIED HEREUNDER FROM AND HELD HARMLESS AGAINST ALL OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, DEFICIENCIES, SUITS, COSTS, EXPENSES (INCLUDING ATTORNEYS' FEES) AND DISBURSEMENTS OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE AGENT OR THE CO-AGENT (EXCEPT TO THE EXTENT THE SAME ARE CAUSED BY THE AGENT'S OR THE CO-AGENT'S [AS APPLICABLE] OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT). WITHOUT LIMITING ANY OTHER PROVISION OF THIS SECTION 12.4, EACH BANK AGREES TO REIMBURSE THE AGENT AND THE CO-AGENT PROMPTLY UPON DEMAND FOR ITS PRO RATA SHARE (CALCULATED ON THE BASIS OF THE COMMITMENTS) OF ANY AND ALL OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEYS' FEES) INCURRED BY THE AGENT OR THE CO-AGENT 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, THE LOAN DOCUMENTS, TO THE EXTENT THAT THE AGENT OR THE CO-AGENT, AS APPLICABLE, IS NOT PROMPTLY REIMBURSED FOR SUCH EXPENSES BY BORROWER. Section 12.5 Independent Credit Decisions. Each Bank agrees that it has independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of BORROWER and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself informed as to the performance or observance by any Loan Party of this Agreement or any other Loan Document or to inspect the Properties or books of any Loan Party. Except for notices, 76 83 reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other financial information concerning the affairs, financial condition or business of any Loan Party (or any of their Affiliates) which may come into the possession of the Agent or any of its Affiliates. Section 12.6 Several Commitments. The Commitments and other obligations of the Banks under this Agreement are several. The default by any Bank in making a Loan in accordance with its Commitment shall not relieve the other Banks of their obligations under this Agreement. In the event of any default by any Bank in making any Loan, each nondefaulting Bank shall be obligated to make its Loan but shall not be obligated to advance the amount which the defaulting Bank was required to advance hereunder. In no event shall any Bank be required to advance an amount or amounts with respect to any of the Loans which would in the aggregate exceed such Bank's Commitment with respect to such Loans. No Bank shall be responsible for any act or omission of any other Bank. Notwithstanding anything to the contrary contained in this Agreement or any of the other Loan Documents, any Bank that fails to make available to the Agent its pro rata share of any Loan or to purchase its pro rata share of any Letter of Credit as, when and to the full extent required by the provisions of this Agreement, shall be deemed delinquent (a "Non-Funding Bank") and shall be deemed a Non-Funding Bank until such time as such delinquency is satisfied. A Non-Funding Bank shall be deemed to have assigned any and all payments due to it from the Loan Parties, whether on account of outstanding Loans, the Letter of Credit, interest, fees or otherwise, to the remaining non-delinquent Banks for application to, and reduction of, their respective pro rata shares of all outstanding Loans, Letters of Credit, fees and/or otherwise. As among the Banks, a Non-Funding Bank shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans, etc. of the non-delinquent Banks, the Banks' respective pro rata shares of all outstanding Loans and Letters of Credit have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. Section 12.7 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and Borrower. Upon any such resignation, the Required Banks will have the right, after notice to and consultation with Borrower if (but only if) no Default has then occurred and is continuing, to appoint another Bank as a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States or any state thereof and having combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges, immunities and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any Agent's resignation as Agent, the provisions of this Article 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was the Agent. 77 84 ARTICLE 13 Miscellaneous Section 13.1 Expenses. Whether or not the transactions contemplated hereby are consummated, BORROWER hereby agrees, on demand, to pay or reimburse the Agent and each of the Banks for paying (as the Agent may request): (a) all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents and any and all (actual or proposed) amendments, modifications, renewals, extensions and supplements thereof and thereto, and the syndication of the Loans, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent, (b) all reasonable out-of- pocket costs and expenses of the Agent and the Banks in connection with any Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the reasonable fees and expenses of legal counsel for the Agent and the Banks, (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by this Agreement or any other Loan Document, and (e) all reasonable out-of- pocket costs and expenses incurred by the Agent in connection with due diligence, computer services, copying, appraisals, environmental audits, collateral audits, field exams, insurance, consultants and search reports. SECTION 13.2 INDEMNIFICATION. BORROWER SHALL INDEMNIFY THE AGENT, THE CO-AGENT AND EACH BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' AND CONSULTANTS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY ANY LOAN PARTY OF ANY REPRESENTATION, WARRANTY, COVENANT OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE USE OR PROPOSED USE OF ANY LOAN OR LETTER OF CREDIT, (E) ANY AND ALL TAXES, LEVIES, DEDUCTIONS AND CHARGES IMPOSED ON THE AGENT, THE ISSUING BANK OR ANY BANK (OTHER THAN TAXES IMPOSED ON THE OVERALL NET INCOME OR GROSS RECEIPTS OF THE AGENT, THE CO- AGENT, THE ISSUING BANK OR ANY OTHER BANK) IN RESPECT OF ANY LETTER OF CREDIT, (F) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL OR CLEANUP OF ANY HAZARDOUS MATERIAL OR THE EXISTENCE OF ANY UNDERGROUND STORAGE TANK LOCATED ON, ABOUT, WITHIN OR AFFECTING ANY OF THE PROPERTIES OF ANY LOAN PARTY, OR OTHERWISE ATTRIBUTABLE TO ANY LOAN PARTY IN CONNECTION WITH 78 85 ANY OTHER SITE, OR (G) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING; BUT EXCLUDING ANY OF THE FOREGOING TO THE EXTENT DIRECTLY CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION 13.2 SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. WITHOUT PREJUDICE TO THE SURVIVAL OF ANY OTHER TERM OR PROVISION OF THIS AGREEMENT, THE OBLIGATIONS OF BORROWER UNDER THIS SECTION 13.2 SHALL SURVIVE THE REPAYMENT OF THE LOANS AND LETTER OF CREDIT LIABILITIES AND OTHER OBLIGATIONS AND TERMINATION OF THE COMMITMENTS. Section 13.3 Limitation of Liability. None of the Agent, the Co-Agent, any Bank or any Affiliate, officer, director, employee, attorney or agent thereof shall be liable to BORROWER or any Loan Party for any error of judgment or act done in good faith, or be otherwise liable or responsible under any circumstances whatsoever (including such Person's negligence), except for such Person's gross negligence or willful misconduct. None of the Agent, the Co- Agent, any Bank, or any Affiliate, officer, director, employee, attorney or agent thereof shall have any liability with respect to, and BORROWER hereby waives, releases and agrees not to sue any of them upon, any claim for any special, indirect, incidental or consequential damages suffered or incurred by BORROWER or any other Loan Party in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Borrower hereby waive, release and agree not to sue the Agent, the Co-Agent or any Bank or any of their respective Affiliates, officers, directors, employees, attorneys or agents for exemplary or punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 13.4 No Duty. All attorneys, accountants, appraisers and other professional Persons and consultants retained by the Agent, the Co-Agent and the Banks shall have the right to act exclusively in the interest of the Agent, the Co-Agent and the Banks and shall have no duty of disclosure, duty of loyalty, duty of care or other duty or obligation of any type or nature whatsoever to BORROWER or any of Borrower' shareholders or any other Person. Section 13.5 No Fiduciary Relationship. The relationship between BORROWER and each Bank is solely that of debtor and creditor, and neither the Agent, the Co-Agent nor any Bank has any fiduciary or other special relationship with BORROWER or any other Loan Party, and no term 79 86 or condition of any of the Loan Documents shall be construed so as to deem the relationship between BORROWER and any Bank, or any other Loan Party and any Bank, to be other than that of debtor and creditor. No joint venture or partnership is created by this Agreement among the Banks or between BORROWER or any other Loan Party and any Bank. Section 13.6 Equitable Relief. BORROWER recognize that in the event BORROWER fail to pay, perform, observe or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to the Agent and the Banks. BORROWER therefore agrees that the Agent and the Banks, if the Agent or the Banks so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 13.7 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 13.8 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. BORROWER may not assign or transfer any of their rights or obligations hereunder without the prior written consent of the Agent and the Banks. Any Bank may sell participations to one or more banks or other institutions in or to all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the Loan owing to it); provided, however, that (i) such Bank's obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment) shall remain unchanged, (ii) such Bank shall remain solely responsible to BORROWER for the performance of such obligations, (iii) such Bank shall remain the holder of its Note for all purposes of this Agreement, (iv) BORROWER 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 (v) such Bank shall not sell a participation that conveys to the participant the right to vote or give or withhold consents under this Agreement or any other Loan Document, other than the right to vote upon or consent to (A) any increase of such Bank's Commitment, (B) any reduction of the principal amount of, or interest to be paid on, the Loan of such Bank, (C) any reduction of any commitment fee or other amount payable to such Bank under any Loan Document, (D) any postponement of any date for the payment of any amount payable in respect of the Loan of such Bank, (E) any release of a material portion of the Collateral from the Liens created by the Security Documents and not otherwise expressly authorized by the Loan Documents, and (F) any release of any Loan Party from liability under the Loan Documents. Each holder of a participation interest in this Agreement shall be entitled to 80 87 the benefits of the provisions of Section 3.5, 4.6, 4.7 and 13.2 of this Agreement as if and to the same extent as if it were a Bank hereunder. (b) BORROWER and the Banks agree that any Bank (the "Assigning Bank") may at any time assign to one or more Eligible Assignees all, or a proportionate part of all, of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment, Loans and Letter of Credit Liabilities) (each an "Assignee"); provided, however, that (i) each such assignment shall be of a consistent, and not a varying, percentage of all of the Assigning Bank's rights and obligations under this Agreement and the other Loan Documents, (ii) except in the case of an assignment of all of a Bank's rights and obligations under this Agreement and the other Loan Documents, the amount of the Commitment, Loans and Letter of Credit Liabilities of the Assigning Bank being assigned pursuant to each assignment (determined as of the date of the Assignment Acceptance with respect to such assignment) shall in no event be less than an amount equal to $5,000,000, and (iii) the parties to each such assignment shall execute and deliver to the Agent for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with the Notes subject to such assignment, and a processing and recordation fee of $2,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, or, if so specified in such Assignment and Acceptance, the date of acceptance thereof by the Agent, (A) the Assignee thereunder shall be a party hereto as a "Bank" and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and under the Loan Documents and (B) the Assigning Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a Bank's rights and obligations under the Loan Documents, such Bank shall cease to be a party thereto). Notwithstanding anything to the contrary contained herein, each Assigning Bank shall, concurrently with each assignment to an Assignee referred to in this Section 13.8(b), also assign to such Assignee an identical interest in such Assigning Bank's Acquisition Loans and commitments thereunder. (For example, if an Assigning Bank assigns 50% of its Commitment or its Obligations to an Assignee, such Assigning Bank shall also, concurrently therewith, assign 50% of its commitment relating to the Acquisition Loans or its Acquisition Loans Obligations, respectively, to such Assignee.) (c) 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 and enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or 81 88 document furnished pursuant thereto; (ii) such Assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of its obligations under the Loan Documents; (iii) such Assignee confirms that it has received a copy of the other Loan Documents, together with copies of the financial statements referred to in Section 7.2 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 the Agent or 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 and the other Loan Documents; (v) such Assignee confirms that it is an Eligible Assignee; (vi) such Assignee appoints and authorizes the Agent to take such action as agent on its behalf and exercise such powers under the Loan Documents as are delegated to the Agent 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 the Loan Documents are required to be performed by it as a Bank. (d) The Agent shall maintain at its Principal Office 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 Commitments 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 BORROWER, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes under the Loan Documents. The Register shall be available for inspection by BORROWER or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assigning Bank and Assignee representing that it is an Eligible Assignee, together with the Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt written notice thereof to BORROWER. Within five Business Days after its receipt of such notice BORROWER, at their expense, shall execute and deliver to the Agent in exchange for each surrendered Note a new Note in an amount equal to the Commitment assumed by it (or, if the Commitments have terminated or expired, the Loans assigned to it) pursuant to such Assignment and Acceptance and, if the Assigning Bank has retained any Loan or Letter of Credit Liability, the Commitment retained by it (or, if the Commitments have terminated or expired, the Loans retained by it) (each such promissory note shall constitute a "Note" for purposes of the Loan Documents). Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit C hereto. 82 89 (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.8, disclose to the Assignee or participant, or proposed Assignee or participant, any information relating to BORROWER or any Subsidiary or Affiliate of BORROWER furnished to such Bank by or on behalf of BORROWER or any Subsidiary or Affiliate of BORROWER; provided that each such actual or proposed Assignee or participant shall agree to be bound by the provisions of Section 13.20. (g) Any Bank may assign and pledge all or part of the Note held by it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve System and/or Federal Reserve Bank; provided, that any payment made by BORROWER for the benefit of such assigning and/or pledging Bank in accordance with the terms of the Loan Documents shall satisfy BORROWER's obligations under the Loan Documents in respect thereof to the extent of such payment. No such assignment and/or pledge shall release the assigning and/or pledging Bank from its obligations hereunder. Section 13.9 Survival. All representations and warranties made or deemed made in this Agreement or any other Loan Document or in any document, statement or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and the issuance of the Letters of Credit, and no investigation by the Agent or any Bank or any closing shall affect the representations and warranties or the right of the Agent or any Bank to rely upon them. Without prejudice to the survival of any other obligation of BORROWER hereunder, the obligations of BORROWER under Article 4 and Sections 13.1 and 13.2 shall survive repayment of the Notes and termination of the Commitments. SECTION 13.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND (EXCEPT AS PROVIDED IN THIS SECTION 13.10 WITH RESPECT TO THE TERM SHEET) SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. Notwithstanding the foregoing, the Term Sheet shall continue in full force and effect as it relates to fees as provided in Section 2.11. Section 13.11 Amendments. No amendment or waiver of any provision of this Agreement, the Notes or any other Loan Document to which BORROWER is a party, nor any consent to any departure by BORROWER therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and BORROWER in writing, and each such waiver or consent 83 90 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 all of the Banks and BORROWER, do any of the following: (a) increase the Commitments of the Banks or subject the Banks to any additional obligations; (b) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (c) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder; (d) waive any of the conditions precedent specified in Article 6; (e) change the Commitment Percentages or the aggregate unpaid principal amount of the Notes or the percentage of the Banks which shall be required for the Banks or any of them to take any action under this Agreement; (f) change any provision contained in Section 9.14 or this Section 13.11 or modify the definition of "Borrowing Base", "Eligible Receivables" or "Required Banks" contained in Section 1.1; or (g) release any Collateral from any of the Liens created by the Security Documents; and provided further, however, that no amendment, waiver or consent relating to Sections 12.1, 12.2, 12.3, 12.4 or 12.5 shall require the agreement of any Loan Party. Notwithstanding anything to the contrary contained in this Section 13.11, no amendment, waiver or consent shall be made with respect to Article 12 hereof without the prior written consent of the Agent. Section 13.12 Maximum Interest Rate. (a) No interest rate specified in this Agreement or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the interest rate (the "Contract Rate") for any Obligation shall exceed the Maximum Rate, thereby causing the interest accruing on such Obligation to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate for such Obligation shall not reduce the rate of interest on such Obligation below the Maximum Rate until the aggregate amount of interest accrued on such Obligation equals the aggregate amount of interest which would have accrued on such Obligation if the Contract Rate for such Obligation had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, none of the terms and provisions of this Agreement or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate; and neither the Agent nor any Bank shall ever charge, receive, take, collect, reserve or apply, as interest on the Obligations, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other obligation provided for in this Agreement or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 13.12(b), or (ii) an amount, which when added to all other interest payable under this Agreement and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, the Agent or any Bank ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Obligations and treated hereunder as such; and if the Obligations, or applicable portions thereof, are paid in full, any remaining excess shall 84 91 promptly be paid to BORROWER (or other appropriate Person). In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, BORROWER, the Agent and the Banks shall, to the maximum extent permitted by applicable law, (A) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (B) exclude voluntary prepayments and the effects thereof, and (C) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Obligations, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Obligations; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, the Agent and/or the Banks, as appropriate, shall refund to BORROWER (or other appropriate Person) the amount of such excess and, in such event, the Agent and the Banks shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. (c) Pursuant to Article 15.10(b) of Chapter 15, Subtitle 79, Revised Civil Statutes of Texas 1925, as amended, BORROWER agrees that such Chapter 15 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not govern or in any manner apply to the Obligations. Section 13.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which BORROWER is a party shall be given or made by telecopy or in writing and telecopied, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (or, with respect to a Bank that becomes a party to this Agreement pursuant to an assignment made in accordance with Section 13.8, in the Assignment and Acceptance executed by it); or, as to any party, at such other address as shall be designated by such party in a notice to each other party given in accordance with this Section 13.13. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid; provided, however, that notices to the Agent shall be deemed given when received by the Agent. SECTION 13.14 GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. EXCEPT AS MAY BE EXPRESSLY STATED TO THE CONTRARY IN CERTAIN LOAN DOCUMENTS, THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE LAWS OF THE UNITED STATES. EACH OF BORROWER HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF EACH OF (A) ANY UNITED STATES DISTRICT COURT OF NEW YORK, (B) THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS, (C) ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK, AND (D) ANY TEXAS STATE COURT SITTING IN HOUSTON, TEXAS, FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING 85 92 OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH BORROWER AT ITS ADDRESS SET FORTH UNDERNEATH ITS SIGNATURE HERETO. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORM. Section 13.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13.16 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 13.17 Headings. The headings, captions and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 13.18 Construction. BORROWER, the Agent, and the Banks acknowledges that it has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the parties hereto. Section 13.19 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists. Section 13.20 Confidentiality. Each Bank agrees to exercise its best efforts to keep any information delivered or made available by any Loan Party to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank from disclosing such information (a) to the Agent, the Co-Agent or any other Bank, (b) to any Person if reasonably incidental to the administration of the Loans or Letter of Credit Liabilities, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (e) which has been publicly disclosed, (f) in connection with any litigation to which the Agent, any Bank or their respective Affiliates may be a party, (g) to the extent reasonably required in connection with the exercise of any remedy under 86 93 the Loan Documents, (h) to such Bank's legal counsel and independent auditors, and (i) to any actual or proposed participant or Assignee of all or part of its rights hereunder, so long as such actual or proposed participant or Assignee agrees to be bound by the provisions of this Section 13.20. SECTION 13.21 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF THE AGENT OR ANY BANK IN THE NEGOTIATION, ADMINISTRATION OR ENFORCEMENT THEREOF. Section 13.22 Approvals and Consent. Except as may be expressly provided to the contrary in this Agreement or in the other Loan Documents (as applicable), in any instance under this Agreement or the other Loan Documents where the approval, consent or exercise of judgment of any Bank Party is requested or required, (a) the granting or denial of such approval or consent and the exercise of such judgment shall be within the sole discretion of such Bank Party, and such Bank Party shall not, for any reason or to any extent, be required to grant such approval or consent or to exercise such judgment in any particular manner, regardless of the reasonableness of the request or the action or judgment of such Bank Party, and (b) no approval or consent of any Bank Party shall in any event be effective unless the same shall be in writing and the same shall be effective only in the specific instance and for the specific purpose for which given. Section 13.23 Agent for Services of Process. BORROWER hereby irrevocably designates Edwin T. Markham with offices at 666 Third Avenue, 9th Floor, New York, New York, 10017 to receive for and on behalf of such BORROWER service of process in New York. In the event that Ms. Riordan resigns or ceases to serve as BORROWER's agent for service of process hereunder, BORROWER agrees forthwith (a) to designate another agent for service of process in New York, New York and (b) to give prompt written notice to the Agent of the name and address of such agent. BORROWER agrees that the failure of its agent for service of process to give any notice of any such service of process to BORROWER shall not impair or affect the validity of such service or of any judgment based thereon. If, despite the foregoing, there is for any reason no agent for service of process of BORROWER available to be served, then BORROWER further irrevocably consents to the service of process by the mailing thereof by the Agent or the Required Banks by registered or certified mail, postage prepaid, to BORROWER at its address listed on the signature pages hereof. Nothing in this Section 13.23 shall affect the right of the Agent or the Banks to serve legal process in any other manner permitted by law or affect the right of the Agent or any Bank to bring any action or proceeding against BORROWER or its Property in the court of any jurisdiction. Section 13.24 Joint and Several Obligations. Each and every representation, warranty, covenant, agreement, indebtedness, liability or obligation of BORROWER under this Agreement or any other Loan Document shall be, and shall be deemed to be, the joint and several representation, warranty, covenant, agreement, indebtedness, liability or obligation, respectively, of BORROWER. 87 94 Section 13.25 Co-Agent. All of the privileges and immunities created by Articles 12 and 13 of this Agreement in favor of the Agent in its capacity as such shall be equally applicable to the Co-Agent in its capacity as such. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: -------- FALCON DRILLING COMPANY, INC. By: /s/ LEIGHTON E. MOSS -------------------------------------- Name: Leighton E. Moss Title: Vice President and General Counsel Address for Notices: ------------------- 1900 West Loop South, Suite 1800 Houston, Texas 77027 Telecopy No.: 713-623-8103 Telephone No.: 713-623-8984 Attention: Don P. Rodney S-1 95 AGENT: ----- BANQUE PARIBAS By: /s/ BRIAN MALONE --------------------------------------- Name: Brian Malone ------------------------------------- Title: Vice President ------------------------------------ By: /s/ LARRY ROBINSON --------------------------------------- Name: Larry Robinson ------------------------------------- Title: Vice President ------------------------------------ Address for Notices: ------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: 713-659-3832 Telephone No.: 713-659-4811 Attention: Mr. Brian M. Malone Vice President BANKS: ----- BANQUE PARIBAS By: /s/ BRIAN MALONE --------------------------------------- Commitment: Name: Brian Malone - ---------- ------------------------------------- Title: Vice President ------------------------------------ $27,692,307.69 By: /s/ LARRY ROBINSON --------------------------------------- Name: Larry Robinson ------------------------------------- Title: Vice President ------------------------------------ S - 2 96 Address for Notices: ------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No.: 713-659-3832 Telephone No.: 713-659-4811 Attention: Mr. Brian M. Malone Vice President Lending Office for ABR Loans: ---------------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Leah Evans Operations Officer Lending Office for Eurodollar Loans: ----------------------------------- Banque Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Leah Evans Operations Officer S - 3 97 ARAB BANKING CORPORATION (B.S.C.) By: /s/ STEPHEN A. PLAUCHE -------------------------------------- Commitment: Name: Stephen A. Plauche - ---------- ------------------------------------ Title: Vice President ----------------------------------- $12,307,692.31 Address for Notices: ------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager With copies to: Arab Banking Corporation (B.S.C.) 600 Travis Street, Suite 1900 Houston, Texas 77002 Telecopy No.: (713) 227-6507 Telephone No.: (713) 227-8444 Attention: Mr. Stephen A. Plauche Vice President Lending Office for ABR Loans: ---------------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager Lending Office for Eurodollar Loans: ----------------------------------- Arab Banking Corporation (B.S.C.) 277 Park Avenue, 32nd Floor New York, New York 10172 Telecopy No.: (212) 583-0921 Telephone No.: (212) 583-4720 Attention: Loan Administration Manager S - 4 EX-10.26 4 REGISTRATION RIGHTS AGREEMENT DATED - 12/10/96 1 EXHIBIT 10.26 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of December 10, 1996, by and between Falcon Drilling Company, Inc., a Delaware corporation (the "Company") and KS Deepsea Drillships, a Norwegian Limited Partnership ("Drillships"). W I T N E S S E T H WHEREAS, the Company and Drillships have entered into a Memorandum of Agreement dated November 6, 1996 (as amended, the "Purchase Agreement") providing for the sale by Drillships or its guaranteed nominee and the purchase by the Company or its guaranteed nominee of two Bahamas flag drillships described therein, a portion of the purchase price of which consists of shares of the Common Stock of the Company; WHEREAS, to induce Drillships to enter into the Purchase Agreement and as a condition precedent to the Closing thereunder (as such term is defined therein), the Company has agreed to grant certain registration rights, from time to time, with respect to the Registrable Securities (as hereinafter defined) in accordance with the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Agreement" shall have the meaning set forth in the initial paragraph hereof, and as the same may be amended or modified from time to time in accordance with the provisions hereof. "Closing Date" shall have the meaning set forth in the Purchase Agreement. "Commission" shall mean the Securities and Exchange Commission (or any successor body thereto). "Common Stock" shall mean the common stock, par value $.01 per share, of the Company which is not registered under the Securities Act, in the amount specified in the Purchase Agreement. "Demand Registration" shall have the meaning set forth in Section 3(a), hereto "Holder" shall have the meaning set forth in Section 4(a). "Holder's Counsel" shall have the meaning set forth in Section 6(a)(i). "NASD" shall mean the National Association of Securities Dealers, Inc. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. 2 "Purchase Agreement" shall have the meaning set forth in the second paragraph of this Agreement. "Registrable Securities" shall mean the Common Stock of the Company constituting Registrable Securities as provided in Section 2 of this Agreement. "Registration Expenses" shall mean all expenses incident to the Company's performance of or compliance with the registration rights granted hereunder, including, without limitation, all registration, filing, listing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and expenses of the Company's independent public accountants, including fees and expenses associated with any special audits or "cold comfort" letters required by or incident to such performance and compliance, and any fees and disbursements of underwriters customarily paid by issuers and sellers of securities provided, however, that "Registration Expenses" shall not include fees and expenses of counsel to any holder of Registrable Securities nor shall it include underwriting discounts, commissions and transfer taxes, if any. "Securities Act" shall mean the Securities Act of 1933, as amended. 2. Securities Subject to this Agreement; Representations and Warranties (a) The securities entitled to the benefit of this Agreement are the shares of Common Stock of the Company issued to Drillships pursuant to the Purchase Agreement. The term "Registrable Securities" shall include the foregoing securities and shall also include any securities issued as a dividend or distribution or pursuant to a recapitalization, reorganization, consolidation or merger on account of Registrable Securities, and includes any shares of Common Stock received by Drillships by way of sub division of the outstanding shares of Common Stock into a greater number of shares (by reclassification, stock split or otherwise). Certificates representing Registrable Securities shall contain the following legend on the face thereof: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except pursuant to (i) an effective registration statement under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar rule under the Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel of the Company, that an exemption from registration under the Act is available. The foregoing legend shall remain on the face of such certificates until the Common Stock represented thereby has been registered with the Commission or until counsel to the Company has determined that such legend may be removed in accordance with applicable provisions of the Securities Act and the rules and regulations promulgated thereunder. (b) A Registrable Security shall cease to be a Registrable Security when: (i) such security has been effectively registered under the Securities Act and has been disposed of pursuant to a registration 2 3 statement (which shall not include the sale of Registrable Securities to Drillships pursuant to the Purchase Agreement); (ii) such security is sold pursuant to Rule 144 under the Securities Act (or similar provision); (iii) such security has been otherwise transferred and (A) the Company delivers a new certificate for such security which does not bear a registration legend and (B) Holder's counsel is of the reasonable opinion that subsequent disposition of such security into the public market does not require registration under the Securities Act; or (iv) such security has ceased to be outstanding. (c) The Company represents and warrants, as follow: (i) The Company is a corporation organized, validly existing and in good standing under the laws of Delaware. (ii) The Company has duly authorized and approved by all requisite corporate action this Agreement, and the Company has all requisite corporate power and authority to enter into, execute and deliver this Agreement and perform its obligations hereunder. (iii) This Agreement has been duly executed and delivered by the Company and is a valid and binding obligation of it enforceable against it in accordance with its terms except to the extent that its enforceability may be subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally and general equitable principals. (iv) The Registrable Securities have been duly and validity authorized and issued, fully paid and non-assessable and will not subject the Holder thereof to any liability solely by reason of being such Holder. The Registrable Securities are free and clear of all liens, encumbrances, restrictions and claims of every kind. The Company has full legal right, power and authority to sell, assign, transfer and convey the Registrable Securities so owned and to deliver such Registrable Securities, and the Company can and will deliver good and marketable title to such Registrable Securities. (v) The Company is not subject to any charter, by-law, mortgage, lien, lease, agreement, instrument, order, law, rule, regulation, judgment or decree, or any other restriction of any kind or character, which would prevent consummation of the transactions contemplated by this Agreement. (d) Drillships shall be provided with an opinion of counsel dated the date hereof, in form and substance reasonably satisfactory to Drillships, covering the matters set forth in Section 2(c) hereof, and such other matters as it may reasonably request. 3. Demand Registration. (a) At any time on and after March 1, 1997, any Holder or Holders of 50% or more of Registrable Securities may make a written request (specifying the intended method of disposition) that the Company effect the registration of Registrable Securities under the Securities Act (such registration upon such request, a "Demand Registration"), provided that such request shall relate to an amount of Registrable Securities at least equal to 25% of the total amount of Registrable Securities. (b) Within ten days after receipt of a request for the Demand Registration, the Company shall give written notice (the "Notice") of such request to all other Holders and shall include in such registration (except as otherwise provided herein) all Registrable Securities for which the Company has received, 3 4 within 15 days after receipt by the applicable Holder of the Notice, a written request to be included therein. All requests made under this Section 3(b) shall specify the aggregate number of Registrable Securities to be registered. (c) A registration shall not constitute a Demand Registration until it has become effective. In any registration initiated as a Demand Registration, the Company shall pay all Registration Expenses incurred in connection therewith, whether or not such Demand Registration becomes effective; provided that a Holder participating in such registration shall pay all Registration Expenses if such Demand Registration fails to become effective solely as a result of an act or omission by such Holder. (d) The Company shall only be obligated to effect one Demand Registration. (e) The Holder of a majority of the Registrable Securities shall have the right to decide whether or not the offering of the securities will be an underwritten offering and shall have the right to choose such underwriter or underwriters. 4. Piggy-back Registration. (a) If, at any time, the Company proposes to file a registration statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any security holders of the Company of any class of debt or equity security of the Company (other than a registration statement on Form S-4 or S-8 or any successor or similar forms thereto), which is anticipated to be or becomes effective on or after May 30, 1997, the Company shall give written notice of such proposed filing (the "Offering Notice") to Drillships and to all holders of Registrable Securities to whom the transfer of Registrable Securities have, from time to time, been registered on the books and records of the Company (Drillships and any such transferee each referred to herein as a "Holder" and collectively as "Holders"), such securities so transferred constituting Registrable Securities immediately following such transfer, at least 30 days before the date of anticipated filing with the Commission. Such Offering Notice shall offer to any Holder, the opportunity, but in no event shall such offer constitute a mandatory obligation, to register such number of Registrable Securities as any such Holder may request in writing. For such request for registration (each a "Piggyback Registration") to be effective it must be received by the Company within 15 days after receipt by such Holder of the Offering Notice. (b) In connection with any Piggy-back Registration, the Company shall use best effort to cause the managing underwriter or underwriters of a proposed underwritten offering to permit any Holder of the Registrable Securities who requested to be included in the registration for such offering to include such Registrable Securities in such offering on the same terms and conditions as any similar securities of the Company or, if such offering is for the account of other security holders, any similar securities of such security holders included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of a proposed underwritten offering advise the Company in writing that in its or their opinion the number of Registrable Securities proposed to be sold in such offering exceeds the number of Registrable Securities that can be sold in such offering without adversely affecting the market for the Common Stock, the Company will include in such registration the number of Registrable Securities that in the opinion of such managing underwriter or underwriters can be sold without adversely affecting the market for the Common Stock. In such event, the Company shall reduce the number of Registrable Securities to be offered for the accounts of any Holder pro rata on the basis of the relative number of any Registrable Securities requested by each Holder to be included in such registration to the extent necessary 4 5 to reduce the total number of Registrable Securities to be included in such offering to the number recommended by such managing underwriter or underwriters; provided however, that any such reduction in the number of Registrable Securities shall not constitute a Piggy-back Registration. The Company shall pay all Registration Expenses incurred in connection with a Piggy-back Registration. (c) The Holders of Registrable Securities shall be entitled to participate in no more than two Piggy-back Registrations. 5. Certain Matters Concerning Demand Registrations. (a) Notwithstanding anything in the foregoing Sections 3(a) and 4(a), if the Company's Board of Directors reasonably determines that a Demand Registration would substantially interfere with a material transaction being considered by the Company, the Company may delay such Demand Registration for 30 days. (b) The Company may, if permitted by law, effect any Demand Registration by the filing of a registration statement on Form S-3 (or any successor or similar short-form registration statement). (c) A Demand Registration shall not be deemed to have been effected unless it becomes effective with the Commission, provided that a registration which does not become effective after the Company filed a registration statement with respect thereto with the Commission solely by reason of any participating Holder failing to proceed shall be deemed to have been effected by the Company in satisfaction of the obligation of the Company to register Registrable Securities pursuant to the Demand Registration, unless the Company shall have been promptly reimbursed for all Registration Expenses by the Person who demanded registration and failed to proceed. If a Demand registration has been initiated, the failure of any Holder to proceed with such registration shall not constitute a revocation of the request for registration nor relieve the Company of its obligation to effect such Demand Registration as to Registrable Securities of any other Holder who has elected to participate in such Demand Registration and who proceeds therewith. Notwithstanding the foregoing, a registration statement will not be deemed to have been effected if after it becomes effective with the Commission, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or any court proceeding for any reason other than a misrepresentation or omission by the Holder initiating the demand. 6. Registration Procedures; Damages. (a) If and whenever any Holder of Registrable Securities have requested that any Registrable Securities be registered pursuant to Section 3 or 4, the Company shall use its best efforts to effect the registration of such Registrable Securities under the Securities Act and in accordance with the intended method of disposition thereof as expeditiously as practicable and in connection with any such request will, as expeditiously as possible: (i) in connection with a Demand Registration, prepare and file with the Commission, as soon as practicable, but in any event not later than 60 days after receipt of a request to file a registration statement with respect to Registrable Securities, a registration statement on any form for which the Company then qualifies or which counsel for the Company and the Holder's Counsel (as hereinafter defined) shall deem appropriate and which form shall be available for the sale of such Registrable 5 6 Securities in accordance with the intended method of distribution thereof and, if the offering is an underwritten offering, shall be reasonably satisfactory to the managing underwriter or underwriters, and use its best efforts to cause such registration statement to become effective; provided, however, that before filing a registration statement or prospectus or amendments or supplements thereto, the Company shall (a) furnish to the counsel (the "Holder's Counsel") selected by the Holder making the demand, or if no demand is made, the holders, in the aggregate, of a majority of the Registrable Securities covered by such registration statement, copies of all documents proposed to be filed a reasonable period of time prior to the filing thereof, which documents will be subject to the review and comment of such counsel and each seller of Registrable Securities included in such registration statement, and (b) notify each seller of Registrable Securities of any stop order, injunction or other order or requirement issued or threatened by the Commission or other governmental agency or any court injunction and take all reasonable actions required to prevent the entry of such stop order, injunction or other order or requirement or to remove it if entered; provided further, that in no event shall the Company be under any obligation to cause a Demand Registration to become effective prior to May 30, 1997; (ii) in connection with a registration pursuant to Section 3 or 4, prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 90 days (or such shorter period that will terminate when all Registrable Securities covered by such registration statement have been sold, but not before the expiration of the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable), and comply with the provisions of the Securities Act applicable to it with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (iii) furnish to each seller of Registrable Securities one signed copy of the registration statement and each amendment thereto as filed with the Commission, and such number of copies of such registration statement, amendments and supplements thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them; (iv) use all reasonable efforts to register or qualify such Registrable Securities under such other securities or "blue sky" laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts and things that may be reasonably necessary or advisable to qualify for sale in such jurisdictions the Registrable Securities owned by such seller; provided, however, that the Company shall not be required (a) to qualify generally to do business in any jurisdiction where it is not then so qualified, (b) to subject itself to jurisdiction or qualification in any such jurisdiction, (c) to consent to general service of process in any such jurisdiction, (d) to provide any undertaking required by such other securities or "blue sky" laws or (e) make any change in the charter or bylaws that the Board of Directors determines in good faith to be contrary to the best interest of the Company and its stockholders; (v) use all reasonable efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; 6 7 (vi) notify each seller of such Registrable Securities and the Holder's Counsel at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading, and prepare and file with the Commission a supplement or amendment to such prospectus after prompt review by the Holder's Counsel so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading; (vii) enter into customary agreements in form and substance reasonably satisfactory to the Company (including an underwriting agreement in customary form for companies of similar size and credit rating, if the offering is an underwritten offering) and take in good faith such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities, including making presentations to brokers, analysts and potential purchasers, in each case as if the Company were the seller of the Registrable Securities; (viii) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, the Holder's Counsel and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") and provide reasonable access during normal business hours to officers, directors, employees and agents to ask questions, in each ease as shall be reasonably necessary to enable the Inspectors to exercise their due diligence responsibility, and cause the Company's officers, directors, employees and agents to supply all information reasonably requested and to answer all questions reasonably asked by any such Inspector in connection with such registration statement. Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (a) the disclosure of such records is, in the reasonable opinion of Holder's Counsel, necessary to avoid or correct a misstatement or omission of a material fact in the registration statement, provided that any such Holder has notified the Company of such condition and has afforded the Company an opportunity to correct any such misstatement or omission, or (b) the release of such records is required (in the written opinion of counsel of such seller or underwriter, which counsel shall be reasonably acceptable to the Company) pursuant to applicable state or federal law. The seller of Registrable Securities agrees that it will deliver such opinion to the Company a reasonable period before releasing such information and, upon learning that disclosure of such records is sought by a court or governmental agency, provide notice to the Company and, in each case, allow the Company, at the Company's expenses, to undertake an appropriate action to prevent disclosure of the records deemed confidential; (ix) if such sale is pursuant to an underwritten offering, use all reasonable efforts to obtain a "cold comfort" letter and updates thereof from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as the holders, in the aggregate, of a majority of the Registrable Securities being sold and the managing underwriter or underwriters reasonably request; (x) otherwise use all reasonable efforts to comply with all applicable rules and regulations of 7 8 the Commission, and make generally available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (xi) use all reasonable efforts to cause all Registrable Securities covered by the registration statement to be listed on each securities exchange, if any, on which similar securities issued by the Company are then listed, provided that the applicable listing requirements are satisfied; (xii) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; and (xiii) cause counsel to the Company to provide customary legal opinions reasonably requested by the Holders holding, in the aggregate, of a majority of the Registrable Securities being sold. The Company may request each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities and other matters as may be reasonably required to be included in the registration statement and each seller of Registrable Securities shall have the opportunity to review and approve the presentation of such material in the registration statement. In addition, any Holder of Registrable Securities will have the right to propose a plan of distribution section of the registration statement/prospectus in the form attached hereto as Exhibit A. The Company shall promptly notify the Holder's Counsel of any request by the Commission for any amendment or supplement of such registration statement or prospectus or for additional information and shall promptly notify each seller of Registrable Securities of any such request by the Commission if such request pertains directly to the material set forth in the preceding sentence. The Company shall promptly notify each seller of Registrable Securities and the Holder's Counsel after the Company shall receive notice of the time when such registration statement became effective or when any amendment or supplement referred to in the preceding sentence is filed. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Paragraph (vi) of this Section 6(a), each such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Person's receipt of the copies of the supplemented or amended prospectus contemplated by paragraph (vi) of this Section 6(a), and, if so directed by the Company, such Person shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such registration statement shall be maintained effective pursuant to this Agreement (including the period referred to in paragraph (ii) of this Section 6(a)) by the number of days during the period from and including the date of the giving of such notice pursuant to paragraph (vi) of this Section 6(a) to and including the date when each seller of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by paragraph (vi) of this Section 6(a). (b) The Company may require each Holder, at Company's expense, to furnish the Company with such information and undertakings as it may reasonably request regarding each such Holder and the distribution of such securities as the Company may from time to time reasonably request in writing. 8 9 7. Underwritten Offerings. (a) If a Demand Registration is an underwritten offering, if requested by the underwriters, the Company will enter into an underwriting agreement with the managing underwriter or underwriters for such offering (which managing underwriter or underwriters shall be an investment banking firm or firms of national reputation), such agreement to be in form and substance reasonably satisfactory to the Company and to Holder's Counsel and to contain such representations and warranties by the Company and such other terms as are customarily contained in agreements of such type, including, without limitation, indemnities to the effect and to the extent provided in Section 8. The sellers of Registrable Securities in such offering shall be party to such underwriting agreement and may require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such sellers and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligation of such sellers. No Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Person, its ownership of Registrable Securities and its intended method of distribution and any other representation required by applicable law. (b) Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities, if so required by the managing underwriter, not to effect any public sale or distribution of Registrable Securities or sales of such Registrable Securities pursuant to Rule 144 or Rule 144A under the Securities Act, during the 14 days prior to and the 90 days after any firm commitment underwritten registration pursuant to Section 3 or 4 has become effective (except as part of such registration) or, if the managing underwriter advises the Company that in its opinion, no such public sale or distribution should be effected for a period of 120 days after such underwritten registration in order to complete the sale and distribution of securities included by such registration and the Company gives written notice to each Holder of such advice. Each such Person shall not effect any public sale or distribution of Registrable Securities or sales of such Registrable Securities pursuant to Rule 144 or Rule 144A under the Securities Act during such 120-day period after such underwritten registration, except as part of such underwritten registration, whether or not such Person participates in such registration. 8. Indemnification. (a) The Company will, and hereby does, agree to indemnify and hold harmless, to the full extent permitted by law, Drillships and each Holder, and each other Person, if any, who controls Drillships or such Holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several, to which Drillships or any Holder or any such director, partner, member, manager, officer, employee, agent or other controlling Person or Drillships or its controlling Persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein or any document incorporated therein by reference, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make such statements therein (in the case of a prospectus, in light of the circumstance under which they 9 10 were made) not misleading, or (ii) any violation by the Company or any of its officers, directors, employees, representatives or agents of any rule or regulation under applicable securities laws or other laws applicable to the Company, in each case, the Company will reimburse Drillships, any Holder and each such director, partner, member, manager, officer, employee, agent and controlling Person of Drillships or its controlling Persons for any legal and any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospects, summary prospectus, amendment or supplement in reliance upon and in conformity with information furnished in writing to the Company by Drillships or any such Holder. (b) Drillships and each Holder will, and hereby does, agree to provide the Company with an undertaking to indemnify and hold harmless, severally and not jointly, to the full extent permitted by law, the Company, its directors, officers and each other Person, if any, who controls the Company (within the meaning of the Securities Act), against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact or any omission or alleged omission of a material fact required to be stated in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained herein or any document incorporated therein by reference, or any amendment or supplement hereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading, only to the extent, such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing to the Company solely by Drillships or any such Holder. (c) Promptly after receipt by an indemnified party of notice of any threatened action or proceeding or the commencement of any action or proceeding involving a claim referred to in the preceding subsections of this Section 8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the threat or commencement of such action or proceeding, provided that the failure of any indemnified party to give notice as provided herein shalt not relieve the indemnifying party of its obligations under the preceding subsections of this Section 8, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying patty shall not be liable to such indemnified company for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall consent to entry of any judgment or enter into any settlement without the consent of the indemnified company which does not include as an unconditional term thereof the giving by the claimant or plaintiff to 10 11 such indemnified party of a release from all liability in respect of such claim or litigation. (d) Indemnification similar to that specified in the preceding subsections of this Section 8 (with appropriate modifications) shall be given by the Company and the sellers of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) If the indemnification provided for in this Section 8 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to herein, then the indemnifying party, to the extent such indemnification is unavailable, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities or expenses. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative extent of knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8(e) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any Person. If indemnification is available under this Section 8, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Sections 8(a) and 8(b) without regard to the relative fault of said indemnifying parties or indemnified party or any other equitable consideration provided for in this Section 8. (f) The indemnification or contribution required by this Section 8 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 9. Covenants Relating to Rule 144. The Company covenants that it shall use its best efforts to file the reports required to be filed by it under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder for so long as the Company becomes obligated to file such reports (or, if the Company ceases to be required to file such reports, it shall, upon the request of any Holder, make publicly available other information so that Rule 144 shall be available to any Holder), and it shall, if feasible, take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Person to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rules or 11 12 regulations hereafter adopted by the Commission. Upon the request of any Holder, the Company shall deliver to such Person a written statement as to whether it has complied with such requirement. 10. Miscellaneous. (a) Specific Performance. The parties hereto acknowledge that there may be no adequate remedy at law if any party fails to perform any of its obligations hereunder and that each party may be irreparably harmed by any such failure, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement. (b) Notices. All notices, requests, claims, demands, waivers and other communications hereunder shall be in writing md shall be deemed to have been duly given when delivered by hand, if delivered personally by courier, or by telecopy or ten (10) days after being deposited in the mail (registered or certified mail, postage prepaid, return receipt requested) as follows: if to the Company, to it at 1900 West Loop South, Suite 1800, Houston, Texas 77027, Attention: Steven A. Webster and if to Drillships, to it at c/o Wexford Management LLC, 411 West Putnam Avenue, Greenwich, CT 06830, Attention: Spyros Skouras and if to a Holder, to its address as indicated on the Company's register or stock ledger or other books or records, or to such other address as any such Holder may have furnished to the Company in writing in accordance herewith, except the notices of change of address shall be effective only upon receipt. (c) Governing Law and Arbitration. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. Any dispute arising out of or in relation to this Agreement or the activities conducted hereunder (whether tort or otherwise) shall be finally and exclusively resolved by arbitration in New York, New York, in accordance with the Rules of Arbitration of the American Arbitration Association by three arbitrators. The arbitration shall be conducted in the English language, and each arbitrator shall have English as his or her first (mother-tongue) language. Disputes involving sums less than US$25,000 shall be resolved on the basis of document submission alone by one arbitrator. All decisions of the arbitrator(s) shall be in writing, and the arbitrator(s) shall provide written reasons for their decisions. The arbitration shall be final and binding on the parties. The prevailing party shall be entitled to recover from the losing party reasonable expenses, attorneys' fees and costs. (d) Headings. The descriptive headings of the several Sections and paragraphs of this Agreement are inserted for convenience only, and do not constitute a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. (e) Entire Agreement; Amendments. This Agreement and the other writings referred to herein or delivered pursuant hereto which form a part hereof and contain the entire understanding of the parties with respect to its subject matter. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. This Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument duly executed by the Company, Drillships and any Holder. Drillships and any other Holder shall be bound by an amendment or waiver authorized by this Section 10(e), whether or not any Registrable Securities held by such Person 12 13 shall, have been marked to indicate such consent. (f) Assignability of Registration Rights. The rights and benefits accruing to, and the obligations of, any Holder hereunder shall be freely assignable in connection with and shall attach to any transfer of Registrable Securities to any Person provided that any of such rights, benefits and obligations shall be effective only to the extent set forth herein and that, except as set forth in Section 4, no individual holder of a Registrable Security shall have any rights, benefits or obligations hereunder unless such individual holder constitutes a Holder; and provided further that any Holder effecting a transfer of the rights set forth in this Agreement, or who has knowledge that any such transfer would cause any other Person or group of Persons to have the rights of a Holder, shall provide the Company with notice of such transfer and the identity of such Person or Persons. (h) Counterparts. This Agreement may be entered into in any number of counterparts, and by the parties to it on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. (i) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all of the rights of Drillships or any other Holder shall be enforceable to the fullest extent permitted by law. (j) Written Consent. The Company, Drillships and each Holder agree that whenever in this Agreement the written consent of any party is required, such written consent shall not be unreasonably withheld or delayed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. FALCON DRILLING COMPANY, INC. By /s/ LEIGHTON E. MOSS ---------------------------------------- Name: Leighton E. Moss Title: V.P. KS DEEPSEA DRILLSHIPS By /s/ SPYROS SKOURAS ---------------------------------------- Name: Spyros Skouras Title: 13 14 EXHIBIT A PLAN OF DISTRIBUTION The Common Stock may be sold from time to time by the Selling Stockholders, or by pledgees, donees, transferees or other successors in interest. Such sales may be made on one or more exchanges or in the over-the- counter market, or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The shares may be sold by one or more of the following: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) an exchange distribution in accordance with the rules of such exchange; and (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers. In addition, any securities covered by this Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus. From time to time the Selling Stockholders may engage in short sales, short sales versus the box, puts and calls and other transactions in securities of the issuer or derivatives thereof, and may sell and deliver the shares in connection therewith. In effecting sales, brokers or dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from Selling Stockholders in amounts to be negotiated immediately prior to the sale. The Selling Stockholders and agents who execute orders on their behalf may be deemed to be underwriters as that term is defined in Section 2(11) of the Act and a portion of any proceeds of sales and discounts, commissions or other compensation may be deemed to be underwriting compensation for purposes of the Act. 14 EX-10.27 5 LEASE & AGREEMENT DATED - 1/1/77 1 EXHIBIT 10.27 STATE OF LOUISIANA PARISH OF IBERIA LEASE AND AGREEMENT BE IT KNOWN that on the date and place written below but effective as of January 1, 1997 (the "Effective Date") and in the presence of the undersigned Notary Public and two competent witnesses there personally came and appeared: W & H VENTURES, L.L.C., a Louisiana Limited Liability Company domiciled in the Parish of Iberia (sometimes hereinafter referred to as "Lessor") and Double Eagle Marine, Inc., a Louisiana corporation domiciled in the Parish of St. Mary (sometimes hereafter referred to as "Lessee") who did declare and agree as follows: W I T N E S S E T H : WHEREAS, Lessor is the owner of certain premises situated in St. Mary, Louisiana; and WHEREAS, Lessor has agreed to lease such property to Lessee for the term of five (5) years and eleven (11) months for use by Lessee in connection with oilfield marine services; and WHEREAS, Lessor and Lessee have agreed to certain terms, conditions, stipulations and provisions in respect to the said lease and, to that end, in consideration of the terms and conditions herein recited, Lessor and Lessee have agreed and do hereby agree as follows: 2 1. LEASED PREMISES Lessor does hereby lease, let, rent and demise unto and in favor of Lessee those certain premises located in Morgan City, St. Mary Parish, Louisiana, which are fully described in Exhibit "A" attached hereto and made a part hereof (the "Leased Premises"). 2. TERM OF LEASE; OPTION This Lease shall be for a primary term of five (5) years and eleven (11) months, commencing January 1, 1997 and terminating at midnight November 30, 2002. Lessee shall have the option to renew this lease for one (1) additional five (5) year term on the same terms and conditions except for the rental amount which shall be negotiated by Lessor and Lessee. Lessee shall notify Lessor of his election to exercise this renewal option at least ninety (90) days prior to expiration of the primary term. 3. RENTALS Lessee shall pay to Lessor as rental for the Leased Premises, each month, in advance, on or before the 1st day of each and every month, during the initial term of this Lease, the sum of $2,500.00. The monthly rent payable during any renewal term shall be at a rate determined by negotiations between Lessor and Lessee and established at least thirty (30) days prior to the commencement of the renewal term. 4. USE OF LEASED PREMISES Lessee agrees that the activities to be conducted on the Leased Premises will not in any manner constitute a nuisance or hazard and that Lessee will observe and comply with all land use, environmental, pollution and other applicable laws, - 2 - 3 regulations, orders and ordinances prescribed by any and all governmental and regulatory authorities having jurisdiction over the Leased Premises and the activities conducted thereon by Lessee. 5. IMPROVEMENTS TO THE PREMISES Only upon Lessor's written consent first obtained, which consent shall not be unreasonably withheld, Lessee may, at its sole expense, construct and erect buildings, sheds and other structures upon the Leased Premises and otherwise make improvements and alterations thereto consistent with Lessee's use and occupancy. All such improvements shall be constructed in conformity with any applicable zoning ordinances, setback requirements, building codes or other applicable ordinances, laws or regulations and shall not obstruct or otherwise interfere with the use of any servitudes to which the Lease Premises are subject. All such improvements shall become the property of Lessor upon termination hereof without cost, charge or reimbursement to Lessee. 6. REPAIRS AND ALTERATIONS Lessor shall not be obligated to fix, maintain, repair, replace or refurbish the Leased Premises or the leased equipment or any structure, building, facility or improvement now located on the Leased Premises, or to be located and constructed thereon by Lessee. All such repairs, replacements, maintenance and refurbishing shall be done and performed by Lessee at Lessee's sold cost and expense during the term of this Lease. Lessee shall keep the Leased Premises, buildings, facilities and improvements in good repair and working condition throughout the entire term of this - 3 - 4 Lease and return same to Lessor in the same condition as received, ordinary wear and tear excepted. Lessor warrants the premises are in good repair and working condition on the commencement hereof. 7. UTILITIES Lessee shall be responsible for all utility and other services used, connected or provided in connection with Lessee's occupancy of the Leased Premises and equipment, including electricity, natural gas, sewer, telephone and waste disposal. Lessee shall obtain all such services in its name and shall post all meter, connection and similar deposits as may be required in connection therewith. 8. TAXES Lessor shall pay all ad valorem property and all other special tax assessments levied and assessed against the Leased Premises or improvements located thereon. 9. INSURANCE; WAIVER OF SUBROGATION Lessee shall provide and keep in force at its own cost and expense during the entire term hereof full comprehensive public liability and property damage insurance with respect to the Leased Premises and Lessee's use and occupancy thereof, including those portions of the Leased Premises used as driveways, walkways and parking areas. Such insurance shall contain limits of not less than $500,000.00 per person and $1,000,000.00 per accident for bodily injury or death, together with $500,000.00 for damage to property in any one occurrence. All such policies of insurance shall be issued by one or more solvent and financially sound insurance - 4 - 5 companies authorized to engage in business in the State of Louisiana, and at least twenty-five (25) days prior to the expiration of any such policy Lessee shall supply Lessor with a substitute therefor with evidence of payment of all premiums. Lessee shall at all times furnish Lessor with certificates attesting to the existence of the aforesaid insurance coverage and shall not commence occupancy of the Leased Premises without first providing same to Lessor. Lessee further agrees to cause all policies of insurance required hereunder, including all liability policies insuring Lessee against personal injury, death or physical damage or destruction of property on or about the Leased Premises, to contain a specific provision or endorsement by which the insurer renounces, disclaims, and waives all rights of recovery or subrogation against Lessor and its managers, members and employees. All policies required hereunder shall name Lessor as either a co-insured or an additional insured thereunder. 10. INDEMNIFICATION AND LIABILITY FOR INJURIES Lessee agrees hereby to indemnify and save lessor harmless from any and all actions, demands, liabilities, claims, losses or litigation arising in whole or in part out of Lessee's occupancy or use of the Leased Premises, out of any activity conducted thereon, or out of the condition of the Leased Premises, and any building, structure or improvement situated thereon. Further, at all times, Lessee assumes complete responsibility for the condition of the Leased Premises and the buildings and improvements situated thereon, and hereby relieves Lessor from all liability for personal injury to Lessee, or to Lessee's - 5 - 6 patrons, customers, invitees, business guests, deliverymen, or to anyone else on or about the Leased Premises who derives their right to be thereon from Lessee, arising from, or in any way related to, any defect or vice on the Leased Premises, whether latent or patent. 11. PROPERTY DAMAGE; DISCLAIMER Lessee disclaims, waives and renounces any and all claims, actions and demands which Lessee may have against Lessor for damages to, or the destruction and loss of, personal property, including consequential and residual damages, however arising, and whether caused in whole or in part by any vice or defect, latent or patent, of the Leased Premises, it being understood and agreed between Lessor and Lessee that Lessee shall have no claim or recourse against Lessor for the loss of or damage to property belonging to Lessee or any other third party situated on or about the Leased Premises. 12. DEFAULT As used in this Lease, the term "Event of Default" shall mean any of the following: (a) The failure of Lessee to make any payment of rental as and when the same becomes due and payable and the failure to cure such default within two (2) business days after written notice from Lessor. (b) The failure of Lessee to fulfill any duty or obligation imposed on Lessee by this Lease, and the failure to commence promptly and diligently cure same within thirty (30) days following written notice from Lessor. (c) The appointment of a receiver or the entry of an order declaring Lessee bankrupt or the assignment by Lessee for the benefit of creditors or the participation by Lessee in any other insolvency proceeding. - 6 - 7 (d) The seizure or taking of the leasehold interest of Lessee hereunder pursuant to an execution of a judgment or any act of assignment for the benefit of Lessee's creditors. Upon the happening of any "Event of Default", Lessor may at its sole option and election i) terminate this Lease and cause Lessee's eviction from the Leased Premises without prejudice to any other right, action and remedy available to Lessor or ii) permit and suffer Lessee's continued occupancy of the Leased Premises and, upon Lessee's continued failure to pay rent after receipt of ten (10) days' written notice from Lessor to make such payment, accelerate all rentals due for the remainder of the term of the Lease, which said accelerated rentals shall be payable, in full, without discount or reduction, by Lessee to Lessor within ten (10) days after written demand therefore has been served by Lessor upon Lessee. Upon Lessee's payment of the accelerated rentals, Lessee shall be considered to have cured any rental default, and shall be entitled to remain in possession of the Leased Premises for the remainder of the term, subject to all of the other obligations of Lessee hereunder. 13. IDENTITY OF INTEREST The execution of this Lease or the performance of any act pursuant to the provisions hereof shall not be deemed or construed to have the effect of creating between Lessor and Lessee the relationship of principal and agent or of a partnership or of a joint venture, and the relationship between them shall be and remain only that of Lessor and Lessee. - 7 - 8 14. MINERAL LEASES Lessor shall have and hereby reserves the unconditional right to make, grant and execute any and all oil, gas and mineral leases or other similar grants for the drilling, exploration and mining of all oil, gas and other minerals and hydrocarbons which may be situated on, under or beneath the surface of the Leased Premises. In so doing, Lessor (without Lessee's written permission and consent first obtained) shall require all such mineral leases to drill, mine or otherwise explore for such minerals only by means of slant or directional drilling operations and in a manner so as not to interfere with Lessee's use and enjoyment of the Leased Premises. Accordingly, this lease, and all rights held hereunder by Lessee, shall at all times be inferior, secondary and subordinate to any and all existing or future oil, gas and mineral leases and other grants and contracts which have already or may hereafter be granted by Lessor. 15. NOTICES AND REPORTS Any notice, report, statement, approval, consent, designation, demand or request to be given and any option or election to be exercised by a party under the provisions of this Lease shall be effective only when made in writing and delivered (or mailed by registered or certified mail with postage prepaid) to the other party at the address given below: Lessor: W&H Ventures, L.L.C. c/o Wayne Pourciau 2107 Bayou Bend Road New Iberia, LA 70560 - 8 - 9 Lessee: Double Eagle Marine, Inc. c/o Steven Webster 1900 West Loop South, Suite 1800 Houston, TX 77027 Provided, however, that either party may designate a different address from time to time by giving to the other party notice in writing of the changes. 16. ENTIRE AGREEMENT This Lease contains all of the understandings by and between the parties hereto, and all prior or contemporaneous agreements relative thereto have been merged herein or are voided by this instrument. This Lease may be amended, modified, altered, or changed in whole or in part only by an instrument in writing signed by each of the parties hereto. 17. ASSIGNMENT AND SUBLETTING Lessee may assign this Lease or sublet the Leased Premises, or any part or portion thereof, or otherwise transfer any right or interest hereunder, with the prior written consent of Lessor, provided, Lessee shall remain fully liable hereunder notwithstanding any sublease, assignment, or other transfer of any right or interest hereunder by Lessee. Any such approval by Lessor shall be limited to the particular instance specified in such written consent, and Lessee shall not thereby be relieved of any duty, obligation or liability under the provisions of this Lease, and shall remain at all times liable and responsible therefore in solido with any such sub-Lessee and/or assignee. - 9 - 10 18. ATTORNEY'S FEES In the event it becomes necessary for either Lessor or Lessee to employ an attorney to obtain enforcement of any obligation provided hereunder and imposed upon either Lessor or Lessee hereby, and in the event such party is successful in asserting such claim, including claims for payment of rentals, then, in such event, the party so adjudged liable shall be responsible to the other for all responsible attorney's fees thereby incurred. The provisions of this paragraph include attorney's fees which might be incurred by Lessor in connection with an eviction of Lessee and the regaining of possession and occupancy by Lessor of the Leased Premises. 19. INTEREST ON RENTAL DEFAULT In the event Lessee becomes more than ten (10) days delinquent in the payment of any rental due hereunder to Lessor then, in such event, such delinquency shall carry and bear and Lessee shall pay to Lessor, in addition to such rental, eighteen (18%) per cent per annum interest on all such unpaid rental installments from due date, until finally paid. 20. BINDING EFFECT The terms and provisions of this lease shall be binding upon and will enure to the benefit of the respective successors and assigns of the parties hereto. 21. GOVERNING LAW This lease and the rights, duties and obligations of Lessor and Lessee shall be governed and controlled under the laws of the State of Louisiana. - 10 - 11 22. PARAGRAPH CAPTIONS The paragraph captions as to the contents of particular paragraphs herein are inserted only for convenience and are in no way to be construed as part of this Lease or as a limitation on the scope of the particular paragraphs to which they refer. THUS DONE, PASSED AND SIGNED BY LESSOR IN THE CITY OF NEW ORLEANS, PARISH OF ORLEANS, LOUISIANA ON THE 10TH DAY OF JANUARY, 1997 IN THE PRESENCE OF THE UNDERSIGNED NOTARY AND COMPETENT WITNESSES AFTER DUE READING OF THE WHOLE. WITNESSES: LESSOR: W & H VENTURES, L.L.C. /s/ JULIE POURCIAU By: /s/ WAYNE POURCIAU - ------------------------ -------------------------------- Wayne Pourciau Member/Manager /s/ LEIGHTON E. MOSS LESSEE: - ------------------------ DOUBLE EAGLE MARINE, INC. BY: /s/ HARRY WIGGINS -------------------------------- Harry Wiggins Vice President
/s/ NATHAN P. HORNER ------------------------------------- NOTARY PUBLIC - 11 - 12 EXHIBIT "A" PROPERTY DESCRIPTION That certain tract or parcel of land, together with all buildings and improvements thereon and all rights, ways, privileges, and servitudes thereto appertaining and all appurtenances thereof, situated in Section 1, Township 16 South, Range 12 East, St. Mary Parish, Louisiana, about one mile below the original Town of Berwick as per map and plan thereof by A. L. Fields, containing and measuring eighty-three and 18/100 (83.18') feet on the East side of River Road and extending back to the Atchafalaya River a distance of three hundred ten (310') feet, more or less, along the Southern boundary, a distance of three hundred twenty(320') feet, more or less, along the Northern boundary and extending a distance of eighty-eight (88') feet along the Eastern boundary, all as shown by a map and plan of said property by T. F. Kramer, C. E. and Surveyor, dated November 18, 1947, and recorded in COB 9-Z, at Page 662, under Entry No. 99,963 of the records of St. Mary Parish, Louisiana, which is made a part hereof by reference thereto and according to said map and plan of land, the said tract is bounded on the North by property of Andrew C. Freeman, on the East by the Atchafalaya River, on the West by River Road, and on the South by property of Mrs. Hester Freeman Robicheaux. Being the same property acquired by Wayne Pourciau, et al by Act of Cash Sale from Atchafalaya Federal Savings Bank, dated October 19, 1987, filed for record at COB 30-T, under Entry No. 220,744, of the records of St. Mary Parish, Louisiana; and by Wayne M. Pourciau in that Judgment of Possession in Succession of Roberta Hebert Pourciau, dated October 31, 1995, filed for record at COB 39-R, under Entry No. 225,239, of the records of St. Mary Parish, Louisiana. - 12 - EX-10.28 6 BAREBOAT CHARTER AGREEMENT DATED - 12/10/96 1 EXHIBIT 10.28 BAREBOAT CHARTER AGREEMENT THIS Bareboat Charter Agreement (the "Charter") is made the 10th day of December, 1996, by and between Hyde Offshore Limited Partnership, a California limited partnership (the "OWNER") and Falcon Drilling Company, Inc., a Delaware Corporation (the "CHARTERER"). R E C I T A L S WHEREAS, contemporaneously with the execution of this Charter, the OWNER has purchased from K/S Deepsea Drillships ("Deepsea") the Bahamian flag drilling vessel FALCON ICE (ex. DEEPSEA ICE), Official Number 710745, and its appurtenant machinery and equipment, more fully described in Exhibit 1 hereto and incorporated herein by reference (the "Vessel"); and WHEREAS, the OWNER and the CHARTERER desire for the OWNER to charter to the CHARTERER the Rig to be used from time to time for oil or gas drilling, completion, or reworking operations, and related services, by one or more third party petroleum companies (an "Operator"), which shall contract with the CHARTERER directly or through a sub-charter for the use of the Vessel. 2 A G R E E M E N T NOW THEREFORE, in consideration of the mutual promises, covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the OWNER and the CHARTERER agree as follows: 1. (a) Term. Subject to the terms and conditions of this Charter, the OWNER hereby charters and demises to the CHARTERER, and the CHARTERER hereby hires from the OWNER, the Vessel. Except as otherwise provided in this Charter, the term of this Charter (the "Charter Term") shall continue from the Date of Delivery (as defined in Section 2(a) herein) of the Vessel to the OWNER up to and through the date thirty-six (36) months following the Date of Delivery. The CHARTERER may directly or through a sub-charter, for so long as the CHARTERER is not in default under the Charter and always subject, without limitation, to Section 4 herein, from time to time enter into an agreement with an Operator for utilization of the Vessel (a "Third Party Contract") which shall be subordinate to this Charter. (b) Completion of Contracts. The CHARTERER shall contract for work for the Vessel which terminates on or before the end of the Charter Term. If, in the reasonable judgment of the CHARTERER, the work to be contracted for may exceed the Charter Term, then the CHARTERER -2- 3 shall not enter into such Third Party Contract without the OWNER's prior written consent. The OWNER will reasonably review the CHARTERER's request for such a consent and will either: (i) provide its consent with the stipulation that the Charter will be extended until the end of the Third Party Contract; or (ii) not consent to the Third Party Contract and allow the CHARTERER to terminate the Charter up to thirty (30) days prior to the end of the Charter Term. Should a Third Party Contract terminate during the Charter Term, and the CHARTERER has not requested the OWNER's consent for further Third Party Contracts, then the CHARTERER may terminate the Charter up to thirty (30) days prior to the end of the Charter Term. (c) Third Party Contract Extension. In the event the Vessel is engaged in a Third Party Contract at the end of the Charter Term, notwithstanding Section l(b) herein, and expiration of this Charter would cause a breach or default in the performance of the Third Party Contract (an "Ongoing Third Party Contract"), this Charter shall be extended for such time on terms as are then in effect as is reasonably necessary to complete the Ongoing Third Party Contract and re-deliver the Vessel to the OWNER. (d) Termination of Charter During Third Party Contract. In the event the Charter is terminated by reason of an -3- 4 Event of Default (as hereinafter defined) or by mutual agreement during the term of a Third Party Contract or any sub-charter, if the OWNER so elects in its sole discretion, the CHARTERER shall use its reasonable efforts to assign to the OWNER the interests of the CHARTERER in and to any such sub-charter and/or Third Party Contract. The CHARTERER shall execute such documents as are reasonably necessary to effect any such assignments, and upon termination of the Charter shall take such actions as are reasonably requested by the OWNER and otherwise use its best efforts to cause a full transfer of the CHARTERER's interests in the sub-charter and Third Party Contract to the OWNER and if requested by the OWNER to effect a smooth transition in the operation of the Vessel to a nominee of the OWNER. 2. (a) Delivery. The delivery of the Vessel by Deepsea to the OWNER, in such condition as the Vessel is accepted by and delivered to the OWNER, shall be deemed to be delivery of the Vessel by the OWNER to the CHARTERER and acceptance of the Vessel by the CHARTERER under this Charter (the date of such occurrence being the "Date of Delivery") and shall constitute full performance of the OWNER's obligations to deliver the Vessel to the CHARTERER. The OWNER shall deliver to the CHARTERER with the Vessel all documentation -4- 5 relating to the operation of the Vessel and its equipment that the OWNER receives from Deepsea, including technical and operating manuals, construction drawings, specifications, repair records and regulatory inspection records (collectively, the "Technical Documents"). During the Charter Term, the CHARTERER shall be entitled to possession of the Technical Documents; provided, however, that the OWNER and its designees shall be allowed reasonable access to and may make copies of the Technical Documents. THE OWNER HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, THE DESIGN, CONDITION, MERCHANTABILITY, SEAWORTHINESS OF OR THE QUALITY OF THE MATERIAL, EQUIPMENT, OR WORKMANSHIP IN THE VESSEL, OR AS TO ITS FITNESS FOR A PARTICULAR PURPOSE OR ANY PARTICULAR TRADE, AND THE OWNER FURTHER DISCLAIMS ALL OTHER LIABILITIES (AT COMMON LAW OR IN CONTRACT OR TORT OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY). THE VESSEL IS DELIVERED BY THE OWNER TO THE CHARTERER "AS IS, WHERE IS" AND WITH ALL FAULTS. (b) Re-Delivery. The CHARTERER shall, at its expense, on the expiration date of the Charter Term or other termination of the Charter, re-deliver the Vessel to the OWNER at a safe location in the port of Singapore or offshore Singapore, or at such other safe port -5- 6 as may be mutually agreed upon by the OWNER and the CHARTERER. The CHARTERER shall re-deliver all Technical Documents to the OWNER with the Vessel. The CHARTERER shall provide the OWNER with 30/14/7 days approximate notice of the place and anticipated date of re-delivery of the Vessel and three (3) days definite notice of the actual date and place of re-delivery. (c) Survey, Inventory and Inspection. To establish a benchmark for the condition of the Vessel and the amount of inventory on the Vessel at the commencement of the Charter, a joint survey will be performed at the time of delivery of the Vessel (the "On-hire Survey") and a joint survey is to be held immediately prior to the redelivery of the Vessel (the "Off-hire Survey") as provided for in this Section 2(c). The expenses for independent surveyors for such surveys shall be shared equally between the CHARTERER and the OWNER. Such surveys will include, but not be limited to, an inventory of all consumables, stores, spare parts and equipment on board the Vessel and ashore; a monetary valuation of such inventory; a general condition survey of the Vessel including photographic or videotape records; an inspection of class records; and an inspection of maintenance records. The CHARTERER and the OWNER each will mutually agree on the factual nature of such surveys and such agreement will not be -6- 7 unreasonably withheld. At the OWNER's option and expense, an underwater survey may be performed as a part of the On-hire Survey and Off-hire Survey. The On-hire Survey report and the Off-hire Survey report produced pursuant to this Section 2(c), when agreed, shall be deemed to be incorporated into this Charter by reference. (d) (i) Re-delivery - Condition. The CHARTERER shall re-deliver the Vessel in the same good order, structure, state and condition as it was when it was delivered, except for ordinary wear and tear. The Vessel when so re-delivered (i) shall have installed thereon all spares required by the American Bureau of Shipping ("ABS") and any other regulatory authority having jurisdiction over the Vessel; (ii) shall have a currently effective Certificate of the highest classification and rating issued by the ABS for drillships of its age and type, with continuous survey cycles up to date; (iii) shall be in good order, condition and repair required by all of the -7- 8 terms of Section 5 hereof, with no requirements, recommendations or citations of the ABS, the United States Coast Guard or any other governmental agency or department having jurisdiction over the Vessel uncorrected as evidenced by a special survey of the Vessel completed within six (6) months of re-delivery; (iv) shall have all national and international trading or other certificates required for operation as a mobile offshore drilling unit in the location of its most recent employment prior to redelivery; (v) the main diesel engines of the Vessel shall at redelivery be returned to the OWNER with the same time remaining, in aggregate, until their next major overhauls (assuming 30,000 operating hours per engine between major overhauls) as recorded in the On-hire Survey; the CHARTERER will compensate the OWNER for any deficiency in remaining time, at -8- 9 the CHARTERER'S then current cost for overhaul, pro-rated for 30,000 hours and the OWNER will compensate the CHARTERER for any surplus at the same rate; (vi) the CHARTERER shall have fulfilled its obligations under any Third Party Contract then currently in force as may be required by the respective Operator; (vii) if the Vessel is not in Singapore or Singapore waters, the CHARTERER shall on behalf of the OWNER obtain valid and current documentation for immediate export of the Vessel from its location to Singapore to the extent such documentation is required, such documentation to be provided at the CHARTERER's expense; and (viii) the Vessel shall be in all respects seaworthy. The CHARTERER shall also deliver to the OWNER with the Vessel, the Vessel's log books, all plans and drawings in the possession of the CHARTERER, and all classification -9- 10 society, inspection, modification and overhaul records relating applicable to the Vessel. (ii) Re-delivery - Standards. The Vessel is to be re-delivered (i) in the same (or better) condition as received by the CHARTERER, ordinary wear and tear excepted, and (ii) with equipment in compliance with published operating specifications and the CHARTERER's maintenance practice for similar equipment on similar drillships owned or operated by the CHARTERER or its owners or affiliates. If the OWNER elects to perform an underwater survey, as provided in Section 2(c) above, any damage affecting class revealed by such survey shall be repaired by the CHARTERER, at the CHARTERER's time and expense. If the OWNER requires the CHARTERER (pursuant to the preceding sentence) to repair damage revealed pursuant to an underwater survey, and the estimated cost of such repairs exceeds USD 1,000,000, the Option granted to the CHARTERER pursuant to Section 18 below shall be extended for a period of fifteen (15) days from the date of such underwater survey. (e) Re-delivery Inventory. The CHARTERER shall re-deliver the Vessel with the same amount of fuel oil, lubricating oil, unbroached provisions, paints, oils, -10- 11 ropes, spare parts and equipment, including, but not limited, to the inventory determined as a part of the On-hire Survey, and other unused consumable stores as are on board and ashore at the commencement of the Charter Term. In the event the quantity of fuel oil or lubricating oil is less than it was determined in the On-hire Survey, the CHARTERER shall compensate the OWNER for such discrepancy at the then current unit cost for the difference in value as appropriate. In the event consumable stores are greater at re-delivery than at delivery, the CHARTERER may remove the excess. In the event the amount of fuel oil or lubricating oil is greater at re-delivery than delivery, the OWNER will purchase the excess at the then current unit cost for the difference in value as appropriate. 3. (a) (i) Basic Charter Hire. The CHARTERER shall pay to the OWNER charter hire ("Basic Charter Hire") for the Vessel during the Charter Term as follows: (x) for months 1 through 12 - USD 10,000 per day; (y) for months 13 through 24 - USD 11,000 per day and (z) for months 25 through 36 and for any extended period pursuant to Sections 1(c) and 2(c) above - USD 13,000 per day. Basic Charter Hire for the first and last calendar months for the Charter Term shall be prorated if the Date of Delivery is other than the first day of a calendar month. The -11- 12 Charter Hire for the month in which the Date of Delivery occurs shall be payable within ten (10) days after the Date of Delivery. Charter Hire payments for each subsequent calendar month shall be made prior to the first day of each such month. (ii) Additional Hire. All other amounts to be paid by the CHARTERER to the OWNER under this Charter shall be deemed "Additional Hire." (iii) Charter Hire Payments. Payments of Basic Charter Hire and Additional Hire (collectively, "Charter Hire") shall be paid in U.S. currency to such account and in such manner as may be designated in writing by the OWNER from time to time. (b) Hell or High Water Charter Obligation. Except as hereinafter provided, the CHARTERER's obligation to pay Charter Hire hereunder shall be absolute during the term of this Charter irrespective of any contingency whatsoever, including, but not limited to (i) any set-off, counterclaim, recoupment, defense or other right which either party hereto may have against the other; (ii) any temporary unavailability of the Vessel by reason of any damage to the Vessel; (iii) any failure or delay on the part of any party hereto, whether with or without fault on its part, in performing or complying with any of the terms or covenants hereunder; (iv) any insolvency, bankruptcy, reorganization, -12- 13 arrangement, readjustment or debt, dissolution, liquidation or similar proceeding by or against the CHARTERER or any other person; and (v) any invalidity or unenforceability, or lack of due authorization of or defect in the execution, of this Charter. The CHARTERER shall not be obligated to pay Basic Charter Hire for any period during which the Vessel is not available for the CHARTERER's use due to defect in the OWNER's title or as a result of an act or omission of the OWNER. (c) Withholding Deductions. Notwithstanding anything herein to the contrary, the CHARTERER hereby covenants and agrees that it shall make all payments of Charter Hire under this Charter to the OWNER free and clear from, and without deduction by reason of, income, gross receipts, sales or use taxes or withholdings of any nature whatsoever imposed, assessed, levied or collected by or within any taxing jurisdiction; provided, however, that to the extent required by the laws of the United States or any jurisdiction where the OWNER is domiciled, the CHARTERER may make any deductions or withholdings in respect of payments hereunder. (d) Audit and Inspection. The CHARTERER will, upon request, permit the OWNER or its representatives at any reasonable time or times during normal business hours, -13- 14 to inspect the Vessel; provided, however that any inspection of the Vessel shall be subject to the consent of the Operators under applicable drilling contracts and the consent of applicable governmental agencies; which consents the CHARTERER shall use its best efforts to obtain. 4. (a) Use; Operating Areas. The CHARTERER may use the Vessel in connection with contract oil and gas drilling operations for Operators in any area, provided: (i) the CHARTERER shall only use the Vessel in the territorial waters of nations which recognize the rights of vessels documented under the flag of the Vessel; (ii) the Vessel shall be moved only to a location where the Vessel's operating specifications allow it to operate safely, and (iii) the Vessel shall be employed only in lawful activities under the laws of the United States and any other authority having jurisdiction over the Vessel, in connection with contract oil or gas drilling, completion, or re-working operations, and related services. The CHARTERER further agrees that it shall always operate the Vessel in compliance with the effective contract between the CHARTERER or any sub-charterer and the Operator, but always within the Vessel's technical capacities and certification and within the limits of the Vessel's insurance coverage. -14- 15 (b) Limits on Third Party Contracts. (i) Subject to the terms of this Charter, and in particular Sections 4 and 7 herein, the CHARTERER shall have the right to enter into Third Party Contracts with financially responsible Operators, (which for operations in U.S. territorial waters or the U.S. economic zone shall be as defined by the U.S. Minerals Management Service, and for any operations in all other areas shall be as defined by applicable governmental authorities for the area in which the Vessel is operating) for oil or gas drilling, completion, or re-working operations, and related services. As a condition precedent to entering into any Third Party Contracts. The CHARTERER shall use its best efforts to have the Operator under such Third Party Contracts indemnify and hold harmless the Vessel, the CHARTERER, the Owner and any sub-charterer for any loss or damage to any geological formation, strata, or oil or gas reservoir beneath the surface of the earth, as well as for pollution claims resulting from a kick, blowout, seepage or other escape of pollutants from below the surface of the water. (ii) the CHARTERER shall comply with and satisfy all provisions of any applicable law, convention, -15- 16 regulation, proclamation, rule or order concerning financial responsibility for liabilities imposed on the CHARTERER or the Vessel with respect to pollution by any state or nation or political subdivision thereof and shall maintain all certificates or other evidence of financial responsibility as may be required by any such law, convention, regulation, proclamation, rule or order with respect to the operations in which the Vessel is from time to time engaged. (c) Marketing Efforts. It is agreed that the CHARTERER shall market and contract the Vessel and shall keep the OWNER advised of such activities as well as general market conditions. The CHARTERER shall also keep the OWNER advised on a monthly basis of the work and contract status of the Vessel and the day rates being obtained, and, upon request by the OWNER, forward copies of any Third Party Contracts to the OWNER. -16- 17 5. Maintenance and Operation. (a) Charterer's Control and Expenses. During the Charter Term, the CHARTERER shall have exclusive control of the Vessel and, subject to the terms of the Charter, will operate, navigate, man and victual the Vessel at its own expense. The CHARTERER shall pay all charges and expenses of every kind and nature whatsoever incident to the use and operation of the Vessel under the Charter, and under any Third Party Contract, throughout the Charter Term. Such costs and expenses shall include, but not be limited to, those relating to (i) customs duties, bonds, work permits, fees, licenses, clearances, pilotage fees, wharfage fees, canal fees and costs, or similar charges incurred in connection with the importation, exportation, operation or navigation of the Vessel by the CHARTERER, (ii) maintaining the Vessel's classification society status with unexpired classification certificates and its Bahamian registration, national, local, and international trading certificates and all other certificates required by the United States Coast Guard or other governmental agencies or regulatory authorities having jurisdiction over the Vessel (or the area where the Vessel is operating from time to time), (iii) maintaining the Vessel's machinery, appurtenances and spare parts, and drilling equipment, including, without limitation, downhole equipment, in a good state -17- 18 of repair and in efficient operating condition in accordance with good offshore practices, the CHARTERER's practice for similar drillships and equipment owned or operated by the CHARTERER or its affiliates, and in compliance with manufacturers' recommendations, and (iv) supervision, management, victualing (including catering), supplies, parts service companies, port charges, dockage and wharfage, fueling and lubrication. (b) Maintenance and Repairs. During the Charter Term, the CHARTERER, at its own cost and expense, will perform work on the Vessel as necessary to keep the Vessel clean, painted and in good running order, repair and condition in accordance with good industry maintenance practice, the CHARTERER's practice for similar drillships owned or operated by the CHARTERER or its owners or affiliates, requirements set out in Third Party Contracts and as set forth in this Charter. The CHARTERER additionally will maintain the Vessel's machinery and drilling equipment, including, without limitation, downhole equipment, in compliance with manufacturer's recommendations and specifications and the requirements of the classification societies and regulatory agencies having authority over the Vessel and its equipment. The CHARTERER will notify the OWNER immediately of any accident involving the Vessel -18- 19 estimated to require repairs the cost of which will exceed USD 100,000. (c) Inspections. On reasonable prior notice, the OWNER or any persons designated by the OWNER shall have the right at any reasonable time, but will be under no obligation, to inspect the Vessel to ascertain its condition, to satisfy itself that the Vessel is being properly maintained and repaired, and to otherwise confirm that the CHARTERER is in compliance with the Charter; provided, that prior to any such inspection the persons inspecting the Vessel shall execute a release of the CHARTERER, releasing the CHARTERER from liability for any personal claims arising during such inspection of the Vessel. The cost of such inspection shall be borne by the OWNER. (d) Stacking. The CHARTERER shall be responsible for stacking the Vessel in a safe and acceptable condition and location during such time as the Vessel is not employed under a Third Party Contract. During any such stacking period, the CHARTERER shall ensure that the Vessel is adequately supervised and manned at all times, and that the Vessel is at all times kept in a condition which would permit reactivation and start-up of drilling operations on thirty (30) days notice, subject to the availability of necessary manning and materials. The costs and expenses in any way related -19- 20 to such stacking or reactivation shall be paid by the CHARTERER. 6. Alterations. (a) Structural Modifications. The CHARTERER will not make any substantial structural or other changes in the Vessel without the prior written consent of the OWNER, which consent shall not be unreasonably withheld. (b) Alterations and Restoration. Subject to the re-delivery and maintenance provisions of this Charter, the CHARTERER may at any time alter or remove items of equipment, or may fit additional items of equipment required to render the Vessel available for an Operator's purpose, provided the CHARTERER absorbs the cost and time of such alterations and refitting and restoring the Vessel to original condition before redelivery of the Vessel. Such changes shall not be made without the appropriate approval of the relevant classification and certifying authorities. (c) Replacements. The CHARTERER shall from time to time during this Charter, at its own cost and expense, replace such items of equipment as shall be so damaged or worn as to be unfit for use. All such items of equipment so replaced by the CHARTERER shall without further action become the property of the OWNER. (d) Capital Expenditures. The cost associated with any addition of capital equipment not on the Vessel or -20- 21 replacement of functioning equipment with higher capability equipment shall be considered to be a "Capital Expenditure". Any Capital Expenditure that requires a material structural modification of the Vessel shall be in all respects subject to the prior written approval of the OWNER which approval shall not be unreasonably withheld. The CHARTERER shall have the right to pay for any Capital Expenditure if it so elects. In the event that the CHARTERER does not elect to pay for a Capital Expenditure, and the OWNER elects to pay for such Capital Expenditure at the request of or with the agreement of the CHARTERER, all items, improvements, additions or replacement so made to the Vessel or its equipment shall become the property of the OWNER and the Charter Hire for the remainder of the Charter Term shall be increased by an amount equal to the Capital Expenditure multiplied by 0.00073 for each day in the applicable month (the collective amount of such increase in the Charter Hire paid by the CHARTERER to the OWNER at any given time is referred to as the "Capital Payments"). In the event the OWNER does not pay for a Capital Expenditure, any items, improvements and additions to the Vessel or its equipment so purchased or made by the CHARTERER shall become the property of the CHARTERER so long as the removal thereof from the Vessel upon its re-delivery to the -21- 22 OWNER does not render the Vessel unfit for its intended use and provided the Vessel is restored to its original condition, normal wear and tear excepted, at the CHARTERER's time and expense prior to re-delivery. To the extent any reimbursement or adjustment of compensation is made by an Operator with respect to any Capital Expenditure, such amounts will be the property of the party that paid for such Capital Expenditure. Capital Expenditures required by new applicable regulatory or classification requirements arising after the purchase of the Vessel by the OWNER shall be paid by the OWNER; provided, however, that the total amount of all such Capital Expenditures paid by the OWNER shall be added to the amount of the Purchase Price as defined in Section 18 below. 7. (a) Insurance-General. The CHARTERER shall, at its own expense, keep the Vessel insured against such risks which should be covered by experienced, prudent and responsible companies engaged in the offshore contract drilling of hydrocarbons in places and under conditions comparable to those in which the Vessel is employed from time to time, and possessing financial and operating characteristics similar to the CHARTERER ("Similar Companies") in accordance with the practices of Similar Companies, with present underwriters or other insurers reasonably acceptable to the OWNER, in -22- 23 conformance with good marine practice, including, without limiting the generality of the foregoing, insurance for damage to the Vessel, hull and machinery, trip/tow protection and indemnity, collision liability, employer's liability, pollution (excluding that emanating from the well bore), comprehensive general liability, property damage, fire, and theft. All insurance coverage shall be placed through independent brokers of recognized standing and with the CHARTERER's current club or underwriters or with a club or first-class underwriters reasonably acceptable to the OWNER. The limits specified below shall be minimum limits with respect to the Vessel, and shall in no way diminish the CHARTERER's insurance or indemnity obligations herein: (i) Marine full form hull and machinery and increased value insurance extended to insure against all risks of loss or damage, including, but not limited to, the risk of blowout and cratering and against such other risks as are typically insured against by Similar Companies for the protection of the interests of the OWNER and the CHARTERER for not less than the Insured Value as set forth in Section 7(g) below. The deductible or self-insured retention under the policy shall -23- 24 not exceed USD 250,000 per occurrence; (ii) Marine full form protection and indemnity insurance and comprehensive general lability insurance, under forms typically maintained by Similar Companies. Such insurance shall be maintained in the United States or London markets, or other major insurance market approved by the OWNER, and shall be in an amount not less than that: (A) carried by Similar Companies or (B) carried by the CHARTERER for any other drillship owned or chartered by the CHARTERER or its affiliates. Said policy shall not include a deductible or self-insured retention in excess of USD 250,000 per occurrence; (iii) The CHARTERER shall, at all times during which the Vessel is within the jurisdiction of the United States of America, maintain insurance or post bond or maintain evidence of financial responsibility with respect to the Vessel to cover the actual cost of removal of discharged oil for which the CHARTERER or the Vessel may be held strictly liable (or held liable due to the negligence of the CHARTERER or any other person) under the Clean Water Act of 1977, the Oil -24- 25 Pollution Act of 1990 or the Outer Continental Shelf Lands Act, or any subsequent enactment, or under any other federal, state or local law, rule, regulation or ordinance applicable where the Vessel is located which may apply to the Vessel or to the CHARTERER; and the CHARTERER shall maintain insurance covering similar pollution risks or liabilities incident thereto under any law, rule, regulation or judicial decision of any foreign jurisdiction or jurisdictions or political subdivision thereof applicable to the CHARTERER, the Vessel, or its operations; (iv) Such workers' compensation insurance, including, without limitation, longshoremen's and harbor workers' insurance, as shall be required by applicable law, including endorsements for Outer Continental Shelf operations, borrowed servant, voluntary compensation, and in rem claims; (v) Insurance (with a minimum limit of USD 20,000,000 per occurrence or such greater amount as is carried by the CHARTERER or its affiliates on their owned or chartered rigs) naming the CHARTERER and the OWNER as -25- 26 assureds and loss payees, as their interests may appear, against Contingent Operator's Extra Expense ("C.O.E.E.") liability in connection with operations conducted by the Vessel under a Third Party Contract with a financially responsible Operator that indemnifies against such C.O.E.E. arising out of blowout (above and below ground), cratering, re-drilling/re-completion, cost of control, clean-up, containment, seepage, pollution, spillage or leakage in connection with operations conducted by the Vessel, in form and substance typically maintained by Similar Companies, and third party liabilities that may be assumed by a contract which is legally enforceable and in form and substance typically maintained by Similar Companies. Deductibles or self-insured retention shall not exceed USD 250,000 and shall be for the account of the CHARTERER; (vi) If the Vessel is used outside the U.S. Gulf of Mexico, war-risk and political-risk insurance naming the CHARTERER and the OWNER as assureds and loss payees, which shall be maintained in the broadest forms generally available in the United States market, and -26- 27 shall include coverage for war risk hull and machinery, confiscation, terrorist acts, expropriation, nationalization, and deprivation. Such insurance and deductibles shall be in amounts equal to the corresponding policies described in sub-paragraphs (i) and (ii) above; and (vii) The insurance set out in section 7(a)(i) above shall be endorsed by the CHARTERER at its own expense to include breach of warranty coverage for the benefit of the OWNER. (b) Form of Insurance. All insurance required under Section 7(a) above shall be in such form and with such underwriters, companies or clubs as the OWNER shall reasonably approve. The OWNER (and if applicable, the OWNER's bank as mortgagee of the Vessel) shall be named as named assureds as their interest may appear, but without liability for premiums, club calls, or assessments; and in respect of insurance pursuant to 7(a), shall be named as loss payee(s) up to the Insured Value. All policies shall provide that the OWNER (and if applicable, the OWNER's bank as mortgagee of the Vessel) and the CHARTERER will be given at least thirty (30) days notice of cancellation, non-renewal or material alteration. Any deductibles under such policies shall always be for the account of the -27- 28 CHARTERER. Unless otherwise required by the OWNER, such coverage shall be in the same form as the CHARTERER or its affiliates maintains in force on the drillships owned or operated by them. (c) Proof of Insurance. The CHARTERER shall furnish the OWNER from time to time on request, and in any event at least annually, with copies of all insurance policies, cover notes or other documents evidencing the creation, renewal, amount and payment of the insurance maintained on the Vessel and for which period the insurance premiums are paid. (d) Forced Insurance. In the event the CHARTERER fails to procure and maintain insurance in accordance with this Section 7, the OWNER may, but shall not be obligated to, effect and maintain the insurance or entries in a protection and indemnity association or club as required herein and to pay the premiums therefore and, upon the OWNER's giving notice to the CHARTERER of the amounts of premiums and costs so incurred, the CHARTERER shall reimburse the OWNER for such amounts not later than fifteen (15) days after such notice. (e) Insurance Indemnity. Should the CHARTERER fail or neglect to fulfill any of the insurance requirements of a Third Party Contract, the CHARTERER hereby undertakes to indemnify and hold the OWNER harmless from and against any loss, claim, damage, expense or costs -28- 29 (including all legal fees and costs) incurred as a consequence of such failure or neglect. (f) Termination Due To Loss. This Charter shall be terminated due to a total or constructive total loss of the Vessel as determined by underwriters, and Charter Hire pursuant to Section 3 hereof shall be payable until the date of such total or constructive loss, as ultimately determined by the underwriters. (g) Payments in Event of Total or Constructive Loss. In the event of a total or constructive loss of the Vessel, the OWNER, in lieu of any and all other claims and damages, shall receive from the CHARTERER, and the CHARTERER shall pay to the OWNER, an amount equal to the sum of (i) any accrued and unpaid Charter Hire payable in accordance with Section 3 hereof calculated through the date of such loss, (ii) the value of the hull and machinery of the Vessel which is hereby agreed to be the Purchase Price (as defined in Section 18 hereof), determined as if the date of such total or constructive loss were the Effective Date (as defined in Section 18 hereof), plus one-hundred ten (110) percent of any Capital Expenditure paid for by the OWNER (the "Insured Value") and (iii) all other sums that may be due and payable by the CHARTERER on the date of such loss under this Charter, less (x) all insurance proceeds received directly by the OWNER -29- 30 attributable for such total or constructive loss (other than those relating to any insurance policies paid for by the OWNER), and (y) all payments of Charter Hire paid by the CHARTERER with respect to the period beginning upon the date of such total loss, together with interest calculated at an annual rate of ten (10) percent. The CHARTERER's obligation to pay amounts set forth in (i), (ii) and (iii) above shall be absolute and shall be due to the OWNER upon the earlier of the CHARTERER's receipt of insurance proceeds and ninety (90) days following the date of the declaration of such total loss. The OWNER may, at its own expense, place additional Total Loss Only coverage. Any proceeds paid under such additional insurance shall be paid directly by insurers to the OWNER and shall not be included in the calculation set forth above. (h) Limitation of Liability. Nothing in this Charter shall be construed or held to deprive the OWNER, the CHARTERER or the Vessel of any right to claim limitation of liability against third parties provided by any applicable statute of any jurisdiction. (i) Wreck Removal. In the event the Vessel becomes a wreck or obstruction to navigation, the CHARTERER shall indemnify the OWNER against any sums whatsoever which the OWNER shall become liable to pay or shall pay in consequence of the Vessel becoming a wreck or -30- 31 obstruction to navigation. 8. Liens. Neither the CHARTERER nor any of its employees shall have any right, power or authority to create,incur or permit to be imposed upon the Vessel any lien whatsoever during the Charter Term, except for crew's wages, general average and salvage. The CHARTERER shall carry a copy of this Charter with the Vessel's papers, and on demand will exhibit the same to any person having business with the Vessel which might give rise to any lien thereon, other than liens for crew's wages, general average and salvage. The CHARTERER will place and keep prominently displayed in the chart room and the captain's cabin on the Vessel in a conspicuous place, a notice, framed under glass, printed in plain type of such size that the paragraph of reading material shall cover a reasonable space acceptable to the OWNER reading as follows: "THIS VESSEL IS UNDER CHARTER TO FALCON DRILLING COMPANY, INC. UNDER THE TERMS OF SAID CHARTER, NEITHER THE CHARTERER, NOR ANY SUB-CHARTERER, NOR THE MASTER, NOR ANY OTHER PERSON HAS THE RIGHT, POWER OR AUTHORITY TO CREATE, INCUR OR PERMIT TO BE PLACED OR IMPOSED UPON THIS VESSEL ANY LIEN WHATSOEVER OTHER THAN LIENS FOR CREW'S WAGES, GENERAL AVERAGE AND SALVAGE." -31- 32 9. Mortgages; Financing. The CHARTERER hereby agrees that should the OWNER wish to mortgage the Vessel or assign this Charter in connection with any financing arrangements of the OWNER, the CHARTERER shall agree to post notices of the mortgage and the Charter as reasonably required, execute such documents acknowledging the terms and existence of the mortgage, and otherwise cooperate reasonably with the OWNER and any mortgagee in respect of such financing. Any such mortgage shall provide that the CHARTERER shall have the right of quiet enjoyment so long as no Event of Default has occurred under this Charter and that the Option contained in Section 18 below shall not be adversely effected by the mortgage or the acts of the mortgagee. Any reasonable costs and expenses associated with such activity will be borne by the OWNER. 10. Sale of Vessel During Charter. (a) OWNER shall have the right to sell the Vessel and assign the Charter at any time during the Charter Term; provided, however, that any such sale and assignment shall be subject to the continued effectiveness of this Charter, including, but not limited to the Option contained in Section 18 below. Upon such sale and assignment, if the CHARTERER consents to such sale and assignment, which consent shall not to be unreasonably withheld, the OWNER shall be relieved of all of its obligations under the Charter -32- 33 except for the indemnities provided for in Section 16(b) and Section 16(c)(ii) herein. (b) If the OWNER shall decide to sell the Vessel or to market the Vessel for possible sale, it shall give the CHARTERER written notice of such decision. The CHARTERER shall have the right, notwithstanding the provisions of Section 18 below, within ten (10) days of receipt of such notice to inform the OWNER in writing of its exercise of its Option under Section 18 below. (c) If the CHARTERER elects not to exercise its Option under Section 18 below after receiving the OWNER'S notice pursuant to Section 10(b) above, the CHARTERER shall have, in addition to its rights under Section 18 below, a right of first refusal as to any third party offer to purchase the Vessel received by the OWNER. The right of the CHARTERER to purchase the Vessel shall be on the same terms and conditions as contained in the third party offer and the CHARTERER shall exercise such right by written notice to the OWNER delivered within three (3) days of being notified in writing of the third party offer and its terms and conditions by the OWNER. 11. Representations and Warranties. (a) CHARTERER's Representations. The CHARTERER represents, warrants, covenants, and agrees to and with the OWNER that: (i) the CHARTERER is a corporation duly -33- 34 organized, validly existing, and in good standing under the laws of the State of Delaware, has the corporate power to own its property and assets, and is duly qualified in each jurisdiction where the nature of its operations requires such qualification; and (ii) the execution, delivery, and performance of this Charter are within the CHARTERER's power, have been duly authorized by all necessary corporate action, do not contravene the CHARTERER's articles or certificate of incorporation or bylaws, or similar documents, and do not contravene any law, any order of any court or other agency of government, or any agreement or instrument or contractual restriction binding on or affecting any of its property, or constitute a default thereunder. (b) OWNER's Representations. The OWNER represents, warrants, covenants, and agrees to and with the CHARTERER that (i) the OWNER is a limited partnership duly organized, validly existing, and in good standing under the laws of the State of California, has the legal power to own its property and assets, and is duly qualified in each jurisdiction where the nature of its operations requires such qualification; and (ii) the execution, delivery, and performance of this Charter are within the OWNER's power, have been duly authorized by all necessary partnership action, do not contravene the OWNER's certificate of limited partnership, and do -34- 35 not contravene any law, any order of any court or other agency of government, or any agreement or instrument or contractual restriction binding or affecting any of its property, or constitute a default thereunder. 12. Assignment; Sub-charter. (a) The CHARTERER does not have the right to, and shall not, assign, pledge, or hypothecate this Charter (by operation of law or otherwise), in whole or in part, or any interest herein, or any right, duty or obligation hereunder, or to sub-charter the Vessel (collectively, an "Assignment") without the prior written consent of the OWNER, and any purported Assignment without the OWNER's prior written consent shall be void and unenforceable against the OWNER. The CHARTERER shall remain primarily liable under this Charter in the event of any permitted Assignment, which will in no event be considered a novation of this Charter unless the OWNER expressly agrees to the contrary in writing. (b) Notwithstanding the foregoing: (i) the CHARTERER may sub-charter the Vessel without the necessity of obtaining the OWNER's consent provided physical, financial and operational control of the Vessel remains in the hands of the CHARTERER for the duration of the -35- 36 sub-charter, the sub-charter is subordinate to this Charter, and the sub-charterer executes an acknowledgement of the existence and priority of this Charter, in form and substance reasonably satisfactory to the OWNER and; (ii) the CHARTERER may sub-charter the Vessel to any entity wholly owned by the CHARTERER so long as the CHARTERER remains primarily liabile under this Charter. 13. Logo and Vessel Names. The OWNER agrees that the CHARTERER may display the CHARTERER's logo and the CHARTERER's designated name on the Vessel during the Charter Term. 14. Notices. All notices and other communications required under this Charter shall be by personal delivery or facsimile, confirmed in writing by letter, to each party at its address as it may declare from time to time pursuant to this notice provision. Any such notice or communication shall be deemed effective on the date of delivery, if by personal delivery, or on the next business day after transmission if by facsimile. OWNER: CHARTERER: Hyde Offshore Limited Partnership Falcon Drilling Company, Inc. One Market Plaza 1900 West Loop South Steuart Street Tower, Suite 800 Suite 1800 San Francisco, California 94105-1301 Houston, Texas 77027 Attn: Legal Department Attn: Steve A. Webster Tel: (415) 974-1399 Tel: (713) 623-8984 Fax: (415) 882-0861 Fax: (713) 623-8103 Telex: 34430 -36- 37 15. Defaults; Remedies. (a) Events of Default. Any one or more of the following is an Event of Default by the CHARTERER: (i) the CHARTERER shall fail to pay the whole or part of any Basic Charter Hire or Additional Hire specified in Section 3 hereof on the due date thereof, and the same shall continue for three (3) business days following the due date thereof; (ii) the CHARTERER shall fail to pay when due the whole or any part of the Insured Value of the Vessel when required by this Charter, and the same shall have continued for three (3) business days following the due date thereof; (iii) the CHARTERER shall fail to carry and maintain insurance on or with respect to the Vessel in accordance with the provisions of Section 7 hereof; (iv) the CHARTERER shall fail to perform or comply with any other covenant, condition, or agreement to be performed or observed by it hereunder and the CHARTERER shall fail to cure such failure to perform or comply within ten (10) business days -37- 38 after the OWNER shall have demanded in writing the cure thereof; (v) Any representation or warranty made by the CHARTERER herein shall prove to have been incorrect in any material respect as of the date on which made, or any statement, report, schedule, notice or other writing furnished by the CHARTERER to the OWNER in connection herewith shall prove to have been incorrect in any material respect as of the date on which the facts set forth therein are stated or certified, and the CHARTERER shall fail to cure such defect within five (5) business days after the OWNER shall have demanded in writing the cure thereof; (vi) the CHARTERER or any sub-charterer shall become insolvent or bankrupt or shall cease paying or providing for the payment of its debts generally; the CHARTERER or any sub- charterer shall be dissolved, shall be adjudged a bankrupt by a court of competent jurisdiction, shall make a general assignment for the benefit of its creditors, or shall lose its charter by forfeiture or otherwise; or a petition for an arrangement or for reorganization of the CHARTERER, FALCON or any sub-charterer under the bankruptcy laws of the relevant jurisdiction shall be filed by the -38- 39 CHARTERER, FALCON or such sub-charterer, or such petition shall be filed by creditors and the same shall be approved by a court of competent jurisdiction; and (vii) An arrangement or reorganization of the CHARTERER or any sub-charterer under the bankruptcy laws of the relevant jurisdiction shall be approved by a court, whether proposed by a creditor, a stockholder or any other party or person whatsoever; or a receiver or receivers of any kind whatsoever, whether appointed in admiralty, bankruptcy, common law or equity proceedings, shall be appointed by a decree of a court of competent jurisdiction with respect to the Vessel or all or substantially all of the property of the CHARTERER or any sub-charterer. (b) Remedies. At any time that an Event of Default has occurred and is continuing, the OWNER, by written notice to the CHARTERER, may declare the CHARTERER in default hereunder, in which case the OWNER shall be entitled to pursue all remedies available at law or in equity, including, without limitation, the following remedies: (i) By notice to the CHARTERER, the OWNER may terminate this Charter, whereupon the CHARTERER will re-deliver the Vessel to the OWNER with all -39- 40 reasonable dispatch and in accordance with all of the relevant provisions of Section 2; (ii) The OWNER may, after notice to the CHARTERER, re-take the Vessel wherever found, whether upon the high seas or at any port, harbor or other place and irrespective of whether the CHARTERER, any sub-charterer or any other person is in possession of the Vessel, all without prior demand and without legal process, the CHARTERER HEREBY WAIVING ANY AND ALL RIGHTS TO PRIOR NOTICE AND A JUDICIAL HEARING WITH RESPECT TO THE REPOSSESSION OF THE VESSEL BY THE OWNER, and for that purpose the OWNER or its agent may enter upon any dock, pier or other premises where the Vessel is and may take possession thereof, without the OWNER or its agent incurring any liability by reason of such re-taking, whether for the restoration of damage to property caused by such re-taking or for damages of any kind for any reason to the CHARTERER or any person claiming under the CHARTERER; (iii) The OWNER may sell or otherwise dispose of the Vessel at public auction or by private sale, without prior notice to the CHARTERER, at such time or times and upon such terms as the OWNER may determine, for cash or credit, at such price as -40- 41 the OWNER shall deem fair, with the Vessel in its then condition or following any commercially reasonable preparation, or otherwise dispose of, hold, use, operate, charter to others the Vessel, in a commercially reasonable manner, all free and clear of any rights of the CHARTER, including any right of redemption, and without any duty to account to the CHARTERER with respect to such action or inaction or for any proceeds with respect hereto; any disposition or holding of the Vessel shall not be deemed a retention by the OWNER in satisfaction of the CHARTERER's obligations under this Charter; and (iv) The OWNER may proceed by appropriate action for collection from the CHARTERER of all costs and expenses, including attorneys' fees, court costs, and other expenses, incurred by the OWNER in connection with the enforcement of this Charter and the exercise of remedies hereunder. Further, in addition to any other amounts to which the OWNER may be entitled, the CHARTERER shall be liable for all costs and expenses incurred by the OWNER, which shall include all insurance premiums, all demurrage, dockage, and anchorage charges, all legal fees, and all other costs and expenses whatsoever incurred by the OWNER by reason of the -41- 42 occurrence of an Event of Default or by reason of the exercise by the OWNER of any remedy hereunder, including, without limitation, any cost or expense incurred by the OWNER in connection with any re-taking of the Vessel. No remedy referred to in this Section 15(b) is intended to be exclusive, but each remedy shall be cumulative and in addition to, and may exercised concurrently with, any other remedy which is referred to herein or which may otherwise be available to the OWNER at law, in equity or in admiralty. 16. (a) CHARTERER's Indemnification of the OWNER. The CHARTERER hereby assumes liability for, and shall defend, indemnify and hold harmless the OWNER, its owners and affiliates and any mortgagee of the Vessel, and each of their respective successors and assigns, and the directors, officers, employees, representatives, agents and servants of any of the foregoing (collectively, the "Indemnified Parties") from and against any and all Claims (as hereinafter defined) which may be imposed on, incurred by or asserted against any of the Indemnified Parties or the Vessel (whether or not also indemnified against pursuant to any other agreement or by any other person), regardless of when asserted (whether before, after or during the Charter Term), in any way relating -42- 43 to or arising out of any of the following occurring during the Charter Term: the construction, documentation, registry, delivery, possession, ownership (as owner pro hac vice), use, operation, chartering, sub-chartering, condition, maintenance, repair, and return of the Vessel. Notwithstanding the foregoing, the CHARTERER shall not be obligated to indemnify the OWNER in respect of any act or omission constituting gross negligence or willful misconduct by the OWNER or its agents or representatives. The CHARTERER agrees to further indemnify, defend and hold harmless the OWNER and the Vessel from and against all liens created and imposed on the Vessel as a result of the CHARTERER's manning and operating the Vessel, and in the event of the seizure of the Vessel under legal process to enforce such lien or asserted lien, the CHARTERER shall secure the prompt release of the Vessel by payment of same or otherwise as may be appropriate. The OWNER's right to compensation provided for in Section 3 herein for the operation of the Vessel shall not be suspended during any time when the Vessel is under seizure by legal process as a result of such liens or asserted liens. As used herein, "Claims" shall mean any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses, fines, penalties and disbursements -43- 44 (including, without limitation, reasonable attorneys' fees, and investigatory fees and disbursements) of whatsoever kind and nature, including, without limitation, (i) claims or penalties arising from any violation of the laws or regulations of any authority or country or political subdivision thereof, (ii) claims as the result of latent, patent or other defects, whether or not discoverable by the OWNER or the CHARTERER, and (iii) tort claims of any kind, including, without limitation, claims for injury or damage caused by leakage, discharge or spillage of oil or cargo or refuse. (b) OWNER's Indemnification of the CHARTERER. The OWNER agrees to indemnify, defend, and hold harmless the CHARTERER from all damages or costs arising as a result of the gross negligence, violation of any law or regulation (the performance of which rests solely with the OWNER rather than the performance of the CHARTERER under the terms of this Charter), or willful misconduct of the OWNER, except to the extent such damages or costs are contributed to or caused by the CHARTERER. (c) Tax Indemnification. (i) The CHARTERER agrees to pay, and shall indemnify, protect, defend and hold harmless the OWNER from all sales taxes, use taxes, ad valorem taxes, governmental fees, duties, and dues of whatever -44- 45 nature, imposed, assessed, or levied on the Vessel during the Charter Term, and shall also be responsible for and pay any employment, payroll and other similar taxes arising from employment of its employees. Ad valorem taxes for any period that is not fully within the Charter Term shall be prorated and the OWNER shall be responsible for the portion thereof not allocable to the Charter Term. (ii) The OWNER shall be responsible for any customs duties levied on the Vessel or income taxes or similar charges on the net income of the OWNER levied against the OWNER or the Vessel by the United States or by the OWNER's country of registration, domicile or place of business or the country of registry of the Vessel. (d) The obligations of the OWNER and the CHARTERER under this Section 16 shall survive the expiration or earlier termination of this Charter in perpetuity and are expressly made for the benefit of, and shall be enforceable by, the party to which the obligations are owed, and its successors and assigns. (e) Except as otherwise limited herein, it is the intent of the parties hereto that all indemnity obligations or liabilities assumed by such parties under this Charter be without limit and without regard to the cause or -45- 46 causes thereof (including preexisting conditions), the unseaworthiness of any vessel, strict liability or the negligence of any party or parties, whether such negligence be sole, joint or concurrent, active or passive. (f) Consequential Damages. Neither party hereto shall be liable to the other party for any economic losses, or incidental, consequential or special damages, arising out of, resulting from or relating in any way to this Charter, irrespective of the negligence or fault of any party. 17. Arbitration. If any dispute arises between the parties with respect to this Charter which cannot be settled amicably by mutual agreement, such dispute shall be settled exclusively by arbitration in accordance with the rules of the Society of Maritime Arbitrators, Inc. (the "Rules") and this Section 17. In the event of such dispute, either party may serve notice of arbitration ("Notice of Arbitration") on the other party. Notwithstanding anything in Section 14 hereof to the contrary, a Notice of Arbitration shall only be sent by facsimile, confirmed by registered letter, postage prepaid, and shall be effective on receipt of or facsimile by the party to whom it is addressed. Proof of receipt of a facsimile shall be the answer back of the party to whom it is addressed on the facsimile confirmation page. The Notice of Arbitration shall be dated, shall name the arbitrator -46- 47 selected by such party and, without prejudice to any right under the Rules permitting subsequent modifications, shall specify the claims or issues which are to be subjected to arbitration. Within thirty (30) days of the effective date of the Notice of Arbitration, the other party shall appoint an arbitrator and notify the first party of the arbitrator so appointed. If such other party fails to appoint an arbitrator (who accepts such appointment) and notify the first party thereof within such thirty (30) day period, then the arbitrator appointed by the first party shall sit as a sole arbitrator and decide the matter with all the powers of the arbitration tribunal, and the party who fails to appoint an arbitrator shall cooperate fully with such arbitration, the award rendered or any subsequent enforcement thereof on the basis of the arbitration being conducted by and the award being rendered by a sole arbitrator. If the party receiving the Notice of Arbitration appoints an arbitrator (who accepts such appointment) within the foregoing thirty (30) day period, then within sixty (60) days of the effective date of the Notice of Arbitration the two arbitrators thus appointed shall appoint a third arbitrator, who shall serve as chairman of the arbitration panel. If the two arbitrators are unable to agree on the appointment of a third arbitrator within such period, such appointment shall be made by the President of the Society of Maritime Arbitrators, Inc. upon application by either party. The arbitration panel shall decide the matter -47- 48 as expeditiously as possible; however, no time limits shall be imposed. The arbitration shall be conducted in the English language in New York, New York, or at such other place or places as the parties may agree upon. Decisions of the arbitration panel shall be by majority vote. The costs and expenses of the arbitration panel, including, but not limited to, the costs and expenses of administration of the arbitration proceeding, shall be borne by the parties as determined by the arbitration panel or, failing such determination, shall be shared equally by the parties. The arbitration award shall be final, binding and not subject to appeal and shall be enforceable in any court of competent jurisdiction in any country. 18. Purchase Option. (a) The CHARTERER shall have the option (the "Option") to purchase the Vessel at any time during the Charter Term for the Purchase Price (as hereinafter defined) provided that (i) no Event of Default under Section 15 (a)(i) or (ii) of this Charter shall have occurred and be continuing, (ii) the CHARTERER shall have given the OWNER no less than sixty (60) days written notice (the "Option Notice") of its election to exercise the Option and (iii) the Purchase Price shall be increased by any amounts paid by the OWNER for Capital Expenditures pursuant to Section 6(d) above, as reduced by any Capital Payments paid by the CHARTERER to the OWNER pursuant to Section 6(d). The Option Notice shall specify the date on which the CHARTERER intends -48- 49 to purchase the Vessel pursuant to its exercise of the Option, which date shall be no less than thirty (30) days nor more than ninety (90) days after the Option Notice is received by the OWNER (the "Effective Date"). Notwithstanding the foregoing, the CHARTERER may revoke any Option Notice at any time prior to ten (10) days prior to the Effective Date without affecting the CHARTERER's rights hereunder to exercise the Option. The sale of the Vessel pursuant to the Option shall be on an "AS IS, WHERE IS" basis and substantially in the form of the Memorandum of Agreement attached hereto as Exhibit 2 and incorporated herein by reference. As used herein, and subject to an increase in amount based on any Capital Expenditure pursuant to Section 6(d) hereof, the "Purchase Price" shall mean the following: (i) USD 21,500,000, if the Effective Date is within the first twelve (12) months of the Charter Term; (ii) USD 22,500,000, if the Effective Date is within the second twelve (12) months of the Charter Term; or (iii) USD 23,000,000, if the Effective Date is within the third twelve (12) months of the Charter Term or the Option is exercised pursuant to any extension under Section 2(d)(ii) above. (b) Upon any sale of the Vessel by the OWNER to the CHARTERER at any time during the Charter Term, the OWNER shall refund to the CHARTERER any Basic Charter Hire paid by the CHARTERER to the OWNER attributable to the period after the date -49- 50 of such sale. 19. Governing Law. This Charter will be governed by and interpreted in accordance with the general maritime laws of the United States of America and, to the extent they are not applicable, the internal laws of the State of New York. 20. Waiver. No waiver by either party of any breach by the other of any obligation, agreement or covenant hereunder shall be deemed to be a waiver of that or any subsequent breach of the same or any other covenant, agreement or obligation nor shall any forbearance by any party to seek a remedy for any breach by the other party may deemed a waiver by such party of its rights or remedies with respect to such breach, unless such waiver is in each case in writing duly executed by such party. 21. Entire Agreement; Amendment. This Charter and its exhibits constitute the entire agreement between the parties hereto relating to the subject matter hereof and supersedes all prior agreements and undertakings of the parties hereto, whether oral or written, in connection herewith. No amendment of this Charter shall be valid unless made in writing and signed by each of the parties hereto. 22. Counterparts. This Charter may be executed in counterparts, in which event all executed counterparts will be treated as an original hereof. 23. Severability. The OWNER and the CHARTERER agree that with respect to any specific provision of this Charter that is -50- 51 held by any court or other constituted legal authority to be void or otherwise unenforceable in any particular manner, the parties hereto consider and permit this Charter to be amended in such manner as may be required in order to cause said provision and all other terms of this Charter to remain binding and enforceable against the OWNER and the CHARTERER. 24. Captions. The captions in this Charter are for convenience and reference only and shall not define or limit any of the terms or provisions, or otherwise affect the construction, hereof. 25. Binding Effect. Subject to Section 12 hereof, this Charter shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties have executed this Charter as of the date first written above. OWNER HYDE OFFSHORE LIMITED PARTNERSHIP By:Hyde Offshore, Inc., Its General Partner By: /s/ ROBERT A. CAREY --------------------------------------- Name: Robert A. Carey ------------------------------------- Title: Vice President ------------------------------------ CHARTERER FALCON DRILLING COMPANY, INC. By: /s/ LEIGHTON E. MOSS --------------------------------------- Name: Leighton E. Moss ------------------------------------ Title: Vice President ----------------------------------- -51- EX-21 7 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF FALCON DRILLING COMPANY, INC. Double Eagle Marine, Inc. (Louisiana) Eilert-Olsen Investments, Inc. (Texas) Falcon Drilling Management, Inc. (Delaware) Falcon Inland, Inc. (Delaware) Falcon Offshore, Inc. (Delaware) Falcon Services Company, Inc. (Delaware) (Also d/b/a Falcon Drilling Company) Falcon Workover Company, Inc. (Delaware) (Also d/b/a Blake Workover & Drilling Company) Falcon Drilling Holdings, L.P. (Delaware) Falcon Drilling De Venezuela, Inc. (Delaware) Falcon Atlantic Ltd. (Cayman Islands) Falcon Drilling (S.E.A.) Pte. Ltd. (Singapore) Falcon Drilling Do Brasil, Ltda. (Brazil) Falrig Offshore (USA), L.P. (Delaware) Falrig Offshore Partners (Texas) Falrig Offshore, Inc. (Delaware) Kestrel Offshore, Inc. (Delaware) Perforaciones Falrig De Venezuela C.A. (Venezuela) Raptor Exploration Co., Inc. (Delaware) EX-23 8 CONSENT OF ARTHUR ANDERSEN L.L.P. 1 EXHIBIT 23 As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into Falcon Drilling Company's previously filed Registration Statement on Form S-8 filed September 29, 1995 (Registration No. 33-97546). ARTHUR ANDERSEN LLP March 27, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 - FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 85,050 0 73,062 (1,471) 0 166,574 526,828 (58,866) 652,042 57,062 295,051 0 0 393 273,355 652,042 0 319,341 0 245,806 (1,913) 0 23,894 51,554 19,075 32,479 0 0 0 32,479 .90 .90
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