Fill and Sign the Exchange Agreement and Increase in Authorized Common Stock Form

EXCHANGE AGREEMENT AND INCREASE IN AUTHORIZED COMMON STOCK On February 24,1987 the Company entered into an Exchange Agreement (the "Agreement") with NAI pursuant to which the Company would issue 5,112,782 shares of Common Stock to NAI in exchange for the cancellation of the Company's outstanding indebtedness to NAL The Agreement also provides that NAI will declare and pay a dividend of such shares to NAI’s shareholders. The issuance of the shares of Comm on Stock to NAI in exchange for the cancellation of the Company's debt to NAI and the dividend of such shares to the NAI shareholders are collectively referred to herein as the "Exchange." The Company would be issuing substantially all of its authorized and unissued shares of Common Stock to NAI in connection with the Exchange. The Board of Directors has approved and recommends t hat the shareholders approve, in connection with and as a part of the proposal to approve the Exchange , a proposal to amend the Certificate of Incorporation of the Company (the "Capital Amendment") to i ncrease the number of authorized shares of Common Stock by 5,000,000. The Capital Amendment would allow the Company to consummate the Exchange and to maintain for future purposes approximately the same num ber of authorized and unissued shares of Common Stock that exists at the present time. The Exchange is conditioned upon, among other things, shareholder approval by both the Company and NAL Approval of the Capital Amendment is a requisite part of the approval of the Exchange by the shareholders of the Company. The Board of Directors has unanimously approved the Exchange and the Capital Amendment as described in this proxy statement and recommends the Exchange and the Capital Amendment for approval by the shareholders of the Company. History of Indebtedness to NAL In connection with the spinoff of the Company by NAI effective October 1, 1985, the Company and NAI entered into a note agreement pursuant to which the Company issued its note in the original principal amount of $25,000,000 (the "Note") to NAI in settlement of certain the n existing advances from NAI to the Company. An additional $17,284,000 of intercompany advances in excess of $25,000,000 was forgiven by NAI as a contribution to the Company's capital. The Note provided for quarterly paym ents of principal and interest, with interest accruing on the unpaid principal amount at a rate equal to the greater of NAI's cost of funds or the prime lending rate (10.6 percent at December 31, 1985 and 10.7 percent at Se ptember 30, 1986). Repayment of the indebtedness represented by the Note (the "Indebtedness") was secured by first liens in favor of NAI on each of the Company's two deep water jackup rigs, the "Ed Holt " and the "Sam Noble" (the "Collateral"). The Company made its scheduled quarterly payments of principal and interest under the Not e through September 30, 1986. As a result of the Company's cash flow difficulties caused by the substantial ly depressed level of contract drilling revenues experienced in 1986, the Company approached NAI in late December 1986 with a proposal to restructure the Indebtedness. At December 31, 1986, principal of $24,500,000 and accrued interest from October 1 through December 31, 1986 of $656,000 were outstanding under the Note. The Company determined not to make the principal payment of $500,000, and paid only $100,000 of the a ccrued interest, due on January 1, 1987, and sought NA.I's waiver of such nonpayment pending the negotiations to restructure the Indebtedness. NAI granted a waiver without relinquishing any of its rights under the note agreement. On February 6, 1987, the Company and NAI entered into a letter agreement dated February 4, 1987 providing for the restructuring of the Indebtedness. Under the terms of the restructured note agreeme nt, the scheduled quarterly principal payments of $500,000 were deferred until March 31, 1988, the scheduled quarterly interest payments from January 1, 1987 through March 31, 1988 were reduced to $100,000 per quarter, and past due interest through January 1, 1987 of approximately $556,000 was forgiven by NAL The Company agreed to make additional principal payments in amounts equal to 50 percent of positive cash flow, if any, from 1987 operations in excess of $1,000,000, and 50 percent of any net cash proceeds from the sale of drilling equipment. The Company also agreed not to grant liens on its unencumbered asset s. In addition, the Note was reformed to reflect the parties' original intention that NAI could look for sat isfaction of the Note only to the Collateral, and not to the general credit of the Company. After March 31, 1988, the original quarterly principal payments of $500,000, together with accrued interest at a rate equal to the greater of NAI's cost of funds or the prime lending rate, will be resumed. During the negotiations to restructure the Indebtedness, the Company and NAI discussed the possibility of a transaction whereby the Company would issue shares of Common Stock to NAI in exchange for cance llation of the Indebtedness. In the February 4, 1987 letter agreement referred to above, the Company and NAI agreed to actively pursue efforts to enter into a definitive agreement providing for such an excha nge. The resulting negotiations culminated in the Agreement which is described below. Although the parties had agreed to pursue efforts to enter into such an exchange transaction, their agreement to restructure the Indebtedness was not dependent upon their achieving such result, and accordingly, the terms of the restructured Note a nd note agreement are unaffected by the proposed Exchange. If the Exchange is not consummated for any reason, the restructured Note and note agreement will remain in effect under the respective terms thereof. "I Negotiation of the Terms of the Restructured Indebtedness and the Exchange Transaction. T he terms of the restructured Indebtedness and of the Exchange are the result of negotiations between the repre sentatives of the Company and NAL Sam Noble and John F. Snodgrass are each directors of both the Company and NAI. T here is no officer of the Company who is also an officer of NAL Due to their positions, Messrs. Noble a nd Snodgrass did not vote as directors when either the restructured Indebtedness or the Agreement was presented to the respective Boards of Directors for approval. The Company believes that all negotiations relating to the restructuring of the Indebtedness and the Exchange were conducted on an arm's-length basis. Terms of the Exchange Transaction. On February 24, 1987 the Company and NAI entered into the Agreement pursuant to which the Company would issue 5,112,782 shares of authorized and unissued Common Stock (the "Shares") to NAI in exchange for the Note and cancellation of the Indebtedness. The Shares to be issued upon consummation of the Exchange would constitute approximately 31.1 percent of the Company's then outstanding Common Stock. Based upon negotiations between the Company and NAI, the fair market value of the Note was valued at $17,000,000. This amount was determined principally by evaluating the market value of the Col lateral. The Collateral was purchased by the Company in 1981 and 1982 at a total cost of approximate ly $93 million, and had a book value at December 31, 1986 of approximately $48 million. However, the market val ue of drilling equipment, such as the Collateral, has recently decreased substantially due t o the precipitous decline in drilling activity. The Company has substantial expertise, gained through over 65 years of experienc e in the contract drilling industry, in valuing drilling equipment. On the basis of such expertise and its bel ief that a near-term significant improvement in the drilling industry is not likely, the Board determined that $17,000,000 was a reasonable fair market value for the Collateral. Consideration was given by the Boa rd to obtaining independent appraisals of the Collateral and/or an investment bankers' "fairness" opinion. The Board dete rmined, however, that the cost of obtaining such an appraisal and/or opinion was not justified in light of the Company's expertise and industry experience. The major factors considered by the Board in determining the fair market value of the Collateral were the quality and condition of the Collateral, the current marke t values of comparable equipment and the belief that the depressed industry has reached the bottom of the cycle and, accordingly, that the market values of drilling equipment are not likely to materially deteriorate further in the short-term. The number of the Shares to be issued was determined by dividing the $17,000,000 amount by the market value of a share of Common Stock. The market value of the Common Stock for such purpose was ca lculated by averaging the last sale price of Common Stock, as reported on the NASDAQ National Market Syste m, for the 15 consecutive trading days preceding February 24, 1987, the date of execution of the Agreement. The average price as calculated was $3.325. THE CLOSING SALE PRICE OF THE COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET SYSTEM ON APRIL 10, 1987 WAS $4.00. The Agreement provides that NAI will declare and pay a dividend of the Shares to NAI's share holders. The record date and the payment date for such dividend will be set by NAI following satisfacti on of the conditions specified in the Agreement. The Company will issue and deliver the Shares to NAI on the payment date for the dividend in consideration of the tender by NAI of the Note to the Company and the cancel lation of the Indebtedness. In connection with the cancellation of the Indebtedness, NAI will release its first lien on the Collateral and the restructured note agreement will terminate. Consummation of the Exchange is subject to satisfaction of various conditions, including the correctness of representations and receipt of opinions of counsel, as well as approval of the Exchange and the Capital Amendment by the shareholders of the Company at the 1987 annual meeting and approval of the Exchange by NAI shareholders at their annual meeting. In addition, NAI must obtain the consent of the lenders under its bank credit agreement. The Agreement will terminate if the Exchange has not occurred on or before August 30, 1987. The Code provides generally that a corporation that issues stock to cancel its debt i s to be treated as if it had paid the debt with cash in an amount equal to the fair market value of the st ock. Such corporation would recognize income in the amount of the excess, if any, of the outstanding balance of t he debt over the fair market value of the stock at the date of its issuance. The Company anticipates that any income recognized by the Company as a result of the Exchange should be offset by either the anticipated operat ing loss for the current year or the net operating loss carryforward from previous years. Amendment to Certificate of Incorporation. The Company presently has authorized capita l consisting of 5,000,000 shares of Preferred Stock, par value $1.00 per share ("Preferred Stock"), and 20,000,000 shares of Common Stock. At February 24, 1987, no shares of Preferred Stock had been issued, 11,287,093 shares of Common Stock were issued and outstanding, 3,198,742 shares of Common Stock were reserved for issuance under the 1985 Plan and 5,514,165 shares of Common Stock were unissued. The terms of the Agreement provide for the Company to issue 5,112,782 shares of Common Stock to NAI in exchange for the cancell ation of the Indebtedness. Accordingly, the Company would be issuing substantially all of its authorize d and unissued Common Stock to consummate the Exchange. As a requisite part of the approval of the Excha nge by the shareholders of the Company, the shareholders must also approve the Capital Amendment which wi ll increase the authorized shares of Common Stock by 5,000,000. The proposal to approve the Exchange and the Capi tal Amendment is presented to the shareholders as a single proposal. If the proposal is approved by sha reholders of the Company, but the Exchange is not consummated for any reason, the Capital Amendment will not be effected. Reasons for the Exchange and Capital Amendment. The currently depressed market for contract drilling services has had a severe adverse impact on the ability of the Company to generate cash flows sufficient to make the originally scheduled payments of principal and interest under the Note. The Company's revenues of $71.6 million for 1985 declined to $35.8 million for 1986, representing a 50 percent decrease. Gross profit margins declined from 23 percent in 1985 to 14 percent in 1986, principally as a result of decre asing rates for contract drilling services. Working capital provided by operations decreased $9.2 million from 1985 to 1986. The Company's average rig utilization rate decreased from 50 percent for 1985 to 26 perc ent for 1986. The impact on the Company's operations of the substantially worsened industry conditions experie nced in 1986 severely impaired the ability of the Company to generate the cash flow necessary to service the Indebtedness, and led to the restructuring of the Indebtedness in February 1987. Although management of the Company believes that the depressed industry conditions have rea ched the bottom of the cycle, there are no current indications that the demand for contract drilling ser-vices will increase significantly in the near future. For this reason, the Board of Directors believes that t he Company will be more likely to withstand the current industry conditions, and can emerge as a financially stronger company when the industry conditions improve, if the burden of the Indebtedness is removed. Cancellation of the Indebt edness in exchange for the issuance of the Shares will relieve the Company of all of its long-term debt obligations except for those under the United States Government Guaranteed Ship Financing Sinking Fund Bonds (approximatel y $3,084,000 of which was outstanding at December 31, 1986). As described above, the Company will issue 5,112,782 shares of Common Stock with a value of $17,000,000 (based upon the value calculated in accordance with the Agreement of $3.325 per share) in exchange for the cancellation of the Indebtedness. (The aggregate market value of the Sha res on the date of issuance thereof could be greater than or less than $17,000,000.) The outstanding principal amount of the restructured Note at February 24, 1987 was $24,500,000. Based upon the negotiations between the Company and NAI, and the Company's evaluation of the Collateral using its substantial expertise and experience in the contract drilling industry, the Board of Directors of the Company has determined that the terms of the Exchange are fair and reasonable to the Company. Since NAI will distribute the Shares as a dividend to its shareholders, the effect of the consummation of the Exchange will be to cause an immediate decrease in the individual ownership int erest of those shareholders of the Company who have a smaller proportionate ownership interest in NAI than in the Company. The proportionate ownership interest of a Company shareholder who has the same proportionate ownership inte rest in NAI will not be decreased as a result of the Exchange. The following tables ill ustrate the percentages of the Company's Common Stock that WW be held by (i) the existing shareholders of the Company, aft er consummation of the Exchange, assuming such shareholders have no ownership interest in the common stoc k of NAI and (ii) by an existing shareholder of the Company, after consummation of the Exchange , assuming various ownership interests of such shareholder in the common stock of NAI Shares Percent of Outstanding Total Shares Existing Company Shareholders 11,324,8130 68.9% Consummation of Exchange 5,112,782 31.1% Total 16,437,595 100.0% On March 9, 1987. Proportionate Ownership of Noble Drilling Corporation After Consummation of the Exchange Assuming the Indicated Ownership of NAI 0% 1% 5% 7.5% (no shares) (437-%* shs.) (2,186,545 shs.) (3,279,817 shs.) of NAI** of NAI** of NAI** of NAI** Existing proportionate ownership of Noble Drilling Corporation (and number of shares. 1% (113,248 shs.) 0.69% 1.00% 2.24% 3.02% 5% (566,240 shs,) 3.45% 3.76% 5.00% 5.78% 7.5% (849,360 shs.) 5.17% 5.48% 6.72% 7.50% *Based on 11,324,813 shares of the Company outstanding on March 9, 1987. **Based on 43,730,901 shares of NAI outstanding on March 3, 1987.It is possible that the issuance of the additional Shares will cause the market va lue per share of Common Stock to decrease. However, since the Company is receiving, in its opinion, fair value for the issuance of the Shares, represented by the cancellation of the Indebtedness, the Company does not believe c onsummation of the Exchange will have a material adverse impact on the market value of its Common Stock. There will be a decrease as a result of the Exchange of the proportionate ownership interest of a shareholder of the Company who has a smaller proportionate ownership interest in NAI than in the Company. Also as a result of the Exchange, the Company's shareholders' equity account will increase by an amount equal to the outstanding balance of the cancelled Indebtedness reduced by related federal income taxes, if any. At Decembe r 31, 1986, book value per share of Common Stock computed by dividing shareholders' equity by the number of outstanding shares of Common Stock, was $6.28 per share. Book value per share of Common Stock after the Exchange, taking into account the increase in the number of shares of Common Stock outstanding and the increase in shareholders' equity, would be $5.66 per share, which represents a 9.9 percent decrease. In assessing the fairness and reasonableness of the Exchange, the Board considered all alte rnatives believed to be relevant, including (i) the refinancing of the Indebtedness through the public debt m arket or private bank financing and (ii) permitting NAI to foreclose on the Collateral. Due to the depressed state of the contract drilling industry, however, the Company was unable to pursue a refinancing alternative. Furt hermore, a refinancing of the Indebtedness would not provide the short term cash flow relief obtainable as a result of the Exchange unless such a refinancing included a significant deferral of debt service. The Company anticipates that, when industry conditions improve, the recovery will occur initially in the Gul f and be led by an improving market for jackup drilling rigs, such as the Collateral. In addition, the expansion of the Company's capability in the Gulf has been a stated Company goal. Accordingly, the Board of Directors considered the alternative of foreclosure on the Collateral as unacceptable. The Capital Amendment will allow the Company to issue the Shares while mainta ining for future purposes approximately the same number of authorized and unissued shares of Common Stock that existe d prior to the Exchange. The Board of Directors has no present plans for issuing any of such shares of authorized and unissued Common Stock, but believes that the Company should have the flexibility to i ssue any number of such shares if attractive opportunities arise in the future. The provisions providing for the issuanc e of Preferred Stock would remain unchanged. The Board of Directors believes that the Exchange and the related Capital Amendment are in the best interests of the Corporation and its shareholders as it provides the Company with significant cash flow relief which will enable it to better withstand the current and anticipated depre ssed industry conditions. The directors of the Company to be elected at the meeting on May 5, 1987 and each other direct or of the Company do not have any substantial personal interest in the approval of the Exchange and the relate d Capital Amendment by shareholders. Required Affirmative Vote. The affirmative vote of the holders of a majority of the sha res of Common Stock present and voting on the approval of the Exchange and the Capital Amendment at the meeting is required to approve the Exchange and the Capital Amendment. The Exchange and the Ca pital Amendment will not be consummated unless, among other things, they are approved by the requisite vote of share holders of the Company. The Board of Directors has unanimously approved the Exchange and the Capital Amendment and recommends that shareholders vote FOR such proposal. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OFNOBLE DRILLING CORPORATION The following unaudited pro forma consolidated balance sheet at December 31, 1986, and pro forma consolidated statement of operations for the year-then ended, reflect the financial posit ion and operations, respectively, of the Company, after giving effect to the Exchange, as described in the notes hereto. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements of the Company and related notes thereto incorporated herein by reference. See "Incorporation of Annual Report." The pro forma consolidated statement of operations is not necessarily indicative of the future results of operations of the Company. NOBLE DRILLING CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET December 31, 1986 (in thousands of dollars) ASSETS Pro Forma Adjustments Historical Note I Pro Forma Current assets $ 12,361 12,361 Property and equipment, net 103,205 103,205 Other assets 61 61 Total assets $115,627 $115,627 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 4,722 $ (656) (a) $ 4,066 Long-term debt 27,328 (24,500) (a) 2,828 Deferred income taxes 11,878 3,262 (b) 15,140 Other liabilities 775 775 Total liabilities 44,703 (21,894) 22,809 25,156 (a) Shareholders' equity 70,924 (3,262) (b) 92,818 Total liabilities and shareholders' equity $115,627 $115,627 NOTE TO PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited) December 31, 1986 NOTE 1 The "Pro Forma Adjustments" are as follows and assume the Exchange had occurred as of December 31, 1986: (a) The assumed discharge of $24,50,000 of the note payable to NAI and accrued interest of $656,000 thereon in exchange for Common Stock. (b) The deferred tax effect of the tax gain on the Exchange. NOBLE DRILLING CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 1986 (in thousands, except per share amounts) Pro Forms Adjustments Historical Note I Pro Forma Revenues $ 35,837 $ 35,837 Costs and expenses 117,842 $ (2,651) (a) 115,191Loss before income taxes (82,005) (2,651) (79,354) Income tax benefit 38,050 (1,230) (b) 36,820 Net loss $(43,955) $(1,421) $(42,534) Net loss per share of common stock $(3.90) $(2.59) Weighted average shares outstanding 11,283 16,395 NOTE TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For the Year Ended December 31, 1986 NOTE I The "Pro Forma Adjustments" are as follows and assume the Exchange had occurred as of January 1, 1986:(a) Interest expense associated with the NAI note at a variable rate of interest (10.67% for 1986) assumed to be forgiven in connection with the Exchange. (b) The adjustment in the provision for income taxes to reflect the tax effect of the pro forma adjustment. CAPITALIZATION OF NOBLE DRILLING CORPORATIONDecember 31, 1986 (in thousands of dollars) The following table sets forth as of December 31, 1986 the capitalization of the Company and the pro forma capitalization of the Company after giving effect to the Exchange as descri bed in the notes below. This data should be read in conjunction with the historical consolidated financial statements and the related notes thereto of the Company incorporated herein by reference and the unaudited pro forma consoli dated financial statements and the related notes thereto of the Company included el sewhere herein. See "Incorporation of Annual Report" and "Unaudited Pro Forma Consolidated Financial Statements of Noble Drilli ng Corporation." Pro Forma Historical Adjustments (1) Pro Forma Short-term debt, consisting of current installments of long-term debt(2) $ 256 $ 256 Long-term debt (2): Note payable to NAL due in various installments through 1990 $24,500 $ (24,500) (a) U.S. Government Guaranteed Ship Financing Sinking Fund Bonds with interest at 8.60% to 8.95% maturing serially from 1983 to 1998 3,084 $ 3,084 Total long-term debt excluding current installments 27,584 (24,500) 3,084 Shareholders' equity: Preferred stock - par value $1; 5,000,000 shares authorized, none issued Common stock - par value $1; 20,000,000 shares authorized, 11,287,093 issued and outstanding, historical, 16,399,875 issued and outstanding, pro forma(3) 11,287 5,113 (a) 16,400 Capital in excess of par value 17,313 16,781 (a) 34,094 Retained earnings 42,324 42,324 Total shareholders' equity 70,924 21,894 92,818 Total capitalization $98,508 $(2,606) $95,902 Shareholders' equity per share(4) $ 6.28 $ 5.66 (1) The "Pro Forma Adjustments" are as follows and assume the Exchange had occurred as of December 31, 1986: (a) The assumed discharge of $24,500,000 of the note payable to NAI and accrued interest of $656,000 thereon in exchange for Common Stock. (2) Reference is made to the historical consolidated financial statements of the Company and Note 4 there to for information concerning current and long-term debt. (3) The Board of Directors has proposed that the authorized shares of Common Stock be increased to 25,000,000. See "Exchange Agreement and Increase in Authorized Common Stock." (4) The historical per share amount was computed using 11,287,093 shares and the pro forma per share amount was computed using 16,399,875 shares. Noble Drilling Corporation 4/16/87