SECURITIES AND EXCHANGE COMMISSION
UNITED STATES
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35345
PACIFIC DRILLING S.A.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Luxembourg
(Jurisdiction of incorporation or organization)
8-10, Avenue de la Gare
L-1610 Luxembourg
(Address of principal executive offices)
Lisa Manget Buchanan
Senior Vice President, General Counsel and Secretary
11700 Katy Freeway, Suite 175
Houston, Texas 77079
Phone (832) 255-0519
Fax (832) 201-9883
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Common shares, $0.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2018, there were 75,031,380 shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes ☒ No ☐
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
B. CAPITALIZATION AND INDEBTEDNESS
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
D. RISK FACTORS
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
B. BUSINESS OVERVIEW
C. ORGANIZATIONAL STRUCTURE
D. PROPERTY, PLANT AND EQUIPMENT
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
B. LIQUIDITY AND CAPITAL RESOURCES
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
D. TREND INFORMATION
E. OFF-BALANCE SHEET ARRANGEMENTS
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
G. SAFE HARBOR
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
B. COMPENSATION
C. BOARD PRACTICES
D. EMPLOYEES
E. SHARE OWNERSHIP
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
B. RELATED PARTY TRANSACTIONS
C. INTERESTS OF EXPERTS AND COUNSEL
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
B. SIGNIFICANT CHANGES
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
B. PLAN OF DISTRIBUTION
C. MARKETS
D. SELLING SHAREHOLDERS
E. DILUTION
F. EXPENSES OF THE ISSUE
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
C. MATERIAL CONTRACTS
D. EXCHANGE CONTROLS
E. TAXATION
F. DIVIDENDS AND PAYING AGENTS
G. STATEMENT BY EXPERTS
H. DOCUMENTS ON DISPLAY
I. SUBSIDIARY INFORMATION
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
B. WARRANTS AND RIGHTS
C. OTHER SECURITIES
D. AMERICAN DEPOSITORY SHARES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this annual report constitute “forward-looking statements” within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are generally identifiable by their use of words
such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “our ability to,” “may,” “plan,” “potential,” “predict,”
“project,” “projected,” “should,” “will,” “would,” or other similar words which are not generally historical in nature. The forward-
looking statements speak only as of the date of this annual report, and we undertake no obligation to publicly update or revise any
forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
Our forward-looking statements express our current expectations or forecasts of possible future results or events, including future
financial and operational performance and cash balances; future revenue efficiency levels; market outlook; forecasts of trends; future
client contract opportunities; future contract dayrates; our business strategies and plans or objectives of management; estimated duration
of client contracts; backlog; expected capital expenditures; projected costs and savings; and the potential impact of our completed
Chapter 11 bankruptcy proceedings on our future operations and ability to finance our business.
Although we believe that the assumptions and expectations reflected in our forward-looking statements are reasonable and made in
good faith, these statements are not guarantees, and actual future results may differ materially due to a variety of factors. These
statements are subject to a number of risks and uncertainties and are based on a number of judgments and assumptions as of the date such
statements are made about future events, many of which are beyond our control. Actual events and results may differ materially from
those anticipated, estimated, projected or implied by us in such statements due to a variety of factors, including if one or more of these
risks or uncertainties materialize, or if our underlying assumptions prove incorrect.
Important factors that could cause actual results to differ materially from our expectations include:
·
·
·
·
·
·
·
·
·
·
changes in actual and forecasted worldwide oil and gas supply and demand and prices, and the related impact on demand for
our services;
the offshore drilling market, including changes in capital expenditures by our clients;
rig availability and supply of, and demand for, high-specification drillships and other drilling rigs competing with our fleet;
our ability to enter into and negotiate favorable terms for new drilling contracts or extensions of existing drilling contracts;
our ability to successfully negotiate and consummate definitive contracts and satisfy other customary conditions with respect to
letters of intent and letters of award that we receive for our drillships;
possible cancellation, renegotiation, termination or suspension of drilling contracts as a result of mechanical difficulties,
performance, market changes or other reasons;
costs related to stacking of rigs and costs to mobilize a stacked rig;
our small fleet and reliance on a limited number of clients;
our ability to maintain relationships with suppliers, clients, other third parties and employees following our emergence from
Chapter 11 bankruptcy proceedings; and
the other risk factors described under the heading “Risk Factors” in Item 3.D. of this annual report.
All forward-looking statements in this annual report are expressly qualified in their entirety by the cautionary statements in this
section and the “Risk Factors” section herein. Additional factors or risks that we currently deem immaterial, that are not presently known
to us, that arise in the future or that are not specific to us could also cause our actual results to differ materially from our expected results.
Given these uncertainties, you are cautioned not to unduly rely on our forward-looking statements, which speak only as of the date made.
We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or
developments, changed circumstances or otherwise. Further, we may make changes to our business strategies and plans at any time and
without
4
notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could materially affect our results.
PART I
As used in this annual report, unless the context otherwise requires, references to “Pacific Drilling,” the “Company,” “we,” “us,”
“our” and words of similar import refer to Pacific Drilling S.A. and its subsidiaries. Unless otherwise indicated, all references to “U.S. $”
and “$” in this report are to, and amounts are represented in, United States dollars.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
Background
–
Emergence
from
Bankruptcy
Proceedings
By order entered on November 2, 2018 (the “Confirmation Order”), the United States Bankruptcy Court for the Southern District
of New York (the “Bankruptcy Court”) confirmed the Company’s Modified Fourth Amended Joint Plan of Reorganization, dated
October 31, 2018 (the “Plan”) that had been filed with the Bankruptcy Court in connection with the filing by the Company and certain of
its subsidiaries (the “Initial Debtors”) of petitions (the “Bankruptcy Petitions”) on November 12, 2017 (the “Petition Date”) with the
Bankruptcy Court seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). During the course of
the bankruptcy proceedings, the Initial Debtors continued to operate their businesses as debtors-in-possession. On November 19, 2018
(the “Plan Effective Date”), the Company and the Initial Debtors other than the Zonda Debtors (described below) (the “Debtors”)
emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan.
The Company’s two subsidiaries involved in the arbitration with Samsung Heavy Industries Co. Ltd. (“SHI”) related to the Pacific
Zonda
– Pacific Drilling VIII Limited (“PDVIII”) and Pacific Drilling Services, Inc. (“PDSI” and, together with PDVIII, the “Zonda
Debtors”) – are not Debtors under the Plan and filed a separate plan of reorganization that was confirmed by order of the Bankruptcy
Court on January 30, 2019. On the date the plan was confirmed, the Zonda Debtors had $4.6 million in cash and no other material assets
after accounting for post-petition administrative expenses (other than the value of their claims against SHI) for SHI to recover against on
account of its claims. The Company expects that the Zonda Debtors will emerge from their separate bankruptcy proceedings after the
successful resolution of the arbitration related to the vessel known as the Pacific
Zonda
. If the Company is unsuccessful in the
arbitration, the Company expects to liquidate the Zonda Debtors. For additional information, see Item 4.A. “History and Development of
the Company – Zonda Arbitration.”
Prior to our emergence from bankruptcy on November 19, 2018, we had approximately $3.0 billion principal amount of pre-
petition indebtedness consisting of amounts outstanding under a 2013 senior secured revolving credit facility (the “2013 Revolving Credit
Facility”), a senior secured credit facility (the “SSCF”), a 2018 senior secured institutional term loan facility (the “Term Loan B,”), 2017
senior secured notes (the “2017 Notes”) and 2020 senior secured notes (the “2020 Notes”), plus an additional $50 million in post-petition
debtor-in-possession financing. One shareholder, Quantum Pacific Gibraltar Ltd (“QP”), owned approximately 70.3% of our outstanding
common shares.
Pursuant to the Plan, we raised approximately $1.5 billion in new capital, before expenses, consisting of approximately $1.0
billion raised through issuance of our 8.375% First Lien Notes due 2023 (the “First Lien Notes”) and 11.0%/12.0% Second Lien PIK
Notes due 2024 (the “Second Lien PIK Notes” and, together with the First Lien Notes, the “Notes”), and $500.0 million raised through
the issuance of new common shares pursuant to a private placement to QP and a separate equity rights offering. We used the net
proceeds to repay all of our pre-petition indebtedness that was
5
not equitized pursuant to the Plan, to repay the post-petition debtor-in-possession financing, and to pay certain fees and expenses. As a
result of these transactions, we believe that on as of March 1, 2019, QP owned approximately 5.1% of our outstanding common shares
and seven institutional investors (primarily QP and former holders of our Term Loan B, 2017 Notes and 2020 Notes extinguished
pursuant to the Plan) owned in the aggregate approximately 85.7% of our outstanding common shares.
More specifically, upon emergence of the Company from bankruptcy on November 19, 2018 in accordance with the Plan:
·
The Company’s pre-petition 2013 Revolving Credit Facility and SSCF and post-petition debtor-in-possession financing were
repaid in full;
· Holders of the Company’s pre-petition Term Loan B, 2017 Notes and 2020 Notes received an aggregate of 24,416,442
common shares (or, approximately 32.6% of the outstanding shares) in exchange for their claims;
·
·
·
·
·
·
The Company issued an aggregate of 44,174,136 common shares (or, approximately 58.9% of the outstanding shares) to
holders of the Term Loan B, 2017 Notes and 2020 Notes who subscribed in the Company’s $460.0 million equity rights
offering;
The Company issued 3,841,229 common shares (or, approximately 5.1% of the outstanding shares) to QP in a $40.0 million
private placement;
The Company issued 2,566,056 common shares (or approximately 3.4% of the outstanding shares) to members of an ad hoc
group of holders of the Term Loan B, 2017 Notes and 2020 Notes (the “Ad Hoc Group”) in payment of their fee for
backstopping the equity rights offering;
The Company issued approximately 7.5 million common shares to Pacific Drilling Administrator Limited, a wholly owned
subsidiary of the Company that serves as administrator of the Company’s 2018 Omnibus Stock Incentive Plan (the “2018
Stock Plan”), adopted by the Board, and which shares were reserved for issuance under the 2018 Stock Plan;
Existing holders of the Company’s common shares received no recovery and were diluted by the issuances of common shares
under the Plan such that they held in the aggregate approximately 0.003% of the Company’s common shares outstanding upon
emergence from bankruptcy; and
The undisputed claims of other unsecured creditors such as clients, employees and vendors, will be paid in full in the ordinary
course of business.
Prior to the issuance of the shares described above, the Company effected a 1-for-10,000 reverse stock split (the “Reverse Stock
Split”). As a result of the Reverse Stock Split and the issuances of common shares described above, the Company had issued and
outstanding on the Plan Effective Date approximately 75.0 million common shares, and approximately 7.5 million shares were reserved
for issuance pursuant to the 2018 Stock Plan.
In addition, pursuant to the Plan, on September 26, 2018 bankruptcy-remote subsidiaries of the Company issued, and on
November 19, 2018 such subsidiaries merged with the Company and the Company assumed (the “Notes Assumption”):
·
·
$750.0 million in aggregate principal amount of the First Lien Notes secured by first-priority liens on substantially all assets of
the Debtors; and
$273.6 million in aggregate principal amount of the Second Lien PIK Notes secured by second-priority liens on substantially
all assets of the Debtors. Approximately $23.6 million aggregate principal amount was issued as a commitment fee to the Ad
Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.
Concurrent with the Notes Assumption, all of the Company’s subsidiaries other than the Zonda Debtors, certain immaterial
subsidiaries and Pacific International Drilling West Africa Limited (“PIDWAL,” a Nigerian limited liability company indirectly 49%
owned by the Company) guaranteed on a senior secured basis the First Lien Notes and Second Lien PIK Notes. It is expected that the
Zonda Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their
separate plan of reorganization after the successful resolution of
6
the arbitration proceeding involving the Pacific
Zonda
discussed elsewhere herein. If the Company is unsuccessful in the arbitration, the
Company expects to liquidate the Zonda Debtors and the Zonda Debtors would not guarantee the First Lien Notes and Second Lien PIK
Notes.
Pursuant to the Plan, the following additional principal transactions and events occurred on the Plan Effective Date:
·
Amendment
of
Articles
of
Association
. The Company’s Articles of Association (our “Articles”) were amended to, among other
things, reflect the new capital structure and establish a classified board of Class A directors and Class B directors.
· Governance
Agreement
. The Company entered into a Governance Agreement (the “Governance Agreement”) with certain
holders of its shares, which provides for, among other things, director nomination and board observer rights of the parties, as
well as an agreement to increase the Company’s share capital at the request of certain parties.
·
·
·
Resignation
of
Directors
and
Election
of
New
Directors
.
All of the Company’s directors prior to our emergence from
bankruptcy resigned from our board of directors and upon our emergence from bankruptcy, W. Matt Ralls (Chairman), David
Weinstein and Bernie G. Wolford Jr. joined the board of directors as Class A directors, and Daniel Han, Donald Platner, and
Kiran Ramineni joined the board of directors as Class B directors. Subsequent to our emergence from bankruptcy, John V.
Simon joined our board of directors as a Class A director.
Appointment
of
Chief
Executive
Officer
. Bernie G. Wolford Jr. was appointed Chief Executive Officer of the Company.
Registration
Rights
Agreement
. The Company entered into a Registration Rights Agreement (the “Registration Rights
Agreement”) with certain holders of its shares, which grants such holders certain registration rights with respect to our
common shares.
See Note 2 to our consolidated financial statements for additional information.
Selected
Financial
Data
On the Plan Effective Date, we adopted and applied the relevant guidance with respect to the accounting and financial reporting
for entities that have emerged from bankruptcy proceedings, or “Fresh Start Accounting.” Under Fresh Start Accounting, our balance
sheet on the Plan Effective Date reflects all of our assets and liabilities at fair value. Our emergence from bankruptcy and the adoption of
Fresh Start Accounting resulted in a new reporting entity, referred to herein as the “Successor”, for financial reporting purposes. To
facilitate discussion and analysis of our financial condition and results of operations herein, we refer to the reorganized Debtors as the
Successor for periods subsequent to November 19, 2018 and as the “Predecessor” for periods on or prior to November 19, 2018. As a
result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, our consolidated financial statements
subsequent to November 19, 2018 may not be comparable to our consolidated financial statements prior to November 19, 2018, and as
such, “black-line” financial statements are presented to distinguish between the Predecessor and Successor companies.
You should read the following selected consolidated financial data in conjunction with Item 5, “Operating Results” and our
historical consolidated financial statements and related notes thereto included elsewhere in this annual report. The financial information
included in this annual report may not be indicative of our future financial position, results of operations or cash flows.
7
Successor
Period From
November
20, 2018
through
December
31,
2018
Period From
January 1,
2018
through
November 19,
2018
Predecessor
Years Ended December 31,
2017
2016
(in thousands, except per share information)
2015
2014
Statement of operations data:
Revenues
Contract drilling
Costs and expenses
Operating expenses
General and administrative expenses
Depreciation and amortization expense
Loss from construction contract rescission
Operating income (loss)
Other income (expense)
$
28,489
$
236,379 $ 319,716 $ 769,472 $1,085,063 $1,085,794
(19,744)
(4,245)
(27,277)
(51,266)
—
(22,777)
(189,606)
(50,604)
(248,302)
(488,512)
—
(252,133)
(244,089)
(87,134)
(278,949)
(610,172)
—
(290,456)
(290,038)
(63,379)
(275,901)
(629,318)
—
140,154
(431,261)
(55,511)
(243,457)
(730,229)
(40,155)
314,679
(459,617)
(57,662)
(199,337)
(716,616)
—
369,178
Interest expense
Write-off of deferred financing costs
Gain on debt extinguishment
Reorganization items
Interest income
Equity earnings in unconsolidated subsidiaries
Expenses to unconsolidated subsidiaries, net
Other income (expense)
(1)
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Earnings (loss) per common share, basic
Weighted-average number of common shares,
(2)
basic
(2)
Earnings (loss) per common share, diluted
Weighted-average number of common shares,
(2)
$
(10,904)
—
—
(1,300)
1,008
392
(1,198)
526
(34,253)
6,769
$ (27,484)
(106,632)
—
—
(1,799,664)
3,148
—
—
(1,904)
(2,157,185)
2,308
(130,130)
—
—
—
521
—
—
(5,692)
233,877
(45,620)
$(2,154,877) $ (525,166) $ (37,157) $ 126,230 $ 188,257
(156,361)
—
—
—
265
—
—
(3,482)
155,101
(28,871)
(189,044)
—
36,233
—
362
—
—
(2,755)
(15,050)
(22,107)
(178,983)
(30,846)
—
(6,474)
2,717
—
—
(8,261)
(512,303)
(12,863)
$
(0.37)
$
(100.89) $
(24.64) $
(1.76) $
5.97 $
8.67
75,010
(0.37)
$
21,359
(100.89) $
21,315
(24.64) $
21,167
21,145
(1.76) $
5.97 $
21,722
8.66
diluted
(2)
75,010
21,359
21,315
21,167
21,156
21,737
8
(in thousands)
Balance sheet data:
Cash, cash equivalents and restricted cash
Property and equipment, net
(3)
Total assets
Long-term debt
Shareholders’ equity
(4)
Successor
Year Ended
December 31,
2018
$
389,075
1,915,172
2,748,213
1,039,335
1,618,958
Predecessor
2017
Years Ended December 31,
2016
2015
2014
$
317,448 $
626,168 $
116,033 $
4,652,001
5,362,961
3,043,967
2,151,801
4,909,873
5,998,207
3,145,449
2,666,200
5,143,556
5,792,720
2,845,670
2,692,055
167,794
5,431,823
6,028,080
3,101,021
2,578,872
Interest income presented for the years ended December 31, 2017, 2016, 2015 and 2014 has been reclassified from other expense.
(1)
(2) Share and per share data for the years ended December 31, 2015 and 2014 have been restated to reflect a 1-for-10 reverse stock split
in May 2016.
(3) Total assets for the year ended December 31, 2014 have been adjusted to reflect the retrospective adoption of an accounting
standard, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability rather
than as an asset.
Includes current maturities of long-term debt, net of debt issuance costs. Debt balances as of December 31, 2017 are presented
within liabilities subject to compromise on the balance sheet.
(4)
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
An
investment
in
our
common
shares
involves
a
high
degree
of
risk.
You
should
consider
carefully
the
following
risk
factors,
as
well
as
the
other
information
contained
in
this
annual
report,
before
making
an
investment
in
our
common
shares.
Any
of
the
risk
factors
described
below
could
significantly
and
negatively
affect
our
business,
financial
position,
results
of
operations
or
cash
flows.
In
addition,
these
risks
represent
important
factors
that
can
cause
our
actual
results
to
differ
materially
from
those
anticipated
in
our
forward-
looking
statements.
Risks Related to Our Business
The
demand
for
our
services
depends
on
the
level
of
activity
in
the
offshore
oil
and
gas
industry,
which
is
significantly
affected
by,
among
other
things,
volatile
oil
and
natural
gas
prices.
Our
business
has
been
and
may
continue
to
be
materially
and
adversely
affected
by
the
significant
decline
in
the
oil
and
gas
industry.
Lack
of
an
improvement
in
the
market
for
our
offshore
contract
drilling
services
would
materially
and
adversely
affect
our
liquidity
and
ability
to
repay
or
refinance
our
indebtedness.
The offshore contract drilling industry has been cyclical and volatile, and the substantial drop in oil prices beginning mid-2014
resulted in a significant decline in drilling activity. The demand for our services depends on the level of activity in oil and natural gas
exploration, development and production in offshore areas worldwide. Oil and natural gas prices and market expectations of potential
changes in these prices also significantly affect the level of offshore activity and demand for drilling units.
Oil and gas prices are extremely volatile and are affected by numerous factors beyond our control, including:
·
the worldwide production and demand for oil and natural gas and any geographical dislocations in supply and demand;
9
·
the development of new technologies, alternative fuels and alternative sources of hydrocarbon production, such as increases in
onshore shale production in the United States;
· worldwide economic and financial problems and corresponding decline in the demand for oil and gas and consequently for our
services; and
·
the worldwide social and political environment, including uncertainty or instability resulting from changes in political
leadership, an escalation or additional outbreak of armed hostilities, insurrection or other crises in the Middle East, Africa,
South America or other geographic areas or acts of terrorism in the United States, or elsewhere.
Declines in oil and gas prices for an extended period of time, and market expectations of continued lower oil prices, have
negatively affected and could continue to negatively affect our business. Sustained periods of low oil prices have resulted in and could
continue to result in reduced exploration and drilling. These commodity price declines have an effect on rig demand, and periods of low
demand can cause excess rig supply and intensify competition in the industry, which often results in drilling units of all generations and
technical specifications being idle for periods of time. As a result of the low commodity prices, exploration and production companies
have significantly reduced capital spending over the last few years, leading to a current oversupply of drilling rigs. These developments
have exerted negative pricing pressure on our market.
We cannot accurately predict the future level of demand for our services or future conditions in the oil and gas industry and we
cannot assure you that the market will improve. If the market for our offshore contract drilling services does not improve as a result of
low oil prices, continued low demand for contract drilling services and/or continued low levels of exploration, development or production
expenditures by oil and gas companies, our revenues could be further reduced and our business, results of operations, liquidity and ability
to repay or refinance our indebtedness would be materially and adversely affected.
Failure
to
secure
new
drilling
contracts
for
our
drillships
could
have
a
material
adverse
effect
on
our
financial
position,
results
of
operations
or
cash
flows.
As of March 1, 2019, we did not have signed drilling contracts for four of our seven drillships, the Pacific
Scirocco
, the Pacific
Meltem,
the Pacific
Khamsin
or the Pacific
Mistral
. Our ability to obtain drilling contracts for our drillships will depend on market
conditions and our clients’ drilling programs. Some of the new contracts we have recently obtained have been for significantly shorter
terms and lower dayrates than our prior drilling contracts, and there is uncertainty as to whether new contracts we may enter into in the
future will continue to have comparatively shorter durations or require us to work at depressed dayrates. We may not be able to secure
contracts for our drillships on favorable terms, or at all. Our failure to secure drilling contracts for our uncontracted drillships or currently
operating drillships after the expiration of existing contracts, or to successfully negotiate and execute definitive contracts and satisfy other
conditions precedent to finalizing any letters of intent and letters of award, could have a material adverse effect on our financial position,
results of operations or cash flows.
An
oversupply
of
rigs
competing
with
our
rigs
could
continue
to
depress
the
demand
and
contract
prices
for
our
rigs
and
could
adversely
affect
our
financial
position,
results
of
operations
or
cash
flows.
There are numerous high-specification floating rigs currently available for drilling services in the industry worldwide. The current
oversupply of high-specification floating rigs has led to a significant reduction in dayrates and lower utilization, and dayrates may
continue to decline. Lower utilization and dayrates could require us to enter into lower dayrate contracts or to idle or stack more of our
drillships, which could have a material adverse effect on our business prospects, financial condition, liquidity and results of operations.
We
have
a
small
fleet
and
rely
on
a
limited
number
of
clients.
The
loss
of
any
client
or
significant
downtime
on
any
drillship
attributable
to
maintenance,
repairs
or
other
factors
could
adversely
affect
our
financial
position,
results
of
operations
or
cash
flows.
As a result of our relatively small fleet of seven drillships, we anticipate that revenues will depend on contracts with a limited
number of clients. As of March 1, 2019, one of our operating drillships, the Pacific
Sharav
, was working for a subsidiary of Chevron,
under a contract that has been extended to November 2019, and our drillship the Pacific
10
Bora
was working under a contract with Nigerian AGIP Exploration Limited, a subsidiary of Eni S.p.A., to operate in
Nigeria. Additionally, another of our drillships, the Pacific
Santa
Ana
, was under contract for the second phase of a plug and
abandonment project for PC Mauritania 1 Pty Ltd. (“Petronas”), expected to commence in third quarter 2019, as well as a contract with
Total E&P Senegal for work in Senegal and Mauritania expected to commence in April 2019.
The loss of any one of our clients or any potential clients could have a material adverse effect on our financial position, results of
operations or cash flows. In addition, our limited number of drillships makes us more susceptible to incremental loss in the event of
downtime on any one operating unit. If any one of our drillships becomes inactive for a substantial period of time and is not otherwise
earning contractual revenues, it could have a material adverse impact on our financial position, results of operations or cash flows.
Our
backlog
of
contract
drilling
revenue
may
not
be
fully
realized.
Our contract backlog includes firm commitments only, which are represented by signed drilling contracts. We calculate our
contract backlog by multiplying the contractual dayrate by the number of days committed under the contracts (excluding options to
extend), assuming full utilization, and also including mobilization fees, upgrade reimbursements and other revenue sources, such as the
standby rate during upgrades, as stipulated in the applicable contracts. For a well-by-well contract, we calculate the contract backlog by
estimating the expected number of remaining days to drill the firm wells committed. The actual amounts of revenues earned and the
actual periods during which revenues are earned may differ from the amounts and periods shown in the contract backlog amounts we
present, due to various factors, including unplanned downtime and maintenance projects and other factors. We may not be able to realize
the full amount of our contract backlog due to events beyond our control, and accordingly the actual amount of revenues earned may be
substantially lower than the backlog reported. In addition, some of our clients may experience liquidity issues, which could worsen if
commodity prices remain low or decrease further for an extended period of time. Liquidity issues could lead our clients to seek to
repudiate, cancel or renegotiate contracts for various reasons, as described below under “—Our drilling contracts may be terminated early
in certain circumstances.” Our inability to realize the full amount of our contract backlog could have a material adverse effect on our
financial position, results of operations or cash flows.
We
may
enter
into
drilling
contracts
with
less
favorable
terms
that
expose
us
to
greater
risks
than
we
would
assume
under
stronger
market
conditions.
The current market conditions and oversupply of drilling rigs has impacted and could continue to impact our existing drilling
contracts. Our clients may seek to renegotiate dayrates and other terms under our existing contracts and, as a result, we may not be able to
preserve current dayrates or utilization and we may not be able to extend contracts with our clients on favorable terms, or at all. For
example, our current contract with Chevron for the Pacific
Sharav
expires in August 2019, and our extension of that contract, as well as
our other more recent contracts are at dayrates that are significantly lower than the dayrate of the current Chevron contract. Additionally,
our clients may seek to terminate existing contracts prior to the expiration of their terms, as described below in “—Our drilling contracts
may be terminated early in certain circumstances.”
We may enter into drilling contracts or amendments to drilling contracts that expose us to greater risks than we would assume
under stronger market conditions, such as greater exposure to environmental or other liabilities and more onerous termination provisions
giving the client a right to terminate without cause or upon little or no notice. Upon termination, these contracts may not result in a
payment to us or, if a termination payment is required, it may not fully compensate us for the loss of a contract. In addition, the early
termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial position,
results of operations or cash flows. We can provide no assurance that any such increased risk exposure will not have a material negative
impact on our future operations and financial results.
We
may
not
continue
to
realize
the
cost-savings
we
have
recently
achieved
on
our
idle
rigs
and
reactivation
of
idle
rigs
may
take
longer
or
be
more
costly
than
we
anticipate.
Our operating expenses and maintenance costs depend on a variety of factors including crew costs, provisions, equipment,
insurance, maintenance and repairs and shipyard costs, many of which are beyond our control. During periods in which a rig is idle, we
may decide to “smart-stack” the rig, which means the rig is maintained with a reduced level of crew to be ready to ramp up to operational
status for redeployment within a three-month time frame. During
11
periods in which multiple rigs are idle, we may decide to maintain the rigs in “modified smart-stack” status, which means the idle rigs are
maintained as a group with one rig providing the power source for the other rigs, which have no crew onboard and require a longer time
frame for redeployment.
We believe our results for the year ended December 31, 2018 reflect the cost savings we expected to achieve from our smart-
stacking and modified smart-stacking approaches. We may not continue to realize those cost-savings, and, if we are required to idle
additional rigs, we may not achieve similar cost savings.
Reactivation of idle rigs may take longer and be more costly than anticipated and there is limited history of reactivating idle rigs
after smart-stacking. As our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance
costs can vary significantly. In general, labor costs increase primarily due to higher salary levels and inflation. Equipment maintenance
expenses fluctuate depending upon the type of activity the rig is performing and the age and condition of the equipment. Contract
preparation expenses vary based on the scope and length of contract preparation required and the duration of the firm contractual period
over which such expenditures are amortized.
Our
drilling
contracts
may
be
terminated
early
in
certain
circumstances.
Our contracts with clients generally may be terminated at the option of the client upon payment of an early termination fee, which
is typically a significant percentage of the dayrate or the standby rate under the drilling contract for a specified period of time. During
periods of depressed market conditions, we are subject to an increased risk that our clients may seek to terminate our contracts. Early
termination payments may not fully compensate us for the loss of the contract. Accordingly, the actual amount of revenues earned may be
substantially lower than the backlog reported. Our contracts also generally provide for termination by the client without the payment of
any termination fee under various circumstances, such as sustained unacceptable performance by us, as a result of impaired performance
caused by equipment or operational issues, destruction of a drilling rig, or sustained periods of downtime due to force majeure events or
otherwise. Many of these events are beyond our control. If our clients terminate some of our contracts, and we are unable to secure new
contracts on a timely basis and on substantially similar terms, or if payments due under our contracts are suspended for an extended
period of time or if a number of our contracts are renegotiated, our financial position, results of operations or cash flows could be
materially adversely affected.
The
market
value
of
our
drillships
may
decrease,
which
could
cause
us
to
take
accounting
charges
or
to
incur
losses
if
we
decide
to
sell
them
following
a
decline
in
their
values.
If the offshore contract drilling industry continues to suffer adverse developments, the fair market values of our drillships may
decline. The fair market values of the drillships we currently own or may acquire in the future may increase or decrease depending on a
number of factors, many of which are beyond our control, including the general economic and market conditions affecting the oil and gas
industry and the possible corresponding adverse effect on the level of offshore drilling activity.
Any such deterioration in the market values of our drillships could require us to record an impairment charge in our financial
statements, which could adversely affect our results of operations. We may not be able to sell our drillships at prices we deem acceptable
or at all. If we sell any of our drillships when prices for such drillships have fallen, the sale may be at less than such drillship’s carrying
amount on our financial statements, resulting in a loss.
Our
business
and
the
industry
in
which
we
operate
involve
numerous
operating
hazards
which,
if
they
occur,
may
have
a
material
adverse
effect
on
our
business.
Our operations are subject to the usual hazards inherent in the drilling and operation of oil and natural gas wells, such as blowouts,
reservoir damage, loss of production, loss of well control, cratering, fires, explosions, spills of hazardous materials and pollution. The
occurrence of any of these events could result in the suspension of our drilling or production operations, claims by the operator, severe
damage to or destruction of the property and equipment involved, injury or death to drilling unit personnel and environmental and natural
resources damages. Our operations could be suspended as a result of these hazards, whether the fault is ours or that of a third party. In
certain circumstances, governmental authorities may suspend drilling operations as a result of these hazards, and our clients may cancel
or terminate their contracts. We may also be subject to personal injury and other claims by drilling unit personnel as a result of our
drilling operations.
12
We
may
experience
downtime
as
a
result
of
repairs
or
maintenance,
human
error,
defective
or
failed
equipment
or
delays
waiting
for
replacement
parts.
Our operations may be suspended because of machinery breakdowns, human error, abnormal operating conditions, failure of
subcontractors to perform or supply goods or services, delays on replacement parts or personnel shortages, which may cause us to
experience operational downtime and could have an adverse effect on our results of operations.
In addition, we rely on certain third parties to provide supplies and services necessary for our offshore drilling operations,
including, but not limited to, suppliers of drilling equipment and catering and machinery suppliers. Mergers in our industry have reduced
the number of available suppliers, resulting in fewer alternatives for sourcing key supplies. Such consolidation may result in a shortage of
supplies and services, potentially inhibiting the ability of suppliers to deliver on time, or at all. These delays may have a material adverse
effect on our results of operations and result in downtime, and delays in the repair and maintenance of our drillships.
Our
business
is
subject
to
numerous
governmental
laws
and
regulations,
including
environmental
requirements,
that
may
impose
significant
costs
and
liabilities
on
us.
Our operations are subject to federal, state, local, foreign and international laws and regulations that may, among other things,
require us to obtain and maintain specific permits or other governmental approvals to control or limit the discharge of oil and other
contaminants into the environment or otherwise relate to environmental protection, and which impose stringent standards on our activities
that are protective of the environment. For example, any operations and activities that we conduct in the United States and its territorial
waters are subject to numerous environmental laws, including the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the
Comprehensive Environmental Response, Compensation, and Liability Act and the International Convention for the Prevention of
Pollution from Ships (each, as amended from time to time), and analogous state laws. Failure to comply with these laws, regulations and
treaties may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, the denial or
revocation of permits or other authorizations and the issuance of injunctions that may limit or prohibit some or all of our operations. Laws
and regulations protecting the environment have become more stringent in recent years and may in certain circumstances impose strict
liability, rendering us liable for environmental and natural resource damages caused by others or for acts that were in compliance with all
applicable laws at the time the acts were performed. The application of these laws and regulations, the modification of existing laws or
regulations or the adoption of new laws or regulations that curtail exploratory or developmental drilling for oil and natural gas could
materially limit future contract drilling opportunities or materially increase our costs, including our capital expenditures.
The
imposition
of
stringent
restrictions
or
prohibitions
on
offshore
drilling
by
a
governing
body
may
have
a
material
adverse
effect
on
our
business.
Prior catastrophic events that resulted in the release of oil or other contaminants offshore have heightened environmental and
regulatory concerns about the oil and gas industry. In the past, the U.S. federal government, acting through the U.S. Department of the
Interior and its implementing agencies that have since evolved into the present day Bureau of Ocean Energy Management and Bureau of
Safety and Environmental Enforcement, have issued various rules, Notices to Lessees and Operators and temporary drilling moratoria
that interrupted operations and resulted in additional stringent environmental and safety regulations or requirements applicable to oil and
gas exploration, development and production operators in the U.S. Gulf of Mexico, some of whom are our clients. Any such regulatory
initiatives may serve to effectively slow down the pace of drilling and production operations in the U.S. Gulf of Mexico due to
adjustments in operating procedures and certification requirements as well as increased lead times to obtain exploration and production
plan reviews. Also, our clients may require changes to our operations or procedures in order for our clients to meet their own additional
compliance requirements, which may increase our costs.
Our
business
could
be
affected
adversely
by
union
disputes
and
strikes
or
work
stoppages
by
our
employees.
In
addition,
our
labor
costs
and
the
operating
restrictions
under
which
we
operate
could
increase
as
a
result
of
collective
bargaining
negotiations
and
changes
in
labor
laws
and
regulations.
Some of our international employees (currently representing approximately 1% of our workforce) are represented by unions and
are working under agreements that are subject to annual salary negotiations. We cannot guarantee the results of any such collective
bargaining negotiations or whether any such negotiations will result in a work stoppage. In addition, employees may strike or engage in
work stoppages or slowdowns for reasons unrelated to our union
13
arrangements. Any future work stoppage or slowdown could, depending on the affected operations and the length of the work stoppage or
slowdown, have a material adverse effect on our financial position, results of operations or cash flows. In addition, we could enter new
markets where the workforce is represented by unions, which could result in higher operating costs that we are unable to pass along to
our clients.
Our
global
operations
may
be
adversely
affected
by
political
and
economic
circumstances
in
the
countries
in
which
we
operate,
including
as
a
result
of
violations
of
the
U.S.
Foreign
Corrupt
Practices
Act
and
similar
foreign
anti-bribery
laws.
A
significant
portion
of
our
business
has
been,
and
may
in
the
future
be,
conducted
in
West
Africa,
which
exposes
us
to
risks
of
war,
local
economic
instabilities,
corruption,
political
disruption
and
civil
disturbance
in
that
region.
We operate in oil and natural gas producing areas worldwide. We are subject to a number of risks inherent in any business that
operates globally, including: political, social and economic instability; war; piracy and acts of terrorism; corruption; potential seizure,
expropriation or nationalization of assets; increased operating costs; wage and price controls; imposition or changes in interpretation and
enforcement of local content laws; and other forms of government regulation and economic conditions that are beyond our control.
The United States Foreign Corrupt Practices Act (the “FCPA”), the UK Bribery Act 2010, the Nigerian Corrupt Practices and
Other Related Offenses Act of 2000, Brazil’s Anti-Corruption Law of 2014 and similar worldwide anti-bribery laws generally prohibit
companies and their intermediaries from making, offering or authorizing improper payments to government officials for the purpose of
obtaining or retaining business. We may operate in countries where strict compliance with anti-bribery laws conflicts with local customs
and practices. Violations of, or any non-compliance with, current and future anti-bribery laws (either due to acts or inadvertence by us or
our agents) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere.
In order to effectively compete in some foreign jurisdictions, we utilize local agents and/or establish joint ventures with local
operators or strategic partners. Our agents often interact with government officials on our behalf. Even though some of our agents and
partners may not themselves be subject to the FCPA or other anti-bribery laws to which we may be subject, if our agents or partners make
improper payments to government officials in connection with engagements or partnerships with us, we could be investigated and
potentially found liable for violation of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which
could have a material adverse effect on our financial position, results of operations or cash flows.
These risks may be higher in developing countries such as Nigeria and Mauritania. Countries in West Africa have experienced
political and economic instability in the past and such instability may continue in the future. Disruptions in our operations may occur in
the future, and losses caused by these disruptions may not be covered by insurance.
We
may
be
required
to
make
significant
capital
expenditures
to
maintain
our
competitiveness
and
to
comply
with
applicable
laws,
regulations
and
standards
of
governmental
authorities
and
organizations.
Changes in offshore drilling technology, client requirements for new or upgraded equipment and competition within our industry
may require us to make significant capital expenditures in order to maintain our competitiveness. Our competitors may have greater
financial and other resources than we have, which may enable them to make technological improvements to existing equipment or
replace equipment that becomes obsolete. In addition, changes in governmental regulations, safety or other equipment standards may
require us to make additional unforeseen capital expenditures.
If we are unable to fund these capital expenditures with cash flow from operations, we may either incur additional borrowings or
raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial position
at the time, changes in laws and regulations and by adverse market conditions. In addition, our ability to raise additional capital is limited
by the terms of our debt agreements. Our failure to obtain the funds for necessary future capital expenditures could limit our ability to
continue to operate some of our vessels and could have a material adverse effect on our business and on our financial position, results of
operations or cash flows.
14
There
may
be
limits
on
our
ability
to
mobilize
drillships
between
geographical
areas
and
the
time
spent
on
and
costs
of
such
mobilizations
may
materially
and
adversely
affect
our
business.
The offshore contract drilling market is generally a global market, as drilling units may be mobilized from one area to another.
However, the ability to mobilize drilling units can be impacted by several factors including governmental regulation and customs
practices, the significant costs to move a drilling unit, weather, political instability, civil unrest, military actions and the technical
capability of the drilling units to operate in various environments. Additionally, while a drillship is being mobilized from one geographic
market to another, we may not be paid by the client for the time that the drillship is out of service. Also, we may mobilize a drillship to
another geographic market without a client contract, which may result in costs that are not reimbursed by future clients.
The
loss
of
key
personnel
could
negatively
impact
our
business.
Our future operational performance depends to a significant degree upon the continued service of key members of our
management as well as marketing, sales and operations personnel. The loss of one or more of our key personnel could have a material
adverse effect on our business. We believe our future success will also depend in large part upon our ability to attract, retain and further
motivate highly skilled management, marketing, sales and operations personnel. We may experience intense competition for personnel,
and we may not be able to retain key employees or be successful in attracting, assimilating and retaining personnel in the future. In
addition, our ability to attract, recruit and retain key personnel may be negatively impacted by our emergence from bankruptcy and the
uncertainties currently facing the industry in which we operate.
Any
significant
cyber-attack
or
interruption
in
network
security
could
materially
and
adversely
disrupt
and
affect
our
operations
and
business.
We have become increasingly dependent upon digital technologies to conduct and support our offshore operations, and we rely on
our operational and financial computer systems to conduct almost all aspects of our business. Threats to our information technology
systems associated with cybersecurity risks and incidents or attacks continue to grow. Any failure of our computer systems, or those of
our clients, vendors or others with whom we do business, could materially disrupt our operations and could result in the corruption of
data or unauthorized release of proprietary or confidential data concerning the Company, its business operations and activities, clients or
employees. Computers and other digital technologies could become impaired or unavailable due to a variety of causes, including, among
others, theft, cyber-attack, design defects, terrorist attacks, utility outages, human error or complications encountered as existing systems
are maintained, repaired, replaced or upgraded. Any cyber-attack or interruption could have a material adverse effect on our financial
position, results of operations or cash flows, and our reputation.
Our
insurance
may
not
be
adequate
in
the
event
of
a
catastrophic
loss.
Damage to the environment could result from our operations, particularly through oil spillage or extensive uncontrolled fires. We
may be subject to property, environmental, natural resource and other damage claims by oil and gas companies, other businesses
operating offshore and in coastal areas, environmental conservation groups, governmental entities and other third parties. Insurance
policies and contractual rights to indemnity may not adequately cover losses, and we may not have insurance coverage or rights to
indemnity for all risks. In particular, pollution and environmental risks generally are not fully insurable.
Losses caused by the occurrence of a significant event against which we are not fully insured, or caused by a number of lesser
events against which we are insured but are subject to substantial deductibles, aggregate limits and/or self-insured amounts, could
materially increase our costs and impair our profitability and financial position. Our policy limits for property, casualty, liability and
business interruption insurance, including coverage for severe weather, terrorist acts, war, civil disturbances, pollution or environmental
damage, may not be adequate should a catastrophic event occur related to our property, plant or equipment, or our insurers may not have
adequate financial resources to sufficiently or fully pay related claims or damages. When any of our coverage expires, adequate
replacement coverage may not be available, offered at reasonable prices or offered by insurers with sufficient financial resources.
15
Our
clients
may
be
unable
or
unwilling
to
indemnify
us.
Consistent with standard industry practice, our clients generally assume, and indemnify us against, well control and subsurface
risks pursuant to our dayrate contracts. These risks are associated with the loss of control of a well, such as blowout or cratering, the cost
to regain control or re-drill the well and associated pollution. However, the indemnification provisions in our contracts may not cover all
damages, claims or losses to us or third parties, and our clients may not have sufficient resources to cover their indemnification
obligations or may contest their obligation to indemnify us. The indemnification provisions of our contracts may be subject to differing
interpretations and the laws or courts of certain jurisdictions may enforce such provisions while other laws or courts may find them
unenforceable, void or limited by public policy considerations, including when the cause of the underlying loss or damage is our gross
negligence or willful misconduct, when punitive damages are attributable to us or when fines or penalties are imposed directly against us.
Also, in the interest of maintaining good relations with our key clients, we may choose not to assert certain indemnification claims. In
addition, in certain market conditions, we may be unable to negotiate contracts containing indemnity provisions that obligate our clients
to indemnify us for such damages and risks.
We
may
suffer
losses
as
a
result
of
foreign
currency
fluctuations.
A significant portion of the contract revenues of our foreign operations will be paid in U.S. dollars; however, some payments are
made in foreign currencies. As a result, we are exposed to currency fluctuations and exchange rate risks as a result of our foreign
operations. To minimize the financial impact of these risks when we are paid in foreign currency, we attempt to match the currency of
operating costs with the currency of contract revenue. If we are unable to substantially match the timing and amounts of these payments,
any increase in the value of the U.S. dollar in relation to the value of applicable foreign currencies could adversely affect our operating
results.
Public
health
threats
could
have
a
material
adverse
effect
on
our
financial
position,
results
of
operations
or
cash
flows.
Public health threats, such as Ebola, the H1N1 flu virus, the Zika virus, Severe Acute Respiratory Syndrome, and other highly
communicable diseases, outbreaks of which have occurred in various parts of the world in which we operate, could adversely impact our
operations, the operations of our clients and the global economy, including the worldwide demand for oil and natural gas and the level of
demand for our services. Any quarantine of personnel or inability to access our offices or rigs could adversely affect our operations.
Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for drilling
services caused by public health threats in the future, may adversely affect our financial position, results of operations or cash flows.
We
may
be
adversely
affected
by
national,
state
and
foreign
or
international
laws
or
regulatory
initiatives
focusing
on
greenhouse
gas
(“GHG”)
reduction.
Due to concern over the risk of climate change, there has been a broad range of proposed or promulgated initiatives regarding
GHG reduction. Regulatory frameworks adopted, or being considered for adoption, to reduce GHG emissions include cap and trade
regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy. Although
it is not possible at this time to predict how new legislation or regulations that may be adopted to address GHG emissions in the United
States would impact our business, any such future laws and regulations that require reporting of GHGs or otherwise limit emissions of
GHGs from oil and gas exploration and production operators, some of whom are our clients, could require such operators to incur
increased costs, lengthen project implementation times, and adversely affect demand for the oil and natural gas that they produce, which
could decrease demand for our services. In addition, some experts believe climate change could increase the frequency and severity of
extreme weather conditions. We are currently unable to predict the manner or extent of any such potential GHG reduction or climate
change effects.
We
may
be
involved
in
litigation,
arbitration
or
other
legal
proceedings
from
time
to
time,
the
outcomes
of
which
may
be
unpredictable
and
may
have
an
adverse
impact
on
our
business
and
financial
condition,
which
may
be
material.
Our business involves numerous operating hazards and risks, and we operate in many different international jurisdictions. In the
normal course of our business we may become involved in disputes and legal or arbitration proceedings, which may have unpredictable
outcomes and which may be material. We are involved in arbitration
16
proceedings relating to the vessel known as the Pacific
Zonda
, as described elsewhere herein (the “Zonda Arbitration”), and as of
December 31, 2018 we have recorded a receivable from unconsolidated subsidiaries of $204.7 million related to the arbitration. For
additional information, see Note 7 to our consolidated financial statements. While we expect to prevail in the Zonda Arbitration, we
cannot assure you that we will do so.
Risks Related to Our Emergence from Bankruptcy
We
experienced
a
change
of
control
in
connection
with
our
emergence
from
bankruptcy
and
our
new
board
of
directors
may
change
our
business
strategy
and
has
changed
and
may
continue
to
change
key
personnel.
As a result of the issuances of common shares, change in the composition of our board of directors, amendments to our Articles
and execution and delivery of the Governance Agreement discussed elsewhere in this annual report, a change in control of the Company
occurred on the Plan Effective Date in connection with the Company’s emergence from the Chapter 11 bankruptcy proceedings. Pursuant
to the Governance Agreement, until the “Nomination Termination Time” (as defined therein), certain of our shareholders have the right
to appoint our Class B directors, constituting three of our seven directors. As of the Plan Effective Date and March 1, 2019, only a few of
our shareholders, if they were to act in concert, could control the election of our remaining four Class A directors.
Pursuant to our Articles and the Governance Agreement, prior to the Nomination Termination Time, any two Class B directors
acting in their capacities as such (a “Class B Majority”) have broad authority to act on the Company’s behalf in connection with any
Acquisition Proposal or Acquisition (as such terms are defined in the Articles), including but not limited to the authority to solicit
prospective Acquisition Proposals, to retain, at the Company’s expense such consultants, legal counsel and other advisors as a Class B
Majority may from time to time deem appropriate to assist the Class B directors in the performance of their duties with respect to
Acquisition Proposals, and subject to specified conditions, to execute and deliver on behalf of the Company definitive documentation
providing for the consummation of an Acquisition. For additional information, see Item 10.B. “Additional Information - Memorandum
and Articles of Association.”
Our post-emergence board of directors may change our business strategy, including but not limited to changing our operating
strategy or soliciting Acquisition Proposals. On the Plan Effective Date, our new board of directors appointed a new chief executive
officer and has made and may make other changes in key personnel. These or potential future changes may not be successful and may be
disruptive to our business and relationships with clients, vendors, suppliers, service providers, other third parties and employees.
We
remain
subject
to
risks
and
uncertainties
associated
with
our
emergence
from
bankruptcy.
Notwithstanding our emergence from bankruptcy on November 19, 2018, our operations and liquidity remain subject to a number
of risks and uncertainties related to the fact that we operated under Bankruptcy Court protection for approximately one year. These risks
and uncertainties include the following:
·
·
·
·
our ability to maintain our relationships and contracts with our clients, vendors, suppliers, service providers and other third
parties;
our ability to execute our business plan or make effective changes to our business plan in response to changes in market
conditions or changes in strategy implemented by our post-emergence board of directors or other factors;
our ability to attract, motivate and retain key employees; and
our ability to generate sufficient cash flow to operate our business and service our debt, and to comply with terms and
conditions of the indentures governing our First Lien Notes and Second Lien PIK Notes.
Our operating results may be adversely affected by the possible reluctance of third parties to do business with a company that
recently emerged from Chapter 11 bankruptcy proceedings. For example, third parties could require that we provide additional financial
assurances, which could be costly. In addition, failure to retain or attract and maintain key personnel or erosion of employee morale could
have a material adverse effect on our ability to meet client expectations, obtain new contracts and effectively operate our business,
thereby adversely affecting our results of operations and financial condition. We cannot accurately predict or quantify the ultimate impact
that our emergence from bankruptcy may have on our business, results of operations and financial condition.
17
The
Plan
was
based
in
large
part
upon
assumptions
and
analyses
developed
by
us.
If
these
assumptions
and
analyses
prove
to
be
incorrect,
our
results
of
operations,
liquidity
and
financial
condition
may
be
materially
and
adversely
affected.
As a part of the Plan process, we were required to prepare projected financial information to demonstrate to the Bankruptcy Court
the feasibility of the Plan and our ability to continue operations upon emergence from bankruptcy. The Plan, and these projections, were
reflective of assumptions and analyses based on our experience and perception of historical trends, prevailing conditions and expected
future developments, as well as other factors that we considered at the time to be appropriate under the circumstances. Whether actual
future results and developments will be consistent with our expectations and assumptions reflected in the Plan depends on a number of
factors, including but not limited to: (i) our ability to maintain our clients’ confidence in our viability as a continuing entity and to attract
and retain sufficient business from them, (ii) our ability to retain or attract and retain key employees, (iii) the overall strength and stability
of general economic conditions of the financial and oil and gas industries, both in the U.S. and in global markets and (iv) our ability to
make required interest payments on and ultimately pay or refinance our debt. Any of these factors could materially adversely affect the
success of our reorganized business.
In addition, the Plan was developed in reliance upon financial projections, and these projections are not part of this annual report,
have not been and are not expected to be updated and should not be relied upon in connection with the purchase of our common shares.
Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these
financial forecasts will not be accurate.
In
connection
with
our
emergence
from
bankruptcy,
our
historical
financial
information
may
not
be
indicative
of
our
future
financial
performance.
In connection with our emergence from bankruptcy, we have adopted Fresh Start Accounting in accordance with provisions of
ASC 852, Reorganizations
, which resulted in the Company becoming a new entity for financial reporting purposes on November 19,
2018, the effective date of emergence. Fresh Start Accounting results in the Company’s assets and liabilities being recorded at fair value
as of the Plan Effective Date. As a result of the adoption of Fresh Start Accounting, the Company’s consolidated financial statements
subsequent to November 19, 2018 will not be comparable to its consolidated financial statements on and prior to that date. The lack of
comparable historical information may discourage investors from purchasing our common shares.
Our
pre-emergence
net
operating
losses
may
be
significantly
reduced
and/or
limited
under
Luxembourg
income
tax
law.
From a Luxembourg Generally Accepted Accounting Principles (the “Lux GAAP”) standpoint, debt forgiveness resulting from the
Chapter 11 bankruptcy proceedings would lead to an increase of the net asset value of the Luxembourg debtor benefitting from the
forgiveness. Such an increase would correspond to the amount of the debt that is forgiven for no consideration. The increase of the net
asset value would also be reflected in the Lux GAAP profit and loss through recognition of cancellation of debt income (“COD Income”)
corresponding to the amount of the debt forgiven for no consideration. Based on the principle of “ accrochement
du
bilan
fiscal
au
bilan
commercial
” (translated as “tax follows book”) provided in article 40 of the Luxembourg Income Tax Law (the “Luxembourg ITL”)
(which is considered as the general rule), any COD Income realized upon the cancellation of a debt from a Lux GAAP standpoint should
also increase the net asset value of the debtor for Luxembourg tax purposes.
Article 52 of the Luxembourg ITL relates specifically to gains derived by a Luxembourg corporate debtor upon total or partial
debt forgiveness occurring in the context of a financial reorganization aimed at the financial recovery of the debtor ( i.e.
, “ gain
d’assainissement
” or “reorganization profit”). This article provides that the increase in the net asset value of a Luxembourg corporate
debtor resulting from a gain
d’assainissement
/ reorganization profit is eliminated from the positive taxable result of the Luxembourg
debtor only to the extent of that result. In other words, the tax exemption applies only to the portion of net gain
d’assainissement
/
reorganization profit exceeding existing tax losses available during the year of the debt forgiveness.
Considering the above, we may benefit from an exemption of COD Income pursuant to article 52 of the Luxembourg ITL upon
cancellation of our debts. Based on article 52 of the Luxembourg ITL and article 114(2)1 of the Luxembourg ITL, COD Income derived
by us upon cancellation of our debts should first be offset with existing tax losses carry forwards and be exempt based on article 52 of the
Luxembourg ITL for the remainder.
18
Luxembourg tax law allows tax losses to offset taxable profits unless it is determined that a change of shareholders results in tax
abuse. Luxembourg jurisprudence uses a “facts and circumstances” analysis that indicates an abuse of law could be found where the loss-
generating activity is discontinued following a change in ownership and a new profitable business is begun. However, a finding of valid
commercial reasons reflecting the economic reality should be sufficient to avoid the perception of abuse of law. Also, after a corporate
restructuring, utilizing accumulated tax losses within the same group should not be suspect if there are economic reasons beyond using
the losses. Finally, the mere conversion of our legal form may, in certain situations, not prevent our use of the losses to offset future
profits. Similarly, a mere change in shareholders should not result in loss of the deductibility of the tax losses. However, a change in
shareholders together with a change of activity (such as disposition of the loss generating assets and the beginning of a completely new
activity by the loss company) would significantly increase the risk of characterization of the transaction as tax abusive and jeopardize the
deductibility of the tax losses.
There
is
uncertainty
regarding
whether
courts
outside
the
United
States
will
recognize
the
Confirmation
Order.
Our parent company, Pacific Drilling S.A., is incorporated pursuant to, and the rights attaching to its shares are governed by, the
laws of Luxembourg. Additionally, many of our subsidiaries which were Debtors under the Plan are incorporated under, and their
interests are governed by, the laws of foreign jurisdictions other than the United States. Although we intend to make commercially
reasonable efforts to ensure that the Confirmation Order and the steps we took to implement the restructuring thereunder are effective in
all applicable jurisdictions, it is possible that if a creditor or stakeholder were to challenge the restructuring, a foreign court may refuse to
recognize the effect of the Confirmation Order.
Risks Related to Our Indebtedness
We
have
substantial
indebtedness.
As of December 31, 2018, we have total long-term debt of $1.0 billion. Our substantial debt could have important consequences to
our debt and equity holders, including, but not limited to:
·
·
·
·
increasing our vulnerability to general adverse economic and industry conditions;
requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal and interest on
our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, business
development or other general corporate requirements;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or
other general corporate requirements;
increasing the cost of borrowing under any future credit facilities;
· making it more difficult to obtain surety bonds, letters of credit, bank guarantees or other financing, particularly during periods
in which capital markets are weak;
·
·
limiting our flexibility in planning for, or reacting to, changes in our business and in the oil and gas industry; and
placing us at a competitive disadvantage compared to less leveraged competitors.
Our ability to service our debt obligations and fund any working capital needs and capital expenditures will depend, among other
things, on our future operating results, which could be affected by market, economic, financial, competitive and other factors beyond our
control. We may not be able to generate sufficient cash flows or obtain other capital resources to service our debt obligations. If our cash
flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we may be forced to reduce
or eliminate our share repurchase program, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These
alternative measures may not be successful and may not permit us to meet our debt service obligations and fund other cash requirements.
19
The
indentures
governing
our
First
Lien
Notes
and
Second
Lien
PIK
Notes
contain
restrictive
covenants
that
may
limit
our
ability
to
pursue
business
opportunities,
change
our
capital
structure
or
respond
to
changes
in
market
conditions.
The indentures governing our First Lien Notes and Second Lien PIK Notes contain restrictive covenants that may limit our ability
to pursue business opportunities, change our capital structure or respond to changes in market conditions. For example, the indentures
contain covenants that limit our ability, and the ability of our “restricted subsidiaries” (as defined therein), to:
·
·
·
·
incur or guarantee additional indebtedness and issue preferred stock;
pay dividends on or redeem or repurchase capital stock, make certain investments or make certain payments on or with respect
to subordinated and junior debt;
create or incur certain liens;
impose restrictions on the ability of restricted subsidiaries to pay dividends;
· merge or consolidate with other entities;
·
·
·
enter into certain transactions with affiliates;
impair our ability to grant security interests in the collateral securing our debt; and
engage in certain lines of business.
These limitations may adversely affect our ability to take actions that we would choose to take in the absence of such restrictions,
such as pursue certain business opportunities, obtain certain financing, pay dividends, redeem shares, sell assets or fund capital
expenditures, and may adversely affect our ability to react to changes in market or competitive conditions or withstand a downturn in our
business.
We
and
our
subsidiaries
may
incur
significant
amounts
of
additional
debt.
We and our subsidiaries may incur significant amounts of additional debt in the future, including additional first lien secured debt
(up to $50 million of which may be superpriority first lien debt), subject to the limitations in the indentures governing our First Lien
Notes and Second Lien PIK Notes. If we incur additional debt, the risks related to our capital structure and outstanding indebtedness
could be exacerbated, and we may not be able to meet all of our debt obligations.
We
cannot
assure
you
that
we
will
ever
pay
cash
interest
on
the
Second
Lien
PIK
Notes,
and
the
payment
of
PIK
interest
will
increase
our
indebtedness
and
the
risks
associated
therewith.
The indenture governing the Second Lien PIK Notes provides that we are permitted to pay all or a portion of the interest on such
notes in cash in lieu of payment in-kind (“PIK”) interest. However, our ability to pay cash interest on the Second Lien PIK Notes will
depend on available restricted payment capacity under the indenture governing the First Lien Notes. We cannot assure you that we will
have available capacity or, if we do have available capacity, that we will use that capacity to pay cash interest on the Second Lien PIK
Notes. As a result, holders of the Second Lien PIK Notes could potentially receive no cash interest on such notes. In addition, the
payment of PIK interest will increase our indebtedness, related interest obligations, and the risks associated therewith. For additional
information regarding our Second Lien PIK Notes, see Note 8 to our consolidated financial statements.
Default
under
the
terms
of
the
indentures
governing
our
First
Lien
Notes
and
Second
Lien
PIK
Notes
could
result
in
an
acceleration
of
our
indebtedness.
If we are unable to make required payments of principal and interest on our debt or to comply with the other covenants and
restrictions in the indentures governing our First Lien Notes and Second Lien PIK Notes, or other debt agreements we may enter into in
the future, there could be a default under the terms of these debt instruments. Our ability to make such payments and to comply with
other covenants and restrictions may be affected by events beyond our control. As a result, we cannot assure you that we will be able to
make such payments and to comply with the other covenants and restrictions.
20
If an event of default under the indentures governing our Notes occurs, the holders of the Notes may accelerate the Notes and
declare all amounts outstanding due and payable. Borrowings under other future debt instruments that contain cross-acceleration or cross-
default provisions may also be accelerated and become due and payable. If any of these events occurs, our assets might not be sufficient
to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain
alternative financing, it might not be on terms that are favorable or acceptable to us.
We
are
a
holding
company
and
will
depend
on
cash
flow
from
our
operating
subsidiaries
to
meet
required
payments
on
our
debt.
We conduct our operations through, and most of our assets are owned by, our subsidiaries. Our operating income and cash flow
are generated by our subsidiaries. As a result, the principal source of funds necessary to meet our obligations in respect of our
indebtedness will be cash we obtain from our subsidiaries. Contractual provisions or laws, as well as our subsidiaries’ financial condition,
operating requirements and debt requirements, may limit our ability to obtain cash from our subsidiaries to meet our debt service
obligations. Our inability to obtain cash from our subsidiaries may mean that, even though we may have sufficient resources on a
consolidated basis to meet our obligations, we may not be able to pay our debts or meet our other obligations. In addition, applicable tax
laws may subject such subsidiaries’ distributions to us to further taxation.
We
may
not
be
able
to
satisfy
our
obligations
to
holders
of
our
First
Lien
Notes
and
Second
Lien
PIK
Notes
upon
a
change
of
control.
The indentures governing the Notes contain provisions relating to certain events constituting a “change of control” (as defined
therein). Upon a change of control, holders of the Notes will have the right to require us to repurchase the Notes at 101% of their
principal amount, plus accrued and unpaid interest. Our ability to repurchase Notes upon a change of control would be limited by our
access to funds at the time of the repurchase and the terms of our then-outstanding debt agreements, which could restrict or prohibit such
a repurchase. A change of control may also result in a default under other future debt instruments, giving the holders of such obligations
the right to accelerate payment thereunder. We cannot assure you that we will have sufficient funds available upon a change of control to
make any required repurchases of Notes or to make any other required repayments of debt.
Risks Related to Our Common Shares
Our
common
shares
were
relisted
and
began
trading
on
the
New
York
Stock
Exchange
(the
“NYSE”)
on
December
18,
2018;
however,
an
active,
liquid
and
orderly
market
for
our
common
shares
may
not
develop
or
be
sustained.
Investors
may
be
unable
to
sell
common
shares
at
or
above
the
price
they
bought
them
for.
Our common shares were relisted and began trading on the NYSE on December 18, 2018. We can give no assurances that an
active, liquid and orderly trading market for our common shares will be developed or will be sustained. We believe that as of March 1,
2019, approximately 85.7% of our outstanding common shares were controlled by approximately seven principal shareholders. There can
be no assurance that any of our existing shareholders will sell any or all of their common shares. There may be a lack of supply of, or
demand for, our common shares on the NYSE, and in such case, the trading prices of our common shares may be particularly volatile,
and a holder of common shares may not be able to sell the number of shares such holder wants to sell at the desired price. From
September 13, 2017 to December 17, 2018, our common shares were traded on the over-the-counter market and from November 11, 2011
to September 12, 2017 our common shares were traded on the NYSE; however, our capital structure, business and market conditions
have changed substantially during that time and as a result investors should not rely on our historical trading prices.
21
Sales
of
our
common
shares
by
existing
shareholders,
or
the
perception
that
these
sales
may
occur,
may
depress
the
trading
price
of
our
common
shares
or
cause
the
trading
price
of
our
common
shares
to
decline.
Pursuant to our obligations under the Registration Rights Agreement that we entered into as of the Plan Effective Date with certain
of our shareholders, we filed a registration statement with the Securities and Exchange Commission (the “SEC”) to register for resale
certain of the shares held by those shareholders, and are generally required to maintain the registration statement for use by those
shareholders, subject to exceptions and limitations in the Registration Rights Agreement. Up to approximately 54.8 million of our
common shares may be sold pursuant to the registration statement by the selling shareholders, which represents approximately 73% of
our issued and outstanding common shares as of March 1, 2019. We cannot predict the timing or amount of future sales of our common
shares by selling shareholders, but such sales, or the perception that such sales could occur, may adversely affect prevailing trading prices
for our common shares.
We
may
pay
little
or
no
dividends
on
our
common
shares.
We do not expect to pay dividends on our common shares for the foreseeable future. The payment of any future dividends to our
shareholders will depend on decisions that will be made by our board of directors and will depend on then-existing conditions, including
our operating results, financial condition, business prospects, Luxembourg corporate law restrictions, and restrictions under the
indentures governing our Notes and under any future debt agreements or contracts.
We
cannot
guarantee
that
our
share
repurchase
program
will
be
fully
implemented
or
that
it
will
enhance
long-term
shareholder
value.
Repurchases
of
our
common
shares
could
also
increase
the
volatility
of
the
trading
price
of
our
common
shares
and
will
diminish
our
cash
reserves.
On February 22, 2019, our shareholders approved a share repurchase program for a total expenditure of up to $15.0 million for a
two-year period. The share repurchase program does not obligate the Company to repurchase a specific number or dollar value of our
common shares and may be suspended or discontinued at any time, which could result in a decrease in the trading price of our common
shares. We cannot guarantee that the program will be fully consummated or that it will enhance long-term shareholder value. The share
repurchase program will diminish our cash reserves. In addition, repurchases of our common shares through the program could affect the
trading price of our common shares and increase volatility. The existence of a share repurchase program could cause the price of our
common shares to be higher than it would be absent such a program and could potentially reduce the market liquidity for our common
shares.
Certain
shareholders
have
the
right
to
appoint
directors
to
our
board
of
directors,
and
have
the
ability
to
influence
other
corporate
matters,
and
their
interests
may
not
coincide
with
yours.
Our Articles establish a board of directors of seven directors, with three Class B directors and four Class A directors. Pursuant to
the Governance Agreement, until the “Nomination Termination Time” (as defined therein), certain funds affiliated with Avenue Capital
Management II, L.P. (collectively, the “Avenue Parties”) have the right to nominate one Class B director, certain affiliates of Strategic
Value Partners, LLC (collectively, the “SVP Parties”) have the right to nominate one Class B director and the other parties to the
Governance Agreement (defined therein collectively as the “Other Lenders”) have the right to nominate one Class B director. From and
after the Nomination Termination Time, the board of directors will cease to be classified.
Pursuant to our Articles and the Governance Agreement, prior to the Nomination Termination Time, any two Class B directors
acting in their capacities as such (a “Class B Majority”) have broad authority to act on the Company’s behalf in connection with any
Acquisition Proposal or Acquisition (as such terms are defined in the Articles), including but not limited to the authority to solicit
prospective Acquisition Proposals, to retain, at the Company’s expense such consultants, legal counsel and other advisors as a Class B
Majority may from time to time deem appropriate to assist the Class B directors in the performance of their duties with respect to
Acquisition Proposals, and subject to specified conditions, to execute and deliver on behalf of the Company definitive documentation
providing for the consummation of an Acquisition. For additional information, see Item 10.B. “Additional Information - Memorandum
and Articles of Association.”
In addition, as of March 1, 2019, only a few of our shareholders, if they were to act in concert, could control the election of our
four Class A directors. As a result of the nomination rights in the Governance Agreement and the
22
concentration of ownership of our common shares, a relatively few number of shareholders are able to influence the composition of our
board of directors and thereby our management and business strategy. Further, as of the Plan Effective Date, only a few of our
shareholders, if they were to act in concert, could determine the outcome of a shareholder vote on significant corporate matters. The
interests of these shareholders may not coincide with your interests.
As
a
“foreign
private
issuer,”
we
are
exempt
from
most
of
the
NYSE
corporate
governance
standards
applicable
to
U.S.
public
companies,
except
for
the
requirement
to
have
an
independent
audit
committee.
We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the NYSE rules,
a “foreign private issuer” is subject to less stringent corporate governance requirements than a domestic issuer. Subject to certain
exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements
of the NYSE. Based on the foregoing we may elect not to comply with certain NYSE corporate governance requirements, including
(i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that all independent
directors meet in executive session at least once a year, (iii) the requirement that the nominating/corporate governance committee be
composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (iv) the
requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the
committee’s purpose and responsibilities and (v) the requirement to adopt corporate governance guidelines. We are required to have, and
do have, an audit committee composed entirely of independent directors. Accordingly, investors may not have the same protections
afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
As
a
“foreign
private
issuer,”
we
are
exempt
from
a
number
of
rules
under
the
U.S.
securities
laws
and
are
permitted
to
file
less
information
with
the
SEC
than
U.S.
public
companies.
This
may
limit
the
information
available
to
holders
of
our
common
shares.
As a “foreign private issuer,” we are not subject to all of the disclosure requirements applicable to companies organized within the
United States. For example, we are exempt from certain rules under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations
applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and
“short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and
financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly
available information concerning our Company than there is for U.S. public companies.
The
rights
of
our
shareholders
and
responsibilities
of
our
directors
and
officers
are
governed
by
Luxembourg
law
and
differ
in
some
respects
from
the
rights
and
responsibilities
of
shareholders
under
other
jurisdictions,
including
jurisdictions
in
the
United
States.
Our corporate affairs are governed by our Articles, and by the laws governing companies incorporated in Luxembourg, including
the Luxembourg Company Law ( loi
du
10
août
1915
concernant
les
sociétés
commerciales
). The rights of our shareholders and the
responsibilities of our directors and officers under Luxembourg law differ in some respects from those of a company incorporated under
other jurisdictions, including jurisdictions in the United States. Corporate laws governing Luxembourg companies may not be as
extensive as those in effect in U.S. jurisdictions and the Luxembourg Company Law (as defined above) in respect of corporate
governance matters might not be as protective of shareholders as the corporate law and court decisions interpreting the corporate law in
Delaware, where the majority of U.S. public companies are incorporated. In addition, we anticipate that all of our shareholder meetings
will take place in Luxembourg. Our shareholders may have more difficulty in protecting their interests in connection with actions taken
by our directors and officers or our principal shareholders than they would as shareholders of a corporation incorporated in a jurisdiction
in the United States.
23
Because
we
are
incorporated
under
the
laws
of
Luxembourg,
shareholders
may
face
difficulty
protecting
their
interests,
and
their
ability
to
obtain
and
enforce
judgments
through
other
international
courts,
including
courts
in
the
United
States,
may
be
limited.
We are a public limited liability company incorporated under the laws of Luxembourg, and as a result, it may be difficult for
investors to effect service of process within the United States upon us or to enforce judgments against us obtained in U.S. courts based on
the civil liability provisions of the federal securities laws of the United States. In addition, a substantial portion of our assets may be
located outside the United States. There is uncertainty as to whether the courts of Luxembourg would enforce final judgments of United
States courts obtained against us predicated upon the civil liability provisions of the federal securities laws of the United States.
Tax Risks
Changes
in
tax
laws,
treaties
or
regulations
or
adverse
outcomes
resulting
from
examination
of
our
tax
returns
could
adversely
affect
our
financial
results.
Our future effective tax rates could be adversely affected by changes in tax laws, treaties and regulations, both in the United States
and internationally. Tax laws, treaties and regulations are highly complex and subject to interpretation. Consequently, we are subject to
changing tax laws, treaties and regulations in and between countries in which we operate or are resident. Our income tax expense is based
upon the interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws,
treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our
worldwide earnings. If any country successfully challenges our income tax filings based on our structure, or if we otherwise lose a
material tax dispute, our effective tax rate on worldwide earnings could increase substantially and our financial results could be
materially adversely affected.
We
may
not
be
able
to
make
distributions
without
subjecting
our
shareholders
to
Luxembourg
withholding
tax.
If we are not successful in our efforts to make distributions, if any, through a withholding tax free reduction of share capital or
share premium (the absence of withholding on such distributions is subject to certain requirements), then any dividends paid by us
generally will be subject to a Luxembourg withholding tax at a rate of 15% (17.65% if the dividend tax is not withheld from the
shareholder) (subject to the reductions/exceptions discussed under Item 10.E. “Taxation—Luxembourg Tax Considerations”). The
withholding tax must be withheld by the Company from the gross distribution and paid to the Luxembourg tax authorities. Under current
Luxembourg tax law, a reduction of share capital or share premium is not subject to Luxembourg withholding tax provided that certain
conditions are met, including, for example, the condition that we do not have distributable reserves or profits. However, there can be no
assurance that our shareholders will approve such a reduction in share capital or share premium, that we will be able to meet the other
legal requirements for a reduction in share capital or share premium, or that Luxembourg tax withholding rules will not be changed in the
future. In addition, over the long term, the amount of share capital and share premium available for us to use for capital reductions will be
limited. If we are unable to make a distribution through a withholding tax free reduction in share capital or share premium, we may not be
able to make distributions without subjecting our shareholders to Luxembourg withholding taxes.
U.S.
tax
authorities
could
treat
us
as
a
“passive
foreign
investment
company,”
which
could
have
adverse
U.S.
federal
income
tax
consequences
to
U.S.
holders
of
our
common
shares.
A foreign corporation will be treated as a “passive foreign investment company,” or “PFIC”, for U.S. federal income tax purposes
if, after the application of certain look-through rules, either: (i) at least 75% of its gross income for any taxable year consists of certain
types of “passive income” or (ii) at least 50% of the value (determined on the basis of a quarterly average) of the corporation’s assets for
any taxable year produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income”
includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than certain rents
and royalties that are received from unrelated parties in connection with the active conduct of a trade or business, but does not include
income derived from the performance of services. U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax
regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive
from the sale or other disposition of their interests in the PFIC.
24
Based on our operations as of the date of this annual report, we believe that we will not be a PFIC in the current taxable year and
that we will not become a PFIC in any future taxable year. However, this involves a facts and circumstances analysis and it is possible
that the IRS would not agree with this conclusion. Further, the determination of whether a corporation is a PFIC is made annually and
thus may be subject to change. Therefore, we can give investors no assurance as to our PFIC status. Investors are encouraged to consult
their own independent tax advisors about the PFIC rules, including the availability of certain elections and reporting requirements. For
additional information see Item 10.E. “Taxation—U.S. Federal Income Tax Considerations.”
We
may
become
a
controlled
foreign
corporation
in
the
future.
While we do not believe that we are currently a controlled foreign corporation (“CFC”), we will become a CFC if U.S. persons,
who own (or are considered to own, as a result of the attribution rules) 10% or more of the voting power of our stock (each a “10% U.S.
shareholder”), collectively own more than 50% of either the total combined voting power of all classes of our voting stock or the total
value of our stock.
If we become a CFC, each U.S. Holder that is a 10% U.S. shareholder may be required to include in income its allocable share of
our “Subpart F” income reported. Subpart F income generally includes dividends, interest, net gain from the sale or disposition of
securities, non-actively managed rents and certain other generally passive types of income. The aggregate Subpart F income inclusions in
any taxable year relating to a particular CFC are limited to such entity’s current earnings and profits (as determined for U.S. federal
income tax purposes). These inclusions are treated as ordinary income (whether or not such inclusions are attributable to net capital
gains). Thus, if we become a CFC, a 10% U.S. shareholder may be required to report as ordinary income its allocable share of our
Subpart F income without corresponding receipts of cash.
Further, if we become a CFC, the tax basis of a 10% U.S. shareholder shares will be increased to reflect any required Subpart F
income inclusions. Such income may be treated as income from sources within the United States, for certain foreign tax credit purposes,
to the extent derived by us from U.S. sources. Such income will not be eligible for the reduced rate of tax applicable to “qualified
dividend income” for individual U.S. persons.
Regardless of whether we have any Subpart F income, if we become a CFC, any gain recognized by a 10% U.S. shareholder from
the disposition of our stock will be treated as ordinary income to the extent of such holder’s allocable share of our current and/or
accumulated earnings and profits. In this regard, earnings would not include any amounts previously taxed pursuant to the CFC rules.
If we are classified as both a CFC and a PFIC, a 10% U.S. shareholder will be required to include amounts in income as described
this subheading, and the consequences described under the above risk factor entitled “ U.S.
tax
authorities
could
treat
us
as
a
‘passive
foreign
investment
company,’
which
could
have
adverse
U.S.
federal
income
tax
consequences
to
U.S.
holders
of
our
common
shares
”
above will not apply. The interaction of these rules is complex. U.S. Holders should consult their own advisers as to the consequences of
the CFC and PFIC rules in their individual circumstances.
Changes
in
our
U.S.
federal
income
tax
classification,
or
that
of
our
subsidiaries,
could
result
in
adverse
tax
consequences
to
our
10%
or
greater
U.S.
shareholders.
The Tax Cuts and Jobs Act (the “2017 Act”) signed on December 22, 2017 may have changed the consequences to U.S.
shareholders that own, or are considered to own, as a result of the attribution rules, 10% or more of the voting power or value of the stock
of a non-U.S. corporation (a “10% U.S. shareholder”) under the U.S. federal income tax laws applicable to owners of U.S. controlled
foreign corporations (“CFCs”).
The 2017 Act repealed Section 958(b)(4) of the Internal Revenue Code of 1986, as amended (the “Code”), which, unless clarified
in future regulations or other guidance, may result in classification of certain of the Company’s foreign subsidiaries as CFCs with respect
to any single 10% U.S. shareholder. This may be the result without regard to whether 10% U.S. shareholders together own, directly or
indirectly, more than 50% of the voting power or value of the Company as was the case under prior rules. The repeal is effective as of the
last taxable year of CFCs beginning before January 1, 2018 and for the taxable year of 10% U.S. shareholders in which the CFCs’ taxable
year ends. Additional tax consequences to 10% U.S. shareholders of a CFC may result from other provisions of the 2017 Act. For
example, the 2017 Act added Section 951A of the Code which requires a 10% U.S. shareholder of a CFC to include in income its pro-
25
rata share of the global intangible low-taxed income (GILTI) of the CFC. The 2017 Act also eliminated the requirement in Section 951(a)
of the Code necessitating that a foreign corporation be considered a CFC for an uninterrupted period of at least 30 days in order for a 10%
U.S. shareholder to have a current income inclusion.
From time to time, the Company may elect to employ measures such as the share repurchase program approved by the Company’s
shareholders on February 22, 2019 that could inadvertently create additional 10% U.S. shareholders or result in the Company itself
becoming a CFC, and thus trigger adverse tax consequences for those shareholders as described above. We urge shareholders to consult
their individual tax advisers for advice regarding the 2017 Act revisions to the U.S. Federal income tax laws applicable to owners of
CFCs given the current uncertainty regarding their scope of applicability.
If
a
U.S.
Person
is
treated
as
owning
at
least
10%
of
our
common
shares,
such
holder
may
be
subject
to
adverse
U.S.
federal
income
tax
consequences.
If a U.S. person is treated as owning (directly, indirectly, or constructively) at least 10% of the value or voting power of our
common shares, such person may be treated as a “U.S. shareholder” with respect to each “controlled foreign corporation” in our group (if
any). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled
foreign corporations, regardless of whether or not we are treated as a controlled foreign corporation. A U.S. shareholder of a controlled
foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,”
“global intangible low-taxed income,” and investments in U.S. property by controlled foreign corporations, regardless of whether we
make any distributions. Failure to comply with these reporting obligations may subject a U.S. shareholder to significant monetary
penalties and may prevent the statute of limitations with respect to such shareholder’s U.S. federal income tax return for the year for
which reporting was due from starting. An individual who is a U.S. shareholder with respect to a controlled foreign corporation generally
would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. shareholder that is a U.S. corporation.
We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a
controlled foreign corporation or whether any investor is treated as a U.S. shareholder with respect to any such controlled foreign
corporation or furnish to any U.S. shareholders information that may be necessary to comply with the aforementioned reporting and tax
paying obligations. A U.S. investor should consult its advisors regarding the potential application of these rules to an investment in our
common shares.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The
Company
Pacific Drilling S.A. was formed on March 11, 2011, as a Luxembourg public limited liability company ( société
anonyme)
under
the Luxembourg law of 10 August 1915 on commercial companies, as amended. Our principal executive offices are located at 8-10,
Avenue de la Gare, L-1610 Luxembourg and our telephone number is +352 27 85 81 35. Our registered agent in Luxembourg is Centralis
S.A, which is located at 8-10, Avenue de la Gare, L-1610 Luxembourg. The operational headquarters of our Company is located at
11700 Katy Freeway, Suite 175, Houston Texas 77079. Our telephone number at this address is 713-334-6662.
Our common shares were listed on the Norwegian OTC List from April 2011 to October 2016 and on the NYSE from November
11, 2011 to September 12, 2017. From September 13, 2017 to November 19, 2018 and from November 20, 2018 to December 17, 2018,
our common shares were traded on the over-the-counter market under the ticker symbols “PACDQ” and “PACDD,” respectively. Our
common shares were relisted on the NYSE on December 18, 2018 and currently trade under the symbol “PACD.”
Background—Emergence
from
Bankruptcy
Proceedings
On November 2, 2018, the Bankruptcy Court issued the Confirmation Order approving the Plan and on November 19, 2018, the
Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 bankruptcy proceedings. The Debtors had
filed the Plan with the Bankruptcy Court in connection with their voluntary
26
petitions for relief under Chapter 11 of Title 11 of the United States Code, initially filed on November 12, 2017, which were jointly
administered under the caption In
re
Pacific
Drilling
S.A.,
et
al.
, Case No. 17-13193 (MEW).
The Zonda Debtors are not Debtors under the Plan and filed a separate plan of reorganization, which was confirmed by order of
the Bankruptcy Court on January 30, 2019. On the date the plan was confirmed, the Zonda Debtors had $4.6 million in cash and no other
material assets after accounting for post-petition administrative expenses (other than the value of their claims against SHI) for SHI to
recover against on account of its claims. The Company expects that the Zonda Debtors will emerge from their separate bankruptcy
proceedings after the successful resolution of the Zonda Arbitration. If the Company is unsuccessful in the arbitration, the Company
expects to liquidate the Zonda Debtors.
Reorganization
Transactions
Relating
to
Capital
Structure
Pursuant to the Plan, we raised approximately $1.5 billion in new capital, before expenses, consisting of approximately
$1.0 billion raised through issuance of our First Lien Notes and Second Lien PIK Notes and $500.0 million raised through issuance of
new common shares pursuant to an equity rights offering and private placement. We used the net proceeds to repay all of our pre-petition
indebtedness that was not equitized pursuant to the Plan, to repay post-petition indebtedness incurred under our debtor-in-possession
financing, and to pay certain fees and expenses. We intend to use the remaining balance for general corporate purposes. More
specifically, pursuant to the Plan, the following principal transactions and events occurred on the Plan Effective Date relating to the
Company’s capital structure:
· Completion
of
$500.0
Million
Offerings
of
Common
Shares
. The Company issued common shares in connection with the
completion of a $460.0 million equity rights offering and $40.0 million private placement.
·
·
·
Issuance
of
Common
Shares
to
Equitize
Undersecured
Claims
and
in
Payment
of
Equity
Commitment
Fee
.
The Company
issued common shares to holders of its Term Loan B, 2017 Notes and 2020 Notes, and such indebtedness was extinguished.
The Company also issued common shares to members of the Ad Hoc Group in payment of their fee for backstopping the
equity rights offering.
Assumption
of
the
First
Lien
Notes
and
Second
Lien
PIK
Notes;
Release
of
Escrowed
Proceeds
to
the
Company
.
Bankruptcy-
remote subsidiaries of the Company that issued the First Lien Notes and Second Lien PIK Notes, merged into the Company;
the Company assumed all of the obligations of such issuers under the First Lien Notes and Second Lien PIK Notes and
executed supplemental indentures in connection therewith; certain subsidiaries of the Company guaranteed the Notes as
required pursuant to the indentures for the Notes and executed supplemental indentures in connection therewith; the Company
and guarantors executed documents providing collateral as required pursuant to the indentures for the Notes; and the net
proceeds of the issuance of the Notes were released to the Company.
Repayment
of
Revolving
Credit
Facility,
Senior
Secured
Credit
Facility
and
DIP
Financing
.
The Company paid all
obligations owed under its pre-petition 2013 Revolving Credit Facility and SSCF, and under its post-petition debtor-in-
possession financing, and all such indebtedness was extinguished.
· Completion
of
Reverse
Stock
Split
. Prior to the issuance of the shares described above, the Company effected a 1-for-10,000
Reverse Stock Split.
As a result of the Reverse Stock Split and the issuance of common shares described above, the Company had issued and
outstanding on the Plan Effective Date approximately 75.0 million common shares, and approximately 7.5 million shares were reserved
for issuance pursuant to the 2018 Stock Incentive Plan. Due to the Reverse Stock Split and issuance of the new common shares under the
Plan as described above, the Company’s common shares prior to the Plan Effective Date were diluted such that they represented in the
aggregate approximately 0.003% of the Company’s outstanding common shares on the Plan Effective Date.
Other
Reorganization
Transactions
Pursuant to the Plan, the following additional principal transactions and events occurred on the Plan Effective Date:
·
Amendment
of
Articles
of
Association
. The Company’s Articles were amended to, among other things, reflect the new capital
structure and establish a classified board of Class A directors and Class B directors.
27
· Governance
Agreement
. The Company entered into the Governance Agreement with certain holders of its shares, which
provides for, among other things, director nomination and board observer rights of the parties, as well as an agreement to
increase the Company’s share capital at the request of certain parties.
·
·
·
Resignation
of
Directors
and
Election
of
New
Directors
.
All of the Company’s directors prior to our emergence from
bankruptcy resigned from our board of directors and upon our emergence from bankruptcy, W. Matt Ralls (Chairman), David
Weinstein and Bernie G. Wolford Jr. joined the board of directors as Class A directors, and Daniel Han, Donald Platner, and
Kiran Ramineni joined the board of directors as Class B directors. Subsequent to our emergence from bankruptcy, John V.
Simon joined our board of directors as a Class A director.
Appointment
of
Chief
Executive
Officer
. Bernie G. Wolford Jr. was appointed Chief Executive Officer of the Company.
Registration
Rights
Agreement
. The Company entered into the Registration Rights Agreement with certain holders of its
shares, which grants such holders certain registration rights with respect to our common shares.
For additional information, see Item 10.B. “Additional Information - Memorandum and Articles of Association” and Item 6.A.
“Directors and Senior Management.”
Zonda
Arbitration
In January 2013, our subsidiary PDVIII entered into, and our subsidiary PDSI guaranteed, a contract with SHI for the construction
of the Pacific
Zonda
, with a purchase price of approximately $517.5 million and original delivery date of March 31, 2015 (the
“Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s failure to timely
deliver the drillship in accordance with the contractual specifications. SHI rejected our rescission, and on November 25, 2015, formally
commenced an arbitration proceeding against us in London under the Arbitration Act 1996 before a tribunal of three arbitrators (as
specified in the Construction Contract) (the “Tribunal”). SHI claims that we wrongfully rejected their tendered delivery of the drillship
and seeks the final installment of the purchase price under the Construction Contract. On November 30, 2015, we made demand under
the third-party refund guarantee accompanying the Construction Contract for the amount of our advance payments made under the
Construction Contract of approximately $181.1 million, plus interest. Any payment under the refund guarantee is suspended until an
award under the arbitration is obtained. In addition to seeking repayment of our advance payments made under the Construction Contract,
we have made a counterclaim for the return of our purchased equipment, or the value of such equipment, and damages for our wasted
expenditures. We own $75.0 million in purchased equipment for the Pacific
Zonda
, a majority of which remains on board the Pacific
Zonda
. An evidentiary hearing was held in London before the Tribunal from February 5 through March 2, 2018. Written closing
submissions and short replies to such submissions were filed with the Tribunal in May 2018. Oral closing submissions were heard by the
Tribunal in August 2018. We expect the Tribunal to render its award within the next several months.
Based on our assessment of the facts and circumstances of the rescission, we believe the estimated fair value of our assets related
to the Zonda Arbitration was $204.7 million on the Plan Effective Date. We do not believe that the ultimate outcome resulting from this
arbitration will have a material adverse effect on our financial position, results of operations or cash flows.
As part of our “first day” relief sought in the Chapter 11 bankruptcy proceedings, the Bankruptcy Court granted us a modification
of the automatic stay provisions of the Bankruptcy Code to allow the arbitration to proceed. In our bankruptcy proceedings, SHI asserted
claims against PDVIII and PDSI, secured by the Pacific
Zonda
, for approximately $387.4 million, for the remaining unpaid purchase
price, interest and costs. Subsequent to the initial plan of reorganization filed by the Debtors and the Zonda Debtors with the Bankruptcy
Court, the Company filed an amended plan of reorganization that removed the Zonda Debtors from the Plan. The Zonda Debtors are not
Debtors under the Plan and filed a separate plan of reorganization that was confirmed by order of the Bankruptcy Court on January 30,
2019. On the date the plan was confirmed, PDVIII and PDSI had $4.6 million in cash and no other material assets after accounting for
post-petition administrative expenses (other than the value of their claims against SHI) for SHI to recover against on account of its
claims. The Company expects that the Zonda Debtors will emerge from their separate bankruptcy proceedings after the successful
resolution of the arbitration. If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors.
28
If the Company is successful in the arbitration and the Zonda Debtors emerge from their separate plan of reorganization, the Zonda
Debtors will guarantee the First Lien Notes and Second Lien PIK Notes. In addition, the Company will be required to offer to purchase
First Lien Notes at 100.0% of the principal amount thereof, plus accrued and unpaid interest, with any cash proceeds from a settlement or
award in connection with the arbitration, with such offer to be for an aggregate principal amount of First Lien Notes equal to the lesser of
(x) 50.0% of such cash proceeds and (y) $75.0 million. The Company will also be required to offer to purchase Second Lien PIK Notes at
100.0% of the principal amount thereof, plus accrued and unpaid interest, with the portion of such cash proceeds, if any, that has been
declined by the holders of First Lien Notes.
Capital
Expenditures
We have no material commitments for capital expenditures related to the construction of a newbuild drillship. As of
December 31, 2018, we had commitments for capital expenditures related to rig enhancements of $20.8 million. We also expect to incur
capital expenditures for purchases in the ordinary course of business. Such capital expenditure commitments are included in purchase
obligations presented in Item 5.F. “Tabular Disclosure of Contractual Obligations.”
Available
Information
We file annual and special reports and other information with the SEC. The SEC maintains a website at www.sec.gov, which
contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. In
addition, we post these documents on our website at www.pacificdrilling.com in the Investor Relations section.
B. BUSINESS OVERVIE W
We are an international offshore drilling contractor providing offshore drilling services to the oil and gas industry through the use
of high-specification floating rigs. Our primary business is to contract our fleet of rigs to drill wells for our clients. We believe we own
and operate the only deepwater fleet comprised solely of sixth and seventh generation high-specification drillships, and that our current
fleet of seven drillships offers premium technical capabilities to our clients. The term “high-specification,” as used in the floating rig
drilling industry to denote a particular segment of the market, can vary and continues to evolve with technological improvements. We
generally consider high-specification requirements to include non-harsh environment drillships delivered in or after 2005 and capable of
drilling in water depths of 10,000 feet or more.
Our
Business
Strategies
Our principal business objective is to be the preferred provider of high-specification, floating rig drilling services to the oil and
natural gas industry. Our operating strategy is designed to enable us to provide high quality, safe and cost-competitive services and to
maintain and deploy our assets to position us to benefit from an expected increase in demand for deepwater offshore drilling and increase
our cash flow and profits. Specifically, we expect to achieve our business objectives through the following strategies:
·
·
Enhanced
focus
on
safety
and
operational
excellence
targeting
key
markets
. With current decreased demand for offshore
drilling services, excelling in safety and operational performance is a key factor for success. Our management team is focused
on providing quality drilling services for our clients by minimizing downtime and maximizing rig operational efficiency. We
believe that we have developed a competitive advantage through our exceptional operating performance and plan to target a
presence in key high-specification, deepwater drilling geographies, including West Africa, U.S. Gulf of Mexico and
Brazil. We have built a strong team of experienced professionals that have expertise in diverse areas, such as regulatory and
operational affairs, in these key offshore areas.
Efficiently
manage
costs
while
maintaining
optionality
and
marketability
. With a cost-competitive fleet, we believe we will be
able to benefit relatively early in the anticipated market recovery. We have created a well-positioned and well-maintained fleet
that we believe is at the low end of the cost of supply curve through the thoughtful reduction of expenses, primarily operations,
maintenance and supply chain management. We have implemented company-wide cost-savings initiatives to reduce our rig
operating expenses while effectively
29
maintaining our ability to restart idle rigs within a time frame of three months for a smart-stacked rig and six months for a
modified smart-stacked rig. We are also focused on retaining a critical mass of core management and senior rig operations
personnel and continuing personnel development programs, while managing cash costs. These efforts to manage costs should
enable us to continue to deploy our drillships under contracts with positive rig level cash flows even in the current low dayrate
environment.
· Continued
development
of
strategic
relationships
with
high-quality
clients
. Improvement of our future revenue is dependent
upon major international and national oil companies as well as independent exploration and production companies increasing
their exploration and development programs. Our existing and potential clients tend to take long-term approaches to the
development of their projects, and we believe that our strong operational performance and efficient cost management will
make us a preferred long-term partner. We plan to continue to manage our drillships in such a way as to enable us to nimbly
and cost-effectively exploit the anticipated market recovery.
Clients
A significant number of the most active participants in the high-specification floating rig segment of the offshore exploration and
production industry are major oil and gas companies, national oil companies or well-capitalized large independent oil and gas companies.
During the years ended December 31, 2018, 2017 and 2016, the percentage of revenues earned from our clients was as follows:
Chevron
Eni
Petronas
Total
Other
Revenues
by
Geographic
Area
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018
November 19, 2018
2017
2016
82.1 %
17.9 %
— %
— %
— %
84.0 %
— %
14.2 %
— %
1.8 %
81.6 %
— %
— %
— %
18.4 %
77.1 %
— %
— %
22.9 %
— %
During the years ended December 31, 2018, 2017 and 2016, the percentage of revenues earned by geographic area, based on
drilling location, is as follows:
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018
November 19, 2018
2017
2016
82.1 %
17.9 %
— %
84.0 %
1.8 %
14.2 %
81.6 %
11.2 %
7.2 %
56.9 %
43.1 %
— %
United States
Nigeria
Other
Contract
Backlog
Our contract backlog includes firm commitments only, which are represented by signed drilling contracts. As of March 1, 2019,
our contract backlog was approximately $238.3 million and was attributable to revenues we expect to generate on (i) the Pacific
Sharav
under the drilling contract with a subsidiary of Chevron Corporation (“Chevron”), (ii) the Pacific
Santa
Ana
under the drilling contracts
with Total E&P Senegal (“Total”) and PC Mauritania 1 Pty Ltd (“Petronas”) and (iii) the Pacific
Bora
under the drilling contract with
Nigerian AGIP Exploration Limited, a subsidiary of Eni S.p.A. (“Eni”). We calculate our contract backlog by multiplying the contractual
dayrate by the number of days committed under the contracts (excluding options to extend), assuming full utilization, and also including
mobilization fees, upgrade reimbursements and other revenue sources, such as the standby rate during upgrades, as stipulated in the
30
applicable contracts. For a well-by-well contract, we calculate the contract backlog by estimating the expected number of remaining days
to drill the firm wells committed.
The actual amounts of revenues earned and the actual periods during which revenues are earned may differ from the amounts and
periods shown in the table below due to various factors, including unplanned downtime and maintenance projects and other factors. Our
contracts generally provide for termination at the election of the client with an “early termination payment” to be paid to us if a contract
is terminated prior to the expiration of the fixed term. However, under certain limited circumstances, such as destruction of a drilling rig
or sustained unacceptable performance by us, an early termination payment is not required to be paid. Accordingly, the actual amount of
revenues earned may be substantially lower than the backlog reported.
The firm commitments that comprise our $238.3 million contract backlog as of March 1, 2019, are as follows:
Rig
Pacific
Sharav
Pacific
Sharav
Pacific
Santa
Ana
Pacific
Santa
Ana
Pacific
Bora
Contracted
Location
U.S. Gulf of Mexico
U.S. Gulf of Mexico
Senegal
Mauritania
Nigeria
Client
Chevron
Chevron
Total
Petronas
Eni
Contract
Commencement
August 2014
September 2019
April 2019
July 2019
November 2018
(a) Extension for one firm well and three additional option wells.
(b) Contract to operate in Senegal for one firm well and in Mauritania for one option well.
(c) Contract to perform integrated services for a plug and abandonment project estimated at 360 days.
(d) Contract for two firm wells with one option well.
Drilling
Contracts
Expected
Contract
Duration
5 years
(a)
(b)
(c)
(d)
We typically provide drilling services on a “dayrate” contract basis. Under dayrate contracts, the drilling contractor provides a
drilling rig and rig crews and charges the client a fixed amount per day regardless of the number of days needed to drill the well. The
client bears substantially all of the ancillary costs of constructing the well and supporting drilling operations, as well as the economic risk
relative to the success of the well. In addition, dayrate contracts sometimes provide for a lump sum amount for mobilizing the rig to the
well location and a reduced dayrate when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather
conditions or other conditions beyond the contractor’s control. A dayrate drilling contract generally covers either the drilling of a single
well or group of wells or has a stated term. These contracts may generally be terminated by the client in the event the drilling unit is
damaged, destroyed or lost or if drilling operations are suspended for an extended period of time as a result of a breakdown of equipment,
“force majeure” events beyond the control of either party or upon the occurrence of other specified conditions. In addition, drilling
contracts with certain clients may be cancelable, without cause, with little or no prior notice. Some longer term contracts are subject to
early termination payments. In some instances, the dayrate contract term may be extended by the client exercising options for the drilling
of additional wells or for an additional length of time at fixed or mutually agreed terms, including dayrates.
Competition
The contract drilling industry is highly competitive. Demand for contract drilling and related services is influenced by a number of
factors, including the current and expected prices of oil and natural gas and the capital expenditure plans of oil and natural gas companies
for exploration and development of oil and natural gas. In addition, demand for drilling services remains dependent on a variety of
political and economic factors beyond our control, including worldwide demand for oil and natural gas, the ability of the Organization of
the Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and pricing, the level of production of non-OPEC
countries, local infrastructure and human resources constraints, and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.
31
We are primarily focused on the deepwater market, but may also compete to provide services at shallower depths than deepwater.
Our competition ranges from large international companies offering a wide range of drilling and other oilfield services to smaller, locally
owned companies.
Drilling contracts are generally awarded on a competitive bid or negotiated basis. Pricing is often the primary factor in
determining which qualified contractor is awarded a job; however, rig availability, capabilities, age and each contractor’s safety
performance record and reputation for quality also can be key factors in the determination. Operators also may consider crew experience,
technical and engineering support, rig location and efficiency, as well as long-term relationships with major international oil companies
and national oil companies.
We believe that the market for drilling contracts will continue to be highly competitive in the near and intermediate term. We
believe that our fleet of high-specification drillships provides us with a competitive advantage over many competitors with older fleets, as
high-specification drilling units are generally better suited to meet the requirements of clients for drilling in deepwater, complex
geological formations with challenging well profiles. However, certain competitors may have greater financial resources than we do,
which may enable them to better withstand periods of low utilization and compete more effectively on the basis of price.
Seasonality
In general, seasonal factors do not have a significant direct effect on our business.
Insurance
The contract drilling industry is subject to hazards inherent in the drilling of oil and natural gas wells, including blowouts and well
fires, which could cause personal injury, suspend drilling operations, or seriously damage or destroy the equipment involved. Offshore
drilling operations are also subject to hazards particular to marine operations including capsizing, grounding, collision and loss or damage
from severe weather. While we maintain insurance to protect our drillships in the areas in which we operate, certain political risks and
other environmental risks are not fully insurable. We maintain insurance coverage that includes coverage for hull and machinery, marine
liabilities, third party liability, workers’ compensation and employer’s liability, general liability, vessel pollution and other coverages.
Our insurance is subject to exclusions and limitations, and our insurance coverage may not adequately protect us against liability
from all potential consequences and damages. We believe that our insurance coverage is customary for the industry and adequate for our
business. However, there are risks that such insurance will not adequately protect us against and insurance may not be available to cover
all of the liability from all of the consequences and hazards we may encounter in our operations.
Governmental
Regulation/Environmental
Issues
Our operations are subject to stringent and comprehensive federal, state, local and foreign or international laws and regulations,
including those governing the discharge of oil and other contaminants into the environment or otherwise relating to environmental
protection.
In the United States, we must comply with the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the
Comprehensive Environmental Response, Compensation, and Liability Act, the Federal Water Pollution Control Act (commonly referred
to as the Clean Water Act) and the International Convention for the Prevention of Pollution from Ships, as each has been amended from
time to time. Numerous governmental agencies, which in the United States include, among others, the U.S. Department of the Interior,
Bureau of Ocean Energy Management, Bureau of Safety and Environmental Enforcement, U.S. Coast Guard and U.S. Environmental
Protection Agency, issue regulations to implement and enforce environmental laws, which often require difficult and costly compliance
measures. We could be subject to substantial administrative, civil and criminal penalties, cleanup obligations, legal damages for pollution
or personal injury or injunctive relief for violations of or liabilities under these laws. Moreover, it is possible that changes in these
environmental laws and regulations or any enforcement policies that impose additional or more restrictive requirements or claims for
damages to persons, property, natural resources or the environment could result in substantial costs and liabilities to us. We believe that
we are in substantial compliance with currently applicable environmental laws and regulations.
32
As an independent drilling contractor operating in Nigeria, we are subject to Petroleum (Drilling and Production) Amendment
Regulations 1988 (the “Regulations”) which require us to be accredited with the Department of Petroleum Resources (the “DPR”). The
Guidelines and Application Form for Oil & Gas Industry Service Permit issued by the DPR (the “DPR Guidelines”) require that we are
accredited and issued with a permit by the DPR (the “DPR Permit”) in order to carry out the services in the industry. We have received
and must annually renew the DPR Permit in accordance with the DPR Guidelines. In addition to the DPR Permit, under the Local
Content Act (as defined below), we are required to be registered with the Joint Qualification System (“JQS”). The Nigerian Petroleum
Exchange (“NIPEX”) administers the JQS. NIPEX is required to pre-qualify companies and categorize them into its database as a
prerequisite for any company intending to offer services in the industry and forms the basis for an invitation to tender for contracts. Under
the Regulations we are also required to obtain a valid license prior to operating a drilling rig (a “Drilling Rig Permit”). A Drilling Rig
Permit is granted by the Minister of Petroleum Resources (“Minister”) or any other public officer in the Ministry authorized by the
Minister in writing in that regard.
Our operations are also subject to the provisions of the Environmental Guidelines and Standards for the Petroleum Industry of
Nigeria which establish a uniform monitoring and control program in relation to discharges arising from oil exploration and development
in Nigeria.
The Nigerian Oil and Gas Industry Content Development Act, 2010 (the “Local Content Act”) was enacted to provide for the
development, implementation and monitoring of Nigerian content in the oil and gas industry and places emphasis on the promotion of
Nigerian content among companies bidding for contracts in the oil and gas industry. It also provides for majority Nigerian equity
distribution of the relevant companies. The Local Content Act requires contractors within the oil and gas industry to comply with the
minimum Nigerian Content (as defined in the Local Content Act) specified for each particular project item, service or product
specification as set out in Schedule A of the Local Content Act (the “Schedule”). The Schedule provides the parameters and minimum
level/percentages to be utilized in determining and measuring Nigerian Content in the composite human, material resources and services
applied by operators and contractors in any project in the industry. The most relevant categories under the Schedule for us fall under the
headings of “Well and Drilling Services/Petroleum Technology” and “Exploration, Subsurface, Petroleum Engineering and Seismic.”
The activities listed therein include: “Producing Drilling Services” and “Drilling Rigs Semi-submersibles/Jack ups/others” which both
apply to us. For offshore drilling services within the above referenced categories, the minimum required Nigerian Content for the
provision of such services provided in the Schedule is stated in terms of “Manhours” ( i.e.
, human resources) and is 85% and 55%,
respectively. In the event there is insufficient Nigerian capacity to satisfy the minimum percentages prescribed in the Schedule, the
Minister may authorize the continued importation of the relevant item or personnel for a maximum period of three years from the
commencement of the Local Content Act. This implies that the Minister may grant a waiver for up to a maximum of three years from the
commencement of the Local Content Act ( i.e.
, by 2013). Subject to any amendments to the Local Content Act, and/or guidelines issued
by the Nigerian Content Monitoring Board clarifying certain provisions of the Local Content Act, all entities must comply with the
provisions of the Local Content Act.
We are required to submit a proposed Nigerian Content Execution Plan and will provide a Monthly Nigerian Content Report, a
document that details the amount of Nigerian Content utilized in the performance of the contract.
In addition to the above Nigerian Content requirements, Nigerian subsidiaries of international companies are required to
demonstrate that a minimum of 50% of the equipment deployed for execution of works is owned by the Nigerian subsidiary.
The Local Content Act also requires that our Nigerian subsidiary place 100% of its insurance policies with local Nigerian insurers
and that local capacity must have been exhausted before any insurance risk is placed with foreign insurers and any offshore placement of
insurance must be with prior approval of the National Insurance Commission.
33
C. ORGANIZATIONAL STRUCTUR E
We have 37 subsidiaries organized under the laws of various jurisdictions. For a full listing of our subsidiaries, including their
jurisdictions of organization, see Exhibit 8.1 to this annual report. All subsidiaries are, indirectly or directly, wholly-owned by Pacific
Drilling, S.A., except for Pacific International Drilling West Africa Limited (“PIDWAL”), Pacific Drillship Nigeria Limited (“PDNL”),
Pacific Bora Ltd. (“PBL”) and Pacific Scirocco Ltd. (“PSL”).
PSL and PBL, which own the Pacific
Scirocco
and Pacific
Bora
, respectively, are owned 49.9% by our wholly-owned subsidiary
Pacific Drilling Limited (“PDL”) and 50.1% by PDNL. PDNL is owned 0.1% by PDL and 99.9% by PIDWAL, which is our Nigerian
joint venture with Derotech Offshore Services Limited (“Derotech”). Derotech owns 51% of PIDWAL and PDL, indirectly through
another wholly-owned subsidiary, owns 49% of PIDWAL. Derotech will not accrue the economic benefits of its interest in PIDWAL
unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Likewise, PIDWAL will not
accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge
is cancelled by us. PIDWAL and PDNL are variable interest entities for which we are the primary beneficiary. Accordingly, we
consolidate all interests of PIDWAL and PDNL in our consolidated financial statements.
D. PROPERTY, PLANT AND EQUIPMEN T
Our
Fleet
The following table sets forth certain information regarding our fleet as of March 1, 2019:
Rig Name
Pacific
Bora
Pacific
Mistral
Pacific
Scirocco
Pacific
Santa
Ana
Pacific
Khamsin
Pacific
Sharav
Pacific
Meltem
Water Depth Drilling Depth
Delivered
(in feet)
(in feet)
2010
2011
2011
2011
2013
2014
2014
10,000
12,000
12,000
12,000
12,000
12,000
12,000
37,500
37,500
40,000
40,000
40,000
40,000
40,000
(1)
Hook
Load
(tons)
1,000
1,000
1,000
1,000
1,250
1,250
1,250
# of
Blowout
Dual
Load
Preventers Path
No
No
Yes
Yes
Yes
Yes
Yes
2
1
1
1
2
2
2
(1) All of our drillships have a dual derrick drilling system and five of our seven drillships are dual load path capable. The dual load
path capable drillships can lower pipe and equipment to the seafloor from both drilling stations under the derrick, reducing well
construction time by allowing operations to be conducted concurrently, rather than consecutively in series as the process has, due to
equipment limitations, traditionally required. The remaining two drillships contain a dual derrick drilling system, but only use the
secondary derrick to prepare pipe and equipment for the primary drilling process.
The First Lien Notes are secured by first-priority liens, and the Second Lien PIK Notes are secured by second-priority liens, on
substantially all assets of the Company including all of our drillships.
Properties
We lease our principal executive office and our registered office in Luxembourg and our operational headquarters in Houston,
Texas. We also provide technical, operational and administrative support from a leased office in Nigeria.
ITEM 4A. UNRESOLVED STAF F COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIA L REVIEW AND PROSPECTS
The
following
discussion
and
analysis
should
be
read
in
conjunction
with
Item
3.A.
“Selected
Financial
Data”
and
the
financial
statements
in
Item
18,
“Financial
Statements.”
34
A. OPERATING RESULT S
Predecessor and Successor Reporting
On November 2, 2018, the Bankruptcy Court issued the Confirmation Order approving the Plan and on November 19, 2018, the
Plan became effective pursuant to its terms and we emerged from our Chapter 11 bankruptcy proceedings. We had filed the Plan with the
Bankruptcy Court in connection with our voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code, initially
filed on November 12, 2017, which were jointly administered under the caption In
re
Pacific
Drilling
S.A.,
et
al.
, Case No. 17-13193
(MEW).
On the Plan Effective Date, we adopted and applied the relevant guidance with respect to the accounting and financial reporting
for entities that have emerged from bankruptcy proceedings, or “Fresh Start Accounting.” Under Fresh Start Accounting, our balance
sheet on the Plan Effective Date reflects all of our assets and liabilities at fair value. Our emergence from bankruptcy and the adoption of
Fresh Start Accounting resulted in a new reporting entity, referred to herein as the “Successor,” for financial reporting purposes. To
facilitate discussion and analysis of our financial condition and results of operations herein, we refer to the reorganized Debtors as the
Successor for periods subsequent to November 19, 2018 and as the “Predecessor” for periods on or prior to November 19, 2018. As a
result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, our consolidated financial statements
subsequent to November 19, 2018 may not be comparable to our consolidated financial statements on or prior to November 19, 2018, and
as such, “black-line” financial statements are presented to distinguish between the Predecessor and Successor companies.
Factors Affecting our Results of Operations
The primary factors that have affected our historical operating results and are expected to impact our future operating results
include:
· market conditions, including the volatility of oil prices;
·
·
·
·
·
·
·
·
our clients’ reduced capital expenditure budgets;
the number of drillships in our fleet;
dayrates earned by our drillships;
utilization rates of drillships industry-wide;
operating expenses of our drillships;
administrative expenses;
interest and other financial items; and
tax expenses.
Our revenues are derived primarily from the operation of our drillships at fixed daily rates, which depend principally upon the
number and availability of our drillships, the dayrates received and the number of days utilized. We recognize revenues from drilling
contracts as services are performed upon contract commencement.
Additionally, we may receive revenues for preparation and mobilization of equipment and personnel or for capital improvements
to rigs. Revenues earned and incremental costs incurred directly related to contract preparation and mobilization are deferred and
recognized over the primary term of the drilling contract. We may also receive fees upon completion of a drilling contract that are
conditional based on the occurrence of an event, such as demobilization of a rig.
Our expenses consist primarily of operating expenses, depreciation, administrative expenses, interest and other financial expenses
and tax expenses.
Operating expenses include the remuneration of offshore crews, repairs and maintenance as well as expenses for shore-based
support offices and onshore operations support staff.
35
Depreciation expense is based on the historical cost or, upon the adoption of Fresh Start Accounting, fair value of our drillships
and other property and equipment and recorded on a straight-line basis over the estimated useful lives of each class of assets. Upon the
adoption of Fresh Start Accounting, the estimated useful lives of our drillships and their related equipment generally range from 8 to 33
years.
General and administrative expenses include the costs of management and administration of our Company, such as the labor costs
of our corporate employees, remuneration of our directors and legal and advisory expenses.
Interest expense primarily depends on our overall level of indebtedness and interest rates.
Tax expenses reflect current and deferred tax expenses. Our income tax expense generally results from the taxable income on our
drillship operations.
Fleet Status
The status of our fleet as of March 1, 2019 and certain historical fleet information for the periods covered by the financial
statements included in this annual report follows:
·
·
·
·
·
·
·
The Pacific
Sharav
is operating under a five-year contract with a subsidiary of Chevron through August 27, 2019. In February
2019, the Pacific
Sharav
entered into an amendment to extend the contract with Chevron to operate in the U.S. Gulf of Mexico
beyond its initial five year term for one firm well and three additional option wells.
The Pacific
Bora
completed a five-year contract with a subsidiary of Chevron in September 2016. From February 9, 2017 to
May 16, 2017, the Pacific
Bora
operated under a contract with Folawiyo AJE Services Limited in Nigeria. From August 1,
2017 to October 3, 2017, and from November 30, 2017 to February 5, 2018, the Pacific Bora operated under a contract with
Erin Energy Corporation in Nigeria. On November 30, 2018, the Pacific
Bora
commenced operations with Eni to operate in
Nigeria for one firm well with two option wells (each well estimated at approximately 60 days of work). In February 2019, the
client exercised the first option.
The Pacific
Santa
Ana
commenced a contract with a subsidiary of Chevron in May 2012 that was completed in January 2017.
From December 20, 2017 to May 7, 2018, the Pacific
Santa
Ana
operated in Mauritania under a contract with Petronas to
perform integrated services under Phase I of a two-phased plug and abandonment project. Petronas exercised its option to
contract the Pacific
Santa
Ana
for Phase II of the plug and abandonment project in Mauritania expected to commence in the
third quarter of 2019 with an estimated 360 days of work. The Pacific
Santa
Ana
is currently in Las Palmas undergoing client
acceptance testing to operate for Total in Senegal starting April 2019 for one firm well and in Mauritania for one option well.
The Pacific
Khamsin
is currently transitioning from smart-stacked to hot-stacked status.
The Pacific
Meltem
is currently idle in Las Palmas while actively seeking a contract.
The Pacific
Scirocco
operated under a contract with a subsidiary of Total from December 2011 to December 2016. From May
21, 2017 to September 15, 2017, the Pacific
Scirocco
operated under a contract with Hyperdynamics Corporation in the
Republic of Guinea. The rig is currently idle in Las Palmas while actively seeking a contract.
The Pacific
Mistral
completed a three-year contract with Petroleo Brasiliero S.A. in Brazil in February 2015. The Pacific
Mistral
is currently idle in Las Palmas while actively seeking a contract.
From time to time, we are awarded letters of intent or receive letters of award for our drillships. Certain of those letters remain
subject to negotiation and execution of definitive contracts and other customary conditions. No assurance can be given as to the terms of
any such arrangement, such as the applicable duration or dayrate, until a definitive contract is entered into by the parties, if we are able to
finalize a contract at all.
36
Results of Operations
References to the year ended December 31, 2018 relate to the combined Successor and Predecessor periods for the year ended
December 31, 2018.
Year
ended
December
31,
2018
compared
to
Year
ended
December
31,
2017
The following table provides a comparison of our consolidated results of operations for the years ended December 31, 2018 and
2017:
Successor
Period From
November 20, 2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19,
2018
Predecessor
Year Ended
December 31, 2017
(in thousands)
Revenues
Contract drilling
Costs and expenses
Operating expenses
General and administrative expenses
Depreciation and amortization expense
Operating loss
Other income (expense)
Interest expense
Write-off of deferred financing costs
Reorganization items
Interest income
Equity earnings in unconsolidated subsidiaries
Expenses to unconsolidated subsidiaries, net
Other income (expense)
Loss before income taxes
Income tax (expense) benefit
Net loss
$
28,489
$
236,379 $
319,716
(19,744)
(4,245)
(27,277)
(22,777)
(10,904)
—
(1,300)
1,008
392
(1,198)
526
(34,253)
6,769
(27,484)
$
(189,606)
(50,604)
(248,302)
(252,133)
(106,632)
—
(1,799,664)
3,148
—
—
(1,904)
(2,157,185)
2,308
(2,154,877) $
(244,089)
(87,134)
(278,949)
(290,456)
(178,983)
(30,846)
(6,474)
2,717
—
—
(8,261)
(512,303)
(12,863)
(525,166)
$
Revenues.
During the year ended December 31, 2018, revenues were $264.9 million. The decrease in revenues for the year ended
December 31, 2018, as compared to the year ended December 31, 2017 resulted primarily from lower operating revenues from the
Pacific
Bora
working for only a part of the year, the Pacific
Scirocco
being offhire for the entire year and lower amortization of deferred
revenue for the Pacific
Santa
Ana.
During the year ended December 31, 2018, we achieved an average revenue efficiency of 97.8%, as compared to 98.3% during the
year ended December 31, 2017. Revenue efficiency is defined as actual contractual dayrate revenue (excluding mobilization fees,
upgrade reimbursements and other revenue sources) divided by the maximum amount of contractual dayrate revenue that could have
been earned during such period.
Contract drilling revenue for the years ended December 31, 2018 and 2017 also included amortization of deferred revenue of
$20.2 million and $46.8 million, respectively, and reimbursable revenues of $6.5 million and $6.0 million, respectively. The decrease in
the amortization of deferred revenue was primarily due to lower amortization resulting from the Pacific
Santa
Ana
completing its contract
with Chevron in January 2017.
37
Operating
expenses.
The following table summarizes operating expenses:
(in thousands)
Direct rig related operating expenses
Integrated services
Reimbursable costs
Shore-based and other support costs
Amortization of deferred costs
Total
Successor
Period From
November 20, 2018
through
December 31, 2018
Predecessor
Period From
January 1, 2018
through
November 19,
2018
Year Ended
December 31, 2017
$
$
17,149
—
647
1,820
128
19,744
$
$
136,815 $
15,529
4,656
18,724
13,882
189,606 $
192,918
3,670
4,197
31,615
11,689
244,089
During the year ended December 31, 2018, direct rig related operating expenses were $153.8 million. The decrease in direct rig
related operating expenses resulted primarily from the Pacific
Scirocco
being idle in the year ended December 31, 2018 as compared to
the year ended December 31, 2017 when the rig incurred higher costs while on standby and then operating for a client.
Integrated services represent costs incurred by the Pacific
Santa
Ana
for subcontractors to perform integrated services for Phase I
of the plug and abandonment project with Petronas that was completed on May 7, 2018.
The decrease in shore-based and other support costs per day for the year ended December 31, 2018, as compared to the year ended
December 31, 2017, was primarily due to lower headcount.
General
and
administrative
expenses
. The decrease in general and administrative expenses for the year ended December 31, 2018,
as compared to the year ended December 31, 2017, was primarily due to the classification of legal and advisory expenses related to our
debt restructuring efforts as reorganization items subsequent to the Petition Date and lower accruals for employee incentive programs.
Depreciation
and
amortization
expense
. The decrease in depreciation and amortization expense for the year ended December 31,
2018, as compared to the year ended December 31, 2017, was primarily due to Fresh Start Accounting.
Interest
expense
. The decrease in interest expense for the year ended December 31, 2018, as compared to the year ended
December 31, 2017, was primarily due to no interest accruing on the 2017 Notes, the 2020 Notes and the Term Loan B during the
Chapter 11 proceedings as well as the elimination of amortization of deferred financing costs beginning in the fourth quarter of 2017. The
decrease was partially offset by accrued default interest on the 2013 Revolving Credit Facility and SSCF that was paid in accordance with
our Plan.
Write-off
of
deferred
financing
costs
. During the year ended December 31, 2017, we expensed $30.8 million of deferred financing
costs previously recorded within our consolidated balance sheets as a result of the filing of the Bankruptcy Petitions .
Reorganization
items
. During 2017 after the Petition Date and through the 2018 Predecessor period, we classified all income,
expenses, gains or losses that were incurred or realized subsequent to the Petition Date and as a result of the Chapter 11 proceedings as
reorganization items. See Note 2 to our consolidated financial statements.
Other
expense
. During the year ended December 31, 2017, we recognized an other-than-temporary impairment in our
Hyperdynamics available-for-sale securities of $6.8 million. See Note 14 to our consolidated financial statements. The remaining change
was due to currency exchange fluctuations.
Income
taxes
. During the year ended December 31, 2018, we had an income tax benefit of $9.1 million, compared to an income
tax expense of $12.9 million for the year ended December 31, 2017. The income tax benefit for the year ended December 31, 2018 was
primarily the result of internal restructuring in 2018 allowing us to recognize the tax benefits of net operating losses. Tax expense from
ongoing operations for the year ended December 31, 2018 decreased due to a lower level of drilling operations.
38
The relationship between our provision for or benefit from income taxes and our pre-tax book income can vary significantly from
period to period considering, among other factors, (a) the overall level of pre-tax book income, (b) changes in the blend of income that is
taxed based on gross revenues or at high effective tax rates versus pre-tax book income or at low effective tax rates and (c) our rig
operating structures. Consequently, our income tax expense does not necessarily change proportionally with our pre-tax book income.
Significant decreases in our pre-tax book income typically result in higher effective tax rates, while significant increases in pre-tax book
income can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above. Additionally, pre-tax
book losses typically result in negative effective tax rates. During the years ended December 31, 2018 and 2017, our effective tax rate
was 0.4% and (2.5)%, respectively.
Year
ended
December
31,
2017
compared
to
Year
ended
December
31,
2016
The following table provides a comparison of our consolidated results of operations for the years ended December 31, 2017 and
2016:
Revenues
Contract drilling
Costs and expenses
Operating expenses
General and administrative expenses
Depreciation expense
Operating income (loss)
Other income (expense)
Interest expense
Write-off of deferred financing costs
Gain on debt extinguishment
Reorganization items
Other expense
Loss before income taxes
Income tax expense
Net loss
Years Ended December 31,
2017
2016
Change
% Change
(in thousands, except percentages)
$ 319,716 $ 769,472 $ (449,756)
58%
(244,089)
(87,134)
(278,949)
(290,456)
(290,038)
(63,379)
(275,901)
140,154
45,949
(23,755)
(3,048)
(430,610)
(178,983)
(30,846)
—
(6,474)
(5,544)
(512,303)
(12,863)
10,061
(30,846)
(36,233)
(6,474)
(3,151)
(497,253)
9,244
$ (525,166) $ (37,157) $ (488,009)
(189,044)
—
36,233
—
(2,393)
(15,050)
(22,107)
16%
37%
1%
307%
5%
100%
100%
100%
132%
3304%
42%
1313%
Revenues.
The decrease in revenues for the year ended December 31, 2017, as compared to the year ended December 31, 2016,
resulted primarily from the Pacific
Bora
and the Pacific
Scirocco
being idle for a portion of the year in addition to earning lower dayrates
in their contracts compared to their previous contracts in the prior year, and the Pacific
Santa
Ana
completing its contract with Chevron
in January 2017 and starting its contract with Petronas at a lower dayrate in December 2017.
During the year ended December 31, 2017, our operating fleet of drillships achieved an average revenue efficiency of 98.3%, as
compared to 98.2% during the year ended December 31, 2016.
Contract drilling revenue for the years ended December 31, 2017 and 2016 also included amortization of deferred revenue of
$46.8 million and $67.1 million and reimbursable revenues of $6.0 million and $19.0 million, respectively. The decrease in the
amortization of deferred revenue was primarily due to lower amortization resulting from the Pacific
Santa
Ana
completing its contract
with Chevron in January 2017 and the Pacific
Bora
completing its contract with Chevron in September 2016. The decrease in
reimbursable revenues resulted from lower reimbursable costs incurred with fewer of our drillships operating under drilling contracts.
39
Operating
expenses.
The following table summarizes operating expenses:
Direct rig related operating expenses, net
Integrated services
Reimbursable costs
Shore-based and other support costs
Amortization of deferred costs
Total
Years Ended December 31,
2016
2017
(in thousands)
$
$
192,918 $
3,670
4,197
31,615
11,689
244,089 $
228,934
—
18,362
28,797
13,945
290,038
The decrease in direct rig related operating expenses for the year ended December 31, 2017, as compared to the year ended
December 31, 2016, resulted primarily from lower costs on the Pacific
Bora
, the Pacific
Scirocco
and the Pacific
Santa
Ana
while
offhire and the continued benefits of our cost saving measures.
Reimbursable costs are not included under the scope of the drilling contract’s initial dayrate, but are subject to reimbursement
from our clients. Reimbursable costs can be highly variable between quarters. Because the reimbursement of these costs by our clients is
recorded as additional revenue, they do not generally negatively affect our margins.
General
and
administrative
expenses
. The increase in general and administrative expenses for the year ended December 31, 2017,
as compared to the year ended December 31, 2016, was primarily due to higher legal costs associated with patent litigation settled in
August 2017 and the Zonda Arbitration, and legal and advisory expenses related to our debt restructuring efforts incurred prior to the
Petition Date. Such legal and advisory expenses were $30.7 million for 2017, as compared to $16.9 million for 2016. Additionally, the
increase was a result of severance related costs and timing of expense recognition of incentive awards, including certain performance-
based awards.
Depreciation
expense
. Depreciation expense for 2017 was comparable to 2016.
Interest
expense
. The decrease in interest expense for the year ended December 31, 2017, as compared to the year ended
December 31, 2016, was primarily due to interest expense not accrued subsequent to the Petition Date of $12.0 million for the 2017
Notes, the 2020 Notes and Term Loan B, that we believed were not probable of being treated as an allowed claim in the Chapter 11
proceedings, partially offset by higher amortization of deferred financing costs prior to the Petition Date.
Write-off
of
deferred
financing
costs
. During the year ended December 31, 2017, we expensed $30.8 million of deferred financing
costs previously recorded within our consolidated balance sheets as a result of the filing of the Bankruptcy Petitions . See Note 8 to our
consolidated financial statements.
Gain
on
debt
extinguishment
. During the year ended December 31, 2016, we repurchased $60.6 million of our 2017 Notes for a
purchase price of $23.6 million plus accrued interest. We recorded the resulting gain, net of the corresponding unamortized deferred
financing costs and debt discount, of $36.2 million as a gain on debt extinguishment in our statements of operations.
Reorganization
items
. During the year ended December 31, 2017, we classified all income, expenses, gains or losses that were
incurred or realized subsequent to the Petition Date and as a result of the Chapter 11 proceedings as reorganization items, which primarily
consisted of professional fees. See Note 2 to our consolidated financial statements.
Other
expense
. During the year ended December 31, 2017, we recognized an other-than-temporary impairment in our
Hyperdynamics available-for-sale securities of $6.8 million. See Note 14 to our consolidated financial statements. This increase in other
expense was partially offset by higher interest income from cash equivalents. The remaining change was due to currency exchange
fluctuations.
Income
taxes
. The decrease in income tax expense was primarily due to a decrease in operating activity in 2017 and lower
dayrates on contracts. The decrease was partially offset by the reduction of deferred tax assets as the result of U.S. tax legislation enacted
in December 2017 and the write-off of deferred tax assets related to deferred compensation
40
benefits that expired unused. We do not expect the newly enacted U.S. tax legislation to have a material impact on our income tax
expense in future years.
The relationship between our provision for or benefit from income taxes and our pre-tax book income can vary significantly from
period to period considering, among other factors, (a) the overall level of pre-tax book income, (b) changes in the blend of income that is
taxed based on gross revenues or at high effective tax rates versus pre-tax book income or at low effective tax rates and (c) our rig
operating structures. Consequently, our income tax expense does not necessarily change proportionally with our pre-tax book income.
Significant decreases in our pre-tax book income typically result in higher effective tax rates, while significant increases in pre-tax book
income can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above. Additionally, pre-tax
book losses typically result in negative effective tax rates. During the years ended December 31, 2017 and 2016, our effective tax rate
was (2.5)% and (146.9)%, respectively.
The change in our effective tax rate for the year ended December 31, 2017, as compared to the year ended December 31, 2016 was
the result of our idle drillships and lower dayrates, which were generating larger losses in 2017 as compared to 2016 for which no tax
benefit is expected.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates
and assumptions. These estimates and assumptions impact the reported amounts of assets and liabilities, the disclosures of contingent
assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. On an
ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, financial
instruments, depreciation of property and equipment, impairment of long-lived assets, receivable from unconsolidated subsidiaries,
income taxes, share-based compensation and contingencies. We base our estimates and assumptions on historical experience and on
various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such
estimates.
Our critical accounting estimates are important to the portrayal of both our financial position and results of operations and require
us to make difficult, subjective or complex assumptions or estimates about matters that are uncertain. We would report different amounts
in our consolidated financial statements, which could be material, if we used different assumptions or estimates. We have discussed the
development and selection of our critical accounting estimates with our board of directors and the board of directors has reviewed the
disclosure presented below. During the past three fiscal years, we have not made any material changes in accounting methodology.
We believe that the following is a summary of the critical accounting polices used in the preparation of our consolidated financial
statements.
Fresh
start
accounting
. On the Plan Effective Date, we adopted and applied the relevant guidance with respect to the accounting
and financial reporting for entities that have emerged from bankruptcy proceedings, or “Fresh Start Accounting.” Under Fresh Start
Accounting, our balance sheet on the Plan Effective Date reflects all of our assets and liabilities at fair value. Our emergence from
bankruptcy and the adoption of Fresh Start Accounting resulted in a new reporting entity, referred to herein as the “Successor,” for
financial reporting purposes. To facilitate discussion and analysis of our financial condition and results of operations herein, we refer to
the reorganized Debtors as the Successor for periods subsequent to November 19, 2018 and as the “Predecessor” for periods on or prior
to November 19, 2018. As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, our
consolidated financial statements subsequent to November 19, 2018 may not be comparable to our consolidated financial statements on
or prior to November 19, 2018, and as such, “black-line” financial statements are presented to distinguish between the Predecessor and
Successor companies.
Revenues
from
contracts
with
clients
. Contract drilling revenues are recognized consistent with the contractual rate invoiced for
the services provided during the period. In connection with drilling contracts, we may receive fees for preparation and mobilization of
equipment and personnel or for capital improvements to rigs. We record a contract liability for upfront fees received for mobilization,
contract preparation and capital upgrade, which are amortized ratably to contract drilling revenue as services are rendered over the initial
term of the related drilling contract. Demobilization
41
revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract inception. We
record demobilization revenue in earnings ratably over the initial term of the contract with an offset to an accretive contract asset. We
record reimbursable revenue at the gross amount billed to the client in the period the corresponding goods and services are to be
provided.
Property
and
equipment
. As of December 31, 2018, property and equipment was $1.9 billion, which represented 69.7% of our
total assets. The carrying value of our property and equipment consisted primarily of our high-specification drillships that were recorded
at cost less accumulated depreciation prior to the adoption of Fresh Start Accounting and at fair value upon the adoption of Fresh Start
Accounting.
We estimate useful lives and salvage values by applying judgments and assumptions that reflect both historical experience and
expectations regarding future operations and asset performance. We depreciate the cost value assigned to the hull of the drillship to its
salvage value on a straight-line basis over the estimated useful life of 35 years. Drilling equipment is primarily depreciated on a straight-
line basis over an estimated useful life of 15 years with generally no assigned salvage value. Upon the adoption of Fresh Start
Accounting, the estimated useful lives of our drillships and their related equipment generally range from 8 to 33 years. Applying different
judgments and assumptions to useful lives and salvage values would likely result in materially different net carrying amounts and
depreciation expense for our drillships.
We review property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of
our assets held and used may not be recoverable. Potential impairment indicators include steep declines in commodity prices and related
market conditions, actual or expected declines in rig utilization, increases in idle time or significant damage to the property and
equipment that adversely affects the extent and manner of its use. We assess impairment using estimated undiscounted cash flows for the
property and equipment being evaluated by applying assumptions regarding future operations, market conditions, dayrates, utilization and
idle time. An impairment loss is recorded in the period if the carrying amount of the asset is not recoverable.
Contingencies
. We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the
probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and
circumstances that alter our previous assumptions with respect to the likelihood or amount of loss.
Income
taxes
. Income taxes are provided based upon our interpretation of the tax laws and rates in the countries in which our
subsidiaries are registered and where their operations are conducted and income and expenses are earned and incurred, respectively. This
requires significant judgment and the use of estimates and assumptions regarding future events, such as the amount, timing and character
of income, deductions and tax credits. Our tax liability in any given year could be affected by changes in tax laws, regulations,
agreements, and treaties or our level of operations or profitability in each jurisdiction. Although our annual tax provision is based on the
best information available at the time, a number of years may elapse before the ultimate tax liabilities in the various jurisdictions are
determined.
We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial
statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in effect in the year in which the asset
is realized or the liability is settled. Estimates, judgments and assumptions are required in determining whether deferred tax assets will be
fully or partially realized. When it is estimated to be more likely than not that all or some portion of certain deferred tax assets, such as
net operating loss carryforwards, will not be realized, we establish a valuation allowance for the amount of the deferred tax assets that is
considered to be unrealizable.
We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon
examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we
believe has greater than a 50% likelihood of being realized upon settlement. In determining if a tax position is likely to be sustained upon
examination, we analyze relevant tax laws and regulations, case law, and administrative practices. Actual income taxes paid may vary
from estimates depending upon various factors, including changes in income tax laws, settlement of audits with taxing authorities, or
expiration of statutes of limitations.
42
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Please refer to Note 4 to our consolidated financial statements in this annual report for a discussion of recent accounting
pronouncements and their anticipated impact.
B. LIQUIDITY AND CAPITA L RESOURCES
We centrally manage our funding and treasury activities in accordance with corporate policies to ensure appropriate levels of
liquidity, maintain adequate levels of insurance and balance exposures to market risks. Cash and cash equivalents are held mainly in
United States dollars and Nigerian Naira. Most of our contract drilling revenues are received monthly in arrears and most of our operating
costs are paid on a monthly basis.
Liquidity
Our liquidity fluctuates depending on a number of factors, including, among others, our contract backlog, our revenue efficiency
and the timing of accounts receivable collection as well as payments for operating costs and other obligations. Market conditions in the
offshore drilling industry in recent years have led to materially lower levels of spending for offshore exploration and development by our
current and potential clients on a global basis, which in turn has negatively affected our revenue, profitability and cash flows.
Pursuant to our Plan, we raised approximately $1.5 billion in additional capital, before expenses, consisting of our First Lien Notes
and Second Lien PIK Notes and $500.0 million of new equity. We used the net proceeds to repay all of our pre-petition indebtedness that
was not equitized pursuant to our Plan, to repay the post-petition indebtedness incurred under our debtor-in-possession financing, and to
pay certain fees and expenses. We project that we will have sufficient liquidity to meet our obligations as they become due in the
ordinary course of business and continue as a going concern. Accordingly, the Company’s completion of its restructuring transactions
and emergence from its Chapter 11 proceedings have resolved the significant risks and uncertainties that previously raised substantial
doubt about the Company’s ability to continue as a going concern . For additional information on our First Lien Notes and Second Lien
PIK Notes, see Note 8 to our consolidated financial statements.
Primary sources of funds for our short-term liquidity needs are expected to be our existing cash, cash equivalents and restricted
cash balances. As of March 1, 2019, we had $349.0 million of cash and cash equivalents and $17.2 million of restricted cash.
Share
Repurchase
Program
On February 22, 2019, our shareholders approved a share repurchase program for a total expenditure of up to $15.0 million for a
two-year period. We may purchase shares in one or several transactions on the open market or otherwise; however, we are not obligated
to repurchase any specific number or dollar value of our common shares under the program, and the program may be suspended or
discontinued at any time. We anticipate that repurchases will be funded with cash on hand. As of March 1, 2019, we had not purchased
any common shares under this program.
Capital
Expenditures
We have no material commitments for capital expenditures related to the construction of a newbuild drillship. As of December
31, 2018, we had commitments for capital expenditures related to rig enhancements of $20.8 million. We also expect to incur capital
expenditures for purchases in the ordinary course of business. Such capital expenditure commitments are included in purchase obligations
presented in Item 5.F. “Tabular Disclosure of Contractual Obligations.”
43
Sources
and
Uses
of
Cash
Year
ended
December
31,
2018
compared
to
Year
ended
December
31,
2017
The following table presents our net cash used in operating activities for the years ended December 31, 2018 and 2017:
Successor
Period From
November 20, 2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19,
2018
Predecessor
Year Ended
December 31, 2017
(in thousands)
Cash flow from operating activities:
Net loss
Depreciation and amortization expense
Amortization of deferred revenue
Amortization of deferred costs
Amortization of deferred financing costs
Amortization of debt premium, net
Interest paid-in-kind
Write-off of deferred financing costs
Deferred income taxes
Share-based compensation expense
Other-than-temporary impairment of available-for-sale securities
Reorganization items
Changes in operating assets and liabilities, net
Net cash used in operating activities
$
$
(27,484)
27,277
—
128
—
(38)
3,732
—
(6,507)
599
—
—
(39,459)
(41,752)
$
$
(2,154,877) $
248,302
(20,212)
13,882
1,639
—
4,933
—
4,103
2,543
—
1,746,764
(27,979)
(180,902) $
(525,166)
278,949
(46,829)
11,689
24,889
940
—
30,846
7,409
6,819
6,829
5,315
83,437
(114,873)
The decrease in net cash from operating activities in 2018 resulted primarily from cash collections in 2017 on the Pacific
Scirocco
subsequent to completing its contract with Total in December 2016. In addition, the decrease was due to higher legal and advisory costs
in 2018 related to our emergence from Chapter 11 proceedings and subcontractor payments made in 2018 in connection with the Pacific
Santa
Ana
to perform Phase I of the integrated services project with Petronas.
The following table presents our net cash used in investing activities for the years ended December 31, 2018 and 2017:
(in thousands)
Cash flow from investing activities:
Capital expenditures
Deconsolidation of Zonda Debtors
Purchase of available-for-sale securities
Net cash used in investing activities
Successor
Period From
November 20, 2018
through
December 31, 2018
Predecessor
Period From
January 1, 2018
through
November 19,
2018
Year Ended
December 31, 2017
$
$
(2,697)
—
—
(2,697)
$
$
(18,624) $
(4,910)
—
(23,534) $
(36,645)
—
(6,000)
(42,645)
The decrease in capital expenditures in 2018 primarily resulted from a final milestone payment of $16.3 million for a fleet spare
blowout preventer in 2017. As a result of deconsolidation of the Zonda Debtors, consolidated cash balances decreased by $4.9 million. In
addition, the change in net cash from investing activities resulted from the $6.0 million purchase of available-for-sale securities in the
prior period.
44
The following table presents our net cash provided by (used in) financing activities for the years ended December 31, 2018 and
2017:
Successor
Period From
November 20, 2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19,
2018
Predecessor
Year Ended
December 31, 2017
(in thousands)
Cash flow from financing activities:
Payments for shares issued under share-based compensation plan
Proceeds from debtor-in-possession financing
Payments for debtor-in-possession financing
Proceeds from long-term debt
Payments on long-term debt
Proceeds from equity rights offering
Payments for financing costs
Net cash provided by (used in) financing activities
$
$
(126)
—
—
—
—
—
(13,525)
(13,651)
$
$
(4) $
50,000
(50,000)
1,000,000
(1,136,478)
500,000
(29,355)
334,163 $
(199)
—
—
—
(146,473)
—
(4,530)
(151,202)
During the year ended December 31, 2018, we drew $50.0 million from debtor-in-possession financing, and issued $750.0 million
of First Lien Notes and $273.6 million of Second Lien PIK Notes. We also issued $500.0 million of common shares in an equity rights
offering and private placement. In connection with the above transactions, we paid $42.9 million in financing costs in 2018. Upon our
emergence from bankruptcy, we repaid in full the 2013 Revolving Credit Facility of $475.0 million, the SSCF of $661.5 million and
debtor-in-possessing financing of $50.0 million.
During the year ended December 31, 2017, (i) we made a $76.0 million prepayment of the SSCF in accordance with our obligation
to maintain the loan to rig value covenant in the facility, (ii) we applied cash collateral of $31.7 million to the principal installments due
in May 2017 under the SSCF and (iii) we permanently repaid $25.0 million under the 2013 Revolving Credit Facility.
Year
ended
December
31,
2017
compared
to
Year
ended
December
31,
2016
The following table provides a comparison of our net cash provided by (used in) operating activities for the years ended
December 31, 2017 and 2016:
Cash flow from operating activities:
Net loss
Depreciation expense
Amortization of deferred revenue
Amortization of deferred costs
Amortization of deferred financing costs
Amortization of debt discount
Write-off of deferred financing costs
Deferred income taxes
Share-based compensation expense
Gain on debt extinguishment
Other-than-temporary impairment of available-for-sale securities
Reorganization items
Changes in operating assets and liabilities, net
Net cash provided by (used in) operating activities
Years Ended December 31,
2017
2016
Change
(in thousands)
$
$
(525,166) $
278,949
(46,829)
11,689
24,889
940
30,846
7,409
6,819
—
6,829
5,315
83,437
(114,873) $
(37,157) $ (488,009)
3,048
275,901
20,224
(67,053)
(2,256)
13,945
6,103
18,786
(339)
1,279
30,846
—
(8,085)
15,494
(275)
7,094
36,233
(36,233)
6,829
—
5,315
—
57,048
26,389
249,104 $ (363,977)
The decrease in net cash from operating activities resulted primarily from reduced revenue from our fleet and higher legal and
advisory costs related to our debt restructuring efforts and Chapter 11 proceedings, partially offset by lower operating expenses for the
year ended December 31, 2017.
45
The following table provides a comparison of our net cash used in investing activities for the years ended December 31, 2017 and
2016:
Cash flow from investing activities:
Capital expenditures
Purchase of available-for-sale securities
Net cash used in investing activities
Years Ended December 31,
2017
2016
(in thousands)
Change
$
$
(36,645) $
(6,000)
(36,645) $
(52,625) $ 15,980
(6,000)
9,980
—
(52,625) $
The decrease in capital expenditures resulted primarily from fleet-wide cost control measures implemented. Capital expenditures
for the year ended December 31, 2017 included a final milestone payment of $16.3 million for a fleet spare blowout preventer. Purchase
of available-for-sale securities for the year ended December 31, 2017 consisted of $6.0 million in purchases of Hyperdynamics shares.
See Note 14 to our consolidated financial statements.
The following table provides a comparison of our net cash provided by (used in) financing activities for the years ended
December 31, 2017 and 2016:
Cash flow from financing activities:
Payments for shares issued under share-based compensation plan
Proceeds from long-term debt
Payments on long-term debt
Payments for financing costs
Net cash provided by (used in) financing activities
Years Ended December 31,
2017
2016
(in thousands)
Change
$
(199) $
—
(146,473)
(4,530)
$ (151,202) $
(89) $
(110)
(450,000)
450,000
(35,641)
(110,832)
(25,423)
20,893
313,656 $ (464,858)
The decrease in cash from financing activities for the year ended December 31, 2017, as compared to the same period in 2016,
resulted from no debt drawdown and higher debt payments in 2017. During the year ended December 31, 2016, we drew an aggregate of
$450.0 million under our 2013 Revolving Credit Facility. During the year ended December 31, 2017, (i) we made a $76.0 million
prepayment of the SSCF in accordance with our obligation to maintain the loan to rig value covenant in the facility, (ii) we applied the
cash collateral of $31.7 million to the principal installments due in May 2017 under the SSCF, and (iii) we permanently repaid $25.0
million under the 2013 Revolving Credit Facility. During the year ended December 31, 2016, we made $79.8 million of amortization
payments under the SSCF, and repurchased $60.6 million of the 2017 Notes for a purchase price of $23.6 million plus accrued interest.
Description
of
Indebtedness
See Note 8 to our consolidated financial statements for additional information.
Customs
bonds
As of December 31, 2018, we were contingently liable under certain customs bonds totaling approximately $23.0 million issued as
security in the normal course of our business.
Derivative
Instruments
and
Hedging
Activities
We may enter into derivative instruments from time to time to manage our exposure to fluctuations in interest rates and foreign
exchange rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain
transactions may not meet the criteria for hedge accounting. See Note 15 to our consolidated financial statements.
46
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We do not undertake any significant expenditure on research and development. Additionally, we have no significant interests in
patents or licenses.
D. TREND INFORMATION
Historically, operating results in the offshore contract drilling industry have been cyclical and directly related to the demand for
and the available supply of capable drilling rigs, which are influenced by various factors. Brent crude prices declined from highs above
$100 per barrel in mid-2014 to lows below $40 per barrel in early 2016. Prices generally rose to levels above $70 per barrel in the third
quarter of 2018 before declining to close at $50 at the end of 2018. During 2019 prices have generally risen, closing at $65.07 per barrel
on March 1, 2019. Although dayrates and utilization for high-specification drillships have in the past been less sensitive to short-term oil
price movements than those of older or less capable drilling rigs, the sustained decline in oil prices from 2014 levels rendered many
deepwater projects less attractive to our clients and significantly impacted the number of projects available for high-specification
drillships. However, over the period from 2015 to today, our clients have managed to reduce their total well construction costs thereby
allowing them economic success at lower oil prices and making deepwater projects more attractive.
Drilling
Rig
Supply
Across the industry, there has been one order placed since April 2014 to build an additional high-specification drillship, and within
the last year, there have been several delays in delivery dates for new drillships. We estimate there are approximately 13 high-
specification drillships in late stages of construction still to be delivered with only one having a firm contract announced.
Additionally, as a result of significantly reduced contracting activity, a significant number of floating rigs have been removed from
the actively marketed fleet through cold stacking or scrapping since early 2014. This trend, along with additional delays in delivery dates
of existing orders for high-specification floating rigs, could continue as the offshore drilling market remains near a cyclical low. The
excess supply of high-specification floating rigs is expected to continue in 2019. Although we have visibility into the maximum number
of high-specification floating rigs that could be available, we cannot accurately predict how many of those rigs will be actively marketed
or how many of those rigs may be temporarily or permanently removed from the market.
Drilling
Rig
Demand
Demand for our drillships is a function of the worldwide levels of deepwater exploration and development spending by oil and gas
companies, which has decreased or been delayed significantly as a result of the sustained weakness in oil prices. The type of projects that
modern drillships undertake are generally located in deeper water, in more remote locations, and can be more capital intensive or require
more time to first oil than competing alternatives. The drilling programs of oil and gas companies are also affected by the global
economic and political climate, access to quality drilling prospects, exploration success, perceived future availability and lead time
requirements for drilling equipment, advances in drilling technology, and emphasis on deepwater and high-specification exploration and
production versus other areas.
Overall, 2018 saw an improving pace for high-specification floating rig contracting activity with about 32 rig years contracted,
compared to 26 rig years in 2017. We expect contracting activity to continue to improve; however, no assurances can be given as to the
scope, pace or duration of any recovery.
Supply
and
Demand
Balance
Since the start of the market downturn in 2014, capital expenditure budgets have significantly declined for many exploration and
production companies although we have recently seen some increases. We estimate that through the end of 2019, a significant number of
high-specification floating rigs will be available to commence operations. Additionally, several older, lower-specification drillships and
mid-water semisubmersibles have recently completed contracts without follow-on contracts. The imbalance of supply and demand has
resulted in significantly lower dayrates. While recent scrapping and cold stacking of floating assets have lowered the total rig supply,
supply of deepwater drilling rigs
47
continues to exceed demand. We believe that, if the recent improvement in oil prices is sustained, reduction in rig supply continues and
breakeven costs for deepwater remain competitive, the industry will be able to rebalance its global fleet. Based on the current trend, we
expect the utilization of high-specification floating rigs to improve over the next few years.
For more information on this and other risks to our business and our industry, please read Item 3.D. “Risk Factors” of this annual
report.
E. OFF-BALANCE SHEET ARRANGEMENTS
Currently, we do not have any off-balance sheet arrangements.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The table below sets forth our contractual obligations as of December 31, 2018:
Contractual Obligations
(a)
Long-term debt
Interest on long-term debt
Operating leases
Purchase obligations
(c)
(b)
Total contractual obligations
(d)
2019
2020-2021
2022-2023
(in thousands)
Thereafter
Total
— $
62,813
1,549
26,604
90,966 $
— $
125,625
2,971
176
128,772 $
750,000 $
109,922
3,077
—
862,999 $
273,614 $
246,243
1,179
—
521,036 $
1,023,614
544,603
8,776
26,780
1,603,773
$
$
(a) Amounts are based on the aggregate outstanding principal balances of the First Lien Notes and the Second Lien PIK Notes.
(b)
Interest payments are based on our outstanding borrowings under the First Lien Notes and the Second Lien PIK Notes at their
respective interest rates of 8.375% and 12.0%, which assumes the interest on the Second Lien PIK Notes will be paid in-kind.
Accrued paid in-kind interest is assumed to be settled in cash at the date of maturity of the Second Lien PIK Notes.
(c) Purchase obligations are agreements to purchase goods and services that are enforceable and legally binding, that specify all
significant terms, including the quantities to be purchased, price provisions and the approximate timing of the transactions, which
includes our purchase orders for goods and services entered into in the normal course of business.
(d) Contractual obligations do not include approximately $42.5 million of liabilities from unrecognized tax benefits related to uncertain
tax positions, inclusive of interest and penalties, included on our consolidated balance sheets as of December 31, 2018. We are
unable to specify with certainty the future periods in which we may be obligated to settle such amounts.
Some of the figures included in the table above are based on estimates and assumptions about these obligations, including their
duration and other factors. The contractual obligations we will actually pay in future periods may vary from those reflected in the tables.
G. SAFE HARBOR
See “Cautionary Note Regarding Forward-Looking Statements” in this annual report for additional information.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Directors
All powers not expressly reserved to the shareholders by law or the Articles fall within the competence of the board of directors,
which has full power to carry out and approve all acts and operations consistent with the Company’s corporate object.
48
Except as otherwise provided by an amendment to our Articles, the total number of directors constituting the board of directors
shall be seven directors, who need not be shareholders.
The board of directors is currently divided into two classes, designated Class A and Class B. Our Class A directors are serving for
a term ending at the date of the annual general meeting of the shareholders of the Company at which the annual accounts for the 2018
financial year will be approved, and our Class B directors are serving for a term ending at the annual general meeting of the shareholders
of the Company at which the annual accounts for the 2019 financial year will be approved. Thereafter, each of the Class A directors and
Class B directors will be elected to serve one-year terms. Members of our board of directors may be elected by simple majority of the
votes validly cast at any general meeting of shareholders. From and after the Nomination Termination Time (as defined in the
Governance Agreement), the board of directors will cease to be classified and each director then in office previously designated as a
Class A director or Class B director will remain in office as a director until his or her term expires or until his or her earlier death,
resignation or removal by the shareholders. Any director may be removed with or without cause by a simple majority vote at any general
meeting of shareholders. If the office of a director becomes vacant, our Articles provide that the other directors, acting by a simple
majority, may fill the vacancy on a provisional basis until a new director is appointed at the next general meeting of shareholders. The
Governance Agreement provides certain of our shareholders with the right to nominate and replace Class B directors. For additional
information, see Item 10.B., “Additional Information - Memorandum and Articles of Association —Governance Agreement.”
Pursuant to the Plan, as of the Plan Effective Date, W. Matt Ralls (Chairman), Bernie G. Wolford Jr. and David Weinstein joined
our board of directors as Class A directors, and Daniel Han, Donald Platner, and Kiran Ramineni joined our board of directors as Class B
directors. John V. Simon was appointed by our board of directors as a Class A director as of December 14, 2018 to fill the remaining
vacancy on our board of directors. Pursuant to the Governance Agreement, Mr. Ramineni was nominated for election as a Class B
director by the Avenue Parties, Mr. Han was nominated for election as a Class B director by the SVP Parties, and Mr. Platner was
nominated for election as a Class B director by certain of the Other Lenders. Messrs. Ralls, Ramineni, Han and Platner were elected as
directors at an extraordinary general meeting of shareholders on November 19, 2018. Messrs. Wolford and Weinstein were appointed by
our board of directors on November 19, 2018 to fill vacancies. The business address of the directors is 8-10, Avenue de la Gare, L-1610
Luxembourg, Grand Duchy of Luxembourg.
Pacific Drilling’s board of directors consists of the following seven members:
Name
Daniel Han
Donald Platner
W. Matt Ralls
Kiran Ramineni
John V. Simon
David Weinstein
Bernie G. Wolford Jr.
Age
Position
40 Class B Director
34 Class B Director
69 Chairman of the Board and Class A Director
39 Class B Director
65 Class A Director
59 Class A Director
59 Chief Executive Officer and Class A Director
Certain biographical information regarding the directors is summarized below.
Daniel
Han
. Mr. Han joined our board of directors on the Plan Effective Date. Mr. Han has served as a Managing Director and
Co-Head of the North American investment team of Strategic Value Partners LLC, which he joined in 2014. From 2002 to 2014, Mr. Han
was with Wellspring Capital Management, most recently as a Principal and a member of Wellspring’s Investment Committee. From 2000
to 2002, Mr. Han was an Investment Banking Analyst in the Mergers and Acquisitions Group at J.P. Morgan. Mr. Han currently serves
on the board of Genco Shipping & Trading Limited and has served on the board of directors of several portfolio companies of Strategic
Value Partners.
Donald
Platner
. Mr. Platner joined our board of directors on the Plan Effective Date. Mr. Platner is an Investment Analyst at
Abrams Capital, which he joined in 2013. Prior to joining Abrams Capital, he was at Goldman, Sachs & Co. from 2006 to 2013, where he
was a vice president in the Americas Special Situations Group. At Goldman Sachs, he was responsible for investments in both the public
and private markets, primarily in the energy and industrials sectors. He
49
previously served as a director of Louis Berger Group (where he served as Chairman of the Compensation Committee and as a member
of the Audit Committee). He also previously served as a director of Opal Resources LLC.
W.
Matt
Ralls
. Mr. Ralls joined our board of directors on the Plan Effective Date and serves as Chairman of the board, and of the
Nominating and Corporate Governance Committee. Mr. Ralls served as President of the Rowan Companies from January 2009 to March
2013, as Chief Executive Officer from January 2009 to April 2014, as a director from 2009 and as Executive Chairman of the Board from
April 2014 until his retirement from the company in April 2016. He served as Executive Vice President and Chief Operating Officer of
GlobalSantaFe Corporation from June 2005 until November 2007 and as Senior Vice President and Chief Financial Officer of that
company from 2001 to 2005. Mr. Ralls has held various other management and financial roles with other oil drilling and production
companies. Mr. Ralls also serves as a director of Superior Energy Services (where he serves as Chairman of the Compensation
Committee and a member of the Nominating and Corporate Governance Committee), Cabot Oil and Gas Corporation (where he serves as
Chairman of the Corporate Governance and Nominating Committee and as a member of the Compensation Committee) and NCS
Multistage Holdings, Inc. (where he serves on the Audit Committee and the Compensation, Nominating and Governance Committee).
Kiran
Ramineni
. Mr. Ramineni joined our board of directors on the Plan Effective Date. Mr. Ramineni has been a Vice President
at Avenue Capital Group since 2014 and is responsible for identifying, analyzing and modeling investment opportunities for Avenue U.S.
Strategy, with a focus on energy and utility investments. Prior to joining Avenue Capital Group, Mr. Ramineni was a Senior Vice
President of strategy and finance at U.S. Power Generating Company from 2007 to 2014. Previously, Mr. Ramineni worked for Hold
Brothers Capital as an Equity Trader. Prior to that, he was an Equity Trader at AJ Capital.
John
V.
Simon
. Mr. Simon joined our board of directors on December 14, 2018 and serves as Chairman of our Compensation
Committee. Mr. Simon has over 40 years of experience in the oil and gas industry, specializing in engineering, project management and
leadership roles in the U.S. and internationally. From 2013 to 2016 he served as Chief Executive Officer of Bennu Oil and Gas, a
company formed to acquire ATP Oil & Gas Corp.’s Gulf of Mexico assets out of bankruptcy. Prior to Bennu, Mr. Simon served in a
series of increasingly senior roles at Hess Corporation, most recently as SVP, Global E&P Services (2010-2013) and SVP, Production,
Americas and Africa (2007-2010). Mr. Simon began his career as an engineer with Tenneco Oil Co., where he spent 12 years in a variety
of engineering roles. Mr. Simon also serves on the board of directors of Nine Point Energy, a private exploration and production
company focused on best-in-class development, operation and acquisition of oil and gas assets within the Williston Basin, where he
serves as Risk Committee Chair and on the Audit Committee. Mr. Simon was a director of Ocean Rig UDW Inc. from November 2017
until its acquisition on December 5, 2018 by Transocean Ltd.
David
Weinstein
. Mr. Weinstein joined our board of directors on the Plan Effective Date and serves as Chairman of our Audit
Committee. Mr. Weinstein also currently serves as Deputy Chairman of the Board of TORM plc. He has also served on the board of
directors of TRU Taj Finance Inc., an operating subsidiary of Toys “R” Us Inc. from August 2017 to January 2019, and as Chairman of
the Board of The Oneida Group Inc. from June 2015 through September 2018. From January 2017 through July 2018, Mr. Weinstein
served in various executive leadership roles at Seadrill Limited, including as a director and as Chair of Seadrill’s Refinancing Committee.
He also served as a director and as Chair of the Compensation Committee of Stone Energy Corporation from March 2017 through May
2018. Mr. Weinstein previously served in various executive leadership roles with Horizon Lines, Inc., from November 2011 until June
2015, including as a director and as Chairman of its board of directors. He has also served on a number of other boards and in executive
leadership roles in various private and public companies within, among others, the oil and gas and chemical industries, including most
recently as a director of DeepOcean Group Holdings AS from June 2011 until January 2017. From September 2009 through August 2016,
Mr. Weinstein served as Chairman of the Finance Committee and as a member of the Compensation Committee of Axiall Corporation.
Prior to that, Mr. Weinstein served from March 2007 through August 2008 as Managing Director and Group Head, Debt Capital Markets
—High Yield and Leverage Finance at Calyon Securities Inc., and from March 2000 through February 2002 as Managing Director and
Head of High Yield Origination and Capital Markets at BNP Paribas. Previously, Mr. Weinstein was a Managing Director and Head of
High Yield Capital Markets for BankBoston Securities and Chase Securities, Inc., and head of the Capital Markets Group in the High
Yield Department at Lehman Brothers.
Bernie
G.
Wolford
Jr
. Mr. Wolford joined our board of directors and was appointed as our Chief Executive Officer on the Plan
Effective Date. Prior to joining our Company, from February 3, 2012, Mr. Wolford served as Senior Vice President—Operations at
Noble Corporation (“Noble”). He served as Vice President—Operational Excellence of
50
Noble from March 2010 to February 2012. From January 2003 until March 2010, Mr. Wolford was self-employed. During that time, he
provided consulting services to Noble as a contractor on the construction of the Noble
Dave
Beard
from March 2009 to December 2009.
Mr. Wolford is also a significant shareholder of Mass Technology Corporation, an independent service provider to the downstream
refining and storage sector, and he supported the operations of that company from February 2007 to February 2009. Mr. Wolford began
his career in the offshore drilling industry with Transworld Drilling in 1981, which was acquired by Noble in 1991. From 1981 through
December 2002, he served in various roles in engineering, project management and operations with Transworld and Noble.
Senior Management
Our senior management team is responsible for the day-to-day management of our operations. Members of our senior management
are appointed from time to time by the board of directors and hold office until a successor is elected and qualified. There are no
arrangements or understandings related to the selection of any of our senior management. The business address of our senior management
is 8-10, Avenue de la Gare, L-1610 Luxembourg, Grand Duchy of Luxembourg. The current members of our senior management are:
Name
Bernie G. Wolford, Jr.
Michael D. Acuff
Johannes P. Boots
Lisa Manget Buchanan
Amy L. Roddy
Anthony C. Seeliger
Richard E. Tatum
Age
Position
59 Chief Executive Officer
48
56
58
38
51
41
Senior Vice President, Commercial
Senior Vice President, Chief Financial Officer
Senior Vice President, General Counsel and Secretary
Senior Vice President, Corporate Services
Senior Vice President, Operations
Senior Vice President, Chief Accounting Officer
Bernie
G.
Wolford,
Jr.
Biographical information about Mr. Wolford appears above under the heading “Directors.”
Michael
D.
Acuff.
Mr. Acuff joined Pacific Drilling in June 2014 as our Senior Vice President of Sales and Business
Development and was appointed Senior Vice President Commercial in November 2016. Mr. Acuff is responsible for management and
administration of our sales and contract acquisition, strategic planning activities and procurement and supply chain. Mr. Acuff has more
than 15 years of industry experience, and prior to joining Pacific Drilling, was Senior Vice President of Contracts and Marketing at
Diamond Offshore Drilling, Inc., where he worked from 2010 to 2013. From 1999 to 2010 Mr. Acuff held various management positions
of increasing responsibility in Marketing, Corporate Planning, Operations and Human Resources with Transocean Ltd. Prior to joining
Transocean Ltd., Mr. Acuff served in the U.S. Army from 1993 to 1997 as Battery Executive Officer, Battalion Personnel Officer and
Platoon Leader. Mr. Acuff holds a Bachelor of Science in Civil Engineering from the University of Tennessee and an MBA in Finance
from Rice University.
Johannes
P.
Boots
. Mr. Boots joined Pacific Drilling in December 2009 as our Vice President and Treasurer and was appointed
Senior Vice President and Chief Financial Officer in August 2017. Mr. Boots is responsible for the Company’s global treasury, financing,
risk, audit, tax and investor relations activities. From June 2016 to August 2017, Mr. Boots served as our Senior Vice President of
Finance and Treasurer. Mr. Boots has over 25 years of experience in public and private U.S. and European companies in the international
oil service sector. Before joining Pacific Drilling, Mr. Boots served as corporate treasurer at Global Industries for four years and spent 14
years at Noble Corp. and its predecessor Neddrill in various financial management roles, including treasury, corporate planning,
accounting and internal audit. Prior to Noble Corp., he worked in the shipping and transportation industry for several years in various
operational management roles. Mr. Boots holds a Bachelor of Science degree in Business Economics from the University of Alkmaar, the
Netherlands, and completed the Executive Advanced Management Program at the INSEAD Business School.
Lisa
Manget
Buchanan
. Ms. Buchanan joined Pacific Drilling in August 2015 as our Senior Vice President, General Counsel
and Secretary. Ms. Buchanan has over 30 years of legal experience, most recently serving as Executive Vice President, General Counsel
and Secretary and Chief Administrative Officer at Cal Dive International, Inc. from June 2006 to July 2015. Prior to Cal Dive,
Ms. Buchanan was a partner at the law firm of Jones Walker LLP, which she joined as an associate in 1987 and became a partner in
January 1994. Ms. Buchanan holds a Bachelor of Science degree
51
in commerce from the McIntire School of Commerce, University of Virginia and a Juris Doctorate from the Louisiana State University
Law Center.
Amy
L.
Roddy
. Ms. Roddy joined Pacific Drilling in 2011 as our Director of Investor Relations. She subsequently served in
management positions in corporate communications and human resources before being appointed SVP Corporate Services in May 2016.
Ms. Roddy has more than 15 years of oil and gas industry experience, including time at Transocean, where she held management
positions in investor relations and corporate planning. Prior to joining Transocean, Roddy worked as a process engineer for Fluor Corp.
Ms. Roddy holds a Bachelor of Science degree in chemical engineering from Texas A&M University and a Master of Engineering
Management and an MBA from Northwestern University.
Anthony
C.
Seeliger
. Mr. Seeliger joined Pacific Drilling in 2012 and was named Senior Vice President of Operations in 2015.
He was most recently Vice President of the Americas since July 2012. Mr. Seeliger provides overall direction and guidance to the
Company’s operational, operations excellence and technical support and QHSE functions with the objective of maximizing HSE and
operational performance, growth and profitability, as well as day-to-day leadership and management of the global operations activities.
Mr. Seeliger brings over 25 years of industry experience, including an extensive background in operations management. Prior to joining
Pacific Drilling, he spent nine years with Ensco/Pride, most recently as vice president of Middle East and Africa operations based in
Dubai, UE, and previously in similar management positions based in Europe, Brazil and the Gulf of Mexico. Prior to Ensco/Pride, Mr.
Seeliger held positions of increasing responsibility at industry-related companies including Santa Fe International and Amerada Hess
Corp. Mr. Seeliger holds a Bachelor of Science degree in business administration from the University of Southern California and an
MBA from Southern Methodist University.
Richard
E.
Tatum
. Mr. Tatum joined Pacific Drilling in October 2010 as our Director of Financial Reporting and was appointed
Senior Vice President and Chief Accounting Officer in August 2017. Prior to that, Mr. Tatum served as our Vice President Controller
from March 2014 until August 2017. Mr. Tatum has over 15 years of experience in offshore drilling and public accounting. Prior to
joining Pacific Drilling in October 2010, Mr. Tatum served at Frontier Drilling from 2009 until its merger with Noble Corp. in 2010.
Mr. Tatum began his career as an auditor with Grant Thornton LLP where he held a variety of roles with increasing responsibilities, his
most recent position being a Manager in Grant Thornton’s National Professional Standards Group. Mr. Tatum received a Bachelor of
Science degree in business administration and a Master of professional accounting degree from the University of Texas at Austin and is a
CPA.
B. COMPENSATION
Senior
Management
Members of our senior management receive compensation for the services they provide. During the year ended December 31,
2018, the aggregate cash compensation paid to all seven current members of our senior management as a group was approximately $6.2
million. During the year ended December 31, 2018, we also paid aggregate cash compensation and severance benefits to two former
members of senior management of approximately $5.8 million. Currently, the cash compensation for senior management is comprised of
base salary, an annual performance bonus, potential payouts under long term incentive cash awards granted in 2016 and 2017 (“LTIC
awards”) and potential payments under the 2018 key employee incentive plan (the “KEIP”), which was approved by the Bankruptcy
Court on August 30, 2018. Certain members of our senior management also received retention bonus awards prior to their appointment as
members of the senior management team.
The compensation that we pay to our senior management is evaluated on an annual basis considering the following primary
factors: individual performance during the prior year, market compensation rates and movements and the individual’s anticipated
contribution to us and our growth. Members of our senior management team are also eligible to participate in our retirement savings
plans. In addition, members of our senior management are eligible to participate in welfare benefit programs made available to our U.S.
workforce generally, including medical, dental, life insurance
52
and disability benefits. We believe that the compensation awarded to our senior management is consistent with that of our peers and
similarly situated companies in the industry in which we operate.
Directors
For the period from January 1, 2018 through the Plan Effective Date, we paid our pre-emergence board of directors an aggregate
of approximately $1.7 million in directors’ fees to the independent members of the board of directors, excluding those members of the
board of directors affiliated with the Quantum Pacific Group, an investment holdings group that controls QP (the “Quantum Pacific
Group”). We also paid an aggregate of approximately $0.7 million in directors’ fees to the non-independent members of our board of
directors affiliated with the Quantum Pacific Group, which we paid directly to the Quantum Pacific Group. We did not make any awards
under our Pacific Drilling S.A. 2011 Omnibus Stock Incentive Plan (as amended and restated on March 4, 2014, the “2011 Stock Plan”)
to the members of our board of directors in 2018.
Following the Plan Effective Date, our new board of directors approved a compensation program for the new board. Under this
program, we paid an aggregate of approximately $22,500 and issued an aggregate of 165,000 restricted share units to the Class A
members of our board of directors. The Class B board of directors will not receive any compensation for their service on our board of
directors, and our Chairman will receive compensation solely in the form of equity-based awards. Additionally, members of our board of
directors who are also our employees or employees of our subsidiaries do not receive any additional compensation for their service on our
board of directors.
During 2018 prior to the Plan Effective Date, there were no members of our board of directors who were our employees or
employees of our subsidiaries. In connection with the reconstitution of our board of directors following our emergence from bankruptcy,
our Chief Executive Officer also became a member of our board of directors. We believe that our director fee structure during the year
ended December 31, 2018 was customary and reasonable for companies of our kind and consistent with that of our peers and similarly
situated companies in the industry in which we operate.
Equity
and
Long-Term
Incentive
Compensation
Plans
Prior to the adoption of the 2018 Stock Plan, the 2011 Stock Plan provided for the grant of equity-based or equity-related awards
to directors, officers, employees and consultants. The Compensation Committee of the board of directors determined the terms and
conditions of equity awards made to participants under the 2011 Stock Plan, and also set the terms and conditions of LTIC awards that
were granted outside of the 2011 Stock Plan.
On January 1, 2017, the Compensation Committee granted a total of $7.3 million LTIC awards, $2.6 million of which were
granted to members of senior management, and 0.6 million cash-settled restricted share units under the 2011 Stock Plan, 0.3 million units
of which were granted to members of senior management. In connection with our emergence from bankruptcy on November 19, 2018, all
equity and equity-based awards granted under the 2011 Stock Plan were cancelled and are no longer outstanding. The remaining unvested
portions of the LTIC awards granted during 2016 and 2017, however, remain outstanding and will vest in accordance with their vesting
schedules and, if applicable, the meeting of certain performance targets.
In August 2018, the Bankruptcy Court approved the KEIP, pursuant to which members of senior management were granted cash-
settled awards that vested in part upon our emergence from bankruptcy, and in part upon the achievement of certain revenue performance
targets for 2018, with the remainder of the awards vesting if certain revenue performance targets for 2019 are achieved.
On November 28, 2018, the board of directors approved the 2018 Stock Plan, pursuant to which the Company may issue up to 7.5
million common shares to directors, officers, employees and consultants pursuant to various types of stock-based incentive awards,
including stock options, restricted shares, restricted share units (“RSUs”) and other equity-based awards. The board of directors, upon
recommendations by the Compensation Committee, determines the terms and conditions of equity awards made to participants under the
2018 Stock Plan. Effective December 12, 2018, our board of directors approved the issuance of an aggregate of 39,614 common shares
to 269 participants as stock bonus awards, of which 8,061 shares were withheld for the payment of taxes resulting in a net issuance of
31,553 common shares, 706 of which were granted to senior management. On December 20, 2018, our board of directors approved the
issuance of an aggregate of 165,000 RSUs to our Class A directors, and 400,000 RSUs to our Chief Executive Officer.
53
In addition, on February 25, 2019, the board of directors approved the issuance of an aggregate of 1,232,379 RSUs, 1,071,681 of which
were granted to senior management.
Benefit
Plans
and
Programs
Pacific Drilling sponsors a defined contribution retirement plan covering substantially all U.S. employees (the “U.S. Savings
Plan”) and an international savings plan covering certain of our international employees (the “International Savings Plan”). Under the
U.S. Savings Plan, we match 100% of employee contributions up to 3% and 50% of the next 2% of eligible compensation per participant.
Under the International Savings Plan, we match up to 3% of base compensation (limited to a contribution of $15,000 per participant).
During the years ended December 31, 2018, 2017 and 2016, our total employer contributions to both plans amounted to $2.6 million,
$2.8 million and $4.1 million, respectively.
During 2018, the Company maintained an annual bonus plan for key employees whose decisions, activities and performance have
a significant impact on business results. Target bonus levels were determined on an individual basis and factoring in individual
performance, competitive pay practices and external market conditions. Achievement of bonus payment is based largely on the
achievement of our Company’s targets for the annual period.
Employment
Agreement
of
Chief
Executive
Officer
On November 19, 2018, the Company entered into an employment agreement with Mr. Wolford. Pursuant to the agreement, Mr.
Wolford will remain employed until he resigns or his employment is terminated by the Company in accordance with the terms of the
agreement. Under the employment agreement, Mr. Wolford receives an annual base salary and an annual target bonus opportunity of a
minimum of 100% of annual base salary, and also received certain sign-on equity awards. The employment agreement includes a 12-
month post-employment noncompetition covenant and a 24-month post-employment non-solicitation covenant with respect to
employees, contractors, clients and suppliers. Mr. Wolford’s employment agreement provides for severance payments and benefits if the
Company terminates his employment other than for cause or he terminates his employment for good reason, as defined in the agreement,
subject to Mr. Wolford’s execution and non-revocation of a release of claims in favor of the Company, its subsidiaries and affiliates.
Under the terms of the employment agreement, if Mr. Wolford’s employment is terminated other than for cause (as defined in the
employment agreement) or he terminates his employment for good reason (as defined in the employment agreement) other than during
the twelve-month period following the date of any change of control (the “Protection Period”), he will be entitled to the following:
·
·
·
a lump sum payment of (a) $4.0 million if such termination occurs prior to January 1, 2021, or (b) an amount equal to 1.5 times
the sum of: (A) his base salary in effect for the year of the date of termination, and (B) his target bonus established for the year
in which the termination occurs, if such termination occurs on or after January 1, 2021; and
automatic acceleration of the portion of any time-vested RSUs that have been granted to him that are scheduled to vest on the
next regularly scheduled vesting date following the date of termination; and
reimbursement for up to 18 months for the difference between his COBRA premiums and the monthly employee contribution
amount that active similarly situated employees of the Company pay for the same or similar coverage.
If Mr. Wolford’s employment is terminated during the Protection Period other than for cause or he terminates his employment for
good reason regardless of whether such Protection Period occurs before or after January 1, 2021, he will be entitled to the following:
·
·
a lump sum payment of an amount equal to two times the sum (A) his base salary in effect for the year of the date of
termination, and (B) his target bonus established for the year in which the termination occurs; and
automatic acceleration of all outstanding time-vested RSUs that have been granted to him and acceleration of the payout of any
earned performance-vested RSUs; and
54
·
reimbursement for up to 18 months for the difference between his COBRA premiums and the monthly employee contribution
amount that active similarly situated employees of the Company pay for the same or similar coverage.
Severance
Agreements
We have severance and change of control agreements with each member of the Company’s senior management listed in Item 6.A.,
“Directors and Senior Management” other than Mr. Wolford (the “Severance Agreements”). In connection with our Chapter 11
bankruptcy proceedings, each such member of senior management waived his or her right to claim that our emergence from bankruptcy
triggered a change of control of the Company (as defined in the Severance Agreements.) Other than as subject to the waivers, under the
terms of the Severance Agreements and the applicable award agreements, if at any time prior to a change of control of the Company (as
defined in the Severance Agreements), the Company terminates the member of senior management’s employment other than for cause (as
defined in the Severance Agreements) or the member of senior management terminates his or her employment for good reason (as
defined in the Severance Agreements), the member of senior management will be entitled to the following:
·
·
·
a lump sum payment equal to the sum of: (i) an amount equal to one year of the member of senior management’s annual base
salary in effect for the year of the date of termination, (ii) an amount equal to a pro-rated portion of the target bonus established
for the member of senior management for the year in which the termination occurs calculated through the date of termination,
and (iii) an amount equal to the Company contributions that would be made for 12 months of benefits; and
retention of the LTIC awards and awards under the KEIP, which awards will pay out a pro-rated portion if and when the
applicable performance conditions are satisfied; and
automatic acceleration of the vesting of any stock options, restricted stock, or RSUs that may be granted to the member of
senior management that are scheduled to vest within one year following the date of termination.
If a change of control of the Company occurs and the Company terminates the member of senior management’s employment other
than for cause, or the member of senior management terminates his or her employment for good reason, during the eighteen-month period
following the date of the change of control, the member of senior management will be entitled to the following:
·
·
a lump sum payment of (i) an amount equal to two times the sum of: (A) the member of senior management’s base salary in
effect for the year of the date of termination, and (B) the target bonus established for the member of senior management for the
year in which the termination occurs, and (ii) an amount equal to the contributions that would be made for 24 months of
benefits; and
automatic acceleration of the vesting of all unvested stock options, restricted stock, RSUs, LTIC awards or target awards under
the KEIP that were granted to the member of senior management.
The Severance Agreements also include standard non-competition and non-solicitation language for a period of six months
following termination of employment, as well as customary confidentiality and non-disparagement covenants. The current term of the
Severance Agreements will end on December 31, 2019 subject to automatic two-year renewal terms unless either party gives notice to
terminate the agreement 90 days prior to the end of the applicable term.
55
Indemnity
Agreements
We have indemnity agreements with each of the Company’s directors and senior management. The indemnity agreements
supplement the indemnification rights for the directors and members of senior management under our Articles, and provide, among other
things, for mandatory indemnification against liabilities as well as mandatory advancement and reimbursement of all reasonable expenses
that may be incurred by the indemnitees in various legal proceedings arising out of their service as directors and members of senior
management to the fullest extent authorized by the General Corporation Law of the State of Delaware and as permitted by Luxembourg
law, including any amendments thereto. The indemnity agreements also set out the process for determining entitlement to
indemnification, the conditions to advancement of expenses, the procedures for enforcement of indemnification rights, the limitations on
indemnification and requirements relating to the notice and defense of claims for which indemnification is sought.
C. BOARD PRACTICE S
The board of directors is currently divided into two classes, designated Class A and Class B. Our Class A directors are serving for
a term ending at the date of the annual general meeting of the shareholders of the Company at which the annual accounts for the 2018
financial year will be approved, and our Class B directors are serving for a term ending at the annual general meeting of the shareholders
of the Company at which the annual accounts for the 2019 financial year will be approved. Thereafter, each of the Class A directors and
Class B directors will be elected to serve one-year terms. Members of our board of directors may be elected by simple majority of the
votes validly cast at any general meeting of shareholders. From and after the Nomination Termination Time (as defined in the
Governance Agreement), the board of directors will cease to be classified and each director then in office previously designated as a
Class A director or Class B director will remain in office as a director until his or her term expires or until his or her earlier death,
resignation or removal by the shareholders. Any director may be removed with or without cause by a simple majority vote at any general
meeting of shareholders. If the office of a director becomes vacant, our Articles provide that the other directors, acting by a simple
majority, may fill the vacancy on a provisional basis until a new director is appointed at the next general meeting of shareholders. The
Governance Agreement provides certain of our shareholders with the right to nominate and replace Class B directors. For additional
information, see Item 10.B. “Additional Information - Memorandum and Articles of Association —Governance Agreement.”
On May 22, 2018, at our annual general meeting of shareholders (the “2018 AGM”), each of our then current directors (Messrs.
Asher, Bonnier, Charney, Ducau, Fine, Iskander, Samuels, and Schwed) was re-appointed for an additional one-year term until our next
annual general meeting scheduled to be held on June 4, 2019 (the “2019 AGM”). In connection with our emergence from our bankruptcy
proceedings, on the Plan Effective Date, all of the members of our pre-emergence board of directors resigned from our board and the new
board was appointed. See Item 6.A. “Directors and Senior Management.”
There are no service contracts between us and any of our current directors providing for benefits upon termination of their service
except pursuant to Mr. Wolford’s employment agreement.
Committees of the Board of Directors
Our board of directors has established an Audit Committee, a Compensation Committee and a Nominating and Corporate
Governance Committee and may create such other committees as the board of directors shall determine from time to time. Each of the
standing committees of our board of directors has the composition and responsibilities described below.
56
Audit
Committee
The members of our Audit Committee are Messrs. Weinstein (as Chairman), Ralls and Simon. Our board of directors has
determined that each of the members of our Audit Committee is “independent” under the standards of the NYSE and SEC rules. In
addition, our board of directors has determined that Mr. Weinstein is an audit committee “financial expert,” as defined by the SEC.
The Audit Committee’s primary responsibilities are to assist the board of directors’ oversight of: our accounting practices; the
integrity of our financial statements; our compliance with legal and regulatory requirements; the qualifications, selection, independence
and performance of our independent registered public accounting firm; and the internal audit function. The Audit Committee has adopted
a charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and the NYSE.
Compensation
Committee
The members of our Compensation Committee are Messrs. Simon (as Chairman), Ralls, and Weinstein. The primary purpose of
this committee is to oversee the discharge of the responsibilities of our board of directors relating to compensation of our executive
officers and directors. The Compensation Committee has adopted a charter defining the committee’s primary duties in a manner
consistent with the rules of the SEC and the NYSE.
No member of our Compensation Committee has been at any time an employee of ours. None of our executive officers serves on
the board of directors or compensation committee of a company that has an executive officer that serves on our board of directors or
Compensation Committee. No member of our board of directors is an executive officer of a company in which one of our executive
officers serves as a member of the board of directors or compensation committee of that company.
Nominating
and
Corporate
Governance
Committee
Our board of directors has established a Nominating and Corporate Governance Committee, the members of which are Messrs.
Ralls (as Chairman), Simon and Weinstein.
The primary purpose of the Nominating and Corporate Governance Committee is to assist the board of directors in identifying
individuals qualified to become members of the board of directors and to provide advice to the board of directors regarding its
composition and committees. The Nominating and Corporate Governance Committee has adopted a charter defining the committee’s
primary duties in a manner consistent with the rules of the SEC and the NYSE.
D. EMPLOYEES
As of December 31, 2018, we had a total of 722 employees and 1 subcontractor, consisting of:
·
·
600 in operations; and
123 in finance, strategy and business development, sales and marketing and other administrative functions.
As of December 31, 2018, approximately 336 of our workforce were located in the United States and 98 were located in Nigeria.
The remainder were in various other locations around the world. Four of our international employees in Nigeria are represented by
unions.
As of December 31, 2017, we had a total of 768 employees and 5 subcontractors, consisting of:
·
·
631 in operations; and
142 in finance, strategy and business development, sales and marketing and other administrative functions.
As of December 31, 2017, approximately 321 of our workforce were located in the United States and 181 were located in Nigeria.
The remainder were in various other locations around the world.
57
As of December 31, 2016, we had a total of 843 employees and 5 subcontractors, consisting of:
·
·
705 in operations; and
143 in finance, strategy and business development, sales and marketing and other administrative functions.
As of December 31, 2016, approximately 553 of our workforce were located in the United States and 207 were located in Nigeria.
The remainder were in various other locations around the world.
We believe that our relations with employees and their labor unions are good. Some of our employees in Nigeria are currently
represented by unions and covered by collective bargaining agreements.
E. SHARE OWNERSHIP
The table below shows the number and percentage of our outstanding common shares beneficially owned by each of our
directors and members of senior management and all of our directors and members of senior management as a group as of March 1,
2019. There are no stock options or RSUs awarded to our directors and members of senior management under the 2018 Stock Plan that
are exercisable or vest within 60 days. Common shares do not differ in voting rights. See Item 6.B. “Compensation – Equity
Compensation Plans” for a description of the 2018 Stock Plan.
Beneficial Interest in
Common Shares
Number of
shares
Percentage
(a)
*
*
*
*
*
*
*
*
*
*
*
*
*
706
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Directors and Senior Management
Directors
Daniel Han
Donald Platner
W. Matt Ralls
Kiran Ramineni
John V. Simon
David Weinstein
Bernie G. Wolford Jr.
(b)
Senior Management
Michael D. Acuff
Johannes P. Boots
Lisa Manget Buchanan
Amy L. Roddy
Anthony C. Seeliger
Richard E. Tatum
All officers and directors as a group (13 persons)
* Less than 1%.
(a) Based on issued and outstanding shares of 75,031,380 as of March 1, 2019.
(b) Information for Mr. Wolford appears above under “Directors.”
58
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information as of March 1, 2019 for each person known to us to beneficially own five percent or
more of our outstanding common shares. Each common share entitles the holder thereof to one vote at a general meeting of our
shareholders; common shares do not differ in voting rights:
Name
Strategic Value Partners, LLC (2)
Avenue Capital Management II, L.P. (3)
Abrams Capital Management, L.P. (4)
FMR LLC (5)
Whitebox Advisors LLC (6)
Tor Asia Credit Master Fund LP (7)
Quantum Pacific (Gibraltar) Limited (8)
Beneficial Interest in
Common Shares
Number of
shares
19,323,914
18,702,188
7,414,537
5,723,510
5,153,448
4,146,930
3,842,729
Percentage
(1)
25.8 %
24.9
9.9
7.6
6.9
5.5
5.1
(1) Based on issued and outstanding shares of 75,031,380 as of March 1, 2019.
(2)
(a) Based on a Schedule 13G Report dated February 14, 2019 that this investor filed with the SEC and information provided to the
Company by this investor. This investor indicated that it shares voting and dispositive power with respect to all of the above-listed
shares. In addition, in this report, the investor indicated that the above-listed shares consist of: (i) 2,569,633 shares directly held by
Kings Forest S.à r.l., (ii) 5,320,616 shares directly held by Queens Gate S.à r.l., (iii) 5,491,427 shares directly held by Rathgar S.à
r.l., (iv) 1,181,630 shares directly held by Ringsend S.à r.l., (v) 4,285,739 shares directly held by Yellow Sapphire S.à r.l., (vi)
167,817 shares directly held by Strategic Value Master Fund Ltd., (vii) 81,945 shares directly held by Strategic Value Opportunities
Fund, LP, (viii) 174,542 shares directly held by Strategic Value Special Situations Master Fund III, LP and (ix) 50,565 shares
directly held by Strategic Value Special Situation Master Fund IV, LP (each an “SVP Fund” and collectively, the “SVP Funds”).
(b) In addition, the report indicates: (i) Strategic Value Partners, LLC is the investment manager of, and exercises investment
discretion over Strategic Value Master Fund, Ltd., a Cayman Islands exempted company, which has an ownership interest in Field
Point (Europe) II, LLC, a Delaware limited liability company, which has an ownership interest in Field Point IV, S.à r.l., a
Luxembourg limited liability company, which has an ownership interest in Queens Gate, S.à r.l., a Luxembourg limited liability
company, and Strategic Value Partners, LLC is indirectly majority owned and controlled by Mr. Khosla: (ii) SVP Special Situations
III LLC (“Special Situations III”) is the investment manager of, and exercises investment discretion over Strategic Value Special
Situations Master Fund III, LP, a Cayman Islands exempted limited partnership, which has an ownership interest in Blue Sapphire,
S.à r.l., a Luxembourg limited liability company, which has an ownership interest in Yellow Sapphire, S.à r.l., a Luxembourg limited
liability company, which has an ownership interest in Ringsend, S.à r.l., a Luxembourg limited liability company, and Strategic
Value Partners, LLC is the managing member of Special Situations III, and Strategic Value Partners, LLC and Special Situations III
are both indirectly majority owned and controlled by Mr. Khosla; (iii) SVP Special Situations IV LLC (“Special Situations IV”) is
the investment manager of, and exercises investment discretion over Strategic Value Special Situation Master Fund IV, LP, a
Cayman Islands exempted limited partnership, which has an ownership interest in Ranelagh, S.à r.l., a Luxembourg limited liability
company, which has an ownership interest in Rathgar, S.à.r.l., a Luxembourg limited liability company, and Strategic Value
Partners, LLC is the managing member of Special Situations IV, and Strategic Value Partners, LLC and Special Situations IV are
both indirectly majority owned and controlled by Mr. Khosla; and (iv) SVP Special Situations III-A LLC (“Special Situations III-A”)
is the investment manager of, and exercises investment discretion over Strategic Value Opportunities Fund, LP, a Cayman Islands
exempted limited partnership, which has an ownership interest in Kings Valley, S.à r.l., a Luxembourg limited liability company,
which has an ownership interest in Kings Forest, S.à r.l., a Luxembourg limited liability company, and Strategic Value Partners, LLC
is the managing member of Special Situations III-A, and Strategic Value Partners, LLC and Special Situations III-A are both
indirectly majority owned and controlled by Mr. Khosla.
59
(c) Except for Mr. Khosla, each “Reporting Person” listed in the report disclaimed beneficial ownership of all common shares
owned directly by the SVP Funds. Mr. Khosla is the sole member of Midwood Holdings, LLC, which is the managing member of
Strategic Value Partners, LLC and is also the indirect majority owner and control person of Strategic Value Partners, LLC, Special
Situations III, Special Situations IV and Special Situations III-A. Mr. Khosla is also the Chief Investment Officer of Strategic Value
Partners, LLC. As such, he may be deemed to control the voting and dispositive decisions with respect to the above-listed common
shares made by Strategic Value Partners, LLC, Special Situations III, Special Situations IV and Special Situations III-A and may
therefore be deemed to be the beneficial owner of the common shares reported above.
(d) Pursuant to the Governance Agreement, the SVP Funds and certain funds affiliated with Avenue Capital Group LLC (the
“Avenue Holders”) have agreed with one another to vote their common shares to elect members of the Pacific Drilling board of
directors as set forth therein. Because of the relationship between the SVP Funds and the Avenue Holders as a result of the
Governance Agreement, Strategic Value Partners, LLC, Special Situations III, Special Situations IV, Special Situations III-A and
Mr. Khosla may be deemed pursuant to Rule 13d-3 under the Exchange Act to beneficially own 38,026,102 Pacific Drilling common
shares (inclusive of the above-reported shares for Strategic Value Partners, LLC), which represents 50.7% of the total number of
outstanding common shares of Pacific Drilling as of March 1, 2019. The address for each of the foregoing entities is c/o Strategic
Value Partners, LLC, 100 West Putnam Avenue, Greenwich, CT 06830.
(3)
(a) Based on a Schedule 13G Report dated February 14, 2019 that this investor filed with the SEC. In this report, this investor
indicated that it shared voting and dispositive power with respect to all of the above-listed shares. In addition, in this report, this
investor indicated that the above-listed shares are held directly by: (i) Avenue Energy Opportunities Fund II, L.P., Avenue PPF
Opportunities Fund, L.P., Avenue Energy Opportunities Fund, L.P., Avenue Special Opportunities Fund II, L.P. and Avenue
Strategic Opportunities Fund, L.P. (the “U.S. Funds”) and (ii) Avenue-ASRS Europe Opportunities Fund, L.P., Avenue Europe
Special Situations Fund III (U.S.), L.P., Avenue Europe Special Situations Fund III (Euro), L.P. and Avenue Europe Opportunities
Master Fund, L.P. (the “Europe Funds” and together with the U.S. Funds, the “Avenue Funds”).
(b) Avenue Capital Management II, L.P. is the investment manager of the U.S. Funds and may be deemed to have voting and
dispositive power over the 13,649,683 common shares owned by such entities. Avenue Europe International Management, L.P. is
the investment manager of Europe Funds and may be deemed to have voting and dispositive power over the 5,052,505 common
shares owned by such entities. Avenue Capital Management II GenPar LLC is the general partner of Avenue Capital Management
II, L.P., and Avenue Europe International Management GenPar, LLC is the general partner of Avenue Europe International
Management, L.P. Mr. Marc Lasry is the managing member of Avenue Capital Management II GenPar LLC and Avenue Europe
International Management GenPar, LLC. In this report, except for Mr. Lasry, each “Reporting Person” disclaimed beneficial
ownership of all common shares owned directly by the Avenue Funds. Mr. Lasry is deemed to be the indirect beneficial owner of the
shares reported by the Avenue Funds by reason of his ability to direct the vote and/or disposition of such securities, and his
pecuniary interest in such shares (within the meaning of Rule 16a-1(a)(2) under the Exchange Act) is a fractional interest in such
amount.
(c) Pursuant to the Governance Agreement, the Avenue Funds and certain funds affiliated with Strategic Value Partners, LLC (the
“SVP Funds”) have agreed with one another to vote their common shares to elect members of the Pacific Drilling board of directors
as set forth therein. Because of the relationship between the Avenue Funds and the SVP Funds as a result of the Governance
Agreement, Avenue Capital Management II, L.P., Avenue Capital Management II GenPar LLC, Avenue Europe International
Management, L.P., Avenue Europe International Management GenPar, LLC and Marc Lasry may be deemed pursuant to Rule 13d-3
under the Exchange Act to beneficially own 38,026,102 Pacific Drilling common shares (inclusive of the above-reported shares for
Avenue Capital Management II, L.P.), which represents 50.7% of the total number of outstanding common shares of Pacific Drilling
as of March 1, 2019. The address of each of the foregoing entities is c/o Avenue Capital Management II, L.P., 399 Park Avenue, 6th
Floor, New York, NY 10022.
(4)
(a) Based on a Schedule 13G Report dated February 14, 2019 that Abrams Capital Management, L.P. (“Abrams CM LP”) filed
with the SEC. In this report, Abrams CM LP indicated that it: (i) shared voting and dispositive power with respect to all of the
above-listed shares with each of Mr. David Abrams and Abrams Capital Management, LLC (“Abrams CM LLC”), (ii) shared voting
and dispositive power with respect to 5,974,140 shares
60
with Abrams Capital Partners II, L.P. (“ACP II”), and (iii) shared voting and dispositive power with respect to 7,019,436 shares with
Abrams Capital, LLC (“Abrams Capital”).
(b) Shares reported herein for Abrams Capital represent shares beneficially owned by ACP II and other private investment funds for
which Abrams Capital serves as general partner. Shares reported herein for Abrams CM LP and Abrams CM LLC represent the
above-referenced shares beneficially owned by ACPII and shares beneficially owned by other private investment funds, for which
Abrams CM LP serves as investment manager. Abrams CM LLC is the general partner of Abrams CM LP. Shares reported herein
for Mr. Abrams represent the above referenced shares reported for Abrams Capital and Abrams CM LLC. Mr. Abrams is the
managing member of Abrams Capital and Abrams CM, LLC. In this report, each “Reporting Person” disclaimed beneficial
ownership of the common shares reported, except to the extent of its or his pecuniary interest therein. The address for each of the
foregoing entities is c/o Abrams Capital Management, L.P., 222 Berkeley Street, 21st Floor, Boston, MA 02116.
(5) Based on a Schedule 13G Report dated February 13, 2019 that this investor filed with the SEC. In this report, this investor indicated
that it held sole voting power with respect to 2,162,337 of the common shares reported, and sole dispositive power with respect to all
of the above-listed shares. Ms. Abigail P. Johnson is a Director, the Chairman and the Chief Executive Officer of FMR LLC.
Members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B
voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other
Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be
voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting
common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson
has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the
Investment Company Act (“Fidelity Funds”) advised by Fidelity Management & Research Company (“FMR Co”), a wholly owned
subsidiary of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. FMR Co carries out the voting of the
shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. The address of FMR LLC is 245 Summer
Street, Boston, MA 02210.
(6) Based on a Schedule 13G Report dated as of February 14, 2019 that this investor filed with the SEC and information provided to the
Company by this investor. In the Schedule 13G Report, the investor indicated that, as of December 31, 2018, all of the above-listed
common shares reported for Whitebox Advisors LLC were held in the accounts of Whitebox Advisors LLC’s clients, none of which
individually own more than 5% of the Company’s common shares. In addition, as of December 31, 2018, Whitebox Advisors LLC
shared with Whitebox General Partner LLC voting and dispositive power with respect to all of the above-listed shares. The address
of each of the foregoing entities is 3033 Excelsior Boulevard, Suite 300, Minneapolis, MN 55416.
(7) Based on a Schedule 13G Report dated as of February 13, 2019 that this investor filed with the SEC. In this report, the investor
indicated that Tor Investment Management (Hong Kong) Limited (“Tor”) may be deemed the beneficial owner of the shares held by
Tor Asia Credit Master Fund LP (the “Master Fund”). In addition, Messrs. Patrik Lennart Edsparr and Christopher Louis Mikosh are
the majority owners of Tor. By virtue of their relationship with Tor, Messrs. Edsparr and Mikosh may be deemed to beneficially
own the common shares owned directly by the Master Fund. In this report, the investor further indicated that, as of December 31,
2018, Tor, the Master Fund and Messrs. Edsparr and Mikosh share voting and dispositive power with respect to all of the above-
listed shares. The address of the Master Fund is c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George
Town, Grand Cayman KY1-9005, Cayman Islands. The address of Tor and Messrs. Edsparr and Mikosh is Henley Building 19/F, 5
Queen’s Road Central, Hong Kong.
(8) Based on a Schedule 13G Report dated as of January 17, 2019 that this investor filed with the SEC. In this report, the investor
indicated that, as of December 31, 2018, it shared voting and dispositive power with respect to all of the above-listed
shares. Quantum Pacific (Gibraltar) Limited is a Gibraltar company and wholly-owned indirect subsidiary of Quantum Pacific
International Limited, the indirect ultimate owner of which is a discretionary trust in which Mr. Idan Ofer is the beneficiary. The
address for Quantum Pacific (Gibraltar) Limited is 57/63 Line Wall Road, Gibraltar GX11 1AA and for Quantum Pacific
International Limited is c/o Quantum Pacific Monaco SARL, 7 Avenue de Grande Bretagne, MC 98000, Monaco.
61
As of March 1, 2019, the Company had 50 record holders in the United States, representing substantially all of the total issued and
outstanding common shares of the Company.
To our knowledge, as of March 1, 2019, there were no arrangements the operation of which may at a subsequent date result in a
change of control of the Company. Pursuant to our Articles, any two Class B directors may enter into Acquisition Contracts (as defined
in the Articles) on behalf of the Company, subject to certain conditions. For additional information, see Item 10.B. “Additional
Information - Memorandum and Articles of Association.”
Prior to the Company’s emergence from its Chapter 11 bankruptcy proceedings, QP, the indirect ultimate owner of which is a
discretionary trust in which Mr. Idan Ofer is the beneficiary, owned approximately 70.3% of the Company’s outstanding common shares.
In accordance with the Plan and the issuances of common shares in connection with the Company’s emergence from the Chapter 11
bankruptcy proceedings, the current beneficial ownership of the Company’s common shares is reflected in the table above. Except for the
foregoing, to the Company’s knowledge, there has been no other significant change in the percentage ownership of our common shares
held by any of our major shareholders during the past three years.
B. RELATED PARTY TRANSACTIONS
For information regarding related party transactions, see the discussion of our Governance Agreement and Registration Rights
Agreement in Item 10.B. “Additional Information - Memorandum and Articles of Association” and Note 23 to our consolidated financial
statements.
In addition, the SVP Parties and the Avenue Parties are parties to that certain Equity Commitment Agreement, dated
September 27, 2018, by and among the Company, certain of its subsidiaries and the other parties named therein, pursuant to which the
Company issued common shares to the SVP Parties, the Avenue Parties and certain other members of the Ad Hoc Group for payment of
their fee for backstopping the equity rights offering .
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18, “Financial Statements” within this annual report.
Legal
Proceedings
See Note 17 to our consolidated financial statements.
Distribution
Policy
We do not expect to pay dividends on our common shares for the foreseeable future. The payment of any future dividends to our
shareholders will depend on decisions that will be made by our board of directors and will depend on then-existing conditions, including
our operating results, financial condition, business prospects, Luxembourg corporate law restrictions, and restrictions under the
indentures governing our Notes and under any future debt agreements or contracts.
Share
Repurchase
Program
On February 22, 2019, our shareholders approved a share repurchase program for a total expenditure of up to $15.0 million for a
two-year period. We may purchase shares in one or several transactions on the open market or otherwise; however, we are not obligated
to repurchase any dollar amount or specific number of common shares under the program. We anticipate that repurchases will be funded
with cash on hand. As of March 1, 2019, we had not repurchased any common shares under this program.
62
B. SIGNIFICANT CHANGES
See item 4.A. “History and Development of the Company” and Note 2 to our consolidated financial statements.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Our common shares are traded on the NYSE under the symbol “PACD.”
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our common shares were listed on the Norwegian OTC List from April 2011 to October 2016 and on the NYSE from November
11, 2011 to September 12, 2017. From September 13, 2017 to November 19, 2018 and from November 20, 2018 to December 17, 2018,
our common shares were traded on the over-the-counter market under the ticker symbol “PACDQ” and “PACDD,” respectively. Our
common shares were relisted on the NYSE on December 18, 2018, and currently trade under the symbol “PACD.”
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Our Coordinated Articles of Association, dated as of December 20, 2018, are filed as Exhibit 1.1 to this Annual Report on Form
20-F.
General
Pacific Drilling S.A. is registered with the Luxembourg Registry of Trade and Companies under the Number B159658. Our
Company is formed for an unlimited period and is not to be dissolved by reason of the death, suspension of civil rights, incapacity,
insolvency, bankruptcy or any similar event affecting one or more shareholders.
63
Our corporate purpose, as stated in Article 3 (Corporate object) of our Articles, is as follows:
· Our object is buying and selling, the chartering in and the chartering out, and the management of seagoing ships, as well as the
financial and commercial operations that relate directly or indirectly to such activities.
· We may also charter, hold, lease, operate and provide vessels and equipment used in contract drilling services in oil and gas
drilling operations; acquire, hold, manage, sell or dispose of any such related equipment, and enter into, assist or participate in
financial, commercial and other transactions relating to contract drilling services.
·
In addition, we may acquire participations, in Luxembourg or abroad, in any company or enterprise in any form whatsoever,
and the management of those participations. We may in particular acquire, by subscription, purchase and exchange or in any
other manner, any stock, shares and other participation securities, bonds, debentures, certificates of deposit and other debt
instruments and, more generally, any securities and financial instruments issued by any public or private entity. We may
participate in the creation, development, management and control of any company or enterprise. Further, we may invest in the
acquisition and management of a portfolio of patents or other intellectual property rights of any nature or origin.
· We may borrow in any form. We may issue notes, bonds and any kind of debt and equity securities. We may lend funds,
including, without limitation, the proceeds of any borrowings, to our subsidiaries, affiliated companies and any other
companies. We may also give guarantees and pledge, transfer, encumber or otherwise create and grant security over some or
all of our assets to guarantee our own obligations and those of any other company, and, generally, for our own benefit and that
of any other company or person. We may not carry out any regulated financial sector activities without having obtained the
requisite authorization.
· We may use any techniques, legal means and instruments to manage our investments efficiently and protect ourselves against
credit risks, currency exchange exposure, interest rate risks and other risks.
· We may carry out any commercial, financial or industrial operation and any transaction with respect to real estate or movable
property, which directly or indirectly, favors or relates to our corporate object.
Share
Capital
We are authorized to issue up to 82.5 million common shares (including those shares which have already been issued), par value
of $0.01 per share, and our share capital is $825,000. As of March 1, 2019, an aggregate of 82.5 million common shares were issued, of
which approximately 75.0 million shares were outstanding, and approximately 7.5 million shares are reserved for issuance under the 2018
Stock Plan and held by one of our wholly-owned subsidiaries.
Our Articles provide that we may not issue non-voting equity securities (which shall not be deemed to include any warrants or
options to purchase our shares). Our Articles also provide that no fractional shares may be issued. Holders of our common shares have no
conversion or redemption rights, and there are no sinking fund provisions applicable to our common shares. We cannot subscribe for our
own shares. We may redeem our own shares using a method approved by our board of directors which is in accordance with Luxembourg
law and the rules of any stock exchange(s) on which our shares are listed from time to time.
All issued shares are fully paid. A shareholder in a Luxembourg société anonyme holding fully paid shares is not liable, solely
because of his, her or its shareholder status, for additional payments to us or our creditors.
To our knowledge, as of March 1, 2019 there were no shareholders’ arrangements or agreements, the implementation or
performance of which could, at a later date, result in a change in the control of us in favor of a third person. For information regarding the
rights of certain shareholders to nominate directors, see “Governance Agreement,” below.
Our common shares are governed by Luxembourg law and our Articles. More information concerning shareholders’ rights can be
found in the Luxembourg law on commercial companies dated August 10, 1915, as amended from time to time, and our Articles.
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Form
and
Transfer
of
Shares
Our common shares are issued in registered form only and are freely transferable, subject to any restrictions in our Articles and
pursuant to applicable securities laws. Luxembourg law does not impose any limitations on the rights of Luxembourg or non-
Luxembourg residents to hold or vote our shares.
Issuance
of
Shares;
Capital
Increase/Reduction
Our Articles provide that the share capital may be increased or reduced, subject to the approval by the shareholders at a general
meeting acting in accordance with the conditions prescribed for the amendment of our Articles.
Pursuant to Luxembourg law, our shareholders may approve an authorized share capital and authorize our board of directors to
issue shares up to the maximum amount of such approved share capital for a maximum period of five years from the date of publication
in the Luxembourg official gazette of the amendments of the Articles or the minutes of the relevant general meeting. The shareholders
may amend, renew or extend such authorized share capital and authorization to the board of directors to issue shares.
Under Luxembourg law, existing shareholders benefit from a preferential subscription right on the issuance of common shares.
When authorizing the board of directors to issue common shares out of the authorized capital, the shareholders may also authorize the
board of directors to withdraw or limit the preferential subscription right, subject to compliance with certain notice and information
requirements under Luxembourg law.
Our Articles provide that the board of directors was authorized, for a period of five years from November 19, 2018, without
prejudice to any renewals, to: (a) increase the share capital once or more up to $825,000 (such amount including the current share capital
of the Company) by the issue of new shares having the same rights as the existing shares, or without any such issue; (b) determine the
conditions of any such capital increase including through contributions in cash or in kind, by the incorporation of reserves, issue/share
premiums or retained earnings, with or without issue of new shares to current shareholders or third parties (non-shareholders) or
following the issue of any instrument convertible into common shares or any other instrument carrying an entitlement to, or the right to
subscribe for, common shares; (c) limit or withdraw the shareholders’ preferential subscription rights to the new common shares, if any,
and determine the persons who are authorized to subscribe to the new common shares; and (d) record each share capital increase by way
of a notarial deed and amend the share register accordingly. The board of directors was expressly authorized to increase the Company’s
share capital by incorporation of reserves, issue/share premiums or retained earnings and to issue the additional common shares resulting
from such capital increase to a beneficiary under any stock incentive plan as agreed by the Company (such beneficiary being a
shareholder of the Company or not, or, to an entity appointed by the Company as an administrator in connection with such plan) or under
any equity rights offering, private placements or backstop fees. The Company reserved the right to place transfer and other restrictions on
such common shares as determined by the Company pursuant to such stock incentive plan from time to time.
As of March 1, 2019, given that the available authorized capital has been completely used pursuant to Article 5.3 of our Articles,
our board of directors is not authorized to increase our share capital without further authorization of our shareholders. See “Governance
Agreement” below for a discussion of certain circumstances under which our authorized share capital may be increased.
General
Meeting
of
Shareholders
In accordance with Luxembourg law and our Articles, any regularly constituted general meeting of shareholders represents the
entire body of shareholders of the Company. At a general meeting, the shareholders have full power to adopt and ratify all acts and
operations that are consistent with our corporate object.
Under our Articles, the annual general meeting of our shareholders is held in Luxembourg, on the fourth Tuesday of May of each
year, at 10:00 a.m. (Luxembourg time). If that day is a public holiday or the day following a public holiday in the United States, the
meeting will be held on Tuesday of the following week. Other general meetings of shareholders may be convened at any time.
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Each of our common shares entitles the holder of record thereof to attend our general meeting of shareholders, either in person or
by proxy, to address the general meeting of shareholders, and to exercise voting rights, subject to the provisions of our Articles. There is
no minimum shareholding required to be able to attend or vote at a general meeting of shareholders.
Luxembourg law provides that our board of directors is obligated to convene a general meeting of shareholders if shareholders
representing in the aggregate 10% of the issued share capital so request in writing with an indication of the agenda. In such case, the
general meeting of shareholders must be held within one month of the request. If the requested general meeting of shareholders is not
held within one month of the request, shareholders representing in the aggregate 10% of the issued share capital may petition the
competent president of the district court in Luxembourg to have a court appointee convene the meeting. Luxembourg law provides that
shareholders representing in the aggregate 10% of the issued share capital may request that additional items be added to the agenda of a
general meeting of shareholders. Such a request must be made by registered mail sent to our registered office at least five days prior to
the holding of the general meeting of shareholders.
Voting
Rights
Each common share entitles the holder thereof to one vote at a general meeting of shareholders. Neither Luxembourg law nor our
Articles contain any restrictions as to the voting of our common shares by non-Luxembourg residents.
Luxembourg law distinguishes between “ordinary” general meetings of shareholders and “extraordinary” general meetings of
shareholders.
Ordinary
General
Meetings
of
Shareholders.
Ordinary general meetings of our shareholders may be convened, and a vote may be
held, without a quorum requirement. Resolutions brought before such ordinary general meetings of our shareholders require the approval
of a simple majority of the votes validly cast, irrespective of the number of shares present or represented. Abstentions will not be counted
as “votes” at ordinary general meetings of our shareholders.
Extraordinary
General
Meetings
of
Shareholders.
Extraordinary general meetings of our shareholders may be convened to amend
our Articles and to address certain other limited matters. An extraordinary general meeting of shareholders convened for the purpose of
(a) an increase or decrease of the issued share capital, (b) a limitation or exclusion of preemptive rights, (c) approving a statutory merger
or de-merger of the Company, (d) dissolution of the Company or (e) an amendment of our Articles, must have a quorum of at least one
half of our issued share capital, and such actions require approval of at least two-thirds of the votes validly cast at such extraordinary
general meeting of shareholders. If such a quorum is not reached, the extraordinary general meeting of shareholders may be reconvened
at a later date, pursuant to appropriate notification procedures, which reconvened meeting shall not require a quorum. Abstentions will
not be counted as “votes” at extraordinary general meetings of our shareholders.
Appointment
and
Removal
of
Directors;
Vacancies.
Members of our board of directors may be elected by simple majority of the
votes validly cast at any general meeting of shareholders. Any director may be removed with or without cause by a simple majority vote
at any general meeting of shareholders. If the office of a director becomes vacant, our Articles provide that the remaining directors, acting
by simple majority, may fill such vacancy on a provisional basis until a new director is elected at the next general meeting of
shareholders. See “Governance Agreement” below for a discussion of certain provisions pursuant to which our Class B directors are
nominated prior to the Nomination Termination Time (as defined therein).
Minority
Action
Right
. Luxembourg law provides that the shareholders holding in the aggregate 10% of the issued share capital
who have a right to vote at the general meeting may act on our behalf to discharge the members of the board of directors for misconduct
against our interests, a violation of the law, or a violation of our Articles.
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Board
of
Directors
All powers not expressly reserved to the shareholder(s) by law or the Articles fall within the competence of the board of directors,
which has full power to carry out and approve all acts and operations consistent with the Company’s corporate object.
The board of directors is authorized to delegate the day-to-day management and the power to represent the Company in this
respect, to one or more directors, officers, managers or other agents, whether shareholders or not, acting either individually or jointly,
provided that, prior to the Nomination Termination Time (as defined in the Governance Agreement) any appointment, delegation or
power-of-attorney granted in respect of any Acquisition Proposal Matters (as defined below), or any revocation of the foregoing, shall
only be effective if a Class B Majority (as defined below) votes in favor of such appointment, delegation or power-of-attorney, or
revocation of the foregoing, as the case may be.
Except as otherwise provided by an amendment to our Articles, the total number of directors constituting the board of directors
shall be seven directors, who need not be shareholders.
From and after the Plan Effective Date until the occurrence of the Nomination Termination Time (as defined in the Governance
Agreement described below), the board of directors shall be divided into two classes, designated Class A (composed of four directors)
and Class B (composed of three directors), with all Class A directors and Class B directors elected to terms of one year in length;
provided, that the initial term of office of the Class A directors following the Plan Effective Date shall expire at the general meeting of
the shareholders of the Company at which the annual accounts for the 2018 financial year will be approved and the initial term of office
of the Class B directors following the Plan Effective Date shall expire at the general meeting of the shareholders of the Company at
which the annual accounts for the 2019 financial year will be approved. All directors, whether assigned to Class A or Class B, shall be
elected by the shareholders at the general meeting in accordance with law and shall have one vote each at all meetings of the board of
directors. From and after the Nomination Termination Time (as defined in the Governance Agreement), the board of directors shall cease
to be classified and each director then in office previously designated as a Class A director or Class B director shall remain in office as a
director until his or her term expires or until his or her earlier death, resignation or removal by the shareholders.
The board of directors meets at the request of the chairperson or the majority of the board of directors. A director may grant
another director a power of attorney in order to be represented at any meeting of the board of directors. A quorum of the board of
directors is a majority of its members present or represented and resolutions are adopted by a majority of the members of the board of
directors voting in their favor, except as otherwise provided in the Articles. In the event of a tie vote, the chairman has the right to cast the
deciding vote. The board of directors may also act by means of resolutions in writing signed by all directors. There is no mandatory
retirement age for directors under Luxembourg law.
A director who has a financial interest in a transaction carried out other than in the ordinary course of business which conflicts
with the interests of the Company must advise the board of directors accordingly and have the statement recorded in the minutes of the
meeting. The director concerned may not take part in the deliberations concerning that transaction. A special report on the relevant
transaction is submitted to the shareholders at the next general meeting, before any vote on the matter.
Authority
of
Class
B
Directors
Regarding
Acquisition
Proposals
Prior
to
Nomination
Termination
Time
Until the Nomination Termination Time (as defined in the Governance Agreement described below), the following provisions of
our Articles apply, and after the Nomination Termination Time, these provisions shall have no further force or effect:
(1) Representative
Authority
of
the
Class
B
Directors
Regarding
Acquisition
Proposals
. Any two Class B directors acting in
their capacities as such (a “Class B Majority”) shall have the authority to act on the Company’s behalf (including to bind the
Company with respect to clauses (e) through (g)) with respect to the following matters: (a) to review and evaluate the terms
and conditions of any Acquisition Proposal, (b) to negotiate with any party the Class B Majority deems appropriate with
respect to any Acquisition Proposal; (c) to solicit prospective Acquisition Proposals and/or explore the ability to obtain on
behalf of the Company prospective Acquisition Proposals, (d) to determine whether any Acquisition Proposal is beneficial to
the
67
Company and its shareholders, (e) to make recommendations to the board of directors and shareholders as to what actions, if
any, should be taken with respect to any Acquisition, Acquisition Contract or Acquisition Proposal, including to recommend
that the board of directors or the shareholders, as applicable, approve any Acquisition, Acquisition Contract or Acquisition
Proposal, (f) to retain, at the Company’s expense, such consultants, legal counsel and other advisors as a Class B Majority
may from time to time deem appropriate to assist the Class B directors in the performance of their duties with respect to
Acquisition Proposals, (g) subject to paragraph (2) below, to execute and deliver on behalf of the Company definitive
documentation providing for the consummation of an Acquisition (an “Acquisition Contract”) and (h) to take, or to cause the
Company to take, any and all actions ancillary or related to any actual or prospective Acquisition Proposal or the other matters
referred to in the preceding clauses (a)-(g), including without limitation to authorize and enter into contracts of any nature
(other than an Acquisition Contract except in accordance with paragraph (2) below) (the foregoing clauses (a)-(h),
“Acquisition Proposal Matters”). As used in our Articles: (x) “Acquisition Proposal” means a proposal received by the
Company, any of its subsidiaries, or any of its or their respective directors, officers or outside consultants, counsel or other
advisors providing for an Acquisition; and (y) “Acquisition” means a transaction or series of related transactions resulting in
the acquisition (whether by merger, consolidation, sale or transfer of the Company’s shares, other equity interests or assets or
otherwise) by any natural or legal person or group of such persons, directly or indirectly, (i) of a majority of (A) the
outstanding shares of the Company or (B) the assets of the Company and its subsidiaries determined on a consolidated basis
and (ii) upon the consummation of which, the shareholders of the Company immediately prior to such acquisition collectively
do not own (beneficially or of record) a majority of the voting power of such person or the ultimate parent entity of such
person (or, in the case of a group of such persons, a majority of the voting power of the largest member of such group,
determined by reference to the respective equity financing contributions of such members, or ultimate parent entity of such
largest member).
(2) Approval
of
Acquisition
Contracts.
No Class B director, acting singularly or with any one or more other Class B directors,
shall have the power to cause the Company to enter into any Acquisition Contract or otherwise consummate an Acquisition
unless such Acquisition Contract (a) provides by its terms that consummation of the Acquisition that is the subject thereof is
conditioned upon either (I) the shareholder vote, under the conditions of quorum and vote, required by law or other provision
of the Articles for such Acquisition or (II) shareholder approval by the vote of a majority of the outstanding share capital,
whichever voting standard in the foregoing clauses (I) or (II) is higher (such condition, as applicable, a “Shareholder
Approval Condition”) and (b) does not impose any obligations or penalties on the Company if the Shareholder Approval
Condition is not obtained by the conclusion of the general meeting or extraordinary general meeting, as applicable, convened
to vote on such Acquisition Contract or Acquisition other than reimbursement of the reasonable expenses incurred by the
counterparty thereto (provided, that, for avoidance of doubt, this clause (b) shall not preclude the imposition of any obligation
or penalty on the Company due to any cause or event other than the failure in and of itself to satisfy the Shareholder Approval
Condition at such general meeting or extraordinary general meeting). If a proposed Acquisition Contract satisfies clauses (a)
and (b) of the immediately preceding sentence, then a Class B Majority shall be authorized to represent the Company by
executing and delivering, or causing any person authorized by the Class B Majority to execute and deliver, on the Company’s
behalf, such Acquisition Contract, to convene a general meeting or an extraordinary general meeting, as applicable, to seek
shareholder approval of the Acquisition in accordance with the Shareholder Approval Condition, and, if such shareholder
approval is obtained, to carry out all other powers vested under paragraph (1) above with respect to such Acquisition Contract
(including to cause the Company to consummate the Acquisition and the other transactions contemplated thereby or, subject
to the terms of the Acquisition Contract, terminate such Acquisition Contract and abandon such Acquisition).
(3) Limitation
on
Representative
Authority
of
the
Class
A
Directors
Regarding
Acquisition
Proposals
. No Class A director,
acting singularly or with any one or more other directors, in his or her capacity as such, shall have any representative
authority to bind the Company or otherwise act on the Company’s behalf, nor shall the board of directors take any action, in
either case with respect to any Acquisition, Acquisition Contract or Acquisition Proposal Matters, except with the prior
approval of a Class B Majority. Notwithstanding the immediately prior sentence, this paragraph (3) shall not be interpreted to
limit the rights of the Class A directors to attend meetings of the Class B directors, receive information received by the Class
B directors or to provide ongoing input to the Class B directors, in each case, regarding Acquisitions, Acquisition Contracts,
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Acquisition Proposals or other Acquisition Proposal Matters, and the Class B directors shall so extend such rights to the Class
A directors.
(4) Amendments
. The board of directors shall not propose to the shareholders or recommend that the shareholders approve any
amendment to provisions to the Articles described in this section “Authority of Class B Directors Regarding Acquisition
Proposals Prior to Nomination Termination Time” and/or any other provisions of the Articles directly or indirectly amending
or limiting the application of the provisions described in this section, without the favorable vote of a Class B Majority.
Committees
of
the
Board
of
Directors
Under our Articles, our board of directors may establish committees for certain specific purposes, which may include, but are not
limited to, an audit committee and a compensation committee. As of the date of this registration statement, our board of directors has
established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee.
Amendment
to
our
Articles
Under Luxembourg law, we are required to convene an extraordinary general meeting of shareholders to amend our Articles. The
proposed amendments to our Articles must be included in the agenda of the extraordinary general meeting of shareholders. Any
resolutions to amend our Articles must be taken before a Luxembourg notary and such amendments must be published in accordance
with Luxembourg law.
Merger
and
De-Merger
Our shareholders must approve any merger by absorption involving the Company at an extraordinary general meeting of
shareholders, which must be held before a notary. Similarly, the de-merger of the Company is generally subject to the approval of our
shareholders at an extraordinary general meeting of shareholders.
Liquidation
In the event of our liquidation, dissolution or winding-up, the assets remaining after allowing for the payment of all liabilities will
be paid out to the shareholders pro rata to their respective shareholdings. The decision to voluntarily liquidate, dissolve or wind-up
requires the approval of our shareholders at an extraordinary general meeting of shareholders to be held before a notary.
No
Appraisal
Rights
Neither Luxembourg law nor our Articles provide for any appraisal rights of dissenting shareholders.
Distributions
Subject to Luxembourg law, each share is entitled to participate equally in distributions if, and when, declared by shareholders out
of funds legally available for such purposes. Pursuant to our Articles, at a general meeting, our shareholders may approve distributions,
and our board of directors may declare interim distributions, to the extent permitted by Luxembourg law.
Declared and unpaid distributions held by us for the account of the shareholders will not bear interest. Under Luxembourg law,
claims for unpaid distributions will lapse in our favor five years after the date such distribution is declared.
Limitation
of
Liability;
Indemnification
Pursuant to our Articles, the members of our board of directors cannot be held personally liable by reason of their mandate for any
commitment validly made in the Company’s name, provided such commitments comply with the Articles and Luxembourg law.
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Pursuant to our Articles, we must, to the fullest extent permitted by Luxembourg law, indemnify any director or officer, as well as
any former director or officer, against any damages and/or compensation to be paid and any costs, charges and expenses, reasonably
incurred by him in connection with the defense or settlement of any civil, criminal or administrative action, suit or proceeding to which
he may be made a party by reason of his being or having been a director or officer of the Company, if (a) he acted honestly and in good
faith, and (b) in the case of criminal or administrative proceedings, he had reasonable grounds for believing that conduct was lawful.
Notwithstanding the foregoing, the current or former director or officer will not be entitled to indemnification in case of an action, suit or
proceeding brought against him by the Company or in case he shall be finally adjudged in an action, suit or proceeding to be liable for
gross negligence, willful misconduct, fraud, dishonesty or any other criminal offense.
Furthermore, in case of settlement, the current or former director or officer will only be entitled to indemnification under our
Articles, provided that (a) the board of directors shall have determined in good faith that the defendant’s actions did not constitute willful
and deliberate violations of the law and shall have obtained the relevant legal advice to that effect; and (b) notice of the intention of
settlement of such action, suit or proceeding is given to us at least 10 business days prior to such settlement.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling
persons, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
Annual
Accounts;
Auditors
Our Articles provide that our financial year begins on January 1 and ends on December 31 each year. Each year our board of
directors must prepare annual accounts of the Company, including an inventory of our assets and liabilities, and a balance sheet and a
profit and loss account. Our board of directors must also prepare a consolidated management report each year on the consolidated
financial statements of the Company. The annual accounts, the consolidated financial statements of the Company, the consolidated
management report and the auditor’s reports must be available for inspection by shareholders at our registered office at least 15 calendar
days prior to the date of the annual general meeting of shareholders.
Luxembourg law requires that the operation of the Company be supervised by one or more statutory auditors. The general meeting
of shareholders must appoint the statutory auditor(s) and determine the term of their office, which may not exceed six years, without
prejudice to any renewals. However, because the Company has exceeded certain thresholds, it is required to have its accounts audited by
an independent auditor, which is responsible for advising whether the management report is in line with the financial statements for the
year and has been prepared in accordance with legal requirements. The appointment of the independent auditor follows the same rules as
the appointment of the statutory auditor, and a statutory auditor is no longer required if an independent auditor has been appointed.
KPMG LLP is the independent auditor duly appointed by the annual general meeting of shareholders as of May 22, 2018 for a one-year
mandate.
After approval by the shareholders at an annual general meeting, the annual accounts must be filed within one month after their
approval or seven months of the close of the financial year with the Luxembourg Registry of Trade and Companies.
Information
Rights
Luxembourg law gives shareholders limited rights to inspect certain corporate records eight calendar days prior to the date of the
annual general meeting of shareholders, including the annual accounts, the consolidated financial statements of the Company, a list of
directors and independent auditors, a list of shareholders whose shares are not fully paid-up, the management consolidated report and the
auditor’s reports.
The annual accounts, the consolidated financial statements of the Company, the consolidated management report and the auditor’s
reports are sent to registered shareholders at the same time as the convening notice for the annual general meeting of shareholders. In
addition, any registered shareholder is entitled to receive a copy of these documents free of charge eight calendar days prior to the date of
the annual general meeting of shareholders upon request.
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Under Luxembourg law, it is generally accepted that a shareholder has the right to receive responses to questions concerning items
on the agenda for a general meeting of shareholders if such responses are necessary or useful for a shareholder to make an informed
decision concerning such agenda item, unless a response to such questions could be detrimental to our interests.
Transfer
Agent
and
Registrar
The transfer agent and registrar for our common shares is American Stock Transfer & Trust Company, LLC.
Governance
Agreement
The Company has entered into a Governance Agreement dated as of November 19, 2018 with certain holders of its shares, defined
therein as the Avenue Parties, the SVP Parties, and the Other Lenders.
Nomination
Provisions
. Pursuant to the Governance Agreement, until the Nomination Termination Time, defined below, the
Avenue Parties have the right to nominate one Class B Director, the SVP Parties have the right to nominate one Class B Director and the
Other Lenders have the right to nominate one Class B Director. Each of such parties also has the right to fill a vacancy with respect to its
Class B Director nominee.
The “Nomination Termination Time” means the first such time that it becomes known to the Company that any of (i) the Avenue
Parties (collectively and in the aggregate with each other), (ii) the SVP Parties (collectively and in the aggregate with each other) or
(iii) the Other Lenders (collectively and in the aggregate with each other), hold, beneficially or of record, and have the power to vote or
direct the voting of, 10% or less (the “Ownership Threshold”) of the then issued and outstanding shares of the Company. Whichever of
the Avenue Parties, SVP Parties or Other Lenders, as applicable, whose holdings of shares of the Company first becomes known to the
Company to cease to exceed the Ownership Threshold is referred to as the “Triggering Party.”
During the period beginning at the Nomination Termination Time and ending at the convening of the first general meeting after
the Nomination Termination Time, if the board of directors requests in writing the resignation of the former Class B Director who was
nominated by the Triggering Party, then each of the Avenue Parties, SVP Parties and Other Lenders has agreed to take all necessary
actions to cause such director to resign or otherwise be removed from office as a director.
Each of the Avenue Parties and the SVP Parties agreed with one another to cooperate in facilitating the actions and rights in the
Governance Agreement, including voting their Company common shares in favor of their respective Class B Director nominees. The
Company agreed to cooperate in facilitating the actions and rights in the Governance Agreement, including providing the highest level of
support for the election of the Class B Director nominees as it provides to any other individual standing for election as part of the
Company's slate of directors.
Board
Observer
Rights
. The parties to the Governance Agreement (each, an “Observer Shareholder”) each have the right to
designate a board of directors observer until the first such time that it becomes known to the Company that an Observer Shareholder
(together with its Permitted Transferees as defined in the agreement) ceases to hold beneficially or of record, and have the power to vote
or direct the voting of, at least such Observer Shareholder’s Original Percentage Threshold. “Original Percentage Threshold” means, with
respect to any Observer Shareholder, the lesser of (a) five percent (5%) of the issued and outstanding shares of the Company or (b) fifty
percent (50%) of the shares of the Company such Observer Shareholder together with its Permitted Transferees collectively held,
beneficially or of record, and had the power to vote or direct the voting of, at the close of business on the date of the Governance
Agreement.
Additional
Share
Capital
Authorization
. Each of the Company, the Avenue Parties and the SVP Parties has agreed with one
another that it will take all necessary actions to cause the Articles to be amended as promptly as practicable, following a request therefor
by any of the Company, the Avenue Parties or the SVP Parties, to provide for the authority of the board of directors to increase the
Company’s then current share capital once or more up to $1.0 million (represented by up to an aggregate of 100.0 million authorized
shares) (such amount including the current share capital of the Company of $825,000) by the issue of new shares having the same rights
as the existing shares, or without any such issue.
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Waiver
of
Corporate
Opportunity
. The agreement contains a broad corporate opportunity waiver by the Company in favor of the
shareholders party to the agreement and certain related persons as described in the agreement.
Confidential
Information
. The Class B Directors and Observers may, upon request of the party that designated them, share
Company confidential information with the designating party, subject to the designating party entering into a confidentiality agreement
with the Company.
The foregoing description of the Governance Agreement is only a summary, does not purport to be complete, and is qualified in its
entirety by reference to the Governance Agreement, which is incorporated by reference as an Exhibit to this annual report.
Registration
Rights
Agreement
The Company entered into a Registration Rights Agreement, dated as of November 19, 2018 with QP and the shareholders party to
the Governance Agreement, with respect to the Registrable Securities (as defined in the Registration Rights Agreement). Pursuant to the
agreement, the Company filed a registration statement, declared effective on December 26, 2018, and included in it the Registrable
Securities of each holder who requested inclusion therein of some or all of such holder’s Registrable Securities. The shelf registration
statement may be amended, among other things, under the circumstances specified in the agreement, to register Registrable Securities
that were not previously included in the shelf registration statement and must be amended or replaced by an automatic shelf registration
statement if and after the Company becomes eligible to use one. The Company will use its reasonable best efforts to keep the shelf
registration statement continuously effective. The agreement also contains provisions permitting underwritten shelf resale transactions
with an anticipated aggregate offering price to the public of at least $150.0 million.
In addition, the agreement grants certain demand registration rights to parties beneficially owning at least 10% of the Company’s
shares, provided that the anticipated aggregate offering price to the public is at least $150.0 million or at least 20% of the then-
outstanding Registrable Securities (for the party exercising the demand registration right along with other holders entitled to have their
shares registered along with the initiating holder). The agreement also contains customary “piggyback” registration rights if the Company
proposes to file a registration statement with respect to an offering of its shares.
The agreement contains customary conditions, restrictions, suspension periods, blackout periods and ancillary requirements and
customary indemnification and contribution provisions. The Company will generally pay all registration expenses other than
underwriting fees, discounts, commissions, transfer taxes or similar taxes or charges. Upon the Company becoming aware that it fails to
qualify as a foreign private issuer on the last business day of a second fiscal quarter, the Company must so notify the holders no later than
10 business days thereafter. The agreement terminates with respect to any holder when the holder ceases to hold Registrable Securities
(except with respect to certain indemnification and information rights).
The foregoing description of the Registration Rights Agreement is only a summary, does not purport to be complete, and is
qualified in its entirety by reference to the Registration Rights Agreement, which is incorporated by reference as an Exhibit to this annual
report.
C. MATERIAL CONTRACTS
We have no material contracts other than those entered into in the ordinary course of business, the Governance Agreement, the
Registration Rights Agreement and those described in our description of indebtedness. See Note 8 to our consolidated financial
statements in this annual report for a more detailed description of the terms of our debt financings. For a description of the Governance
Agreement and Registration Rights Agreement, see Item 10.B. “Additional Information – Memorandum and Articles of Association.”
D. EXCHANGE CONTROLS
There are no legislative or other legal provisions currently in force in Luxembourg or arising under our Articles that restrict the
payment of dividends or distributions to holders of our common shares not resident in Luxembourg, except for regulations restricting the
remittance of dividends, distributions and other payments in compliance with
72
United Nations and European Union sanctions. There are no limitations, either under the laws of Luxembourg or in our Articles, on the
right of non-Luxembourg nationals to hold or vote our common shares.
E. TAXATION
Luxembourg Tax Considerations
The
following
is
a
summary
discussion
of
certain
Luxembourg
tax
considerations
that
may
be
applicable
to
U.S.
Holders
(defined
below)
as
a
result
of
owning
or
disposing
of
our
common
shares.
This
does
not
purport
to
be
a
comprehensive
description
of
all
of
the
tax
considerations
that
may
be
relevant
to
any
of
our
common
shares
and
does
not
purport
to
include
tax
considerations
that
arise
from
rules
of
general
application
or
that
are
generally
assumed
to
be
known
to
holders.
This
discussion
is
not
a
complete
analysis
or
listing
of
all
of
the
possible
tax
consequences
of
such
transactions
and
does
not
address
all
tax
considerations
that
might
be
relevant
to
particular
holders
in
light
of
their
personal
circumstances
or
to
persons
that
are
subject
to
special
tax
rules.
It
is
not
intended
to
be,
nor
should
it
be
construed
to
be,
legal
or
tax
advice.
The
summary
is
not
exhaustive,
and
we
strongly
encourage
shareholders
to
consult
their
own
tax
advisors
as
to
the
Luxembourg
tax
consequences
of
the
ownership
and
disposition
of
our
common
shares.
The
summary
applies
only
to
U.S.
Holders
who
will
own
our
common
shares
as
capital
assets
and
does
not
apply
to
other
categories
of
shareholders,
such
as
dealers
in
securities,
trustees,
insurance
companies,
collective
investment
schemes
and
shareholders
who
have,
or
who
are
deemed
to
have,
acquired
their
common
shares
in
the
capital
of
our
common
shares
by
virtue
of
an
office
or
employment.
This
discussion
is
based
on
the
laws
of
the
Grand-Duchy
of
Luxembourg,
including
the
Income
Tax
Act
of
December
4,
1967,
as
amended,
the
Municipal
Business
Tax
Act
of
December
1,
1936,
as
amended,
and
the
Net
Wealth
Tax
Act
of
October
16,
1934,
as
amended
(Vermögenssteuergesetz),
and
the
Law
of
October
16,
1934
on
the
valuation
of
assets
(Bewertungsgesetz)
(the
“Valuation
Law”),
to
which
we
jointly
refer
to
as
the
laws
of
the
Grand-Duchy
of
Luxembourg,
including
the
regulations
promulgated
thereunder,
and
published
judicial
decisions
and
administrative
pronouncements,
each
as
in
effect
on
the
date
of
this
prospectus
or
with
a
known
future
effective
date
and
is
subject
to
any
change
in
law
or
regulations
or
changes
in
interpretation
or
application
thereof
(and
which
may
possibly
have
a
retroactive
effect).
However,
there
can
be
no
assurance
that
the
Luxembourg
tax
authorities
will
not
challenge
any
of
the
Luxembourg
tax
considerations
described
below;
in
particular,
changes
in
law
and/or
administrative
practice,
as
well
as
changes
in
relevant
facts
and
circumstances,
may
alter
the
tax
considerations
described
below.
Prospective
investors
are
encouraged
to
consult
their
own
professional
advisors
as
to
the
effects
of
state,
local
or
foreign
laws
and
regulations,
including
Luxembourg
tax
law
and
regulations,
to
which
they
may
be
subject.
For
purposes
of
this
summary,
a
“U.S.
Holder”
means
any
investor
in
our
common
shares
who
is
a
United
States
(“U.S.”)
resident
within
the
meaning
of
Article
4
of
the
double
tax
treaty
of
3
April
1996
concluded
between
Luxembourg
and
the
United
States
(the
“Treaty”)
and
the
Company
is
a
Luxembourg
resident
within
the
meaning
of
Article
4
of
the
Treaty
and
entitled
to
all
the
benefits
of
the
Treaty
pursuant
to
Article
24
of
the
Treaty.
Tax
Regime
Applicable
to
Realized
Capital
Gains
U.S. Holders will be subject to the following Luxembourg tax treatment in relation to capital gains in the cases described below
(among others):
· An individual who is a U.S. Holder of common shares (and who does not have a permanent establishment, a permanent
representative or a fixed place of business in Luxembourg to which the common shares are attributable) will not be subject to
Luxembourg taxation on capital gains arising upon disposal of such common shares pursuant to Article 14(5) of the Treaty.
· A corporate U.S. Holder, which has a permanent establishment, a permanent representative or a fixed place of business in
Luxembourg to which our common shares are attributable, will be required to recognize capital gains (or losses as the case
may be) on the sale of such common shares, which will be subject to Luxembourg corporate income tax and municipal
business tax. However, gains realized on the sale of the common shares may benefit under certain conditions from the
exemption provided for by Article 166 of the Luxembourg Income Tax and the Grand-Ducal Decree of December 21, 2001 (as
amended) provided that at the time of the disposal of the common shares, among other things, (a) the corporate U.S. Holder
(acting through its permanent representative or fixed place of business in Luxembourg) of common shares holds a stake
representing at least 10% of our total share capital or a cost price of at least 6.0 million Euros (“€”) and
73
(b) such qualifying shareholding has been held for an uninterrupted period of at least 12 months or the corporate U.S. Holder
(acting through its permanent representative or fixed place of business in Luxembourg) undertakes to continue to own such
qualifying shareholding until such time as the corporate U.S. Holder (acting through its permanent representative or fixed
place of business in Luxembourg) has held at least 10% our common shares for an uninterrupted period of at least 12 months.
In certain circumstances, the exemption may not apply in part or in full; for example, the capital gains exemption (for gains
arising on an alienation of the common shares) does not apply up to the aggregate amount of previously tax deducted expenses
and write-offs related to these common shares.
· A corporate U.S. Holder, which has no permanent establishment or a permanent representation in Luxembourg to which the
common shares are attributable, will not be subject to Luxembourg taxation on capital gains arising upon disposal of such
common shares pursuant to Article 14 (5) of the Treaty.
Tax
Regime
Applicable
to
Distributions
Luxembourg
Withholding
Tax
.
A Luxembourg withholding tax of 15% (17.65% if the dividend tax is not withheld from the
shareholder) is due on dividends and similar distributions to U.S. Holders (subject to the exceptions discussed under “—Exemption from
Luxembourg Withholding Tax” and “—Reduction of Luxembourg Withholding Tax” below). Absent an exception, we will be required to
withhold at such rate from distributions to U.S. Holders and pay such withheld amounts to the Luxembourg tax authorities.
Exemption
from
Luxembourg
Withholding
Tax
. Dividends and similar distributions paid to U.S. Holders may under certain
conditions be exempt from Luxembourg dividend withholding tax including, among other things, if: (a) the U.S. Holder is a qualifying
corporate entity holding a stake representing at least 10% of our total share capital or which acquired the common shares for at least
€1.2 million (or its equivalent amount in a foreign currency); and (b) the U.S. Holder has either held this qualifying stake in our capital
for an uninterrupted period of at least 12 months at the time of the payment of the dividend or undertakes to continue to own such
qualifying shareholding until such time as it has held the common shares for an uninterrupted period of at least 12 months. Based on the
above, the U.S. Holder will be a qualifying corporate entity for the exemption if it is a collective entity fully subject to a tax in the U.S.
that corresponds to Luxembourg corporate income tax.
Under current Luxembourg tax law, payments to shareholders in relation to a reduction of share capital or share premium are not
subject to Luxembourg dividend withholding tax if certain conditions are met, including, for example, the condition that we do not have
distributable reserves or profits. If we have, at the time of the payment to U.S. Holders with respect to their common shares, distributable
reserves or profits, a distribution of share capital or share premium will be recharacterized for Luxembourg tax purposes as a distribution
of such reserves or earnings subject to withholding tax. Based on this treatment under Luxembourg law, if certain conditions are met, it
can be expected that a substantial amount of potential future payments to be made by us to U.S. Holders may not be subject to
Luxembourg withholding tax.
Reduction
of
Luxembourg
Withholding
Tax
. Corporate U.S. Holders may claim application of a reduced Luxembourg dividend
withholding tax at a rate of 5% under Article 10(2)(a)(i) of the Treaty, if such U.S. Holders beneficially own at least 10% of our voting
stock without any minimum holding period.
Net
Wealth
Tax
Luxembourg net wealth tax will not be levied on a U.S. Holder with respect to the common shares unless the common shares are
attributable to an enterprise or part thereof that is carried on through a permanent establishment, a fixed place of business or a permanent
representative in Luxembourg, in which case an exemption may apply based on Paragraph 60 of the Valuation Law.
Registration
Tax/Stamp
Duty
No registration tax or stamp duty will be payable by a U.S. Holder of common shares in Luxembourg solely upon the disposal of
common shares by sale or exchange.
74
Estate
and
Gift
Taxes
No estate or inheritance tax is levied on the transfer of common shares upon the death of a U.S. Holder of common shares in cases
where the deceased was not a resident of Luxembourg for inheritance tax purposes, and no gift tax is levied upon a gift of common shares
if the gift is not passed before a Luxembourg notary or recorded in a deed registered in Luxembourg.
The Luxembourg tax considerations summarized above are for general information only. Each Pacific Drilling S.A.
shareholder is encouraged to consult his, her or its tax advisor as to the particular consequences that may apply to such
shareholder.
U.S. Federal Income Tax Considerations
The
following
is
a
discussion
of
the
material
U.S.
federal
income
tax
considerations
relating
to
the
purchase,
ownership
and
disposition
of
our
common
shares.
This
discussion
is
based
upon
the
provisions
of
the
Internal
Revenue
Code
of
1986,
as
amended
(the
“Code”),
existing
and
proposed
Treasury
Regulations
thereunder,
judicial
authority
and
administrative
interpretations,
as
of
the
date
of
this
prospectus,
all
of
which
are
subject
to
change,
possibly
with
retroactive
effect,
or
are
subject
to
different
interpretations.
There
can
be
no
assurance
that
the
Internal
Revenue
Service
(“IRS”)
will
take
a
similar
view
of
such
consequences,
and
we
have
not
obtained,
nor
do
we
intend
to
obtain,
a
ruling
from
the
IRS
with
respect
to
the
U.S.
federal
income
tax
consequences
of
the
purchase,
ownership
and
disposition
of
the
common
shares.
This
discussion
is
limited
to
beneficial
owners
that
hold
our
common
shares
as
“capital
assets”
(generally,
property
held
for
investment).
This
discussion
does
not
address
all
U.S.
federal
income
tax
considerations
that
may
be
relevant
to
a
particular
holder
based
on
its
particular
circumstances,
and
you
are
encouraged
to
consult
your
own
independent
tax
advisor
regarding
your
specific
tax
situation.
For
example,
the
discussion
does
not
address
the
tax
considerations
that
may
be
relevant
to
U.S.
Holders
(defined
below)
in
special
tax
situations,
such
as:
·
·
·
·
·
·
·
·
dealers
in
securities
or
currencies;
insurance
companies;
regulated
investment
companies
and
real
estate
investment
trusts;
tax-exempt
organizations;
brokers
or
dealers
in
securities
or
currencies
and
traders
in
securities
that
elect
to
mark
to
market;
certain
financial
institutions;
partnerships
or
other
pass-through
entities
and
holders
of
interests
therein;
holders
whose
functional
currency
for
U.S.
federal
income
tax
purposes
is
not
the
U.S.
dollar;
· U.S.
expatriates;
·
·
·
·
individual
retirement
accounts
and
other
tax
deferred
accounts;
holders
that
acquired
our
common
shares
in
compensatory
transactions;
holders
that
hold
our
common
shares
as
part
of
a
hedge,
straddle
or
conversion
or
other
integrated
transaction;
or
holders
that
own,
directly,
indirectly,
or
constructively,
10%
or
more
of
the
total
combined
voting
power
of
the
Company.
This
discussion
does
not
address
the
alternative
minimum
tax
consequences
of
holding
common
shares.
Moreover,
this
discussion
does
not
address
the
state,
local
or
non-U.S.
tax
consequences
of
holding
our
common
shares,
or
any
aspect
of
U.S.
federal
tax
law
other
than
U.S.
federal
income
taxation.
You
are
a
“U.S.
Holder”
if
you
are
a
beneficial
owner
of
our
common
shares
and
you
are,
for
U.S.
federal
income
tax
purposes:
·
an
individual
who
is
a
citizen
or
resident
of
the
U.S.;
75
·
·
·
a
corporation,
or
any
other
entity
taxable
as
a
corporation,
created
or
organized
in
or
under
the
laws
of
the
U.S.
or
any
State
thereof,
including
the
District
of
Columbia;
an
estate,
the
income
of
which
is
subject
to
U.S.
federal
income
taxation
regardless
of
its
source;
or
a
trust
(a)
if
a
court
within
the
U.S.
is
able
to
exercise
primary
supervision
over
its
administration
and
one
or
more
U.S.
persons
(as
defined
in
the
Code)
have
the
authority
to
control
all
of
its
substantial
decisions
or
(b)
that
has
a
valid
election
in
effect
under
applicable
Treasury
Regulations
to
be
treated
as
a
U.S.
person.
You
are
a
“Non-U.S.
Holder”
for
purposes
of
this
discussion
if
you
are
a
beneficial
owner
of
our
common
shares
that
is
an
individual,
corporation,
estate
or
trust
that
is
not
a
U.S.
Holder.
If
a
partnership
(or
an
entity
or
arrangement
treated
as
a
partnership
for
U.S.
federal
income
tax
purposes)
holds
our
common
shares,
the
tax
treatment
of
a
partner
will
generally
depend
upon
the
status
of
the
partner
and
upon
the
activities
of
the
partnership.
A
partner
of
a
partnership
considering
the
purchase
of
our
common
shares
is
encouraged
to
consult
its
own
independent
tax
advisor.
You
are
encouraged
to
consult
your
own
independent
tax
advisor
regarding
the
U.S.
federal,
state,
local
and
non-U.S.
income
and
other
tax
consequences
of
purchasing,
owning
and
disposing
of
our
common
shares
in
your
particular
circumstances.
U.S.
Holders
Passive
Foreign
Investment
Company
Rules;
Generally
.
A U.S. Holder generally will be subject to a special, adverse tax regime
that would differ in certain respects from the tax treatment described below if we are, at any time during the U.S. Holder’s holding period
with respect to our common shares, a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. A U.S. Holder
of a PFIC is also subject to special reporting requirements.
In general, we will be a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is “passive
income” or (ii) at least 50% of the average value of all our assets (determined on the basis of a quarterly average) produce or are held for
the production of passive income. For this purpose, passive income generally includes, among other things, dividends, interest, certain
rents and royalties, annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of
the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the
assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.
Based on our operations as of the date of this prospectus, we believe that we will not be a PFIC in the current taxable year and that
we will not become a PFIC in any future taxable year. However, this involves a facts and circumstances analysis and it is possible that the
IRS would not agree with this conclusion. Further, the determination of whether a corporation is a PFIC is made annually and thus may
be subject to change. Therefore, we can give investors no assurance as to our PFIC status. U.S. Holders are encouraged to consult their
own independent tax advisors about the PFIC rules, including the availability of certain elections and reporting requirements.
Our position that we will not be treated as a PFIC is premised on the conclusion that income from our drilling contracts should not
constitute passive income for purposes of the relevant PFIC rules. However, this conclusion is not free from doubt. While there is legal
authority supporting this conclusion, including IRS pronouncements concerning the characterization of income derived from time
charters as services income, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) held in Tidewater
Inc.
v.
United
States
, 565 F.3d 299 (5th Cir. 2009), that income derived from certain timechartering activities should be treated as rental income rather
than services income for purposes of a provision of the Code relating to foreign sales corporations. In that case, the Fifth Circuit did not
address the definition of passive income or the PFIC rules; however, the reasoning of the case could have implications as to how the
income from our drilling contracts would be classified under such rules. If the reasoning of this case were extended to our drilling
contracts in a PFIC context, the gross income we derive or are deemed to derive from such drilling contracts may be treated as rental
income, and we could potentially be treated as a PFIC. In published (but non-precedential) guidance, the IRS has stated that it disagreed
with the holding in Tidewater
and specified that time charters similar to those at issue in the case should be treated as service contracts.
76
There is no legal authority under the PFIC rules addressing our specific method of operation, and any determination as to whether
our method of operation and the composition of our assets generates nonpassive services income must be based on all applicable facts
and circumstances. Conclusions in this area therefore remain matters of interpretation. We are not seeking a ruling from the IRS on the
treatment of income generated from our drilling operations. Thus, it is possible that the IRS or a court could disagree with this position.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different
U.S. federal income taxation rules depending on whether the U.S. Holder makes an election to treat us as a “Qualified Electing Fund,”
which election we refer to as a “QEF election.” As an alternative to making a QEF election, a U.S. Holder may be able to make a “mark-
to-market” election with respect to our common shares, as discussed below. In addition, if we were to be treated as a PFIC for any taxable
year a U.S. Holder would be required to file an annual report with the IRS for that year with respect to such U.S. Holder’s common
shares.
Passive
Foreign
Investment
Company
Rules;
Taxation
of
U.S.
Holders
Making
and
Maintaining
a
Timely
QEF
Election
. If a U.S.
Holder makes and maintains a timely QEF election, which U.S. Holder we refer to as an “Electing Holder,” the Electing Holder must
report each year for U.S. federal income tax purposes his pro rata share of our ordinary earnings and our net capital gain, if any, for our
taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received
from us by the Electing Holder. The Electing Holder’s adjusted tax basis in the common shares would be increased to reflect taxed but
undistributed earnings and profits. Distributions of earnings and profits that have been previously taxed can result in a corresponding
reduction in the adjusted tax basis in the common shares and would not be taxed again once distributed. An Electing Holder would
generally recognize capital gain or loss on the sale or other taxable disposition of our common shares, computed as discussed above using
such Electing Holder’s tax basis in our shares, as adjusted. A U.S. Holder can make a QEF election with respect to any taxable year
during which we are a PFIC by filing a valid IRS Form 8621 in accordance with the relevant instructions and related U.S. Treasury
Regulations with such U.S. Holder’s U.S. federal income tax return for the taxable year, which requires access to certain information
from us. If we were aware that we or any of our subsidiaries were to be treated as a PFIC for any taxable year, we may or may not
provide each U.S. Holder with all necessary information in order to make the QEF election described above. If we were to be treated as a
PFIC, a U.S. Holder would be treated as owning his proportionate share of stock in each of our subsidiaries which is treated as a PFIC
and a separate QEF election would be necessary with respect to each subsidiary. It should be noted that we may not be able to provide
such information if we did not become aware of our status as a PFIC in a timely manner.
Passive
Foreign
Investment
Company
Rules;
Taxation
of
U.S.
Holders
Making
a
“Mark-to-Market”
Election
. Alternatively, if we
were to be treated as a PFIC for any taxable year and our common shares are treated as “marketable stock” for purposes of these rules (
i.e.
, because our common shares may be considered regularly traded on a national securities exchange registered with the SEC (including
the NYSE) or other qualifying exchange or market in accordance with applicable U.S. Treasury Regulations), a U.S. Holder would be
allowed to make a “mark-to-market” election with respect to our common shares, provided the U.S. Holder completes and files a valid
IRS Form 8621 in accordance with the relevant instructions and related U.S. Treasury Regulations. The “mark-to-market” election will
not be available for any of our subsidiaries. If that election is made, the U.S. Holder generally would include as ordinary income in each
taxable year the excess, if any, of the fair market value of the common shares at the end of the taxable year over such holder’s adjusted
tax basis in the common shares. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S.
Holder’s adjusted tax basis in the common shares over their fair market value at the end of the taxable year, but only to the extent of the
net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in his common shares
would be adjusted to reflect any such income or loss amount. Gain realized on the sale or other taxable disposition of our common shares
would be treated as ordinary income, and any loss realized on the sale or other taxable disposition of the common shares would be treated
as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included as ordinary income by the
U.S. Holder.
Passive
Foreign
Investment
Company
Rules;
Taxation
of
U.S.
Holders
Not
Making
a
Timely
QEF
or
Mark-to-Market
Election
.
Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark-to-
market” election for that year, whom we refer to as a “Non-Electing Holder,” would be subject to special rules with respect to (1) any
excess distribution ( i.e.
, the portion of any distributions received by the Non-Electing Holder on our common shares in a taxable year in
excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if
shorter, the Non-Electing Holder’s
77
holding period for the common shares), and (2) any gain realized on the sale or other taxable disposition of our common shares. Under
these special rules:
·
·
·
the excess distribution or gain would be allocated ratably over the Non-Electing Holders’ aggregate holding period for the
common shares;
the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxed as ordinary
income; and
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect
to the resulting tax attributable to each such other taxable year.
These penalties would not apply to a pension or profit-sharing trust or other tax-exempt organization that did not borrow funds or
otherwise utilize leverage in connection with its acquisition of our common shares. If a Non-Electing Holder who is an individual dies
while owning our common shares, such Non-Electing Holder’s successor generally would not receive a step-up in tax basis with respect
to such common shares.
U.S. Holders should consult their own tax adviser about the potential application of the PFIC rules to an investment in the common
shares. The remainder of this discussion assumes that we will not be a PFIC for the current taxable year or for any future taxable year.
Taxation
of
Dividends
.
Any distributions made with respect to our common shares (including amounts withheld on account of
foreign taxes) will, to the extent made from current or accumulated earnings and profits as determined under U.S. federal income tax
principles, constitute dividends for U.S. federal income tax purposes. To the extent that any distribution exceeds the amount of our
current and accumulated earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s
adjusted tax basis in the common shares, and thereafter as capital gain. Such dividends generally would be treated as foreign-source
income for U.S. foreign tax credit purposes.
Dividends (including amounts withheld on account of foreign taxes) paid with respect to our common shares generally will be
includible in the gross income of a U.S. Holder as ordinary income on the day on which the dividends are received by the U.S. Holder. A
non-corporate U.S. Holder would be entitled to a preferential rate of U.S. federal income taxation (with the applicable rate based on the
income and filing status of the U.S. Holder) with respect to any dividends paid on our common shares only if we are a “qualified foreign
corporation.” We will be treated as a qualified foreign corporation if the common shares are readily tradable on an established securities
market or if we are eligible for the benefits of a comprehensive income tax treaty with the U.S. If our common shares are traded on an
established securities market (such as the NYSE) or Pacific Drilling S.A. is eligible for the benefits of a comprehensive income tax treaty
with the U.S., we will be a qualified foreign corporation and therefore non-corporate U.S. Holders will be eligible for a preferential tax
rate if the holders meet certain holding period and other requirements. The determination of whether we are a qualified foreign
corporation will be made at the time of the dividend payment and will be made based on the facts and circumstances at that time. There is
no guarantee that we will be treated as a qualified foreign corporation at the time of paying dividends and that dividends will be subject to
preferential tax rates for non-corporate U.S. Holders. A preferential tax rate will not apply to amounts that the U.S. Holder takes into
account as “investment income,” which may be offset by investment expense. Dividends on our common shares will not be eligible for
the dividends-received deduction generally allowed to U.S. corporations under the Code. You are encouraged to consult your
independent tax advisor regarding qualification for a preferential rate on dividend income and the rules related to investment income.
Subject to limitations under U.S. federal income tax law concerning credits or deductions for foreign taxes, a Luxembourg
withholding tax imposed on dividends described below under “—Luxembourg Tax Considerations—Tax Regime Applicable to
Distributions—Luxembourg Withholding Tax” generally would be treated as a foreign income tax eligible for credit against a U.S.
Holder’s U.S. federal income tax liability (or at a U.S. Holder’s election, may be deducted in computing taxable income if the U.S.
Holder has elected to deduct all foreign income taxes for the taxable year). The rules with respect to foreign tax credits are complex and
U.S. Holders are encouraged to consult their independent tax advisors regarding the availability of the foreign tax credit under their
particular circumstances.
Taxation
of
Capital
Gains
.
Gain or loss realized by a U.S. Holder on the sale, exchange or other taxable disposition of common
shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal
78
to the difference between the amount realized (including the gross amount of the proceeds before the deduction of any foreign tax) on the
sale, exchange or other taxable disposition and such U.S. Holder’s adjusted tax basis in the common shares. The capital gains of a U.S.
Holder that is an individual, estate or trust currently will be subject to a reduced rate of U.S. federal income tax (with the applicable rate
based on the income and filing status of the U.S. Holder) if the holder’s holding period for the common shares exceeded one year as of
the time of the disposition. The deductibility of capital losses is subject to certain limitations. Capital gain or loss, if any, realized by a
U.S. Holder on the sale, exchange or other taxable disposition of common shares generally will be treated as U.S. source income or loss
for U.S. foreign tax credit purposes. Consequently, in the case of a disposition of shares that is subject to Luxembourg or other foreign
income tax imposed on the gain, the U.S. Holder may not be able to benefit from the foreign tax credit for that foreign income tax ( i.e.
,
because gain on the disposition would be U.S. source). Alternatively, the U.S. Holder may take a deduction for the foreign income tax if
such holder does not take a credit for any foreign income tax during the taxable year.
Reporting
Requirements
Regarding
Foreign
Financial
Accounts
.
Certain U.S. Holders who are individuals and who hold
“specified foreign financial assets” (as defined in section 6038D of the Code) with values in excess of certain dollar thresholds, as
prescribed by applicable U.S. Treasury Regulations, are required to report such assets on IRS Form 8938 with their U.S. federal income
tax returns. Specified foreign financial assets include stock of a non-U.S. corporation (such as our common shares) that is not held in an
account maintained by a “financial institution” (as defined in section 1471(d)(5) of the Code). An individual who fails to timely furnish
the required information may be subject to a penalty. Additionally, in the event a U.S. Holder does not file the required information, the
statute of limitations may not close until three years after such information is filed. Under certain circumstances, an entity may be treated
as an individual for purposes of the foregoing rules. Investors are urged to consult their tax advisor regarding these reporting
requirements and any other reporting requirements that may be applicable to their particular circumstances.
Additional
Medicare
Tax
on
Net
Investment
Income
. An additional 3.8% Medicare tax is imposed on the “net investment income”
of certain U.S. citizens and resident aliens and on the undistributed “net investment income” of certain estates and trusts. Among other
items, “net investment income” generally includes dividends and certain net gain from the disposition of property, less certain deductions.
Investors are encouraged to consult their independent tax advisors with respect to this additional tax.
Foreign
Account
Tax
Compliance
Act
. Pursuant to the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax
will be imposed on certain payments to U.S. Holders (or to certain foreign financial institutions, investment funds, and other non-U.S.
persons receiving such payments on a U.S. Holder’s behalf) and certain non-U.S. financial institutions that fail to comply with certain
information-reporting, account identification, withholding, certification and other FATCA-related requirements in respect of their direct
and indirect U.S. shareholders and/or U.S. accountholders. Amounts that a U.S. Holder receives could be subject to withholding under
FATCA if such U.S. Holder holds the common shares through another person ( e.g.
, a foreign bank or broker) that is subject to
withholding under FATCA because it fails to comply with these requirements (even if such U.S. Holder would not otherwise have been
subject to withholding).
To avoid becoming subject to FATCA withholding, we and other non-U.S. financial institutions may be required to report
information to the IRS regarding the holders of our common shares and to withhold on a portion of payments under the common shares to
certain holders that fail to comply with the relevant information reporting requirements (or the holders of the common shares directly or
indirectly through certain non-compliant intermediaries).
Withholding under FATCA would not apply to payments made with respect to our common shares before January 1, 2019.
Prospective investors should consult their tax advisors regarding the potential impact of FATCA, the Luxembourg
Intergovernmental Agreement and any non-U.S. legislation implementing FATCA on the investment in our common shares.
Non-U.S.
Holders
Dividends
. A Non-U.S. Holder generally will not be subject to U.S. federal income tax on dividends received on our common
shares, unless the dividends are effectively connected with the holder’s conduct of a trade or business in the U.S. and, if required by an
applicable income tax treaty, the dividends are attributable to a permanent establishment
79
maintained by the holder in the U.S. or unless the holder is subject to backup withholding, as discussed below. Except to the extent
otherwise provided under an applicable income tax treaty, a Non-U.S. Holder generally will be taxed in the same manner as a U.S.
Holder on dividends that are effectively connected with the Holder’s conduct of a trade or business in the U.S. Effectively connected
dividends received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits
tax” at a 30% rate (or, if applicable, a lower treaty rate), subject to certain adjustments.
Taxation
of
Capital
Gains
.
In general, a Non-U.S. Holder of common shares will not be subject to U.S. federal income or
withholding tax with respect to any gain recognized on a sale, exchange or other taxable disposition of such common shares unless:
·
·
·
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the U.S. (and if required by an
applicable income tax treaty, is also attributable to a permanent establishment that the Non-U.S. Holder maintains in the U.S.),
in which case, the Non-U.S. Holder will generally be subject to regular graduated rates in the same manner as a U.S. Holder,
and if the Non-U.S. Holder is a corporation, may be subject to a branch profits tax equal to 30% (or such lower rate provided
by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, subject to certain
adjustments;
the Non-U.S. Holder is an individual who is present in the U.S. for 183 or more days in the taxable year of the sale, exchange
or other taxable disposition and meets certain other requirements, in which case the gain generally will be subject to a flat 30%
tax that may be offset by U.S. source capital losses (even though the Non-U.S. Holder is not considered a resident of the U.S.);
or
the Non-U.S. Holder is subject to backup withholding, as discussed below.
Backup
Withholding
and
Information
Reporting
.
In general, dividends on common shares, and the proceeds of a sale, exchange or
other disposition of common shares for cash, paid within the U.S. or through certain U.S. related financial intermediaries to a U.S. Holder
or a Non-U.S. Holder are subject to information reporting to the IRS and may be subject to backup withholding unless the holder is an
exempt recipient, is an exempt foreign person or, in the case of backup withholding, provides an accurate taxpayer identification number
and certifies under penalty of perjury that the holder is a U.S. person and is not subject to backup withholding.
Backup withholding is not an additional tax. Generally, a holder may obtain a refund of any amounts withheld under the backup
withholding rules that exceed such holder’s U.S. federal income tax liability by timely filing a refund claim with the IRS. The amount of
any backup withholding withheld from a payment to a holder will be allowed as a credit against the holder’s U.S. federal income tax
liability, provided that the required information is timely furnished to the IRS. Holders are encouraged to consult their independent tax
advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of
exemptions and the procedures for obtaining exemptions.
You are encouraged to consult with your own independent tax advisor regarding the application of the U.S. federal income
tax laws to your particular circumstances, as well as any additional tax consequences resulting from an investment in our
common shares, including the applicability and effect of the tax laws of any state, local or non-U.S. jurisdiction, including estate,
gift and inheritance tax laws.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
80
H. DOCUMENTS ON DISPLAY
We file annual and special reports and other information with the SEC. The SEC maintains a website at www.sec.gov, which
contains reports and other information regarding registrants that file electronically with the SEC. In addition, we post these documents on
our website at www.pacificdrilling.com in the Investor Relations section.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. These risks
arise primarily as a result of potential changes in the fair market value of financial instruments that would result from adverse fluctuations
in interest rates and foreign currency exchange rates as discussed below. We have entered, and in the future may enter, into derivative
financial instrument transactions to manage or reduce market risk, but we do not enter into derivative financial instrument transactions for
speculative or trading purposes.
Interest
Rate
Risk
. Following our emergence from bankruptcy on November 19, 2018, we have no variable interest debt as of
December 31, 2018. The fair value of our fixed rate debt will fluctuate based on changes in market expectations for interest rates and
perceptions of our credit risk.
Foreign
Currency
Exchange
Rate
Risk
. We use the U.S. dollar as our functional currency because the substantial majority of our
revenues and expenses are denominated in U.S. dollars. Accordingly, our reporting currency is also U.S. dollars. However, there is a risk
that currency fluctuations could have an adverse effect on us as we do earn revenue and incur expenses in other currencies. We utilize the
payment structure of client contracts to selectively reduce our exposure to exchange rate fluctuations in connection with monetary assets,
liabilities and cash flows denominated in certain foreign currencies. Due to various factors, including client acceptance, local banking
laws, other statutory requirements, local currency convertibility and the impact of inflation on local costs, actual local currency needs
may vary from those anticipated in the client contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign
currencies have not had a material impact on our overall operating results or financial position.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
Not applicable.
B. WARRANTS AND RIGHTS
Not applicable.
C. OTHER SECURITIES
Not applicable.
D. AMERICAN DEPOSITORY SHARES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
81
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
For information regarding amendments to our Articles and the Governance Agreement entered into in connection with our
emergence from bankruptcy, see Item 10.B. “Additional Information – Memorandum and Articles of Association.”
ITEM 15. CONTROLS AND PROCEDURES
(a)
Disclosure
Controls
and
Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report have been designed and are effective at the reasonable
assurance level so that the information required to be disclosed by us in our periodic SEC filings is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules, regulations and forms and have been accumulated and communicated to our
management, including executive and financial officers, as appropriate, to allow timely decisions regarding required disclosures.
(b)
Management’s
Annual
Report
on
Internal
Control
over
Financial
Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and
actions taken to correct deficiencies as identified.
There are inherent limitations to the effectiveness of internal control over financial reporting, however well designed, including the
possibility of human error and the possible circumvention or overriding of controls. The design of an internal control system is also based
in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that
an internal control will be effective under all potential future conditions. As a result, even an effective system of internal controls can
provide no more than reasonable assurance with respect to the fair presentation of financial statements and the processes under which
they were prepared.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this
assessment, management used the criteria for internal control over financial reporting described in Internal
Control
-
Integrated
Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s
assessment included an evaluation of the design of our internal control over financial reporting and testing of the operating effectiveness
of its internal control over financial reporting.
Management reviewed the results of its assessment with the Audit Committee of our board of directors. Based on this assessment,
management has concluded that, as of December 31, 2018, our internal control over financial reporting was effective.
(c)
Attestation
Report
of
the
Registered
Public
Accounting
Firm
Not applicable.
(d)
Changes
in
Internal
Control
over
Financial
Reporting
There were no changes in these internal controls during the period covered by this annual report that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial reporting.
82
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that David Weinstein, Chairman of the Audit Committee, is an independent Director as
defined by the NYSE and is an audit committee financial expert as defined by the SEC. See Item 6.A, “Directors and Senior
Management” for a description of Mr. Weinstein’s relevant experience.
ITEM 16B. CODE OF ETHICS
We have a Global Code of Conduct applicable to our employees, directors and officers, including our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer and other senior financial officers, that meets the standards and definitions of the SEC.
Any changes to, or waiver from, the Global Code of Conduct will be made only by the board of directors, or a committee thereof, and
appropriate disclosure will be made promptly on our website at www.pacificdrilling.com, in accordance with the rules and regulations of
the SEC.
We have posted a copy of our Global Code of Conduct on our website at www.pacificdrilling.com in the Investor Relations
section and will provide a copy without charge upon request sent to pdcompliance@pacificdrilling.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services
rendered by KPMG LLP, an independent registered accounting firm and our principal external auditors, for the periods indicated.
(b)
Years ended December 31,
2018
2017
(in thousands)
$
$
2,146
—
—
—
2,146
$
$
935
—
—
—
935
(a)
Audit fees
Audit-related fees
(c)
Tax fees
All other fees
Total
(d)
(a) Audit fees represent professional services rendered for the audit of our annual consolidated financial statements and services
provided by the principal accountant in connection with statutory and regulatory filings or engagements.
(b) Audit-related fees consist of assurance and related services rendered by the principal accountant related to the performance of the
audit or review of our consolidated financial statements, which have not been reported under audit fees above.
(c) Tax fees represent fees for professional services rendered by the principal accountant for tax compliance, tax advice and tax
planning.
(d) All other fees include services other than audit fees, audit-related fees and tax fees set forth above.
Audit
Committee’s
Pre-Approval
Policies
and
Procedures
The Audit Committee’s primary responsibilities are to assist the board of directors’ oversight of our accounting practices; the
integrity of our financial statements; our compliance with legal and regulatory requirements; the qualifications, selection, independence
and performance of our independent auditors; and the internal audit function. The Audit Committee has adopted in its charter a policy
regarding the pre-approval of audit and permissible non-audit services provided by the Company’s independent auditors.
Under the policy, the Audit Committee pre-approves all audit services to be provided to the Company, whether provided by the
principal auditors or other firms, and all other services (review, attest and non-audit) to be provided to the Company by the independent
auditors; provided, however, that de minimis non-audit services may instead be approved in accordance with applicable rules and
regulations. All services provided by the principal external auditors for the years ended December 31, 2018, 2017 and 2016 were
approved by the Audit Committee pursuant to the pre-approval policy.
83
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Maximum number
of shares that may
yet be purchased
Average price paid announced plans or under the plans or
Total number of
shares purchased
as part of publicly
programs
per share ($)
Total number of
shares purchased
Month in the year ended
December 31, 2018
—
January
—
February
—
March
—
April
—
May
—
June
—
July
—
August
—
September
—
October
—
November
—
December
Total
—
(1) Represents shares withheld to cover payroll taxes related to stock bonus awards granted in December 2018 by our board of directors
—
—
—
—
—
—
—
—
—
—
—
15.11
15.11
—
—
—
—
—
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
8,061
8,061
programs
to certain key employees.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Not applicable.
ITEM 16H. MINE SAFETY DISCLOSURE
Not Applicable.
84
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18 below.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements listed below are filed as part of this annual report on Form 20-F:
Pacific
Drilling
S.A.
Consolidated
Financial
Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
85
F-1
F-2
F-3
F-4
F-5
F-6
F-7
ITEM 19. EXHIBITS
Exhibit
Number
1.1*
Coordinated Articles of Association of Pacific Drilling S.A., dated December 20, 2018.
Description
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
4.1
Governance Agreement by and among Pacific Drilling S.A. and certain shareholders party thereto dated as of
November 19, 2018 (incorporated by reference to Exhibit 2.1 to the Company’s Report on Form 6-K filed
November 20, 2018, File No. 001-35345).
Registration Rights Agreement dated as of November 19, 2018 by and among the Company and the shareholders party
thereto (incorporated by reference to Exhibit 2.2 to the Company’s Report on Form 6-K filed November 20, 2018, File
No. 001-35345).
Indenture, dated September 26, 2018, between Pacific Drilling First Lien Escrow Issuer Limited and Wilmington Trust,
National Association as Trustee and Collateral Agent relating to the Company’s 8.375% First Lien Notes due 2023
(incorporated by reference to Exhibit 99.1 to the Company’s Report on Form 6-K filed on September 28, 2018, File
No. 001-35345).
Form of 8.375% First Lien Note due 2023 (incorporated by reference to Exhibit 1 to Appendix of Exhibit 99.1 of the
Company’s Report on Form 6-K filed on September 28, 2018, File No. 001-35345).
First Supplemental Indenture, dated November 19, 2018, between Pacific Drilling S.A. and Wilmington Trust, National
Association as Trustee and Collateral Agent relating to the Company’s 8.375% First Lien Notes due 2023
(incorporated by reference to Exhibit 2.3 to the Company’s Report on Form 6-K filed on November 20, 2018, File
No. 001-35345).
Second Supplemental Indenture, dated November 19, 2018, between Pacific Drilling S.A., the Guarantors named
therein and Wilmington Trust, National Association as Trustee and Collateral Agent relating to the Company’s 8.375%
First Lien Notes due 2023 (incorporated by reference to Exhibit 2.4 to the Company’s Report on Form 6-K filed on
November 20, 2018, File No. 001-35345).
Indenture, dated September 26, 2018, between Pacific Drilling Second Lien Escrow Issuer Limited and Wilmington
Trust, National Association as Trustee and Junior Lien Collateral Agent relating to the Company’s 11.000% / 12.000%
Second Lien PIK Notes due 2024 (incorporated by reference to Exhibit 99.3 to the Company’s Report on Form 6-K
filed on September 28, 2018, File No. 001-35345).
Form of 11.000% / 12.000% Second Lien PIK Note due 2024 (incorporated by reference to Exhibit 1 to Appendix of
Exhibit 99.3 of the Company’s Report on Form 6-K filed on September 28, 2018, File No. 001-35345).
First Supplemental Indenture, dated November 19, 2018, between Pacific Drilling S.A. and Wilmington Trust, National
Association as Trustee and Junior Lien Collateral Agent relating to the Company’s 11.000% / 12.000% Second Lien
PIK Notes due 2024 (incorporated by reference to Exhibit 2.5 to the Company’s Report on Form 6-K filed on
November 20, 2018, File No. 001-35345).
Second Supplemental Indenture, dated November 19, 2018, between Pacific Drilling S.A., the Guarantors named
therein and Wilmington Trust, National Association as Trustee and Junior Lien Collateral Agent relating to the
Company’s 11.000% / 12.000% Second Lien PIK Notes due 2024 (incorporated by reference to Exhibit 2.6 to the
Company’s Report on Form 6-K filed on November 20, 2018, File No. 001-35345).
Intercreditor Agreement, dated as of November 19, 2018, between Wilmington Trust, National Association, in its
capacity as First Lien Collateral Agent, and Wilmington Trust, National Association, in its capacity as Junior Lien
Collateral Agent, and acknowledged and agreed to by the Company and the Grantors named therein (incorporated by
reference to Exhibit 2.7 to the Company’s Report on Form 6-K filed on November 20, 2018, File No. 001-35345).
Commitment Agreement (Equity), dated as of September 27, 2018, among Pacific Drilling S.A., the Commitment
Parties party thereto, the Reserve Parties party thereto, and Quantum Pacific (Gibraltar) Limited (incorporated by
reference to Exhibit 99.3 to the Company’s Report on Form 6-K filed on October 1, 2018, File No. 001-35345).
86
Exhibit
Number
4.2
8.1*
12.1*
12.2*
13.1**
13.2**
15.1*
15.2
15.3
15.4*
15.5*
Description
Pacific Drilling S.A. 2018 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s
Registration Statement on Form S-8 filed on November 28, 2018, File No. 333-228582).
Subsidiaries of Pacific Drilling S.A.
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
Certificate of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
Consent of Independent Registered Public Accounting Firm.
Modified Fourth Amended Joint Plan of Reorganization for Pacific Drilling S.A. and Certain of Its Affiliates Pursuant
to Chapter 11 of the Bankruptcy Code [Docket No. 746], dated October 31, 2018 (incorporated by reference to Exhibit
99.1 of the Company’s Report on Form 6-K filed on November 5, 2018, File No. 001-35345).
Order Confirming the Debtors’ Modified Fourth Amended Joint Plan of Reorganization, as entered by the Bankruptcy
Court on November 2, 2018 [Docket No. 746] (incorporated by reference to Exhibit 99.2 of the Company’s Report on
Form 6-K filed on November 5, 2018, File No. 001-35345).
Amended Joint Plan of Liquidation/Reorganization for Pacific Drilling Services, Inc. and Pacific Drilling VIII Limited
Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 30], dated as of January 22, 2019.
Order Confirming the Debtors’ Amended Joint Plan of Liquidation/Reorganization, as entered by the Bankruptcy Court
on January 30, 2019 [Docket No. 881].
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** Furnished herewith.
87
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Date: March 12, 2019
PACIFIC DRILLING S.A.
By:
/s/ Bernie G. Wolford, Jr.
Name: Bernie G. Wolford, Jr.
Title:
Chief Executive Officer
88
Report of Independent Registered Publi c Accounting Firm
To the Shareholders and Board of Directors
Pacific Drilling S.A.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Pacific Drilling S.A. and subsidiaries (the Company) as of
December 31, 2018 (Successor) and 2017 (Predecessor), the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for the periods of November 20, 2018 to December 31, 2018 (Successor), January 1, 2018 to
November 19, 2018 (Predecessor), and for the years ended December 31, 2017 and 2016 (Predecessor), and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 (Successor) and 2017 (Predecessor), and the results of its
operations and its cash flows for the periods of November 20, 2018 to December 31, 2018 (Successor), January 1, 2018 to November 19,
2018 (Predecessor) and for the years ended December 31, 2017 and 2016 (Predecessor), in conformity with U.S. generally accepted
accounting principles.
New
Basis
of
Presentation
As discussed in Note 2 to the consolidated financial statements, on November 2, 2018, the United States Bankruptcy Court for the
Southern District of New York entered an order confirming the Company’s plan for reorganization under Chapter 11, which became
effective on November 19, 2018. Accordingly, the accompanying consolidated financial statements have been prepared in conformity
with Accounting Standards Codification 852-10, Reorganizations
, for the Successor as a new entity with assets, liabilities and a capital
structure having carrying amounts not comparable with prior periods as described in Note 3.
Basis
for
Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2008.
Houston, Texas
March 12, 2019
/s/ KPMG LLP
F-1
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share information)
Successor
Period From
November 20, 2018
Predecessor
Period From
January 1, 2018
through
through
Years Ended December 31,
December 31, 2018 November 19, 2018
2017
2016
$
28,489 $
236,379 $
319,716 $
769,472
(19,744)
(4,245)
(27,277)
(51,266)
(22,777)
(10,904)
—
—
(1,300)
1,008
392
(1,198)
526
(34,253)
6,769
(27,484) $
(0.37) $
75,010
(0.37) $
75,010
(189,606)
(50,604)
(248,302)
(488,512)
(252,133)
(244,089)
(87,134)
(278,949)
(610,172)
(290,456)
(106,632)
—
—
(1,799,664)
3,148
—
—
(1,904)
(2,157,185)
2,308
(178,983)
(30,846)
—
(6,474)
2,717
—
—
(8,261)
(512,303)
(12,863)
(2,154,877) $ (525,166) $
(24.64) $
21,315
(24.64) $
21,315
(100.89) $
21,359
(100.89) $
21,359
(290,038)
(63,379)
(275,901)
(629,318)
140,154
(189,044)
—
36,233
—
362
—
—
(2,755)
(15,050)
(22,107)
(37,157)
(1.76)
21,167
(1.76)
21,167
Revenues
Contract drilling
Costs and expenses
Operating expenses
General and administrative expenses
Depreciation and amortization expense
Operating income (loss)
Other income (expense)
Interest expense
Write-off of deferred financing costs
Gain on debt extinguishment
Reorganization items
Interest income
Equity earnings in unconsolidated subsidiaries
Expenses to unconsolidated subsidiaries, net
Other income (expense)
Loss before income taxes
Income tax (expense) benefit
Net loss
Loss per common share, basic
Weighted-average number of common shares, basic
Loss per common share, diluted
Weighted-average number of common shares, diluted
See accompanying notes to consolidated financial statements.
$
$
$
F-2
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Successor
Period From
November 20, 2018
through
Predecessor
Period From
January 1, 2018
through
Years Ended December 31,
December 31, 2018 November 19, 2018
2017
(2,154,877) $ (525,166) $ (37,157)
2016
Net loss
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities
Reclassification adjustment for other-than-temporary
impairment on available-for-sale securities realized in
net income
Unrecognized loss on derivative instruments
Reclassification adjustment for loss on derivative
instruments realized in net income
Reclassification adjustment for loss on derivative
instruments realized in property and equipment
Total other comprehensive income
Total comprehensive loss
See accompanying notes to consolidated financial statements.
$
(27,484)
$
—
—
—
—
—
—
(27,484)
$
$
F-3
—
(485)
—
—
—
485
(565)
—
(6,290)
643
5,265
8,798
—
643
1,789
4,297
(2,154,234) $ (520,466) $ (32,860)
—
4,700
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except par value)
Assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Other receivable
Materials and supplies
Deferred costs, current
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term receivable
Receivable from unconsolidated subsidiaries
Intangible asset
Investment in unconsolidated subsidiaries
Other assets
Total assets
Liabilities and shareholders’ equity:
Accounts payable
Accrued expenses
Accrued interest
Deferred revenue, current
Total current liabilities
Long-term debt, net of current maturities
Payable to unconsolidated subsidiaries
Deferred revenue
Other long-term liabilities
Total liabilities not subject to compromise
Liabilities subject to compromise
Commitments and contingencies
Shareholders’ equity:
Common shares, $0.01 par value per share, 82,500 and 5,000,000 shares authorized,
82,500 and 22,551 shares issued and 75,031 and 21,339 shares outstanding as of
December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
F-4
Successor
December 31,
2018
Predecessor
December 31,
2017
$
367,577
21,498
40,549
28,000
40,429
482
8,667
507,202
1,915,172
—
204,790
85,053
11,876
24,120
$ 2,748,213
$
308,948
8,500
40,909
—
87,332
14,892
14,774
475,355
4,652,001
202,575
—
—
—
33,030
$ 5,362,961
$
14,941
25,744
16,576
—
57,261
1,039,335
4,400
—
28,259
1,129,255
—
$
11,959
36,174
6,088
23,966
78,187
—
—
12,973
32,323
123,483
3,087,677
750
1,645,692
—
(27,484)
1,618,958
$ 2,748,213
213
2,366,464
(14,493)
(200,383)
2,151,801
$ 5,362,961
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(in thousands)
Additional
Accumulated
Other
Retained
Earnings/
Total
Common Shares
Shares
Amount
Paid-In
Capital
Treasury Shares
Comprehensive (Accumulated Shareholders’
Shares
Amount
Loss
Deficit)
Equity
21,121 $
218 $
2,383,387
2,156 $
(30,000) $
(23,490) $
361,940 $
2,692,055
63
—
—
—
—
21,184
1
(7)
—
—
—
212
(90)
(29,993)
7,094
—
—
2,360,398
(63)
(726)
—
—
—
1,367
—
30,000
—
—
—
—
—
—
—
4,297
—
(19,193)
—
—
—
—
(37,157)
324,783
(89)
—
7,094
4,297
(37,157)
2,666,200
155
1
(200)
(155)
—
—
—
—
21,339
29
—
—
—
—
—
—
—
213
1
—
—
—
(553)
6,819
—
—
2,366,464
(5)
2,543
—
—
—
—
—
—
1,212
(29)
—
—
—
21,368
(21,366)
214
(214)
2,369,002
214
1,183
(1,183)
—
24,416
50,582
—
244
506
(2,369,110)
1,152,199
492,914
—
—
—
75,000
750
1,645,219
7,500
31
—
—
—
—
—
(126)
599
—
(31)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(199)
—
—
4,700
—
(14,493)
—
—
—
(525,166)
(200,383)
—
—
643
—
—
—
—
(2,154,877)
(553)
6,819
4,700
(525,166)
2,151,801
(4)
2,543
643
(2,154,877)
(13,850)
—
(2,355,260)
—
106
—
13,850
—
—
2,355,260
—
—
—
1,152,443
493,420
—
—
—
—
—
—
—
—
1,645,969
—
—
(27,484)
(126)
599
(27,484)
75,031 $
750 $
1,645,692
7,469 $
— $
— $
(27,484) $
1,618,958
Predecessor
Balance at January 1, 2016
Shares issued under share-based
compensation plan
Cancellation of treasury shares
Share-based compensation
Other comprehensive income
Net loss
Balance at December 31, 2016
Shares issued under share-based
compensation plan
Modification of unvested awards
from equity to liability
Share-based compensation
Other comprehensive income
Net loss
Balance at December 31, 2017
Shares issued under share-based
compensation plan
Share-based compensation
Other comprehensive income
Net loss
Balance at November 19, 2018
(Predecessor)
Reverse stock split
Elimination of Predecessor equity
balances
Equity conversion
Equity offerings
Issuance of shares reserved for
Balance at November 20, 2018
(Successor)
Successor
Shares issued under share-based
compensation plan
Share-based compensation
Net loss
Balance at December 31, 2018
(Successor)
share-based compensation plan
—
—
—
7,500
See accompanying notes to consolidated financial statements.
F-5
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018 November 19, 2018
2017
2016
$
(27,484)
$
(2,154,877) $ (525,166) $
(37,157)
Cash flow from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense
Amortization of deferred revenue
Amortization of deferred costs
Amortization of deferred financing costs
Amortization of debt premium, net
Interest paid-in-kind
Write-off of deferred financing costs
Deferred income taxes
Share-based compensation expense
Gain on debt extinguishment
Other-than-temporary impairment of available-for-sale
securities
Reorganization items
Changes in operating assets and liabilities:
Accounts receivable
Materials and supplies
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred revenue
Net cash provided by (used in) operating activities
Cash flow from investing activities:
Capital expenditures
Deconsolidation of Zonda Debtors
Purchase of available-for-sale securities
Net cash used in investing activities
Cash flow from financing activities:
Payments for shares issued under share-based compensation
plan
Proceeds from debtor-in-possession financing
Payments for debtor-in-possession financing
Proceeds from long-term debt
Payments on long-term debt
Proceeds from equity offerings
Payments for financing costs
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash, cash equivalents and restricted cash, beginning of
period
Cash, cash equivalents and restricted cash, end of period
$
See accompanying notes to consolidated financial statements.
F-6
27,277
—
128
—
(38)
3,732
—
(6,507)
599
—
—
—
(11,670)
(122)
(11,177)
(16,490)
—
(41,752)
(2,697)
—
—
(2,697)
(126)
—
—
—
—
—
(13,525)
(13,651)
(58,100)
248,302
(20,212)
13,882
1,639
—
4,933
—
4,103
2,543
—
—
1,746,764
12,028
3,532
(32,962)
(10,096)
(481)
(180,902)
(18,624)
(4,910)
—
(23,534)
(4)
50,000
(50,000)
1,000,000
(1,136,478)
500,000
(29,355)
334,163
129,727
278,949
(46,829)
11,689
24,889
940
—
30,846
7,409
6,819
—
6,829
5,315
53,713
6,187
(20,457)
38,214
5,780
(114,873)
(36,645)
—
(6,000)
(42,645)
(199)
—
—
—
(146,473)
—
(4,530)
(151,202)
(308,720)
275,901
(67,053)
13,945
18,786
1,279
—
—
15,494
7,094
(36,233)
—
—
73,428
2,564
(29,276)
(24,843)
35,175
249,104
(52,625)
—
—
(52,625)
(89)
—
—
450,000
(110,832)
—
(25,423)
313,656
510,135
447,175
389,075
$
317,448
447,175 $
626,168
317,448 $
116,033
626,168
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1—Nature of Business
Pacific Drilling S.A. and its subsidiaries (“Pacific Drilling,” the “Company,” “we,” “us” or “our”) is an international offshore
drilling contractor committed to being the preferred provider of offshore drilling services to the oil and natural gas industry through the
use of high-specification floating rigs. Our primary business is to contract our fleet to drill wells for our clients.
Note 2—Emergence from Bankruptcy Proceedings
By order entered on November 2, 2018, the United States Bankruptcy Court for the Southern District of New York (the
“Bankruptcy Court”) confirmed the Company’s Modified Fourth Amended Joint Plan of Reorganization, dated October 31, 2018 (the
“Plan”) that had been filed with the Bankruptcy Court in connection with the filing by the Company and certain of its subsidiaries (the
“Initial Debtors”) of petitions (the “Bankruptcy Petitions”) on November 12, 2017 (the “Petition Date”) with the Bankruptcy Court
seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). On November 19, 2018 (the “Plan
Effective Date”), the Company and the Initial Debtors other than the Zonda Debtors (described below) (the “Debtors”) emerged from
bankruptcy after successfully completing their reorganization pursuant to the Plan. The Company’s two subsidiaries involved in the
arbitration with Samsung Heavy Industries Co. Ltd. (“SHI”) related to the Pacific
Zonda
, Pacific Drilling VIII Limited and Pacific
Drilling Services, Inc. (together, the “Zonda Debtors”), filed a separate plan of reorganization that was confirmed by order of the
Bankruptcy Court on January 30, 2019 and are not Debtors under the Plan.
During the bankruptcy proceedings, the Debtors operated as “debtors-in-possession” in accordance with applicable provisions of
the Bankruptcy Code.
Upon emergence of the Company from bankruptcy on November 19, 2018 in accordance with the Plan:
·
The Company’s pre-petition 2013 Revolving Credit Facility and SSCF (both as defined below in Note 8), and post-petition
debtor-in-possession financing were repaid in full;
· Holders of the Company’s Term Loan B, 2017 Notes and 2020 Notes (each term as defined below in Note 8) received an
aggregate of 24,416,442 common shares (or, approximately 32.6% of the outstanding shares) in exchange for their claims;
·
·
·
·
·
·
The Company issued an aggregate of 44,174,136 common shares (or, approximately 58.9% of the outstanding shares) to
holders of Term Loan B, 2017 Notes and 2020 Notes who subscribed in the Company’s $460.0 million equity rights offering;
The Company issued 3,841,229 common shares (or, approximately 5.1% of the outstanding shares) to Quantum Pacific
Gibraltar Limited (“QP”) in a $40.0 million private placement;
The Company issued 2,566,056 common shares (or, approximately 3.4% of the outstanding shares) to members of an ad hoc
group of holders of the Term Loan B, 2017 Notes and 2020 Notes (the “Ad Hoc Group”) in payment of their fee for
backstopping the equity rights offering;
The Company issued approximately 7.5 million common shares to Pacific Drilling Administrator Limited, a wholly owned
subsidiary of the Company that serves as administrator of the Company’s 2018 Omnibus Stock Incentive Plan (the “2018
Stock Plan”), adopted by the board of directors, and which shares were reserved for issuance under the 2018 Stock Plan;
Existing holders of the Company’s common shares received no recovery and were diluted by the issuances of common shares
under the Plan such that they held in the aggregate less than 0.003% of the Company’s common shares outstanding upon
emergence from bankruptcy; and
The undisputed claims of other unsecured creditors such as clients, employees and vendors, will be paid in full in the ordinary
course of business.
F-7
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
On the Plan Effective Date, as a result of the issuances of common shares described above, the Company had issued and
outstanding 75.0 million common shares, and 7.5 million shares reserved for issuance pursuant to the 2018 Stock Plan.
In addition, pursuant to the Plan, on September 26, 2018 bankruptcy-remote subsidiaries of the Company issued, and on
November 19, 2018 such subsidiaries merged with the Company and the Company assumed (the “Notes Assumption”):
·
·
$750.0 million in aggregate principal amount of 8.375% First Lien Notes due 2023, secured by first-priority liens on
substantially all assets of the Debtors (the “First Lien Notes”); and
$273.6 million in aggregate principal amount of 11.0% / 12.0% Second Lien PIK Notes due 2024, secured by second-priority
liens on substantially all assets of the Debtors (the “Second Lien PIK Notes”). Approximately $23.6 million aggregate
principal amount was issued as a commitment fee to the Ad Hoc Group for their agreement to backstop the issuance of the
Second Lien PIK Notes.
Concurrent with the Notes Assumption, all of the Company’s subsidiaries other than the Zonda Debtors, certain immaterial
subsidiaries and Pacific International Drilling West Africa Limited (“PIDWAL,” a Nigerian limited liability company indirectly 49%
owned by the Company) guaranteed on a senior secured basis the First Lien Notes and Second Lien PIK Notes. It is expected that the
Zonda Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their
separate plan of reorganization after the successful resolution of the arbitration proceeding involving the Pacific
Zonda
. See Note 17 for
further discussion. If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors and the Zonda
Debtors would not guarantee the First Lien Notes and Second Lien PIK Notes.
F-8
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
We have segregated liabilities and obligations whose treatment and satisfaction were dependent on the outcome of the Chapter 11
proceedings and have classified these items as liabilities subject to compromise on our consolidated balance sheets. The components of
liabilities subject to compromise are as follows:
(in thousands)
2017 Senior Secured Notes
2018 Senior Secured Term Loan B
2013 Revolving Credit Facility
Senior Secured Credit Facility
2020 Senior Secured Notes
Accrued interest
Accounts payable and other estimated allowed claims
Total liabilities subject to compromise
See Note 8 for further discussion.
Successor
Predecessor
December 31, 2018
December 31, 2017
$
$
—
—
—
—
—
—
—
—
$
$
439,364
718,125
475,000
661,478
750,000
39,618
4,092
3,087,677
In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11
proceedings as reorganization items in our consolidated statements of operations. The components of reorganization items are as follows:
Successor
Period From
November 20, 2018
through
December 31, 2018
Predecessor
Period From
January 1, 2018
through
Year Ended
November 19, 2018 December 31, 2017
$
$
1,300
—
—
—
—
—
1,300
$
$
82,787 $
(794,218)
(80)
—
(2,940)
2,514,115
1,799,664 $
6,447
—
—
27
—
—
6,474
(in thousands)
Professional fees
Gain on the settlement of liabilities subject to compromise
Discharge of claims upon emergence from bankruptcy
Revision of estimated claims
Escrow interest income
Fresh start accounting adjustments
Total reorganization items
Note 3—Fresh Start Accounting
Fresh Start Accounting
Upon the Company’s emergence from Chapter 11 bankruptcy, we adopted fresh start accounting (“Fresh Start Accounting”) in
accordance with the provisions of Accounting Standards Codification (“ASC”) 852, Reorganizations
, (“ASC 852”) issued by the
Financial Accounting Standards Board (“FASB”), which resulted in the Company becoming a new entity for financial reporting
purposes. In accordance with ASC 852, the Company was required to adopt Fresh Start Accounting upon its emergence from Chapter 11
because (i) the holders of the then existing common shares of the Predecessor received less than 50% of the new common shares of the
Successor outstanding upon emergence and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of
the Plan was less than the total of all postpetition liabilities and allowed claims.
Upon adoption of Fresh Start Accounting, the reorganization value derived from the enterprise value as disclosed in the Plan was
allocated to the Company’s assets and liabilities based on their fair values (except for deferred income taxes) in accordance with ASC
805, Business
Combinations
. The amount of deferred income taxes recorded was determined in accordance with ASC 740, Income
Taxes
.
The Plan Effective Date fair values of the Company’s assets and liabilities differed materially from their recorded values as
reflected on the historical balance sheet. The effects of the Plan and the application of Fresh Start Accounting
F-9
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
were reflected on the consolidated balance sheet as of November 19, 2018 and the related adjustments thereto were recorded in the
consolidated statements of operations for the period January 1, 2018 through November 19, 2018.
As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, the Company’s
consolidated financial statements subsequent to November 19, 2018, are not comparable to its consolidated financial statements on and
prior to November 19, 2018. References to “Successor” relate to the financial position and results of operations of the reorganized
Company as of and subsequent to November 19, 2018. References to “Predecessor” relate to the financial position of the Company prior
to, and results of operations through and including, November 19, 2018.
The Company’s consolidated financial statements and related footnotes are presented with a “black line” division, which
delineates the lack of comparability between amounts presented after November 19, 2018 and amounts presented on or prior to
November 19, 2018. The Company’s financial results for future periods following the application of Fresh Start Accounting will be
different from historical trends and the differences may be material.
Reorganization Value
Under ASC 852, the Successor determined a value to be assigned to the equity of the emerging entity as of the date of adoption of
Fresh Start Accounting. The Plan confirmed by the Bankruptcy Court estimated a range of enterprise values between $1,650 million and
$2,500 million, with a midpoint of $2,075 million plus the fair value of assets associated with the arbitration with SHI related to the
Pacific
Zonda
. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the
final enterprise value of $2,075 million plus the estimated fair value of the assets associated with the arbitration with SHI of $204.7
million for Fresh Start Accounting.
The following table reconciles the enterprise value to the estimated fair value of our Successor common shares as of the Plan
Effective Date (in thousands):
Enterprise value
Plus: Cash and cash equivalents (excludes funds held in professional fee escrow of $50.2 million)
Plus: Estimated fair value of the assets associated with the Zonda Arbitration
Less: Fair value of debt
Fair value of Successor common shares
$
$
2,075,000
401,910
204,700
(1,035,641)
1,645,969
The following table reconciles the enterprise value to the reorganization value of the Successor’s assets to be allocated to the
Company’s individual assets as of the Plan Effective Date (in thousands):
Enterprise value
Plus: Cash and cash equivalents (excludes funds held in professional fee escrow of $50.2 million)
Plus: Estimated fair value of the assets associated with the Zonda Arbitration
Plus: Current liabilities
Plus: Non-current liabilities excluding long-term debt
Reorganization value of Successor’s assets to be allocated
$
$
2,075,000
401,910
204,700
83,663
29,266
2,794,539
With the assistance of financial advisors, we determined the enterprise and corresponding equity value of the Successor using
various valuation methods, including: (i) a calculation of the present value of future cash flows based on our financial projections, and (ii)
a peer group trading analysis with peer values evaluated on a dollar value per drillship basis. The enterprise value and corresponding
equity value are dependent upon achieving the future financial results set forth in our valuations, as well as the realization of certain other
assumptions. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial
projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of
contingencies beyond our control. Accordingly, we cannot assure you that the estimates, assumptions, valuations or financial projections
will be realized, and actual results could vary materially.
F-10
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Valuation Process
The fair values of the Company’s principal assets, drillships and related equipment, were estimated with the assistance of third
party valuation advisors. The reorganization value was allocated to the Company’s individual assets and liabilities based on their fair
values as described further as follows:
Drillships
and
related
equipment
The fair value of the drillships and related equipment was determined using a combination of the discounted cash flow method
(income approach), that we discounted at a rate of approximately 14%, and the cost approach. The income approach was utilized to
estimate the fair value of drillships that generated positive returns on projected cash flows over the remaining economic useful life of the
drillships and compared to the fair value utilizing the cost approach, adjusted as needed for asset type, age, physical deterioration and
obsolescence.
Materials
and
Supplies
The fair value of the materials and supplies were determined by the direct and indirect cost approaches. They were analyzed on a
line-by-line basis and each asset was adjusted for age, physical depreciation and obsolescence.
Intangible
Asset
We applied the income approach to estimate the value of the client-related intangible asset of our drilling contracts. We
determined the value by comparing the contractual day rates to the estimated comparable market day rates, and applying a discount rate
of 2.9% to the amounts by which contractual revenue exceeded market. The discount rate reflects the corresponding credit rating of the
customer related to the contract and the remaining term.
Assets
associated
with
the
Zonda
Arbitration
We applied a probability weighted approach to estimate the value of assets associated with the Zonda Arbitration, which was
presented within receivable from unconsolidated subsidiaries upon the deconsolidation of the Zonda Debtors. The analysis included
estimating probabilities of success for the various outcomes and expected cash flows associated with each outcome. The probability
weighted cash flows were discounted to the balance sheet date using market data. The analysis utilized certain unobservable inputs that
require significant judgment for which there is little or no market data, which represent Level 3 fair value measurements. These included,
but were not limited to, probability and timing of successfully recovering the advance payments and purchased equipment. See Note 7.
Long-term
Debt
The fair value of the debt was estimated using quoted market prices to the extent available and significant other observable inputs,
which represent Level 2 fair value measurements.
See below under “Fresh Start Adjustments” for additional information regarding assumptions used in the valuation of the
Company’s various other significant assets and liabilities.
Consolidated Balance Sheet
The adjustments included in the following fresh start consolidated balance sheet reflect the effects of the transactions contemplated
by the Plan and executed by the Company on the Plan Effective Date (reflected in the column “Reorganization Adjustments”), the
deconsolidation of Zonda Debtors (reflected in the column “Deconsolidation of Zonda Debtors”) and fair value and other required
accounting adjustments resulting from the adoption of Fresh Start Accounting (reflected in the column “Fresh Start Adjustments”). The
explanatory notes provide additional information with regard to the adjustments recorded, the methods used to determine the fair values
and significant assumptions.
F-11
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Predecessor
Reorganization
Adjustments (1)
As of November 19, 2018
Deconsolidation
of Zonda Debtors
(14)
Fresh Start
Accounting
Adjustments
Successor
$
$
$
154,238 $
1,034,470
28,881
28,000
83,800
11,371
13,281
1,354,041
4,422,709
202,575
239,172 (2) $
(975,795)(3)
—
—
—
—
(4,910) $
—
(2)
—
—
—
$
—
—
—
—
(43,493)(15)
(11,371)(16)
(958)(4)
(737,581)
—
—
(815)
(5,727)
(68,102)
(202,575)
(693)(17)
(55,557)
(2,434,133)(18)
—
—
—
—
—
262,925
—
(58,135)(19)
100,000 (20)
—
27,279
6,006,604 $
—
(1,356)(5)
(738,937)
$
5,774
(1,845)
(9,550) $
(742)(19)
(15,011)(21)
$
(2,463,578)
388,500
58,675
28,879
28,000
40,307
—
10,815
555,176
1,920,474
—
204,790
100,000
5,032
9,067
2,794,539
14,161 $
56,817
1,247 (6) $
11,264 (7)
50,000
45,770
16,246
182,994
969,158
—
30,253
(50,000)(2)
(36,348)(8)
—
(73,837)
—
—
1,782 (9)
(3,261) $
(5,987)
—
—
—
(9,248)
—
1,725
(1,539)
$
—
—
12,147
62,094
—
—
(16,246)(22)
(16,246)
66,483 (23)
—
(2,955)(24)
—
9,422
—
83,663
1,035,641
1,725
27,541
1,182,405
(72,055)
(9,062)
47,282
1,148,570
3,084,874
(3,084,386)(10)
(488)
—
—
214
2,368,232
536 (11)
1,646,097 (12)
(13,850)
(615,271)
1,739,325
—
770,871 (13)
2,417,504
—
—
—
—
—
—
(2,369,110)(25)
13,850 (25)
(155,600)(25)
(2,510,860)
750
1,645,219
—
—
1,645,969
$
6,006,604 $
(738,937)
$
(9,550) $
(2,463,578)
$
2,794,539
Assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Other receivable
Materials and supplies
Deferred costs, current
Prepaid expenses and other
current assets
Total current assets
Property and equipment, net
Long-term receivable
Receivable from
unconsolidated subsidiaries
Intangible asset
Investment in unconsolidated
subsidiaries
Other assets
Total assets
Liabilities and shareholders’
equity:
Accounts payable
Accrued expenses
Debtor-in-possession
financing
Accrued interest
Deferred revenue, current
Total current liabilities
Long-term debt
Payable to unconsolidated
subsidiaries
Other long-term liabilities
Total liabilities not subject to
compromise
Liabilities subject to
compromise
Commitments and
contingencies
Shareholders’ equity:
Common shares
Additional paid-in capital
Accumulated other
comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and
shareholders’ equity
F-12
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Reorganization Adjustments
(1) Represent amounts recorded as of the Plan Effective Date for the implementation of the Plan, including, among other
items, settlement of the Predecessor’s liabilities subject to compromise, repayment of certain of the Predecessor’s debt,
issuances of the Successor’s common shares, proceeds received from the Successor’s equity offerings and transfer of
restricted cash for the issuance of the Successor’s debt.
(2) Changes in cash and cash equivalents include the following (in thousands):
Transfer of restricted cash - escrow funds from the issuance of the First Lien Notes
Transfer of restricted cash - escrow funds from the issuance of the Second Lien PIK Notes
Proceeds from the equity offerings
Payment of 2013 Revolving Credit Facility
Payment of SSCF
Payment of debtor-in-possession financing (including $354 of accrued interest)
Payment of accrued interest on 2013 Revolving Credit Facility and SSCF
Funding of professional fee escrow
Payment of professional fees
Payment of bank fees
Net change in cash and cash equivalents
(3) Changes in restricted cash includes the following (in thousands):
Transfer of restricted cash - escrow funds from the issuance of the First Lien Notes
Transfer of restricted cash - escrow funds from the issuance of the Second Lien PIK Notes
Funding of professional fee escrow
Payment of bank fees
Net change in restricted cash
$
$
$
$
767,578
258,160
500,000
(475,000)
(661,478)
(50,354)
(35,994)
(50,175)
(13,557)
(8)
239,172
(767,578)
(258,160)
50,175
(232)
(975,795)
(4) Reflects the elimination of prepaid directors and officers insurance policies related to the Predecessor.
(5) Reflects the elimination of deferred tax asset related to the implementation of the Plan.
(6) Reflects the reinstatement of liabilities subject to compromise to be paid.
(7) Changes in accrued expenses includes the following (in thousands):
Accrual of professional fees
Accrual of equity issuance costs
Accrual of other fees
Payment of professional fees
Reduction in income taxes related to the implementation of the Plan
Net change in accrued expenses
(8) Reflects the payment of accrued interest (in thousands):
Payment of accrued interest on 2013 Revolving Credit Facility and SSCF
Payment of accrued interest on debtor-in-possession financing
Net change in accrued interest
F-13
$
$
$
$
9,450
6,580
1,593
(6,342)
(17)
11,264
(35,994)
(354)
(36,348)
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
(9) Reflects the recognition of a deferred tax liability related to the implementation of the Plan.
(10) Liabilities subject to compromise settled in accordance with the Plan and the resulting gain were determined as follows (in
thousands):
Liabilities subject to compromise
Less liabilities subject to compromise related to unconsolidated subsidiaries remaining in
$
3,084,874
bankruptcy
Payment of 2013 Revolving Credit Facility
Payment of SSCF
Reinstatement of claims that are expected to be paid
Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the
2020 Notes
Gain on settlement of liabilities subject to compromise
(488)
(475,000)
(661,478)
(1,247)
(1,152,443)
794,218
$
(11) The increase in common shares reflects (in thousands):
Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the
2020 Notes at par
Equity offerings at par
Reduction of share capital for reverse stock split
Net change in common shares
(12) The increase in additional paid-in capital reflects (in thousands):
Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the
2020 Notes
Equity offerings - additional paid-in capital
Reduction of share capital for reverse stock split
Cancellation of Predecessor share based compensation awards
Accrual of equity issuance costs
Net change in additional paid-in-capital
(13) The decrease in accumulated deficit reflects (in thousands):
Gain on settlement of liabilities subject to compromise
Accrued professional fees
Accrued other fees
Elimination of prepaid directors and officers insurance policies related to the Predecessor
Cancellation of predecessor share based compensation awards
Professional and success fees paid on Plan Effective Date
Payment of bank fees
Elimination of deferred tax asset related to the implementation of the Plan
Recognition of a deferred tax liability related to the implementation of the Plan
Reduction in income tax related to the implementation of the Plan
Net change in accumulated deficit
$
$
$
$
$
$
244
506
(214)
536
1,152,199
499,494
214
770
(6,580)
1,646,097
794,218
(9,450)
(1,593)
(958)
(770)
(7,215)
(240)
(1,356)
(1,782)
17
770,871
Deconsolidation of Zonda Debtors
(14) Represents the deconsolidation of Zonda Debtors as of November 19, 2018. The Zonda Debtors filed a separate plan of
reorganization and did not emerge from bankruptcy on the Plan Effective Date. Therefore, the Zonda Debtors were
deconsolidated as of November 19, 2018.
F-14
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Fresh Start Adjustments
(15) Reflects the fair value adjustment of $43.5 million to the Company's materials and supplies due to the adoption of Fresh
Start Accounting.
(16) Reflects the elimination of current deferred costs of $11.4 million due to the adoption of Fresh Start Accounting.
(17) Reflects the fair value adjustment to the Company's prepaid fuel due to the adoption of Fresh Start Accounting.
(18) Reflects the fair value adjustment to the Company's property and equipment, net due to the adoption of Fresh Start
Accounting (in thousands):
Drillships and related equipment
Other property and equipment
Total property and equipment
Accumulated depreciation
Property and equipment, net
Successor
Predecessor
$
1,919,791 $
683
1,920,474
—
$
1,920,474 $
5,928,887
20,737
5,949,624
(1,526,915)
4,422,709
(19) Reflects fair value adjustment to receivable from unconsolidated subsidiaries due to asset revaluation of the Zonda
Debtors.
(20) Reflects the recognition of an asset for the fair value of the client-related intangible asset of our drilling contracts, where
contract rates are in excess of current market rates.
(21) Reflects the elimination of deferred costs of $15.1 million, offset by an increase in deferred tax balances of $0.1 million
due to the adoption of Fresh Start Accounting.
(22) Reflects the elimination of deferred revenue due to the adoption of Fresh Start Accounting.
(23) Reflects the elimination of unamortized deferred financing costs $59.4 million and fair value adjustment of $7.1 million to
the Company's debt due to the adoption of Fresh Start Accounting.
(24) Represents the adjustment to deferred tax balances of $3.0 million as a result of adopting Fresh Start Accounting.
(25) Reflects the cumulative impact of Fresh Start Accounting adjustments discussed above and the elimination of Predecessor
accumulated other comprehensive loss and accumulated deficit.
Note 4—Significant Accounting Policies
Principles of Consolidation —Our consolidated financial statements include the accounts of Pacific Drilling S.A. and
consolidated subsidiaries that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest
entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate all intercompany transactions and
balances in consolidation.
We are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech Offshore
Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech owns 51% of PIDWAL and we
own 49% of PIDWAL. Pacific Scirocco Ltd. (“PSL”) and Pacific Bora Ltd. (“PBL”), which own the Pacific
Scirocco
and Pacific
Bora
,
respectively, are owned 49.9% by our wholly-owned subsidiary Pacific Drilling Limited (“PDL”) and 50.1% by Pacific Drillship Nigeria
Limited (“PDNL”). PDNL is owned 0.1% by PDL and 99.9% by PIDWAL. Derotech will not accrue the economic benefits of its interest
in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Likewise, PIDWAL
will
F-15
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain
pledge is cancelled by us. PIDWAL and PDNL are variable interest entities for which we are the primary beneficiary. Accordingly, we
consolidate all interests of PIDWAL and PDNL in our consolidated financial statements and no portion of their operating results is
allocated to the noncontrolling interest. See Note 20.
Our consolidated financial statements as of December 31, 2018 and for the Successor period in 2018 exclude the Zonda Debtors,
our wholly-owned subsidiaries, which filed a separate plan of reorganization. We account for our investment in the Zonda Debtors using
the equity method of accounting.
Accounting Estimates —The preparation of consolidated financial statements in conformity with generally accepted accounting
principles in the United States (“GAAP”) requires management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet
date and the amounts of revenues and expenses recognized during the reporting period. On an ongoing basis, we evaluate our estimates
and assumptions, including those related to allowance for doubtful accounts, financial instruments, depreciation of property and
equipment, impairment of long-lived assets, long-term receivable, income taxes, share-based compensation and contingencies. We base
our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from such estimates.
Revenue from Contracts with Clients —We earn revenue primarily by (i) providing our drillship, work crews, related
equipment, services and supplies necessary to operate the rig, (ii) delivering the rig by mobilizing to and demobilizing from the drill
location and (iii) performing certain pre-operating activities, including rig preparation activities or equipment modifications required for
the contract.
Dayrate
Drilling
Revenue.
Our drilling contracts provide for payment on a dayrate basis, with higher rates for periods when the
drillship is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate invoices
billed to the client are determined based on the varying rates applicable to the specific activities performed on an hourly basis. Such
dayrate consideration is attributed to the distinct hourly increment to which it relates within the contract term. Therefore, we record
dayrate drilling revenue consistent with the contractual rate invoiced for the services provided during the respective period.
Mobilization/Demobilization
Revenue.
We may receive fees for the mobilization and demobilization of our rigs. These activities
are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall
performance obligation and recognized ratably over the initial term of the related drilling contract. We record a contract liability for
mobilization fees received, which is amortized ratably to contract drilling revenue as services are rendered over the initial term of the
related drilling contract. Demobilization revenue expected to be received upon contract completion is estimated as part of the overall
transaction price at contract inception. We record demobilization revenue in earnings ratably over the initial term of the contract with an
offset to an accretive contract asset.
Contract
Preparation
Revenue.
Some of our drilling contracts require downtime before the start of the contract to prepare the rig
to meet client requirements. At times, we may be compensated by the client for such work. These activities are not considered to be
distinct within the context of the contract. We record a contract liability for contract preparation fees received, which is amortized ratably
to contract drilling revenue over the initial term of the related drilling contract.
Capital
Upgrade
Revenue
. From time to time, we may receive fees from our clients for capital improvements or upgrades to our
rigs to meet contractual requirements. These activities are not considered to be distinct within the context of our contracts. We record a
contract liability for such fees and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract.
Revenues
Related
to
Reimbursable
Expenses
. We generally receive reimbursements from our clients for the purchase of supplies,
equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. Such
reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors
outside of our control. Accordingly, reimbursable revenue is not included in the total transaction price until the uncertainty is resolved,
which typically occurs when the related costs
F-16
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
are incurred on behalf of a client. We are generally considered a principal in such transactions. Therefore, we record the associated
revenue at the gross amount billed to the client in the period the corresponding goods and services are to be provided.
Cash and Cash Equivalents —Cash equivalents are highly liquid investments with original maturities of three months or less that
are readily convertible to known amounts of cash.
Restricted Cash —As of December 31, 2018 and 2017, our consolidated balance sheets included $8.5 million in restricted cash
used as cash collateral under our treasury management services agreement with a financial institution. In addition, as of December 31,
2018, $13.0 million of our restricted cash balance were escrow funds remaining to settle professional fees incurred upon or prior to our
emergence from our Chapter 11 proceedings.
Accounts Receivable —We record trade accounts receivable at the amount we invoice our clients. We provide an allowance for
doubtful accounts, as necessary, based on a review of outstanding receivables, historical collection information and existing economic
conditions. We do not generally require collateral or other security for receivables.
Other Receivable —As of December 31, 2018, other receivable on our consolidated balance sheets was $28.0 million of cash
collateral held in the name of a financial institution as credit support for customs bonds issued in favor of a subsidiary of the Company.
Materials and Supplies —Materials and supplies held for consumption are carried at average cost if acquired after the adoption
of Fresh Start Accounting or at fair value if already outstanding upon the adoption of Fresh Start Accounting. Materials and supplies
balances were presented net of allowances for excess or obsolete materials and supplies of $0 and $11.1 million as of December 31, 2018
and 2017, respectively.
Property and Equipment —Upon the adoption of Fresh Start Accounting, high-specification drillships and other property and
equipment consisting of purchased software systems, furniture, fixtures and other equipment are recorded at fair value. Capital
expenditures made subsequent to the adoption of Fresh Start Accounting, including any major capital improvements, are recorded at cost.
Ongoing maintenance, routine repairs and minor replacements are expensed as incurred.
Property and equipment are depreciated to their salvage value on a straight-line basis over the estimated useful lives of each class
of assets. Our estimated useful lives of property and equipment are as follows:
Drillships and related equipment (Successor)
Other property and equipment (Successor)
Drillships and related equipment (Predecessor)
Other property and equipment (Predecessor)
Years
8-32
1-6
15-35
2-7
We review property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of
our assets held and used may not be recoverable. Potential impairment indicators include steep declines in commodity prices and related
market conditions, cold stacking of rigs or significant damage to the property and equipment that adversely affects the extent and manner
of its use. We assess impairment using estimated undiscounted cash flows for the property and equipment being evaluated by applying
assumptions regarding future operations, market conditions, dayrates, utilization and idle time. An impairment loss is recorded in the
period if the carrying amount of the asset is not recoverable. During the Successor period in 2018 and the Predecessor periods in 2018,
2017 and 2016, there were no long-lived asset impairments.
Intangible Asset —We amortize our client-related intangible asset to depreciation and amortization expense within our
consolidated statements of operations over its remaining drilling contract term on a straight-line basis.
Deferred Financing Costs —Deferred financing costs associated with long-term debt are carried at cost and are amortized to
interest expense using the effective interest rate method over the term of the applicable long-term debt.
Foreign Currency Transactions —The consolidated financial statements are stated in U.S. dollars. We have designated the U.S.
dollar as the functional currency for our foreign subsidiaries in international locations because we
F-17
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
contract with clients, purchase equipment and finance capital using the U.S. dollar. Transactions in other currencies have been translated
into U.S. dollars at the rate of exchange on the transaction date. Any gain or loss arising from a change in exchange rates subsequent to
the transaction date is included as an exchange gain or loss. Monetary assets and liabilities denominated in currencies other than U.S.
dollars are reported at the rates of exchange prevailing at the end of the reporting period. During the Successor period in 2018, foreign
exchange losses were $0.1 million and recorded in other expense in our consolidated statements of operations. During the Predecessor
periods in 2018, 2017 and 2016, foreign exchange losses were $0.1 million, $0.7 million and $0.5 million, respectively, and recorded in
other expense within our consolidated statements of operations.
Earnings per Share —Basic earnings per common share (“EPS”) is computed by dividing the net income by the weighted-
average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share
in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.
Fair Value Measurements —We estimate fair value at the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques
require inputs that are categorized using a three-level hierarchy as follows: (1) unadjusted quoted prices for identical assets or liabilities
in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or
liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require
significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we
categorize the entire fair value measurement according to the lowest level input that is significant to the measurement even though we
may have also utilized significant inputs that are more readily observable.
Share-Based Compensation —The grant date fair value of share-based awards granted to employees is recognized as an
employee compensation expense over the requisite service period on a straight-line basis. For share-based awards to be settled in cash,
compensation expense is remeasured each period with a cumulative adjustment to compensation cost based on changes in our share price.
The amount of compensation expense ultimately recognized is based on the number of awards that do meet the vesting conditions at the
vesting date. For the Successor, any adjustments to the compensation cost recognized in our consolidated statement of operations for
awards that are forfeited are recognized in the period in which the forfeitures occur. For the Predecessor, the amount of compensation
expense recognized is adjusted to reflect the number of awards for which the related vesting conditions are expected to be met using
estimated forfeitures.
Derivatives —We apply cash flow hedge accounting to interest rate swaps that are designated as hedges of the variability of
future cash flows. The derivative financial instruments are recorded on our consolidated balance sheets at fair value as either assets or
liabilities. Changes in the fair value of derivatives designated as cash flow hedges, to the extent the hedge is effective, are recognized in
accumulated other comprehensive income until the hedged item is recognized in earnings.
Hedge effectiveness is measured on an ongoing basis to ensure the validity of the hedges based on the relative cumulative changes
in fair value between the derivative contract and the hedged item over time. Hedge accounting is discontinued prospectively if it is
determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item.
For the Predecessor, other comprehensive income was released to earnings as the asset was depreciated over its useful life for
interest rate hedges related to interest capitalized in the construction of fixed assets. For all other interest rate hedges, other
comprehensive income was released to earnings as interest expense was accrued on the underlying debt.
Contingencies —We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the
probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and
circumstances that alter our previous assumptions with respect to the likelihood or amount of loss. We recognize legal fees related to loss
contingencies as incurred.
Income Taxes —Income taxes are provided based upon the tax laws and rates in the countries in which our subsidiaries are
registered and where their operations are conducted and income and expenses are earned and incurred, respectively. We recognize
deferred tax assets and liabilities for the anticipated future tax effects of temporary
F-18
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in
effect the year in which the asset is realized or the liability is settled. A valuation allowance for deferred tax assets is established when it
is more likely than not that some portion or all of the deferred tax assets will not be realized.
We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon
examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we
believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates
depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. We
recognize interest and penalties related to uncertain tax positions in income tax expense.
Reclassifications —Certain reclassifications of previously reported information have been made to conform to the current year
presentation.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers — In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue
from
Contracts
with
Customers
(Topic 606), which supersedes the revenue recognition requirements in ASU Topic 605,
Revenue
Recognition
. Under the new guidance, revenue is recognized when a client obtains control of promised goods or services and in
an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. We adopted ASU 2014-09
and its related amendments, or collectively, Topic 606, effective January 1, 2018 using the modified retrospective approach. Accordingly,
we have applied the five-step method outlined in Topic 606 for determining when and how revenue is recognized for all contracts that
were not completed as of the date of adoption. Revenues for reporting periods beginning after January 1, 2018 are presented under Topic
606, while prior period amounts have not been adjusted and continue to be reported under the previous revenue recognition guidance. For
contracts that were modified before the effective date, we have considered the modification guidance within the new standard and
determined that the revenue recognized and contract balances recorded prior to adoption for such contracts were not impacted. While
Topic 606 requires additional disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with clients, its adoption did not have a material effect on our financial position, results of operations and cash flows. See Note 10.
Classification and Measurement of Financial Instruments — On January 25, 2016, the FASB issued ASU 2016-01, Financial
Instruments
—
Overall:
Recognition
and
Measurement
of
Financial
Assets
and
Financial
Liabilities
, which requires all equity
investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value through
earnings, and eliminates the available-for-sale classification for equity securities with readily determinable fair values. The standard
requires entities to record a cumulative-effect adjustment on their balance sheets as of the beginning of the fiscal year of adoption. We
adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.
Tax Accounting for Intra-Entity Asset Transfers — On October 24, 2016, the FASB issued ASU 2016-16, Accounting
for
Income
Taxes:
Intra-Entity
Asset
Transfers
of
Assets
Other
than
Inventory
, which requires entities to recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax
consequences and amortizing them into future periods. The standard requires a modified retrospective approach with a cumulative-effect
adjustment directly to retained earnings at the beginning of the period of adoption. We adopted the standard effective January 1, 2018
with no impact to our consolidated financial statements.
Scope of Modification Accounting for Stock Compensation — On May 10, 2017, the FASB issued ASU 2017-09,
Compensation
—
Stock
Compensation
(Topic
718)
—
Scope
of
Modification
Accounting
, which clarifies when to account for a change to
the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required
only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in
terms or conditions. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.
Modification of Accounting for Hedging Activities — On August 28, 2017, the FASB issued ASU 2017-12, Derivatives
and
Hedging
(Topic
815)
—
Targeted
Improvements
to
Accounting
for
Hedging
Activities
, which eliminates
F-19
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging
instrument to be presented in the same income statement line as the hedged item. The new guidance also eases certain documentation and
assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. We adopted
the standard effective January 1, 2018 with no impact to our consolidated financial statements.
Recently Issued Accounting Standards
Leases — On February 25, 2016, the FASB issued ASU 2016-02, Leases
(Topic 842), which requires lessees to recognize a right-
of-use asset and liability for virtually all leases and updates previous accounting standards for lessors to align certain requirements with
the updates to lessee accounting standards and the revenue recognition accounting standards. The update, which permits early adoption, is
effective for annual and interim periods beginning after December 15, 2018. We expect to adopt the standard using the modified
retrospective approach. For transactions in which we are considered a lessee, we expect to recognize a lease liability and a right-of-use
asset of approximately $7.0 million based on our portfolio of leases upon adoption. Additionally, we believe that our drilling contracts
contain a lease component. On July 30, 2018, the FASB issued ASU 2018-11 to provide certain practical expedients, which allow a new
transition method to apply the new lease requirements at the effective date using a cumulative catch-up approach and allow lessors to not
separate lease and non-lease components when the non-lease component is the predominant element of the combined component. The
lessor practical expedient is limited to circumstances in which the lease, if accounted for separately, would be classified as an operating
lease under Topic 842. We believe the non-lease component of our drilling contracts is the predominant element and that the lease
component, if accounted for separately, would be classified as an operating lease. Accordingly, we expect that all of our drilling contracts
will qualify for, and we expect to elect, the practical expedient in ASU 2018-11 to account for the combined component as a single
component under Topic 606. We do not expect our adoption to have a material impact on revenue recognition of current or prior periods
as compared to previous guidance nor do we expect a material impact to our pattern of revenue recognition in future periods.
Measurement of Credit Losses on Financial Instruments — On June 16, 2016, the FASB issued ASU 2016-13, Financial
Instruments
–
Credit
Losses
(Topic
326)
, which introduces a new model for recognizing credit losses on financial instruments based on
an estimate of current expected credit losses. The new model will apply to: (i) loans, accounts receivable, trade receivables, and other
financial assets measured at amortized cost, (ii) loan commitments and certain other off-balance sheet credit exposures, (iii) debt
securities and other financial assets measured at fair value through other comprehensive income and (iv) beneficial interests in securitized
financial assets. This update is effective for annual and interim periods beginning after January 1, 2020. We are currently evaluating the
effect the standard may have on our consolidated financial statements and related disclosures.
Changes to Fair Value Disclosure Requirements — On August 28, 2018, the FASB issued ASU 2018-13, Fair
Value
Measurement
(Topic
820):
Disclosure
Framework
—
Changes
to
the
Disclosure
Requirements
for
Fair
Value
Measurement
, which
eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project.
Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value
hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after January 1, 2020,
with early adoption permitted. We are currently evaluating the effect the standard may have on our consolidated financial statement
disclosures.
F-20
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Note 5—Property and Equipment
Property and equipment consists of the following:
(in thousands)
Drillships and related equipment
Other property and equipment
Property and equipment, cost
Accumulated depreciation
Property and equipment, net
Successor
Predecessor
December 31, 2018 December 31, 2017
$
$
1,926,773
682
1,927,455
(12,283)
1,915,172
$
$
5,911,792
20,566
5,932,358
(1,280,357)
4,652,001
During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, depreciation expense was $12.3 million,
$247.7 million, $278.2 million and $275.1 million, respectively.
Note 6—Intangible Asset
Intangible asset consists of the following:
(in thousands)
Client-related intangible asset
Accumulated amortization
Intangible asset, net
Successor
Predecessor
December 31, 2018 December 31, 2017
$
$
100,000
(14,947)
85,053
$
$
—
—
—
During the Successor period in 2018, amortization expense of intangible asset was $14.9 million, based on an amortization period
of 0.8 year. As of December 31, 2018, the estimated 2019 amortization expense is $85.1 million.
Note 7—Receivable related to Zonda Arbitration
On January 25, 2013, we entered into a contract with Samsung Heavy Industries Co., Ltd. (“SHI”) for the construction of an eighth
drillship, the Pacific
Zonda
, which provided for a purchase price of approximately $517.5 million and an original delivery date of March
31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s
failure to timely deliver the drillship in accordance with the contractual specifications. The carrying value of the newbuild at the date of
rescission was $315.7 million, consisting of (i) advance payments in the aggregate of $181.1 million paid by us to SHI, (ii) purchased
equipment, (iii) internally capitalized construction costs and (iv) capitalized interest.
On November 25, 2015, SHI formally commenced an arbitration proceeding against us in accordance with the Construction
Contract. On November 30, 2015, we made demand under the third party refund guarantee accompanying the Construction Contract for
the amount of our advance payments made under the Construction Contract, plus interest. Any payment under the refund guarantee is
suspended until an award under the arbitration is obtained.
The Zonda Debtors owned $75.0 million in purchased equipment for the Pacific
Zonda
, a majority of which remains on board the
Pacific
Zonda
subject to return to us by SHI.
On November 19, 2018, the Debtors emerged from bankruptcy after successfully completing their reorganization pursuant to the
Plan. As of that date, we deconsolidated the Zonda Debtors, which filed a separate plan of reorganization and are not Debtors under the
Plan. See Note 3.
F-21
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
As a result of adopting Fresh Start Accounting, we estimated the receivable related to the Zonda Arbitration at $204.7 million,
included within receivable from unconsolidated subsidiaries on our consolidated balance sheet. As of December 31, 2017, the carrying
amount of the receivable related to the advance payments and accrued interest was $202.6 million, presented as a long-term receivable,
while the purchased equipment was included in our property and equipment, net on our consolidated balance sheet. See Note 17.
Note 8—Debt
Debt, net of debt premium (discount), consists of the following:
(b)(c)
(in thousands)
Debt Obligations:
2017 Senior Secured Notes
2018 Senior Secured Term Loan B
(a)(b)
2013 Revolving Credit Facility
Senior Secured Credit Facility
(b)(c)
2020 Senior Secured Notes
First Lien Notes
Second Lien PIK Notes
(a)(b)
(b)(c)
Total debt
Less: liabilities subject to compromise
Total long-term debt
(a) Repaid upon our emergence from our Chapter 11 proceedings.
(b)
(c) Exchanged for common shares upon our emergence from our Chapter 11 proceedings.
Included in liabilities subject to compromise at December 31, 2017.
Pre-Petition Secured Debt
Successor
Predecessor
December 31, 2018 December 31, 2017
$
$
—
—
—
—
—
747,400
291,935
1,039,335
—
1,039,335
$
$
439,364
718,125
475,000
661,478
750,000
—
—
3,043,967
(3,043,967)
—
On November 12, 2017, the Debtors filed the Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code. Prior to
the Petition Date, the Company had outstanding its 2017 Notes, Term Loan B, 2013 Revolving Credit Facility, SSCF and 2020 Notes
(collectively, the “Pre-Petition Secured Debt”). For a description of the Pre-Petition Secured Debt, see below.
The filing of the Bankruptcy Petitions constituted an event of default with respect to the Pre-Petition Secured Debt. As a result, the
corresponding Pre-Petition Debt became immediately due and payable and any efforts to enforce such payment obligations were
automatically stayed as a result of the Chapter 11 proceedings. As of December 31, 2017, all debt was classified as liabilities subject to
compromise on our consolidated balance sheets.
On November 19 , 2018, the Company emerged from the Chapter 11 proceedings, and repaid in full the 2013 Revolving Credit
Facility and SSCF, and issued common shares in satisfaction of the claims under the 2017 Notes, Term Loan B and 2020 Notes. As a
result, the Pre-Petition Secured Debt is no longer outstanding.
First Lien Notes and Second Lien PIK Notes
In connection with its emergence from the Chapter 11 proceedings, the Company assumed all obligations under the $750.0 million
First Lien Notes and the $273.6 million Second Lien PIK Notes.
First
Lien
Notes
On September 26, 2018, Pacific Drilling First Lien Escrow Issuer Limited (the “First Lien Escrow Issuer”), a private company
limited by shares incorporated in the British Virgin Islands and wholly owned subsidiary of the Company, entered into an indenture (the
“First Lien Notes Indenture”) with Wilmington Trust, National Association, as trustee (the “Trustee”) and collateral agent, relating to the
issuance by the First Lien Escrow Issuer of $750.0 million aggregate principal amount of 8.375% First Lien Notes due 2023 (the “First
Lien Notes”).
F-22
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The First Lien Notes were sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as
amended (the “Securities Act”), and were offered and sold under Rule 144A of the Securities Act, and to non-U.S. persons in transactions
outside the United States under Regulation S of the Securities Act. The First Lien Notes have not been, and will not be, registered under
the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.
Upon the emergence of the Company from the Chapter 11 proceedings on November 19, 2018, the First Lien Escrow Issuer
merged into the Company and the Company assumed all obligations of the First Lien Escrow Issuer under the First Lien Notes Indenture.
The First Lien Notes accrue interest at a rate of 8.375% per annum, payable semi-annually in arrears on April 1 and October 1 of
each year beginning on April 1, 2019. The First Lien Notes will mature on October 1, 2023, unless earlier redeemed or repurchased.
The First Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of the
Company’s subsidiaries other than the Zonda Debtors, certain immaterial subsidiaries and PIDWAL. It is expected that the Zonda
Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their separate
plan of reorganization after the successful resolution of the arbitration proceeding involving the Pacific
Zonda.
See Note 17 for further
discussion. If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors and the Zonda Debtors
would not guarantee the First Lien Notes and Second Lien PIK Notes.
The First Lien Notes are secured by first-priority liens on substantially all assets of the Company and the guarantors (other than
certain excluded property), including (i) vessels, (ii) books and records, (iii) certain deposit accounts and the amounts contained therein,
(iv) assignments of proceeds of hull and machinery and loss of hire insurance, (v) assignments of earnings from drilling contracts, and
(vi) equity interests owned by the Company and the guarantors, in each case, subject to certain exceptions, including that such first-
priority liens will be subject to payment priority in favor of future holders, if any, of certain superpriority first lien debt of up to $50.0
million.
The First Lien Notes Indenture contains covenants limiting the ability of the Company, and any restricted subsidiary to, among
other things, (i) incur or guarantee additional indebtedness and issue preferred stock, (ii) pay dividends on or redeem or repurchase
capital stock, make certain investments, make certain payments on or with respect to subordinated and junior debt (including making cash
interest or principal payments on the Second Lien PIK Notes (as defined below)), (iii) create or incur certain liens, (iv) impose
restrictions on the ability of restricted subsidiaries to pay dividends, (v) merge or consolidate with other entities, (vi) enter into certain
transactions with affiliates, (vii) impair the security interests in the collateral for the First Lien Notes, and (viii) engage in certain lines of
business. These covenants are subject to a number of important exceptions and qualifications and certain of them will be suspended with
respect to the First Lien Notes in the event that the First Lien Notes obtain an investment grade rating.
The Company may be required to offer to purchase the First Lien Notes at 101.0% percent of the principal amount thereof, plus
accrued and unpaid interest, upon the occurrence of a Change of Control (as defined in the First Lien Notes Indenture), and at 100.0% of
the principal amount, plus accrued and unpaid interest, under certain other circumstances. In addition, the Company will be required to
offer to purchase First Lien Notes at 100.0% of the principal amount thereof, plus accrued and unpaid interest, with any cash proceeds
from a settlement or award in connection with the arbitration relating to the Pacific
Zonda
with such offer to be for an aggregate principal
amount of First Lien Notes equal to the lesser of (x) 50.0% of such cash proceeds and (y) $75.0 million.
At any time prior to October 1, 2020, (i) the Company may redeem the First Lien Notes, in whole or in part, at a redemption price
equal to 100.0% of the principal amount thereof, plus a “make-whole” premium, (ii) the Company may redeem up to 35.0% of the
original principal amount of the First Lien Notes with proceeds from certain equity offerings at a redemption price equal to 108.375% of
the principal amount thereof, and (iii) not more than once in any twelve-month period, the Company may redeem up to 10.0% of the
original principal amount of the First Lien Notes at a redemption price equal to 103.0% of the principal amount thereof, in each case plus
accrued and unpaid interest.
At any time on or after October 1, 2020, the Company may redeem the First Lien Notes, in whole or in part, at the following
redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest,
F-23
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
during the twelve-month period beginning on October 1 of the years indicated: 2020 – 104.188%; 2021 – 102.094%; 2022 and thereafter
– 100.000%.
The First Lien Notes Indenture contains customary events of default, including, among other things, (i) failure to make required
payments; (ii) failure to comply with certain agreements or covenants; (iii) failure to pay certain other indebtedness; (iv) certain events of
bankruptcy and insolvency; and (v) failure to pay certain judgments. An event of default under the First Lien Notes Indenture will allow
either the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding First Lien Notes to accelerate, or in
certain cases will automatically cause the acceleration of, the amounts due under the First Lien Notes.
Intercreditor
Agreement
The relationship between holders of First Lien Notes (and any future first lien debt), on the one hand, and Second Lien PIK Notes
(and any future junior lien debt), on the other hand, is governed by an intercreditor agreement. Pursuant to the intercreditor agreement,
the liens securing first lien debt are effectively senior in priority to the liens securing junior lien debt. If the Company incurs any future
first lien debt, the relationship between holders of such debt and First Lien Notes will be governed by a collateral agency agreement.
Such agreements will allow for payment priority in favor of holders of up to $50.0 million of future superpriority first lien debt.
Second
Lien
PIK
Notes
On September 26, 2018, Pacific Drilling Second Lien Escrow Issuer Limited (the “Second Lien Escrow Issuer”), a private
company limited by shares incorporated in the British Virgin Islands and wholly owned subsidiary of the Company, entered into an
indenture (the “Second Lien PIK Notes Indenture”) with the Trustee, as trustee and junior lien collateral agent, relating to the issuance by
the Second Lien Escrow Issuer of approximately $273.6 million aggregate principal amount of 11.0% / 12.0% Second Lien PIK Notes
due 2024 (the “Second Lien PIK Notes”), of which (i) $250.0 million aggregate principal amount was issued pursuant to the Second Lien
PIK Notes Offering (as defined below), and (ii) approximately $23.6 million aggregate principal amount was issued as a commitment fee
to the Ad Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.
The Second Lien PIK Notes were sold in a private transaction exempt from the registration requirements of the Securities Act and
were offered and sold under Rule 144A of the Securities Act, and to non-U.S. persons in transactions outside the United States under
Regulation S of the Securities Act (the “Second Lien PIK Notes Offering”). The Second Lien PIK Notes have not been, and will not be,
registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption
from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.
Upon the emergence of the Company from the Chapter 11 proceedings on November 19, 2018, the Second Lien Escrow Issuer
merged into the Company and the Company assumed all obligations of the Second Lien Escrow Issuer under the Second Lien PIK Notes
Indenture.
For each interest period, interest is payable, at the option of the Company, (i) entirely in cash (“Cash Interest”), (ii) entirely
through the issuance of additional Second Lien PIK Notes having the same terms and conditions as the Second Lien PIK Notes issued in
the Second Lien PIK Notes Offering in a principal amount equal to the amount of interest then due and payable or by increasing the then
outstanding aggregate principal amount of Second Lien PIK Notes (“PIK Interest”) or (iii) 50% as Cash Interest and 50% as PIK Interest.
If the Company elects to pay interest for an interest period entirely in the form of Cash Interest, interest will accrue at a rate of 11.0% per
annum for such interest period. If the Company elects to pay interest for an interest period entirely in the form of PIK Interest, interest
will accrue at a rate of 12.0% per annum for such interest period. If the Company elects to pay 50% in Cash Interest and 50% in PIK
Interest for an interest period, (i) interest in respect of the Cash Interest portion will accrue at 11.0% and (ii) interest in respect of the PIK
Interest portion will accrue at 12.0% for such interest period.
Interest on the Second Lien PIK Notes will be payable semi-annually in arrears on April 1 and October 1 of each year beginning
on April 1, 2019. The Second Lien PIK Notes will mature on April 1, 2024, unless earlier redeemed or repurchased.
F-24
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The Second Lien PIK Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of
the Company’s subsidiaries that guarantee the Company’s First Lien Notes and are secured by second-priority liens on all of the assets of
the Company and the guarantors that also serve as collateral for the Company’s First Lien Notes.
The Second Lien PIK Notes Indenture contains covenants limiting the ability of the Company, and any restricted subsidiary to,
among other things, (i) incur or guarantee additional indebtedness and issue preferred stock, (ii) pay dividends on or redeem or
repurchase capital stock, make certain investments, make certain payments on or with respect to subordinated and junior debt, (iii) create
or incur certain liens, (iv) impose restrictions on the ability of restricted subsidiaries to pay dividends, (v) merge or consolidate with other
entities, (vi) enter into certain transactions with affiliates, (vii) impair the security interests in the collateral for the Second Lien PIK
Notes, and (viii) engage in certain lines of business. These covenants are subject to a number of important exceptions and qualifications
and certain of them will be suspended with respect to the Second Lien PIK Notes in the event that the Second Lien PIK Notes obtain an
investment grade rating.
The Company may be required to offer to purchase the Second Lien PIK Notes at 101.0% percent of the principal amount thereof,
plus accrued and unpaid interest, upon the occurrence of a Change of Control (as defined in the Second Lien PIK Notes Indenture) (a
“Change of Control Offer”), and at 100.0% of the principal amount, plus accrued and unpaid interest, under certain other circumstances.
In addition, the Company will be required to offer to purchase Second Lien PIK Notes at 100.0% of the principal amount thereof, plus
accrued and unpaid interest, with the cash proceeds, if any, from a settlement or award in connection with the arbitration with SHI related
to the Pacific
Zonda
, with such offer to be for an aggregate principal amount of the Second Lien PIK Notes equal to the lesser of (x)
50.0% of such cash proceeds and (y) $75.0 million, provided, that if the Company is required to offer to purchase the First Lien Notes
with such cash proceeds, the Company shall only be required to offer to purchase the Second Lien PIK Notes with the portion thereof that
has been declined by the holders of First Lien Notes.
At any time prior to April 1, 2020, (i) the Company may redeem the Second Lien PIK Notes, in whole or in part, at a redemption
price equal to 100.0% of the principal amount thereof, plus a “make-whole” premium, and (ii) the Company may redeem up to 35.0% of
the original principal amount of the Second Lien PIK Notes with the proceeds from certain equity offerings at a redemption price equal to
112.0%, in each case plus accrued and unpaid interest.
At any time on or after April 1, 2020, the Company may redeem the Second Lien PIK Notes, in whole or in part, at the following
redemption prices (expressed as a percentage of principal amount), plus any accrued and unpaid interest, during the six-month period
beginning on the dates indicated below:
Date
April 1, 2020
October 1, 2020
April 1, 2021
October 1, 2021
April 1, 2022 and thereafter
Price
112.0%
109.0%
106.0%
103.0%
100.0%
At any time a Change of Control occurs, the Company may redeem all, but not less than all, of the Second Lien PIK Notes at the
following redemption prices (expressed as a percentage of principal amount), plus any accrued and unpaid interest, during the six-month
period beginning on the dates indicated below:
Date
April 1, 2020
October 1, 2020
April 1, 2021
October 1, 2021
April 1, 2022 and thereafter
Price
106.0%
109.0%
106.0%
103.0%
100.0%
If the Company exercises this Change of Control redemption right, it may elect not to make the Change of Control Offer described
above.
F-25
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The Second Lien PIK Notes Indenture contains customary events of default, including, among other things, (i) failure to make
required payments; (ii) failure to comply with certain agreements or covenants; (iii) failure to pay certain other indebtedness; (iv) certain
events of bankruptcy and insolvency; and (v) failure to pay certain judgments. An event of default under the Second Lien PIK Notes
Indenture will allow either the Trustee or the holders of at least 25.0% in aggregate principal amount of the then-outstanding Second Lien
PIK Notes to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the Second Lien PIK
Notes.
Description of Pre-Petition Secured Debt
2017 Senior Secured Notes
In November 2012, Pacific Drilling V Limited (“PDV”), an indirect, wholly-owned subsidiary of the Company, and the Company,
as guarantor, completed a private placement of $500.0 million in aggregate principal amount of 7.25% senior secured notes due 2017 (the
“2017 Notes”). The 2017 Notes bore interest at 7.25% per annum, payable semiannually on June 1 and December 1, with a scheduled
maturity on December 1, 2017.
The 2017 Notes were secured by a first-priority security interest (subject to certain exceptions) in the Pacific
Khamsin
, and
substantially all of the other assets of PDV, including an assignment of earnings and insurance proceeds related to the Pacific
Khamsin
.
During the year ended December 31, 2016, we repurchased $60.6 million of our 2017 Notes.
Effective November 19, 2018, we issued common shares in satisfaction of the 2017 Notes, and thus they are no longer
outstanding.
Senior Secured Credit Facility
In February 2013, Pacific Sharav S.à r.l. and Pacific Drilling VII Limited (together, the “SSCF Borrowers”) and the Company, as
guarantor, entered into a senior secured credit facility agreement, as amended and restated (the “SSCF”), to finance the construction,
operation and other costs associated with the Pacific
Sharav
and the Pacific
Meltem
(the “SSCF Vessels”). The SSCF was primarily
secured on a first priority basis by liens on the SSCF Vessels, and by an assignment of earnings and insurance proceeds relating thereto.
In 2015, we completed the final drawdown under this facility, resulting in a cumulative total drawdown of $985.0 million.
Following the final drawdown, the SSCF consisted of two principal tranches: (i) a Commercial Tranche of $492.5 million provided by a
syndicate of commercial banks and (ii) a Garanti — Instituttet for Eksportkreditt (“GIEK”) Tranche of $492.5 million guaranteed by
GIEK, comprised of two sub-tranches: (x) an Eksportkreditt Norge AS (“EKN”) sub-tranche of $246.3 million and (y) a bank sub-tranche
of $246.3 million.
Borrowings under (A) the Commercial Tranche bore interest at London Interbank Offered Rate (“LIBOR”) plus a margin of
3.75%, (B) the EKN sub-tranche bore interest, at our option, at (i) LIBOR plus a margin of 1.5% (which margin could be reset on
May 31, 2019) or (ii) at a Commercial Interest Reference Rate of 2.37% and (C) the bank sub-tranche bore interest at LIBOR plus a
margin of 1.5%. Borrowings under both sub-tranches were also subject to a guarantee fee of 2% per annum. Interest was payable
quarterly.
The Commercial Tranche had a scheduled maturity on May 31, 2019. Loans made with respect to the Pacific
Sharav
under the
GIEK Tranche had a scheduled maturity on May 12, 2026. Loans made with respect to the Pacific
Meltem
under the GIEK Tranche had a
scheduled maturity on November 24, 2026. The GIEK Tranche contained a put option exercisable if the Commercial Tranche was not
refinanced or renewed on or before February 28, 2019 requiring each SSCF Borrower to prepay, in full, the portion of all outstanding
loans that relate to the GIEK Tranche, on or before May 31, 2019, without any premium, penalty or fees of any kind. The SSCF required
semiannual amortization payments of $39.9 million; however, we did not make these payments during the pendency of our Chapter 11
proceedings.
Effective November 19, 2018, pursuant to the Plan, we repaid the SSCF in full and thus it is no longer outstanding.
F-26
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
2020 Senior Secured Notes
On June 3, 2013, we completed a $750.0 million private placement of 5.375% senior secured notes due 2020 (the “2020 Notes”).
The 2020 Senior Secured Notes bore interest at 5.375% per annum, payable semiannually on June 1 and December 1, with a
scheduled maturity on June 1, 2020.
The 2020 Senior Secured Notes were guaranteed by each of our subsidiaries that own the Pacific
Bora
, the Pacific
Mistral
, the
Pacific
Scirocco
and the Pacific
Santa
Ana
(the “Shared Collateral Vessels”), each of our subsidiaries that own or previously owned
equity or similar interests in a Shared Collateral Vessel-owning subsidiary, and certain other of our subsidiaries that are parties to charters
in respect of the Shared Collateral Vessels, and by certain other future subsidiaries.
The 2020 Senior Secured Notes were secured, on an equal and ratable, first priority basis, with the obligations under the Senior
Secured Term Loan B (as defined below), the 2013 Revolving Credit Facility (as defined below) and certain future obligations, subject to
payment priorities in favor of lenders under the 2013 Revolving Credit Facility pursuant to the terms of an intercreditor agreement (the
“Pre-Petition Intercreditor Agreement”), by liens on the Shared Collateral Vessels, a pledge of the equity of the entities that own the
Shared Collateral Vessels, assignments of earnings and insurance proceeds with respect to the Shared Collateral Vessels, and certain
other assets of the subsidiary guarantors (collectively, the “Shared Collateral”).
Effective November 19, 2018, pursuant to the Plan, we issued common shares in satisfaction of the 2020 Notes and thus they are
no longer outstanding.
2018 Senior Secured Institutional Term Loan – Term Loan B
On June 3, 2013, we entered into a $750.0 million senior secured institutional term loan maturing 2018 (the “Term Loan B”). The
Term Loan B bore interest, at our election, at either (1) LIBOR, which would not be less than a floor of 1% plus a margin of 3.5% per
annum, or (2) a rate of interest per annum equal to (i) the prime rate for such day, (ii) the sum of the federal funds rate plus 0.5% or
(iii) 1% per annum above the one-month LIBOR, whichever was the highest rate in each case plus a margin of 2.5% per annum. Interest
was payable quarterly. The Term Loan B required quarterly amortization payments of $1.9 million and had a scheduled maturity on
June 3, 2018; however, we did not make these payments during the pendency of our Chapter 11 proceedings.
Term Loan B was secured by the Shared Collateral and subject to the terms and provisions of the Pre-Petition Intercreditor
Agreement.
Effective November 19, 2018, pursuant to the Plan, we issued common shares in satisfaction of Term Loan B and thus it is no
longer outstanding.
2013 Revolving Credit Facility
On June 3, 2013, we entered into a $500.0 million senior secured revolving credit facility with a scheduled maturity on June 3,
2018 (as amended, the “2013 Revolving Credit Facility”). The 2013 Revolving Credit Facility was secured by the Shared Collateral and
subject to the provisions of the Pre-Petition Intercreditor Agreement. The 2013 Revolving Credit Facility permitted loans to be extended
up to a maximum sublimit of $475.0 million and permitted letters of credit to be issued up to a maximum sublimit of $300.0 million,
subject to a $475.0 million overall facility limit.
Borrowings under the 2013 Revolving Credit Facility bore interest, at our option, at either (1) LIBOR plus a margin ranging from
3.25% to 3.75% based on our leverage ratio, or (2) a rate of interest per annum equal to (i) the prime rate for such day, (ii) the sum of the
federal funds rate plus 0.5% or (iii) 1% per annum above the one-month LIBOR, whichever was the highest rate in each case plus a
margin ranging from 2.25% to 2.75% per annum based on our leverage ratio. Undrawn commitments accrued a fee ranging from 1.3% to
1.5% per annum based on our leverage ratio. Interest was payable quarterly. Outstanding but undrawn letters of credit accrued a fee at a
rate equal to the margin on LIBOR loans minus 1%.
F-27
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Effective November 19, 2018, pursuant to the Plan, we repaid the 2013 Revolving Credit Facility in full and thus it is no longer
outstanding.
Maturities of Long-Term Debt
As of December 31, 2018, the aggregate maturities of our debt, excluding any PIK interest and net unamortized premium of $7.1
million, were as follows:
Years ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Note 9—Income Taxes
(in thousands)
$
$
—
—
—
—
750,000
273,614
1,023,614
Pacific Drilling S.A., a holding company and Luxembourg resident, is subject to Luxembourg corporate income tax and municipal
business tax at a combined rate of 26.0% for the year ended December 31, 2018, 27.1% for the year ended December 31, 2017, and
29.2% for the year ended December 31, 2016. Qualifying dividend income and capital gains on the sale of qualifying investments in
subsidiaries are exempt from Luxembourg corporate income tax and municipal business tax. Consequently, the Company expects
dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Luxembourg corporate
income tax and municipal business tax.
Under the Plan, the Term Loan B, 2020 Notes, and 2017 Notes were cancelled and extinguished in exchange for common shares
of Pacific Drilling S.A., resulting in cancellation of debt income (“CODI”) for Pacific Drilling S.A. of $863.1 million as calculated under
Luxembourg accounting and tax principles. Article 52 of Luxembourg Income Tax Law generally provides for an exemption from
income tax for CODI that remains after the utilization of net operating losses. As part of the Plan, certain intercompany debt was
extinguished, resulting in bad debt losses for Pacific Drilling S.A., which together with its available net operating losses, is sufficient to
fully offset CODI of Pacific Drilling S.A. that resulted from the Plan.
Income taxes have been provided based on the laws and rates in effect in the countries in which our operations are conducted or in
which our subsidiaries are considered residents for income tax purposes. Our income tax expense or benefit arises from our mix of pretax
earnings or losses, respectively, in the international tax jurisdictions in which we operate. Because the countries in which we operate have
different statutory tax rates and tax regimes with respect to one another, there is no expected relationship between the provision for
income taxes and our income or loss before income taxes.
Loss before income taxes consists of the following:
(in thousands)
Luxembourg
United States
Other jurisdictions
Loss before income taxes
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
December 31, 2018 November 19, 2018
Predecessor
Years ended December 31,
2016
2017
$
$
(9,738)
3,558
(28,073)
(34,253)
$
$
(500,317)
(10,467)
(1,646,401)
(2,157,185)
$
$
349
1,301
(513,953)
(512,303)
$
$
190,849
3,855
(209,754)
(15,050)
F-28
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The components of income tax (provision) benefit consist of the following:
(in thousands)
Current income tax benefit (expense):
Luxembourg
United States
Other foreign
Total current
Deferred tax benefit (expense):
Luxembourg
United States
Other foreign
Total deferred
Income tax expense
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
December 31, 2018 November 19, 2018
Predecessor
Years ended December 31,
2016
2017
$
$
$
$
$
292
(90)
60
262
6,454
(15)
68
6,507
6,769
$
$
$
$
$
(866)
(641)
(288)
(1,795)
6,924
(1,902)
(919)
4,103
2,308
$
$
$
$
$
(2,287)
(3,202)
35
(5,454)
321
(6,145)
(1,585)
(7,409)
(12,863)
$
$
$
$
$
53
(1,874)
(4,792)
(6,613)
(2,893)
(448)
(12,153)
(15,494)
(22,107)
A reconciliation between the Luxembourg statutory rate of 26.0% for the year ended December 31, 2018, 27.1% for the year
ended December 31, 2017 and 29.2% for the year ended December 31, 2016 and our effective tax rate is as follows:
Statutory rate
Effect of tax rates different from the Luxembourg
statutory tax rate
Change in valuation allowance
Changes in unrecognized tax benefits
Equity based compensation shortfall
Change in enacted statutory tax rates
Adjustments related to prior years
Fresh start accounting
Effective tax rate
Successor
Period From
November 20, 2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19, 2018
26.0 %
26.0 %
(18.7)%
(4.3)%
(0.2)%
(0.1)%
— %
— %
(2.6)%
0.1 %
(25.3)%
18.7 %
(1.0)%
— %
— %
1.3 %
— %
19.7 %
F-29
Predecessor
Years ended December 31,
2016
2017
27.1 %
29.2 %
(19.2)%
(8.0)%
(0.8)%
(1.2)%
(0.5)%
0.1 %
— %
(2.5)%
(13.2)%
(85.1)%
(75.9)%
(7.0)%
— %
5.1 %
— %
(146.9)%
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The components of deferred tax assets and liabilities consist of the following:
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
Depreciation and amortization
Accrued payroll expenses
Deferred revenue
Other
Deferred tax assets
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Deferred expenses
Other
Total deferred tax liabilities
Net deferred tax assets
Successor
December 31, 2018
Predecessor
December 31, 2017
$
$
$
$
$
549,107 $
188,161
2,307
42
307
739,924
(701,727)
38,197 $
(22,134) $
—
(5)
(22,139) $
52,568
35,873
4,595
2,189
1,119
96,344
(86,495)
9,849
(6,505)
(1,459)
(88)
(8,052)
16,058 $
1,797
As of December 31, 2018 and 2017, the Company had gross deferred tax assets of $549.1 million and $52.6 million, respectively,
related to loss carry forwards in various worldwide tax jurisdictions. The majority of the loss carry forwards are in Luxembourg and have
a related gross deferred tax asset of $504.2 million that expires in 2034. The remaining loss carry forwards have no expiration.
A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred
tax assets will not be realized. As of December 31, 2018 and 2017, the valuation allowance for deferred tax assets was $701.7 million and
$86.5 million, respectively.
We consider the earnings of certain of our subsidiaries to be indefinitely reinvested. Accordingly, we have not provided for taxes
on these unremitted earnings. Should we make distributions from the unremitted earnings of these subsidiaries, we would be subject to
taxes payable in certain jurisdictions. As of December 31, 2018, the amount of indefinitely reinvested earnings was approximately $20.0
million, and if all of these indefinitely reinvested earnings were distributed, we would be subject to estimated taxes of approximately $1.0
million.
F-30
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon
examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we
believe has greater than a 50% likelihood of being realized upon settlement. As of December 31, 2018, we had $42.5 million of
unrecognized tax benefits which were included in other long-term liabilities on our consolidated balance sheets and would impact our
consolidated effective tax rate if realized. To the extent we have income tax receivable balances available to utilize against amounts
payable for unrecognized tax benefits, we have presented such receivable balances as a reduction to other long-term liabilities on our
consolidated balance sheets. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the Successor period
in 2018 and for the Predecessor periods in 2018 and 2017 is as follows:
(in thousands)
Balance, beginning of period
Increases in unrecognized tax benefits as a result of tax positions taken
during current year
Balance, end of period
Successor
Period From
November 20, 2018
through
Predecessor
Period From
January 1, 2018
through
Year Ended
December 31, 2018 November 19, 2018 December 31, 2017
$
$
41,831
$
38,860 $
34,027
626
42,457
$
2,971
41,831 $
4,833
38,860
As of December 31, 2018 and 2017, we have no accrued interest and penalties related to uncertain tax positions on our balance
sheet as such payments would not be required by law.
The Company is subject to taxation in various U.S., foreign, and state jurisdictions in which it conducts business. Tax years as
early as 2011 remain subject to examination. As of December 31, 2018, the Company has ongoing tax audits in Nigeria and Brazil.
Note 10—Revenue from Contracts with Clients
Contract
Assets
and
Liabilities
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing
schedules. Payment terms on invoiced amounts are typically 30 days. As of December 31, 2018 and 2017, accounts receivable on our
consolidated balance sheets were presented net of allowance for doubtful accounts of $0.0 and $2.6 million, respectively.
Contract assets consist of demobilization revenue that we expect to receive and is recognized ratably throughout the contract term
but invoiced upon completion of the demobilization activities. Once the demobilization revenue is invoiced, the corresponding contract
asset is transferred to accounts receivable.
Contract liabilities include payments received for mobilization, contract preparation and capital upgrade activities, which are
allocated to the overall performance obligation and recognized ratably over the initial term of the contract.
Contract assets and liabilities are netted at a contract level, such that deferred revenue for mobilization, contract preparation and
capital upgrade (contract liabilities) is netted with any accrued demobilization revenue (contract asset) for each applicable contract. Net
current contract asset and liability balances are included in “Prepaid expenses and other current assets” and “Deferred revenue, current,”
respectively, and net noncurrent contract asset and liability balances are included in “Other assets” and “Deferred revenue,” respectively,
on our consolidated balance sheets.
F-31
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The following table provides information about trade receivables, contract assets and contract liabilities:
(in thousands)
Trade receivables, net
Current contract liabilities (deferred revenue)
Noncurrent contract liabilities (deferred revenue)
Successor
December 31,
2018
Predecessor
January 1,
2018
$
$
40,144
—
—
40,398
23,966
12,973
Significant changes in contract assets and contract liabilities for the Predecessor period in 2018 are as follows:
Balance at January 1, 2018
Decrease due to amortization of deferred revenue
Decrease due to completion of prepaid services
Increase due to cash received, excluding amounts recognized as revenue
Decrease due to fresh start accounting adjustments (Note 3)
Balance at November 19, 2018 (Predecessor)
There were no material activities for the Successor period in 2018.
Contract
Fulfillment
Costs
Contract Assets
Contract Liabilities
(in thousands)
— $
—
—
—
—
— $
(36,939)
20,212
2,305
(1,824)
16,246
—
$
$
Certain direct and incremental costs incurred for upfront preparation and initial mobilization of contracted rigs represent costs of
fulfilling a contract as they relate directly to a contract, enhance resources that will be used to satisfy our performance obligations in the
future and are expected to be recovered. Such costs are deferred as a current or noncurrent asset depending on the length of the initial
contract term and amortized ratably to operating expenses as services are rendered over the initial term of the related drilling contract. As
of December 31, 2018, these contract fulfillment costs were $0.4 million and reported in “Deferred costs, current” on our consolidated
balance sheets. During the Successor and Predecessor periods in 2018, amortization of such costs was $0.1 million and $7.5 million
respectively, and there was no impairment of deferred contract costs.
Costs incurred for the demobilization of rigs at contract completion are recognized as incurred during the demobilization process.
Costs incurred for capital upgrades for a contract are capitalized as property and equipment and depreciated over the estimated useful life
of the asset.
Future
Amortization
of
Contract
Liabilities
As of December 31, 2018, there is no revenue expected to be recognized in the future related to unsatisfied performance
obligations. We have applied the optional exemption in Topic 606 and have not disclosed the variable consideration related to our
estimated future dayrate revenue.
Note 11—Shareholders’ Equity
In 2016, we cancelled 0.7 million treasury shares repurchased under a share repurchase program. We accounted for this non-cash
transaction by netting the treasury shares at total cost of $30.0 million against the statutory share capital of the cancelled shares and
additional paid-in capital.
In accordance with the Plan, effective November 19, 2018, by shareholder approval at an Extraordinary General Meeting, the
Company effectuated, among other things, a 1-for-10,000 reverse stock split of its existing common shares (the “Reverse Stock Split”).
On the effective date of the Reverse Stock Split, the Company’s shareholders received one new common share for every 10,000 common
shares they owned. No fractional shares were issued in connection with the Reverse Stock Split; instead, holders of fractional shares were
paid in cash, which amount was not material in the aggregate.
F-32
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
In addition, at an Extraordinary General Meeting, the Company’s shareholders approved the increase in the Company’s share
capital to $825,000, or 82.5 million shares, of which approximately 75.0 million shares were issued and are outstanding in connection
with emergence and the remaining approximately 7.5 million authorized shares were issued to Pacific Drilling Administrators Limited
and reserved for issuance pursuant to the 2018 Stock Plan.
As of December 31, 2018, the Company’s share capital consisted of 82.5 million common shares authorized, $0.01 par value per
share, of which 75.0 million common shares were issued and outstanding.
Note 12—Share-Based Compensation
We recorded share-based compensation expense and related tax benefit within our consolidated statements of operations as
follows:
Successor
Period From
November 20, 2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19, 2018
Predecessor
Years Ended December 31,
2017
2016
(in thousands)
Operating expenses
General and administrative expenses
Share-based compensation expense
Tax benefit
(a)
Total
$
$
— $
599
599
(126)
473 $
177 $
2,366
2,543
—
2,543 $
416 $
6,403
6,819
(1,147)
5,672 $
658
6,436
7,094
(2,011)
5,083
(a) The effects of tax benefits from share-based compensation expense are included within income tax expense in our consolidated
statements of operations. As a result of the cancellation of all equity and equity-based awards granted under the Pacific Drilling
S.A. 2011 Omnibus Stock Incentive Plan (the “2011 Stock Plan”), we do not expect any tax benefit from share-based
compensation expense during the Predecessor period in 2018.
On November 28, 2018, the board of directors approved the 2018 Stock Plan pursuant to which the Company may issue up to
7.5 million common shares to 2018 Stock Plan participants using various types of stock-based incentive awards, including stock options,
restricted shares, restricted share units and other equity-based awards. The Compensation Committee of the board of directors determines
the terms and conditions of equity awards made to participants under the 2018 Stock Plan.
Prior to the adoption of the 2018 Stock Plan, the 2011 Stock Plan provided for the grant of equity-based or equity-related awards
to directors, officers, employees and consultants. In connection with our emergence from bankruptcy on November 19, 2018, all equity
and equity-based awards granted under the 2011 Stock Plan were cancelled and are no longer outstanding.
Stock Options
During the Predecessor periods in 2018, 2017 and 2016, there were no options granted or exercised. A summary of option activity
under the 2011 Stock Plan in the Predecessor period of 2018 is as follows:
Outstanding — January 1, 2018 (Predecessor)
Granted
Exercised
Cancelled or forfeited
Outstanding — November 19, 2018 (Predecessor)
Exercisable — November 19, 2018 (Predecessor)
Number of
Shares
Under
Option
(in thousands)
279 $
—
—
(279)
— $
— $
Weighted-
Average
Remaining
Contractual
Term
(in years)
Weighted-
Average
Exercise
Price
(per share)
64.76
Aggregate
Intrinsic
Value
(in thousands)
64.76
—
—
— $
— $
—
—
F-33
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
During the Successor period in 2018, no options were granted under the 2018 Stock Plan.
Restricted Share Units (“RSUs”)
Pursuant to the 2011 Stock Plan, the Company granted restricted share units to certain members of our board of directors,
executives and employees to be settled in shares of our stock. In 2017, the Company converted all 0.3 million of unvested restricted share
units granted in 2016 into cash-settled restricted share units. We accounted for the modification by transferring $0.6 million amortized
expense from equity to liability.
Pursuant to the 2018 Stock Plan, in December 2018, the board of directors granted an aggregate of 565,000 restricted share units
to our Chairman of the Board, our Chief Executive Officer and our two other Class A directors. The fair value of restricted share units is
determined using the market value of our shares on the date of grant. The restricted share units granted to our Chairman of the Board and
Chief Executive Officer were 50% time-vested RSUs and 50% performance-based RSUs. The time-vested RSUs vest one-third on the
second anniversary of the grant date, one-third on the third anniversary of the grant date, and one-third on the fourth anniversary of the
grant date, with accelerated vesting upon a change of control of the Company. The performance-based RSUs vest only upon the
satisfaction of performance conditions. The RSUs granted to the other Class A directors are time-vested RSUs that vest in equal annual
installments on each of the first and second anniversary of the grant date, with accelerated vesting upon a change of control of the
Company.
A summary of RSUs activity for the year ended December 31, 2018 is as follows:
Nonvested — January 1, 2018 (Predecessor)
Granted
Vested
Cancelled or forfeited
Nonvested — November 19, 2018 (Predecessor)
Nonvested — November 20, 2018 (Successor)
Granted
Vested
Cancelled or forfeited
Nonvested — December 31, 2018 (Successor)
Number of
Restricted
Stock
Units
(in thousands)
Weighted-
Average
Grant-Date Fair
Value
(per share)
70 $
—
(37)
(33)
— $
— $
565
—
—
565 $
45.28
—
54.25
33.63
—
—
13.00
—
—
13.00
No RSUs were granted for the year ended December 31, 2017. The total grant-date fair value of the RSUs vested was $2.0 million,
$5.2 million and $4.8 million for the Predecessor periods in 2018, 2017 and 2016, respectively.
As of December 31, 2018, total compensation costs related to nonvested time-based RSUs not yet recognized was $3.8 million an
d is expected to be recognized over a weighted-average period of 2.9 years.
Stock Bonus Awards
In December 2018, our board of directors approved the issuance of an aggregate of 39,614 common shares to 269 participants as
stock bonus awards under the 2018 Stock Plan, of which 8,061 shares were withheld for the payment of taxes resulting in a net issuance
of 31,553 common shares.
Cash-Settled Restricted Share Units
Pursuant to the 2011 Stock Plan, the Company granted cash-settled restricted share units to certain of our executives and
employees. The value of cash-settled restricted share units was determined based on our common share price on the vesting date and
were paid in cash with no actual shares issued. Compensation expense of cash-settled restricted share units was remeasured each quarter
with a cumulative adjustment to compensation cost during the period based on changes in our share price.
F-34
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
During the Predecessor period in 2018, 0.1 million of cash-settled restricted share units vested and were settled for an immaterial
amount, and all of the remaining 0.4 million units were forfeited.
During the Successor period in 2018, no cash-settled restricted share units were granted under the 2018 Stock Plan.
Note 13—Earnings per Share
The following reflects the income and the share data used in the basic and diluted EPS computations:
(in thousands, except per share information)
Numerator:
Net loss, basic and diluted
Denominator:
Weighted-average number of common shares outstanding,
basic
Weighted-average number of common shares outstanding,
diluted
Loss per share:
Basic
Diluted
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018 November 19, 2018
2017
2016
$
(27,484)
$
(2,154,877) $
(525,166) $
(37,157)
75,010
75,010
21,359
21,315
21,167
21,359
21,315
21,167
$
$
(0.37)
(0.37)
$
$
(100.89) $
(100.89) $
(24.64) $
(24.64) $
(1.76)
(1.76)
The following table presents the share effects of share-based compensation awards excluded from our computations of diluted EPS
as their effect would have been anti-dilutive for the periods presented:
Successor
Period From
November 20,
2018
through
December 31, 2018
Period From
January 1, 2018
through
November 19,
2018
Predecessor
Years Ended December 31,
2017
2016
161
314
349
1,217
(in thousands)
Share-based compensation awards
Note 14—Available-for-Sale Securities
In June and August 2017, we received certain equity securities of Hyperdynamics Corporation (“Hyperdynamics”), consisting of
4,677,450 Hyperdynamics common shares and warrants to purchase 3,082,194 Hyperdynamics common shares issued to us as payment
of a portion of our revenues due under a drilling contract with Hyperdynamics.
In September 2017, Hyperdynamics announced that its exploration well did not encounter hydrocarbons, and in December 2017
filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. During the year ended December 31,
2017, we recognized an other-than-temporary impairment in our Hyperdynamics available-for-sale securities of $6.8 million, recorded in
other expense in our consolidated statements of operations. As of December 31, 2018 and 2017, the aggregate fair value and cost basis of
our investment were $0.
Note 15—Derivatives
We are exposed to market risk from changes in interest rates and foreign exchange rates. From time to time, we have entered into a
variety of derivative financial instruments in connection with the management of our exposure to fluctuations in interest rates and foreign
exchange rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain
transactions may not meet the criteria for hedge accounting.
F-35
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
In 2013, we entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR with a notional value of
$712.5 million. The interest rate swap did not amortize and had a scheduled maturity on December 3, 2017. On a quarterly basis, we paid
a fixed rate of 1.56% and received the maximum of 1% or three-month LIBOR. As of September 30, 2017, we discontinued hedge
accounting of the interest rate swap. The interest rate swap was terminated shortly after the Petition Date.
In 2013, we also entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR with a notional value
of $400.0 million. The interest rate swap did not amortize and had a scheduled maturity on July 1, 2018. On a quarterly basis, we paid a
fixed rate of 1.66% and received three-month LIBOR. As of the Petition Date, we discontinued hedge accounting of the interest rate
swap. The interest rate swap was terminated shortly after the Petition Date.
In 2014, we entered into a series of foreign currency forward contracts as a cash flow hedge against future exchange rate
fluctuations between the Euro and U.S. dollar. We used the forward contracts to hedge Euro payments for forecasted capital expenditures.
As of December 31, 2016, the forward contracts were fully settled. Upon settlement, we paid U.S. dollars and received Euros at forward
rates ranging from $1.25 to $1.27. As a result of settling the effective hedge in 2016, we incurred net cash outflows of $1.8 million, and
reclassified the amounts from accumulated other comprehensive income to property and equipment.
We had no outstanding derivatives as of December 31, 2018 and 2017.
The following table summarizes the cash flow hedge gains and losses:
Gain (Loss) Recognized
in Other Comprehensive Income (“OCI”)
Predecessor
Period From
January 1,
2018 through
November 19,
2018
Years Ended December 31,
2017
2016
Successor
Period From
November 20,
2018 through
December 31,
2018
Loss Reclassified
from Accumulated OCI into
Income
Predecessor
Period From
January 1,
2018 through
November 19,
2018
Years Ended December 31,
2017
2016
Successor
Period From
November 20,
2018 through
December 31,
2018
Derivatives in Cash Flow Hedging
Relationships
(in thousands)
Interest rate swaps
Foreign currency forward
contracts
$
$
—
$
-
—
$
$
- $
643 $
$
- $
—
4,700 $
2,713 $
$
- $
—
1,584 $
—
$
-
—
$
$
- $
643 $
$
- $
—
5,265 $
8,798
$
- $
—
—
For the Predecessor period ended November 19, 2018 and the years ended December 31, 2017 and 2016, we reclassified $0, $4.5
million and $8.0 million to interest expense and $0.6 million, $0.8 million and $0.8 million to depreciation from accumulated other
comprehensive loss, respectively.
Note 16—Fair Value Measurements
We estimated fair value by using appropriate valuation methodologies and information available to management as of
December 31, 2018 and 2017. Considerable judgment is required in developing these estimates, and accordingly, estimated values may
differ from actual results.
F-36
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable, other receivable, accounts payable and
accrued expenses approximated their carrying value due to their short-term nature. It is not practicable to estimate the fair value of the
SSCF debt and 2013 Revolving Credit Facility as of December 31, 2017. The following table presents the carrying value and estimated
fair value of our cash and cash equivalents and other financial instruments:
(in thousands)
Cash and cash equivalents
2017 Senior Secured Notes
2018 Senior Secured Term Loan B
2020 Senior Secured Notes
First Lien Notes
Second Lien PIK Notes
Receivable from unconsolidated subsidiaries
Successor
December 31, 2018
Predecessor
December 31, 2017
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
$
367,577 $
—
—
—
747,400
291,935
204,790
367,577
—
—
—
714,953
285,548
205,790
308,948 $
438,880
722,706
750,000
—
—
—
308,948
243,847
290,841
307,500
—
—
—
We estimate the fair value of our cash equivalents using significant other observable inputs, representative of a Level 2 fair value
measurement, including the net asset values of the investments. As of December 31, 2018 and 2017, the aggregate carrying amount of our
cash equivalents was $331.3 million and $220.7 million, respectively. We estimate the fair values of our variable-rate and fixed-rate debt
using quoted market prices to the extent available and significant other observable inputs, which represent Level 2 fair value
measurements.
We applied a probability weighted approach to estimate the value of assets associated with the Zonda Arbitration, which was
presented within receivable from unconsolidated subsidiaries on our consolidated balance sheets as of December 31, 2018. The analysis
included estimating probabilities of success for the various outcomes and expected cash flows associated with each outcome. The
probability weighted cash flows were discounted to the balance sheet date using market data. The analysis utilized certain unobservable
inputs that require significant judgment for which there is little or no market data, which represent Level 3 fair value measurements.
These included, but were not limited to, probability and timing of successfully recovering the advance payments and purchased
equipment.
See Note 15 for further discussion of our use of financial instruments.
Note 17—Commitments and Contingencies
Operating Leases— We lease office space in countries in which we operate. As of December 31, 2018, the future minimum lease
payments under the non-cancelable operating leases with lease terms in excess of one year was as follows:
Years Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
(In thousands)
1,549
1,472
1,499
1,525
1,552
1,179
8,776
$
$
During the Predecessor periods in 2018, 2017 and 2016, rent expense was $1.6 million, $2.4 million and $2.5 million,
respectively. Rent expense for the Successor period in 2018 was immaterial.
Commitments —As of December 31, 2018, we had commitments for capital expenditures related to rig enhancements of $20.8
million.
F-37
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Customs bonds —As of December 31, 2018, we were contingently liable under certain customs bonds totaling approximately
$23.0 million issued as security in the normal course of our business.
Contingencies —It is to be expected that we will routinely be involved in litigation and disputes arising in the ordinary course of
our business.
On the Petition Date, Pacific Drilling S.A. and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. As a result of the Chapter 11 proceedings, attempts to prosecute, collect, secure or enforce
remedies with respect to pre-petition claims against us were subject to the automatic stay provisions of Section 362(a) of the Bankruptcy
Code, including litigation relating to us and our subsidiaries that were Debtors in the Chapter 11 proceedings. On November 19, 2018, the
Debtors emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. See Note 2.
In January 2013, our subsidiary Pacific Drilling VIII Limited (“PDVIII”) entered into, and our subsidiary Pacific Drilling
Services, Inc. (“PDSI”) guaranteed, a contract with SHI for the construction of the Pacific
Zonda
, with a purchase price of approximately
$517.5 million and original delivery date of March 31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right
to rescind the Construction Contract due to SHI’s failure to timely deliver the drillship in accordance with the contractual specifications.
SHI rejected our rescission, and on November 25, 2015, formally commenced an arbitration proceeding against us in London under the
Arbitration Act 1996 before a tribunal of three arbitrators (as specified in the Construction Contract) (the “Tribunal”). SHI claims that we
wrongfully rejected their tendered delivery of the drillship and seeks the final installment of the purchase price under the Construction
Contract. On November 30, 2015, we made demand under the third-party refund guarantee accompanying the Construction Contract for
the amount of our advance payments made under the Construction Contract of approximately $181.1 million, plus interest. Any payment
under the refund guarantee is suspended until an award under the arbitration is obtained. In addition to seeking repayment of our advance
payments made under the Construction Contract, we have made a counterclaim for the return of our purchased equipment, or the value of
such equipment, and damages for our wasted expenditures. We own $75.0 million in purchased equipment for the Pacific
Zonda
, a
majority of which remains on board the Pacific
Zonda
. As part of our “first day” relief in the Chapter 11 proceedings, the Bankruptcy
Court granted us a modification of the automatic stay provisions of the Bankruptcy Code to allow us to proceed with this arbitration.
An evidentiary hearing was held in London before the Tribunal from February 5 through March 2, 2018. Written closing
submissions and short replies to such submissions were filed with the Tribunal in May 2018. Oral closing submissions were heard by the
Tribunal in early August 2018. We expect the Tribunal to render its award within the next several months.
SHI has asserted claims against PDVIII and PDSI, secured by the Pacific
Zonda
, for approximately $387.4 million, for the
remaining unpaid purchase price, interest and costs. The Zonda Debtors filed a separate plan of reorganization which was confirmed by
order of the Bankruptcy Court on January 30, 2019 and are not Debtors under the Plan. On the date the plan was confirmed, PDVIII and
PDSI had $4.6 million in cash and no other material assets after accounting for post-petition administrative expenses (other than the value
of their claims against SHI) for SHI to recover against on account of its claims. It is expected that the Zonda Debtors will emerge from
bankruptcy pursuant to their separate plan of reorganization after the successful resolution of the arbitration proceeding. If the Zonda
Debtors are unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors.
Based on our assessment of the facts and circumstances of the rescission, we believe the recovery of the advance payments,
accrued interest and the purchased equipment on board the Pacific
Zonda
is probable. Therefore, we have recognized the related assets on
our consolidated balance sheets at December 31, 2018 and 2017. See Note 7.
We do not believe that the ultimate outcome resulting from this arbitration will have a material adverse effect on our financial
position, results of operations or cash flows.
F-38
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Note 18—Concentrations of Credit and Market Risk
Financial instruments that potentially subject the Company to credit risk are primarily cash equivalents, restricted cash and
accounts receivable. At times, cash equivalents and restricted cash may be in excess of FDIC insurance limits.
With regard to accounts receivable, we have an exposure from our concentration of clients within the oil and natural gas industry.
This industry concentration has the potential to impact our exposure to credit and market risks as our clients could be affected by similar
changes in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration has been
largely offset by the creditworthiness of our client base and receipt of advanced payments before providing services to certain clients.
During the years ended December 31, 2018, 2017 and 2016, the percentage of revenues earned from our clients was as follows:
Chevron
Eni
Petronas
Total
Other
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018
November 19, 2018
2017
2016
82.1 %
17.9 %
— %
— %
— %
84.0 %
— %
14.2 %
— %
1.8 %
81.6 %
— %
— %
— %
18.4 %
77.1 %
— %
— %
22.9 %
— %
Some of our employees in Nigeria are represented by unions. As of December 31, 2018 and 2017, approximately 1% of our labor
force was covered by collective bargaining agreements, all of which are subject to annual salary negotiation.
Note 19—Segments and Geographic Areas
Our drillships are part of a single, global market for contract drilling services and can be redeployed globally in response to
changing demands. We consider the operations of each of our drillships to be an operating segment. We evaluate the financial
performance of each of our drillships and our overall fleet based on several factors, including revenues from clients and operating profit.
The consolidation of our operating segments into one reportable segment is attributable to how we manage our fleet, including the nature
of our services provided, type of clients we serve and the ability of our drillships to operate in a single, global market. The accounting
policies of our operating segments are the same as those described in the summary of significant accounting policies. See Note 4.
As of December 31, 2018, the Pacific
Bora
was located offshore Nigeria and the Pacific
Sharav
was located offshore the United
States. As of December 31, 2018, the Pacific
Scirocco
, the Pacific
Mistral
, the Pacific
Santa
Ana
, the Pacific
Khamsin
and the Pacific
Meltem
were anchored at Las Palmas.
During the years ended December 31, 2018, 2017 and 2016, the percentage of revenues earned by geographic area, based on
drilling location, is as follows:
United States
Nigeria
Other
Successor
Period From
November 20, 2018
through
Period From
January 1, 2018
through
Predecessor
Years Ended December 31,
December 31, 2018
November 19, 2018
2017
2016
82.1 %
17.9 %
— %
84.0 %
1.8 %
14.2 %
81.6 %
11.2 %
7.2 %
56.9 %
43.1 %
— %
F-39
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Note 20—Variable Interest Entities
The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany
transactions, were as follows:
(in thousands)
Assets
Liabilities
Net carrying amount
Successor
Predecessor
December 31, 2018
December 31, 2017
$
$
2,381
(1,037)
1,344
$
$
3,142
(1,548)
1,594
PIDWAL is a joint venture formed to provide drilling services in Nigeria. PIDWAL has a 50.1% ownership interest in two of our
rig holding subsidiaries, Pacific Bora Ltd. and Pacific Scirocco Ltd., and we own 49.9% of such entities through our wholly-owned
subsidiary Pacific Drilling Limited (“PDL”). PIDWAL’s interest in the rig holding subsidiaries is held through a holding company,
Pacific Drillship Nigeria Limited (“PDNL”), of which it owns 99.9%, and PDL owns the remaining 0.1%. We determined that each of
these companies met the criteria of a variable interest entity for accounting purposes because its equity at risk was insufficient to permit it
to carry on its activities without additional subordinated financial support from us. We also determined that we were the primary
beneficiary for accounting purposes since (a) for PIDWAL, we had the power to direct the day-to-day management and operations of the
entity, and for PDNL we had the power to secure and direct its equity investment, which are the activities that most significantly impact
each entity’s economic performance, and (b) we had the obligation to absorb losses or the right to receive a majority of the benefits that
could be potentially significant to the variable interest entities. As a result, we consolidate PIDWAL and PDNL in our consolidated
financial statements.
During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, we provided financial support to
PIDWAL to enable it to operate as a going concern by funding its working capital via intercompany loans and payables.
During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, we provided financial support to PDNL
to fund its equity investment in our rig-owning entities operating in Nigeria via intercompany loans. Both the equity investment and
intercompany loans of PDNL are eliminated upon consolidation.
Note 21—Retirement Plans
We sponsor a defined contribution retirement plan covering substantially all U.S. employees and an international savings plan
covering international employees. During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, our total
employer contributions to both plans amounted to $0.3 million, $2.3 million, $2.8 million and $4.1 million, respectively.
Note 22—Supplemental Cash Flow Information
During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, we paid $0, $97.2 million, $120.8
million and $169.8 million of interest, respectively. During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and
2016, we paid income taxes of $0.2 million, $3.9 million, $4.9 million and $12.3 million, respectively.
During the Successor period and Predecessor period in 2018, we paid $36.6 million and $56.0 million in reorganization items,
respectively.
During the Predecessor period in 2018, the following non-cash financing activities occurred:
· We converted $1.2 billion of liabilities subject to compromise into equity when holders of the Company’s Term Loan B, 2017
Notes and 2020 Notes received an aggregate of 24,416,442 common shares in exchange for their claims.
F-40
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
· We issued approximately $23.6 million aggregate principal amount of Second Lien PIK Notes as a commitment fee to the Ad
Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.
· We issued an aggregate of 2,566,056 common shares as a fee to the Ad Hoc Group for their agreement to backstop the equity
rights offering.
· We incurred approximately $14.6 million in debt and equity financing costs that were unpaid as of November 19, 2018.
Within our consolidated statements of cash flows, capital expenditures represent expenditures for which cash payments were made
during the period. These amounts exclude accrued capital expenditures, which are capital expenditures that were accrued but unpaid.
During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, changes in accrued capital expenditures were
$4.3 million, $1.1 million, $(18.5) million and $(9.0) million, respectively.
Note 23—Related Party Transactions
We have determined that Abrams Capital Management, L.P., Avenue Capital Management II, L.P., Strategic Value Partners, LLC
and certain of their affiliates (the “Principal Shareholders”) meet the definition of related parties under U.S. GAAP. As of December 31,
2018, the Principal Shareholders held $36.1 million of our Second Lien PIK Notes.
During the Predecessor periods in 2018 and 2017, the following related party transactions occurred:
P ursuant to the Global Settlement entered into in August 2018 with QP, and as approved by the Bankruptcy Court, the Company
agreed to reimburse QP up to $13.0 million for fees and out-of-pocket expenses incurred in connection with the Debtors’ Chapter 11
proceedings, of which $12.0 million was recorded in reorganization items in our consolidated statements of operations.
In September 2018, QP purchased $20.0 million in principal amount of our Second Lien PIK Notes in our offering of such notes.
During 2018, we paid QP an aggregate of $0.7 million in director fees for services provided by directors affiliated with QP.
In August 2017, we executed an agreement with QP for the reimbursement or payment of certain legal and advisory fees incurred
by QP and related to its participation in the negotiation of our debt restructuring. During the year ended December 31, 2017, we incurred
fees of $3.2 million under such agreement. This agreement expired by its terms upon our filing of the Bankruptcy Petitions.
Note 24—Summarized Financial Information of Zonda Debtors
The following presents summarized financial information of the Zonda Debtors which were deconsolidated as of November 19,
2018 and accounted for under the equity method in the Successor period in 2018.
F-41
PACIFIC DRILLING S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements―Continued
Pacific Drilling VIII Limited and Pacific Drilling Services, Inc.
Summarized Financial Information
(in thousands)
Intercompany revenues
Costs and expenses
Operating income
Net income
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
(a)
Period From
November 20, 2018
through
December 31, 2018
$
$
1,410
(499)
911
392
December 31,
2018
5,569
213,725
1,864
331,786
(a) Noncurrent liabilities primarily consist of pre-petition intercompany payable.
Note 25—Subsequent Events
On February 22, 2019, our shareholders approved a share repurchase program for a total expenditure of up to $15.0 million for a
two-year period. We may purchase shares in one or several transactions on the open market or otherwise; however, we are not obligated
to repurchase any dollar amount or specific number of common shares under the program. We anticipate that repurchases will be funded
with cash on hand. As of March 1, 2019, we had not repurchased any common shares under this program.
On February 25, 2019, the board of directors approved the issuance of an aggregate 1,232,379 RSUs.
F-42
Exhibit 1.1
Pacific Drilling S.A.
Société Anonyme
Siège social: 8-10, avenue de la Gare, L-1610 Luxembourg
R.C.S. Luxembourg: B159658
STATUTS COORDONNES A LA DATE DU 20 DECEMBRE 2018
Société
constituée
aux
termes
d'un
acte
notarié
en
date
du
11
Mars
2011,
par
Maître
ELVINGER,
notaire
de
résidence
à
Luxembourg,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
numéro
1289
en
date
du
15
juin
2011,
inscrite
auprès
du
Registre
de
Commerce
et
des
Sociétés
de
Luxembourg
sous
le
numéro
B
159658
Modification
établie
suivant
acte
reçu
par
Maître
ELVINGER,
notaire
de
résidence
à
Luxembourg,
le
06
Avril
2011,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
22
Juin
2011
sous
le
numéro
1364
Modification
établie
suivant
acte
reçu
par
Maître
ELVINGER,
notaire
de
résidence
à
Luxembourg,
le
30
Mars
2011,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
30
Juin
2011
sous
le
numéro
1427
Modification
établie
suivant
acte
reçu
par
Maître
Joelle
BADEN,
notaire
de
résidence
à
Luxembourg,
le
14
Novembre
2011,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
28
Décembre
2011
sous
le
numéro
3191
Modification
établie
suivant
acte
reçu
par
Maître
Joelle
BADEN,
notaire
de
résidence
à
Luxembourg,
le
18
Novembre
2011,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
03
Janvier
2012
sous
le
numéro
18
Modification
établie
suivant
acte
reçu
par
Maître
Joseph
ELVINGER,
notaire
de
résidence
à
Luxembourg,
le
20
1
Décembre
2011,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
01
Février
2012
sous
le
numéro
272
Modification
établie
suivant
acte
reçu
par
Maître
Jean
SECKLER,
notaire
de
résidence
à
Junglinster,
le
06
Mars
2014,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
14
Mai
2014
sous
le
numéro
1221
Modification
établie
suivant
acte
reçu
par
Maître
Jean
SECKLER,
notaire
de
résidence
à
Junglinster,
le
02
Mai
2016,
publié
au
Mémorial
C,
Recueil
des
Sociétés
et
Associations,
le
09
Juillet
2016
sous
le
numéro
2015
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établie
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acte
reçu
par
Maître
Jean
SECKLER,
notaire
de
résidence
à
Junglinster,
le
24
Mai
2016,
publié
au
RESA
(Recueil
Électronique
des
Sociétés
et
Associations)
le
08
Juin
2016
sous
le
numéro
RESA_2016_006.147
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établie
suivant
acte
reçu
par
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Danielle
KOLBACH,
notaire
de
résidence
à
Rédange/Attert,
en
date
du
24
Juin
2016,
publié
au
RESA
(Recueil
Électronique
des
Sociétés
et
Associations)
le
14
Juillet
2016
sous
le
numéro
RESA_2016_037.70
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MOUTRIER,
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à
Esch-sur-Alzette,
en
date
du
25
Octobre
2018,
publié
au
RESA
(Recueil
Électronique
des
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Associations)
le
31
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2018
sous
le
numéro
RESA_2018_244.561
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Blanche
MOUTRIER,
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de
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à
Esch-sur-Alzette,
en
date
du
25
Octobre
2018,
publié
au
RESA
(Recueil
Électronique
des
Sociétés
et
Associations)
le
31
Octobre
2018
sous
le
numéro
RESA_2018_244.561
Modifications
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Blanche
MOUTRIER,
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de
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à
Esch-sur-Alzette,
en
date
du
19
novembre
2018,
publié
au
RESA
(Recueil
Électronique
des
Sociétés
et
Associations)
le
26
novembre
2018
sous
le
numéro
RESA_2018_264.277
2
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MOUTRIER,
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de
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à
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en
date
du
20
décembre
2018,
publié
au
RESA
(Recueil
Électronique
des
Sociétés
et
Associations)
le
04
janvier
2019
sous
le
numéro
RESA_2019_004.223
3
I. NAME-REGISTERED OFFICE-OBJECT-DURATION
Art. 1. Name
The name of the company is “ Pacific Drilling S.A. ” (the “ Company” ). The Company is a
public company limited by shares ( société
anonyme
) governed by the laws of the Grand Duchy of
Luxembourg, in particular the law of August 10, 1915, on commercial companies, as amended (the “
Law ”), and these articles of incorporation (the “ Articles ”).
Art. 2. Registered office
2.1. The Company’s registered office is established in Luxembourg, Grand Duchy of
Luxembourg. It may be transferred within that municipality by a resolution of the board of directors
(the “ Board ”). It may be transferred to any other location in the Grand Duchy of Luxembourg by a
resolution of the general meeting of shareholders (the “ General Meeting ”), acting in accordance
with the conditions prescribed for the amendment of the Articles.
2.2. Branches, subsidiaries or other offices may be established in the Grand Duchy of
Luxembourg or abroad by a resolution of the Board. If the Board determines that extraordinary
political or military developments or events have occurred or are imminent, and that those
developments or events may interfere with the normal activities of the Company at its registered
office, or with ease of communication between that office and persons abroad, the registered office
may be temporarily transferred abroad until the developments or events in question have completely
ceased. Any such temporary measures do not affect the nationality of the Company, which,
notwithstanding the temporary transfer of its registered office, will remain a Luxembourg incorporated
company.
Art. 3. Corporate object
3.1. The Company’s object is buying and selling, the chartering in and the chartering out, and
the management of seagoing ships, as well as the financial and commercial operations that relate
directly or indirectly to such activities
4
3.2. In addition, the Company may charter, hold, lease, operate and provide vessels and
equipment used in contract drilling services in oil and gas drilling operations; the Company may also
acquire, hold, manage, sell or dispose of any such related equipment, enter into, assist or participate
in financial, commercial and other transactions relating to contract drilling services.
3.3. In addition, the Company may acquire participations, in Luxembourg or abroad, in any
company or enterprise in any form whatsoever, and the management of those participations. The
Company may in particular acquire, by subscription, purchase and exchange or in any other manner,
any stock, shares and other participation securities, bonds, debentures, certificates of deposit and
other debt instruments and, more generally, any securities and financial instruments issued by any
public or private entity. It may participate in the creation, development, management and control of
any company or enterprise. Further, it may invest in the acquisition and management of a portfolio of
patents or other intellectual property rights of any nature or origin.
3.4. The Company may borrow in any form. It may issue notes, bonds and any kind of debt
and equity securities. It may lend funds, including, without limitation, the proceeds of any borrowings,
to its subsidiaries, affiliated companies and any other companies. It may also give guarantees and
pledge, transfer, encumber or otherwise create and grant security over some or all of its assets to
guarantee its own obligations and those of any other company, and, generally, for its own benefit and
that of any other company or person. For the avoidance of doubt, the Company may not carry out
any regulated financial sector activities without having obtained the requisite authorisation.
3.5. The Company may use any techniques, legal means and instruments to manage its
investments efficiently and protect itself against credit risks, currency exchange exposure, interest
rate risks and other risks.
3.6. The Company may carry out any commercial, financial or industrial operation and any
transaction with respect to real estate or movable property, which directly or indirectly, favours or
relates to its corporate object.
5
Art. 4. Duration
4.1. The Company is formed for an unlimited period.
4.2. The Company is not to be dissolved by reason of the death, suspension of civil rights,
incapacity, insolvency, bankruptcy or any similar event affecting one or more shareholders.
II. CAPITAL – SHARES
Art. 5. Capital
5.1. The share capital is set at eight hundred twenty four thousand nine hundred ninety eight
United States Dollars and twenty seven cents (USD 824,998.27) represented by eighty two million
four hundred ninety-nine thousand eight hundred twenty seven (82,499,827) shares in registered
form, without nominal value.
5.2. The share capital may be increased or reduced once or more by a resolution of the
General Meeting acting in accordance with the conditions prescribed for the amendment of the
Articles.
5.3. The Board is authorized, for a period of five (5) years from the 19 November 2018, without
prejudice to any renewals, to:
(i) increase the current share capital once or more up to eight hundred twenty-five
thousand United States dollars (USD 825,000) (such amount including the current share capital of
the Company) by the issue of new shares having the same rights as the existing shares, or without
any such issue;
(ii) determine the conditions of any such capital increase including through contributions in
cash or in kind, by the incorporation of reserves, issue/share premiums or retained earnings, with or
without issue of new shares to current shareholders or third parties (non-shareholders) or following
the issue of any instrument convertible into shares or any other instrument carrying an entitlement to,
or the right to subscribe for, shares;
(iii) limit or withdraw the shareholders’ preferential subscription rights to the new shares, if
any, and determine the persons who are authorized to subscribe to the new shares; and
6
(iv) record each share capital increase by way of a notarial deed and amend the share
register accordingly.
5.4. Within the limits of article 5.3 of the Articles, the Board is expressly authorized to increase
the Company’s share capital by incorporation of reserves, issue/share premiums or retained earnings
and to issue the additional shares resulting from such capital increase to a beneficiary under any
stock incentive plan as agreed by the Company (such beneficiary being a shareholder of the
Company or not, or, to an entity appointed by the Company as an administrator in connection with
such plan) or under any equity rights offering, private placements or backstop fees. The Company
reserves the right to place transfer and other restrictions on such shares as determined by the
Company pursuant to such stock incentive plan from time to time.
5.5. When the Board has implemented an increase in capital as authorised by article 5.3,
article 5 of the present articles of association shall be amended to reflect that increase.
5.6. The Board is expressly authorised to delegate to any natural or legal person to organise
the market in subscription rights, accept subscriptions, conversions or exchanges, receive payment
for the price of shares or other financial instruments, to have registered increases of capital carried
out as well as the corresponding amendments to article 5 of the present articles of association and to
have recorded in said article 5 of the present articles of association the amount by which the
authorisation to increase the capital has actually been used and, where appropriate, the amounts of
any such increase that are reserved for financial instruments which may carry an entitlement to
shares.
Art. 6. Shares
6.1. The shares are and will remain in registered form (actions nominatives).
6.2. A register of shares is kept at the registered office and may be examined by any
shareholder on request.
6.3. The shares may be entered without serial numbers into fungible securities accounts with
financial institutions or other professional depositaries operating a settlement system in relation to
transactions on securities, dividends, interest, matured capital or other
7
matured monies of securities or of other financial instruments being handled through the system of
such depositary (such systems, professionals or other depositaries being referred to hereinafter as
Depositaries and each a Depositary). The shares held in deposit or in an account with such financial
institution or professional depositary shall be recorded in an account opened in the name of the
depositor and may be transferred from one account to another, whether such account is held by the
same or a different financial institution or depositary. The Board may however impose transfer
restrictions for shares that are registered, listed, quoted, dealt in, or have been placed in certain
jurisdictions in compliance with the requirements applicable therein. The transfer to the register kept
at the Company’s registered office may be requested by a shareholder.
6.4. The Company may consider the person in whose name the registered shares are
registered in the register(s) of Shareholders as the full owner of such registered shares. The
Company shall be completely free from any responsibility in dealing with such registered shares
towards third parties and shall be justified in considering any right, interest or claims of such third
parties in or upon such registered shares to be non-existent, subject, however, to any right which
such third party might have to demand the registration or change in registration of registered shares.
6.5. Where the shares are held with Depositaries through fungible securities accounts within
clearing and settlement systems, the exercise of the voting rights in respect of such shares may be
subject to the internal rules and procedures of those clearing and settlement systems.
6.6. All communications and notices to be given to a registered shareholder shall be deemed
validly made to the latest address communicated by the shareholder to the Company. In the event
that a holder of registered shares does not provide an address to which all notices or announcements
from the Company may be sent, the Company may permit a notice to this effect to be entered into the
register(s) of Shareholders and such holder’s address will be deemed to be at the registered office of
the Company or such other address as may be so entered by the Company from time to time, until a
different address shall be provided to the Company by such holder. The holder may, at any time,
change his address as entered in the register(s) of
8
Shareholders by means of written notification to the Company or the relevant registrar.
6.7. A share transfer of registered shares which are not held through fungible securities
accounts is carried out by the entry in the register of shares of a declaration of transfer, duly signed
and dated by both the transferor and the transferee or their authorized representatives, following a
notification to or acceptance by the Company, in accordance with Article 1690 of the Civil Code. The
Company may also accept other documents recording the agreement between the transferor and the
transferee as evidence of a share transfer.
6.8. The rights and obligations attached to any share shall pass to any transferee thereof.
6.9. The shares are indivisible and the Company recognizes only one (1) owner per share.
6.10. The Company may redeem its own shares using a method approved by the Board which is
in accordance with Luxembourg law and the rules of any stock exchange(s) on which the shares in
the Company are listed from time to time.
6.11. The Company will not issue non-voting equity securities (which shall not be deemed to
include any warrants or options to purchase shares of the Company).
III. MANAGEMENT–REPRESENTATION
Art. 7. Board of directors
7.1. Composition of the board of directors
(i) The Company is managed by the Board. Except as provided in Article 8, the total number
of directors constituting the entire Board shall be seven (7) directors. Directors need not be
shareholders. Except as provided in Article 8, from and after 19 November 2018 (the “ Effective
Time ”) until the occurrence of the Nomination Termination Time (as defined in that certain
Governance Agreement, dated on or about the Effective Time, by and among the Company and the
other shareholders thereto (the “ Governance Agreement ”)), the Board shall be divided into two
classes, hereby
9
designated Class A (composed of four (4) directors) and Class B (composed of three (3) directors),
with all Class A directors and Class B directors elected to terms of one (1) year in length; provided ,
that the initial term of office of the Class A directors following the Effective Time shall expire at the
General Meeting of the shareholders of the Company at which the annual accounts for the 2018
financial year will be approved and the initial term of office of the Class B directors following the
Effective Time shall expire at the General Meeting of the shareholders of the Company at which the
annual accounts for the 2019 financial year will be approved. All directors, whether assigned to Class
A or Class B, shall be elected by the shareholders at the General Meeting in accordance with the Law
and shall have one (1) vote each at all meetings of the Board. From and after the Nomination
Termination Time (as defined in the Governance Agreement), the Board shall cease to be classified
and each director then in office previously designated as a Class A director or Class B director shall
remain in office as a director until his or her term expires or until his or her earlier death, resignation
or removal by the shareholders.
(ii) Directors may be removed at any time, with or without cause, by a resolution of the
General Meeting.
(iii) If a legal entity is appointed as director, it must appoint a permanent representative to
perform its duties. The permanent representative is subject to the same rules and incurs the same
liabilities as if he had exercised its functions in its own name and on its own behalf, without prejudice
to the joint and several liability of the legal entity which it represents.
(iv) Should the permanent representative be unable to perform its duties, the legal entity must
immediately appoint another permanent representative.
(v) If the office of a director becomes vacant, the other directors, acting by a simple majority,
may fill the vacancy on a provisional basis until a new director is appointed by the next General
Meeting.
7.2. Powers of the board of directors
(i) All powers not expressly reserved to the shareholder(s) by the Law or the Articles fall
within the competence of the Board, which
10
has full power to carry out and approve all acts and operations consistent with the Company’s
corporate object.
(ii) The Board may delegate special and limited powers to one or more agents for specific
matters and may also establish committees for certain specific purposes. Such committees may
include, but are not limited to, an audit committee and a compensation committee.
(iii) The Board is authorised to delegate the day-to-day management and the power to
represent the Company in this respect, to one or more directors, officers, managers or other agents,
whether shareholders or not, acting either individually or jointly, provided that, prior to the Nomination
Termination Time (as defined in the Governance Agreement) any appointment, delegation or power-
of-attorney granted in respect of any Acquisition Proposal Matters (as defined in article 7.2(iv)(1)
below), or any revocation of the foregoing, shall only be effective if a Class B Majority (as defined
below) votes in favor of such appointment, delegation or power-of-attorney, or revocation of the
foregoing, as the case may be. If the day-to-day management is delegated to one or more directors,
the Board must report to the annual General Meeting any salary, fee and/or any other advantage
granted to those director(s) during the relevant financial year.
For the avoidance of doubt, it is noted that the following non-exhaustive list of matters shall not
under any circumstances be regarded as coming within the scope of day-to-day management:
Approval of the accounts of the Company
Approval of the annual budget of the Company
Approval of Company policies
Approval of recommendations made by any Board committee
Approval of Acquisition Proposals
(iv) Acquisition Proposals Prior to Nomination Termination Time . The following provisions of
this article 7.2(iv) shall apply until the Nomination Termination Time (as defined in the Governance
Agreement), after which the provisions of this article 7.2(iv) (other than the meanings of any terms
defined herein that are used elsewhere in these Articles) shall have no further force or effect.
11
(1)
Representative
Authority
of
the
Class
B
Directors
Regarding
Acquisition
Proposals
.
Notwithstanding
anything
in
these
Articles
to
the
contrary,
any
two
(2)
Class
B
directors
acting
in
their
capacities
as
such
(a
“
Class
B
Majority
”)
shall
have
the
authority
to
act
on
the
Company’s
behalf
(including
to
bind
the
Company
with
respect
to
clauses
(e)
through
(g))
with
respect
to
the
following
matters:
(a)
to
review
and
evaluate
the
terms
and
conditions
of
any
Acquisition
Proposal,
(b)
to
negotiate
with
any
party
the
Class
B
Majority
deems
appropriate
with
respect
to
any
Acquisition
Proposal;
(c)
to
solicit
prospective
Acquisition
Proposals
and/or
explore
the
ability
to
obtain
on
behalf
of
the
Company
prospective
Acquisition
Proposals,
(d)
to
determine
whether
any
Acquisition
Proposal
is
beneficial
to
the
Company
and
its
shareholders,
(e)
to
make
recommendations
to
the
Board
and
shareholders
as
to
what
actions,
if
any,
should
be
taken
with
respect
to
any
Acquisition,
Acquisition
Contract
or
Acquisition
Proposal,
including
to
recommend
that
the
Board
or
the
shareholders,
as
applicable,
approve
any
Acquisition,
Acquisition
Contract
or
Acquisition
Proposal,
(f)
to
retain,
at
the
Company’s
expense,
such
consultants,
legal
counsel
and
other
advisors
as
a
Class
B
Majority
may
from
time
to
time
deem
appropriate
to
assist
the
Class
B
directors
in
the
performance
of
their
duties
with
respect
to
Acquisition
Proposals,
(g)
subject
to
article
7.2(iv)(2)
below,
to
execute
and
deliver
on
behalf
of
the
Company
definitive
documentation
providing
for
the
consummation
of
an
Acquisition
(an
“
Acquisition
Contract
”)
and
(h)
to
take,
or
to
cause
the
Company
to
take,
any
and
all
actions
ancillary
or
related
to
any
actual
or
prospective
Acquisition
Proposal
or
the
other
matters
referred
to
in
the
preceding
clauses
(a)-(g),
including
without
limitation
to
authorize
and
enter
into
contracts
of
any
nature
(other
than
an
Acquisition
Contract
except
in
accordance
with
article
7.2(iv)(2)
below)
(the
foregoing
clauses
(a)-(h),
“
Acquisition
Proposal
Matters
”).
As
used
herein:
(x)
“
Acquisition
Proposal
”
means
a
proposal
received
by
the
Company,
any
of
its
subsidiaries,
or
any
of
its
or
their
respective
directors,
officers
or
outside
consultants,
counsel
or
other
advisors
providing
for
an
Acquisition;
and
(y)
“
Acquisition
”
means
a
transaction
or
series
of
related
transactions
resulting
in
the
acquisition
(whether
by
merger,
consolidation,
sale
or
transfer
of
the
Company’s
shares,
other
equity
interests
or
assets
or
otherwise)
by
any
natural
or
legal
person
or
group
of
such
persons,
directly
or
indirectly,
(1)
of
a
majority
of
(A)
the
outstanding
shares
of
the
Company
or
(B)
the
assets
of
the
Company
and
its
subsidiaries
12
determined
on
a
consolidated
basis
and
(2)
upon
the
consummation
of
which,
the
shareholders
of
the
Company
immediately
prior
to
such
acquisition
collectively
do
not
own
(beneficially
or
of
record)
a
majority
of
the
voting
power
of
such
person
or
the
ultimate
parent
entity
of
such
person
(or,
in
the
case
of
a
group
of
such
persons,
a
majority
of
the
voting
power
of
the
largest
member
of
such
group,
determined
by
reference
to
the
respective
equity
financing
contributions
of
such
members,
or
ultimate
parent
entity
of
such
largest
member).
(2)
Approval
of
Acquisition
Contracts
.
No
Class
B
director,
acting
singularly
or
with
any
one
or
more
other
Class
B
directors,
shall
have
the
power
to
cause
the
Company
to
enter
into
any
Acquisition
Contract
or
otherwise
consummate
an
Acquisition
unless
such
Acquisition
Contract
(a)
provides
by
its
terms
that
consummation
of
the
Acquisition
that
is
the
subject
thereof
is
conditioned
upon
either
(I)
the
shareholder
vote,
under
the
conditions
of
quorum
and
vote,
required
by
the
Law
or
other
provision
of
these
Articles
for
such
Acquisition
or
(II)
shareholder
approval
by
the
vote
of
a
majority
of
the
outstanding
share
capital,
whichever
voting
standard
in
the
foregoing
clauses
(I)
or
(II)
is
higher
(such
condition,
as
applicable,
a
“
Shareholder
Approval
Condition
”)
and
(b)
does
not
impose
any
obligations
or
penalties
on
the
Company
if
the
Shareholder
Approval
Condition
is
not
obtained
by
the
conclusion
of
the
General
Meeting
or
Extraordinary
General
Meeting,
or
Acquisition
other
than
as
applicable,
reimbursement
of
the
reasonable
expenses
incurred
by
the
counterparty
thereto
(
provided
,
that,
for
avoidance
of
doubt,
this
clause
(b)
shall
not
preclude
the
imposition
of
any
obligation
or
penalty
on
the
Company
due
to
any
cause
or
event
other
than
the
failure
in
and
of
itself
to
satisfy
the
Shareholder
Approval
Condition
at
such
General
Meeting
or
Extraordinary
General
Meeting).
If
a
proposed
Acquisition
Contract
satisfies
clauses
(a)
and
(b)
of
the
immediately
preceding
sentence,
then
a
Class
B
Majority
shall
be
authorized
to
represent
the
Company
by
executing
and
delivering,
or
causing
any
person
authorized
by
the
Class
B
Majority
to
execute
and
deliver,
on
the
Company’s
behalf,
such
Acquisition
Contract,
to
convene
a
General
Meeting
or
an
Extraordinary
General
Meeting,
as
applicable,
to
seek
shareholder
approval
of
the
Acquisition
in
accordance
with
the
Shareholder
Approval
Condition,
and,
if
such
shareholder
approval
is
obtained,
to
carry
out
all
other
powers
vested
under
article
7.2(iv)(1)
above
with
respect
to
such
Acquisition
Contract
convened
to
vote
on
such
Acquisition
Contract
13
(including
to
cause
the
Company
to
consummate
the
Acquisition
and
the
other
transactions
contemplated
thereby
or,
subject
to
the
terms
of
the
Acquisition
Contract,
terminate
such
Acquisition
Contract
and
abandon
such
Acquisition).
(3)
Limitation
on
Representative
Authority
of
the
Class
A
Directors
Regarding
Acquisition
Proposals
.
Notwithstanding
anything
in
these
Articles
to
the
contrary
(but
subject
to
the
last
sentence
of
this
article
7.2(iv)(3)),
no
Class
A
director,
acting
singularly
or
with
any
one
or
more
other
directors,
in
his
or
her
capacity
as
such,
shall
have
any
representative
authority
to
bind
the
Company
or
otherwise
act
on
the
Company’s
behalf,
nor
shall
the
Board
take
any
action,
in
either
case
with
respect
to
any
Acquisition,
Acquisition
Contract
or
Acquisition
Proposal
Matters,
except
with
the
prior
approval
of
a
Class
B
Majority.
Notwithstanding
the
immediately
prior
sentence,
this
article
7.2(iv)(3)
shall
not
be
interpreted
to
limit
the
rights
of
the
Class
A
directors
to
attend
meetings
of
the
Class
B
directors,
receive
information
received
by
the
Class
B
directors
or
to
provide
ongoing
input
to
the
Class
B
directors,
in
each
case,
regarding
Acquisitions,
Acquisition
Contracts,
Acquisition
Proposals
or
other
Acquisition
Proposal
Matters,
and
the
Class
B
directors
shall
so
extend
such
rights
to
the
Class
A
directors.
(4)
Amendments
to
Article
7.2(iv)
.
Notwithstanding
anything
to
the
contrary
in
these
Articles,
the
Board
shall
not
propose
to
the
shareholders
or
recommend
that
the
shareholders
approve
any
amendment
to
this
article
7.2(iv)
and/or
any
other
provisions
of
these
Articles
directly
or
indirectly
amending
or
limiting
the
application
of
this
article
7.2(iv)
without
the
favorable
vote
of
a
Class
B
Majority.
7.3. Procedure
(i) The Board must appoint a chairperson from among its members, and may choose a
secretary who need not be a director and who will be responsible for keeping the minutes of the
meetings of the Board and of General Meetings.
(ii) The Board meets at the request of the chairperson or the majority of the Board of directors,
at the place indicated in the notice, which in principle is in Luxembourg.
(iii) Written notice of any Board meeting is given to all directors at least twenty-four (24) hours
in advance, except in the case of an
14
emergency whose nature and circumstances are set forth in the notice.
(iv) No notice is required if all members of the Board are present or represented and state that
they know the agenda for the meeting. A director may also waive notice of a meeting, either before or
after the meeting. Separate written notices are not required for meetings which are held at times and
places indicated in a schedule previously adopted by the Board.
(v) A director may grant another director a power of attorney in order to be represented at any
Board meeting.
(vi) Save as otherwise provided herein, the Board may only validly deliberate and act if a
majority of its members are present or represented. Save as otherwise provided herein, Board
Resolutions are validly adopted if the majority of the members of the Board vote in their favour. The
chairman has a casting vote in the event of a tie vote. Board resolutions are recorded in minutes
signed by the chairperson, by all directors present or represented at the meeting, or by the secretary
(if any).
(vii) Any director may participate in any meeting of the Board by telephone or video conference,
or by any other means of communication which allows all those taking part in the meeting to identify,
hear and speak to each other. Participation by such means is deemed equivalent to participation in
person at a duly convened and held meeting.
(viii) Circular resolutions signed by all the directors (the “ Directors’ Circular Resolutions ”)
are valid and binding as if passed at a duly convened and held Board meeting, and bear the date of
the last signature.
(ix) A director who has an interest in a transaction carried out other than in the ordinary course
of business which conflicts with the interests of the Company must advise the Board accordingly and
have the statement recorded in the minutes of the meeting. The director concerned may not take part
in the deliberations concerning that transaction. A special report on the relevant transaction is
submitted to the shareholders at the next General Meeting, before any vote on the matter.
15
7.4. Representation
(i) The Company is bound towards third parties (a) prior to the Nomination Termination Time
(as defined in the Governance Agreement), by the joint signature of any two Class B directors, with
respect to Acquisition Proposal Matters or an Acquisition Contract; and (b) in all other matters, by the
joint signature of the majority of the Board.
(ii) The Company is also bound towards third parties by the joint or single signature of any
person to whom special signatory powers have been delegated by the Board or, prior to the
Nomination Termination Time (as defined in the Governance Agreement) with respect to Acquisition
Proposal Matters or an Acquisition Contract, by a Class B Majority.
Art. 8. Sole director
8.1. Where the number of shareholders is reduced to one (1), the Company may be managed
by a single director until the ordinary General Meeting following the introduction of an additional
shareholder. In this case, any reference in the Articles to the Board or the directors should be read as
a reference to that sole director, as appropriate.
8.2. Transactions entered into by the Company which conflict with the interest of its sole
director must be recorded in minutes. This does not apply to transactions carried out under normal
circumstances in the ordinary course of business.
8.3. The Company is bound towards third parties by the signature of the sole director or by the
joint or single signature of any person to whom the sole director has delegated special signatory
powers.
Art. 9. Liability of the directors
9.1. The directors may not be held personally liable by reason of their mandate for any
commitment they have validly made in the name of the Company’s name, provided those
commitments comply with the Articles and the Law.
16
Art. 10. Directors’ Remuneration
10.1. The remuneration of the board of directors will be decided by the General Meeting.
10.2. The Company shall, to the fullest extent permitted by Luxembourg law, indemnify any
director or officer, as well as any former director or officer, against any damages and/or
compensation to be paid and any costs, charges and expenses, reasonably incurred by him in
connection with the defense or settlement of any civil, criminal or administrative action, suit or
proceeding to which he may be made a party by reason of his being or having been a director or
officer of the Company, if (i) he acted honestly and in good faith, and (ii) in the case of criminal or
administrative proceedings,
was
lawful. Notwithstanding the foregoing, the current or former director or officer will not be entitled to
indemnification in case of an action, suit or proceeding brought against him by the Company or in
case he shall be finally adjudged in an action, suit or proceeding to be liable for gross negligence,
willful misconduct, fraud, dishonesty or any other criminal offence.
he had reasonable grounds for believing that
conduct
Furthermore, in case of settlement, the current or former director or officer will only be entitled to
indemnification hereunder, provided that (i) the Board shall have determined in good faith that the
defendant’s actions did not constitute willful and deliberate violations of the law and shall have
obtained the relevant legal advice to that effect; and (ii) notice of the intention of settlement of such
action, suit or proceeding is given to the Company at least 10 business days prior to such settlement,
IV. SHAREHOLDER(S)
Art. 11. General meetings of shareholders
11.1. Powers and voting rights
(i) Resolutions of the shareholders are adopted at a general meeting of shareholders (the “
General Meeting ”). The General Meeting has full powers to adopt and ratify all acts and operations
which are consistent with the company’s corporate object.
(ii) Each share gives entitlement to one (1) vote.
17
11.2. Notices, quorum, majority and voting proceedings
(i) General Meetings are held at the time and place specified in the notices.
(ii) The notices for any ordinary General Meeting or extraordinary General Meeting shall
contain the agenda, the hour and the place of the meeting and shall be sent to the registered
shareholders at least eight (8) days before the General Meeting, without prejudice to other means of
communication which need to be accepted on an individual basis by their addresses and to warrant
notification.
(iii) lf all the shareholders are present or represented and consider themselves duly convened
and informed of the agenda, the General Meeting may be held without prior notice.
(iv) A shareholder may grant written power of attorney to another person, shareholder or
otherwise, in order to be represented at any General Meeting.
(v) In connection with any General Meeting, the Board is authorized, but is not required, to
make provision for shareholders to participate by means of remote communication. If the Board shall
have made such provision, a shareholder’s participation by means of remote communication shall be
deemed equivalent to participation in person at the meeting.
(vi) Any shareholder may vote by using the forms provided to that effect by the Company.
Voting forms contain the date, place and agenda of the meeting and the text of the proposed
resolutions. For each resolution, the form must contain three boxes allowing for a vote for or against
that resolution or an abstention. Shareholders must return the voting forms to the registered office.
Only voting forms received prior to the General Meeting are taken into account for calculation of the
quorum. Forms which indicate neither a voting intention nor an abstention are void.
(vii) Resolutions of the General Meeting are passed by a simple majority vote, regardless of the
proportion of share capital represented.
(viii) An extraordinary General Meeting (“ Extraordinary General Meeting ”) may only amend
the Articles if at least one-half of the share capital is represented and the agenda indicates the
proposed
18
amendments to the Articles, including the text of any proposed amendment to the Company’s object
or form. If this quorum is not reached, a second Extraordinary General Meeting may be convened by
means of notices published twice in the Memorial and two Luxembourg newspapers, at an interval of
at fifteen (15) days and fifteen (15) days before the meeting. These notices state the date and
agenda of the Extraordinary General Meeting and the results of the previous Extraordinary General
Meeting. The second Extraordinary General Meeting deliberates validly regardless of the proportion
of capital represented. At both Extraordinary General Meetings, resolutions must be adopted by at
least two-thirds of the votes cast.
(ix) Any change in the nationality of the Company and any increase in a shareholder’s
commitment in the Company require the unanimous consent of the shareholders and bondholders (if
any).
Art. 12. Procedure
12.1. Every General Meeting will be presided over by the chairperson of the Board appointed
pursuant to article 7.3(i) or, in the absence of the chairperson, any other director or officer of the
Company designated by the Board. The secretary appointed pursuant to article 7.3(i) or, in the
absence of such secretary, any other director or officer of the Company designated by the Board,
shall act as secretary at each General Meeting. In connection with each General Meeting, the Board
or, in the absence of a determination by the Board, the person presiding over the General Meeting
shall appoint a scrutineer who shall keep the attendance list.
12.2. In connection with each General Meeting, the Board is authorized to provide such rules of
deliberations and such conditions for allowing shareholders to take part in the meeting as the Board
deems appropriate. Except to the extent inconsistent with the rules and conditions as adopted by the
Board, the person presiding over the meeting shall have the power and authority to prescribe such
additional rules and conditions and to do all such acts as, in the judgment of such person, are
appropriate for the proper conduct of the meeting. Such rules and conditions, whether adopted by
the Board or prescribed by the person presiding over the meeting, may include, in each case to the
extent permitted by applicable law, (a) determining the order of business for the meeting, (b) rules
and
19
procedures for maintaining order at the meeting and the safety of those present, (c) limitations on
attendance at or participation in the meeting to shareholders of record, their duly authorized and
constituted attorneys or such other persons as the person presiding over the meeting shall determine,
(d) restrictions on entry to the meeting after the time fixed for the commencement thereof and (e)
limitations on the time allotted to questions or comments by participants.
12.3. Without limiting the generality of article 12.2 and irrespective of the agenda, the Board or
the person presiding over the meeting may adjourn any ordinary General Meeting or Extraordinary
General Meeting in accordance with the formalities and time limits stipulated for by law.
12.4. Minutes of the General Meetings shall be signed by the members of the board of the
meeting. Copies or excerpts of the minutes to be produced in court or elsewhere shall be signed by
two (2) directors or by the secretary of the Board or by any assistant secretary.
12.5. Notwithstanding anything to the contrary in these Articles and in addition to any greater or
lesser vote required by the Law, other provision of these Articles, the applicable Acquisition Contract
or otherwise, the Company shall not have the power or authority to consummate a transaction
satisfying clause (1)(B) of the definition of Acquisition without the prior approval of shareholders (such
approval obtained by the vote of a majority of the outstanding share capital).
Art. 13. Sole shareholder
13.1. When the number of shareholders is reduced to one (1), the sole shareholder exercises all
powers granted by the Law to the General Meeting.
13.2. Any reference to the General Meeting in the Articles is to be read as a reference to the
sole shareholder, as appropriate.
13.3. The resolutions of the sole shareholder are recorded in minutes.
20
V. ANNUAL ACCOUNTS - ALLOCATION OF PROFITS – SUPERVISION
Art. 14. Financial year and approval of annual accounts
14.1. The financial year begins on 1 January and ends on 31 December of each year.
14.2. The Board prepares the balance sheet and profit and loss account annually, together with
an inventory stating the value of the Company’s assets and liabilities, with an annex summarising its
commitments and the debts owed by its officers, directors and statutory auditors to the Company.
14.3. One month before the Annual General Meeting, the Board provides the statutory auditors
with a report on and documentary evidence of the Company’s operations. The statutory auditors then
prepare a report stating their findings and proposals.
14.4. The Annual General Meeting is held at the registered office or in any other place within the
municipality of the registered office, as specified in the notice, on the fourth Tuesday in May at 10.00
a.m. If that day is a public holiday or the day following a public holiday in the United States of
America, the Annual General Meeting shall be held on the Tuesday of the following week.
14.5. The annual General Meeting may be held abroad if, in the Board’s, absolute and final
judgement, exceptional circumstances so require.
Art. 15. Auditors
15.1. The Company’s operations are supervised by one or more statutory auditors (
commissaires
).
15.2. When so required by law, or when the Company so chooses, the Company’s operations
are supervised by one or more approved external auditors ( réviseurs
d’entreprises
agréés
) .
15.3. The General Meeting appoints the statutory auditors ( commissaires
)/ external auditors (
réviseurs
d’entreprises
agréés
), and determines their number and remuneration and the term of their
mandate, which may not exceed six (6) years but may be renewed.
21
Art. 16. Allocation of profits
16.1. Five per cent (5%) of the Company’s annual net profits are allocated to the reserve
required by law. This requirement ceases when the legal reserve reaches an amount equal to ten per
cent (10%) of the share capital.
16.2. The General Meeting determines the allocation of the balance of the annual net profits.
They may decide on the payment of a dividend, to transfer the balance to a reserve account, or to
carry it forward in accordance with the applicable legal provisions.
16.3. Interim dividends may be distributed at any time, under the following conditions:
(i) the Board draws up interim accounts;
(ii) the interim accounts show that sufficient profits and other reserves (including share
premiums) are available for distribution; it being understood that the amount to be distributed may not
exceed the profits made since the end of the last financial year for which the annual accounts have
been approved, if any, increased by profits carried forward and distributable reserves, and reduced
by losses carried forward and sums to be allocated to the legal or a statutory reserve;
(iii) the decision to distribute interim dividends is made by the Board within two (2) months
from the date of the interim accounts.
In their report to the Board, the statutory auditors ( commissaires
) or the approved external
auditors ( réviseurs
d’entreprises
agréés
), as applicable, must verify whether the above conditions
have been satisfied.
The Company may make payment of dividends and any other payments in cash, shares or other
securities to a Depositary. Said Depositary shall distribute these funds to his depositors according to
the amount of securities or other financial instruments recorded in their name. Such payment by the
Company to the Depositary will effect full discharge of the Company’s obligations in this regard.
VI. DISSOLUTION – LIQUIDATION
17.1. The Company may be dissolved at any time by a resolution of the General Meeting, acting
in accordance with the conditions prescribed for the amendment of the Articles. The General Meeting
appoints one or more liquidators, who need not be shareholders, to
22
carry out the liquidation, and determines their number, powers and remuneration. Unless otherwise
decided by the General Meeting, the liquidators have full powers to realise the Company’s assets and
pay its liabilities.
17.2. The surplus after realisation of the assets and payment of the liabilities is distributed to the
shareholders in proportion to the shares held by each of them.
VII. GENERAL PROVISION
18.1. Notices and communications may be made or waived and circular resolutions may be
evidenced in writing, fax, email or any other means of electronic communication.
18.2. Powers of attorney are granted by any of the means described above. Powers of attorney
in connection with Board meetings may also be granted by a director, in accordance with such
conditions as may be accepted by the Board.
18.3. Signatures may be in handwritten or electronic form, provided they fulfil all legal
requirements for being deemed equivalent to handwritten signatures. Signatures of circular
resolutions or resolutions adopted by telephone or video conference are affixed to one original or
several counterparts of the same document, all of which taken together constitute one and the same
document.
18.4. All matters not expressly governed by these Articles shall be determined in accordance
with the applicable law and, subject to any non-waivable provisions of the law, with any agreement
entered into by the shareholders from time to time.
23
All subsidiaries are, indirectly or directly, wholly-owned by Pacific Drilling S.A. except as indicated below.
Subsidiaries
Exhibit 8.1
Entity
Pacific Drilling do Brasil Investimentos Ltda.
Pacific Drilling do Brasil Serviços de Perfuração Ltda.
Pacific Drilling Services Pte. Ltd.
Pacific International Drilling West Africa Limited
Pacific Drilling Netherlands Coöperatief U.A.
Pacific Drilling N.V.
Pacific Drilling Administrator Limited
Pacific Deepwater Construction Limited
Pacific Drilling International Ltd.
Pacific Drilling Manpower Ltd.
Pacific Drilling Operations Limited
Pacific Drilling South America 1 Limited
Pacific Drilling South America 2 Limited
Pacific Drilling V Limited
Pacific Drilling VII Limited
Pacific Drilling VIII Limited
Pacific Drillship Nigeria Limited
Pacific Santa Ana Limited
Pacific Sharav Korlátolt Felelősségű Társaság
Pacific Bora Ltd.
Pacific Mistral Ltd.
Pacific Scirocco Ltd.
Pacific Drilling Limited
Pacific Drilling, Inc.
Pacific Drilling International, LLC
Pacific Drilling Services, Inc.
Pacific Drilling Manpower, Inc.
Pacific Drilling Operations, Inc.
Pacific Drilling, LLC
Pacific Drilling Finance S.à r.l.
Pacific Drillship S.à r.l.
Pacific Drilling Manpower S.à r.l.
Pacific Sharav S.à r.l.
Pacific Drilling (Gibraltar) Limited
Pacific Drillship (Gibraltar) Limited
Pacific Drilling Holding (Gibraltar) Limited
Jurisdiction of Formation
Brazil
Brazil
Singapore
Nigeria
(1)
The Netherlands
Curacao
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
British Virgin Islands
(2 )
British Virgin Islands
Hungary
Liberia
(3 )
Liberia
Liberia
(3 )
Liberia
USA, Delaware
USA, Delaware
USA, Delaware
USA, Delaware
USA, Delaware
USA, New York
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Gibraltar
Gibraltar
Gibraltar
Pacific Santa Ana (Gibraltar) Limited
_________________
(1) 49% owned by Pacific Drilling Operations Limited. The remaining 51% is owned by Derotech Offshore Services Limited.
(2) 99.9% owned by Pacific International Drilling West Africa Limited, and .1% owned by Pacific Drilling Limited.
(3) 49.9% owned by Pacific Drilling Limited. The remaining 50.1% is owned by Pacific Drillship Nigeria Limited.
Gibraltar
Exhibit 12.1
I, Bernie G. Wolford Jr., certify that:
1.
I have reviewed this annual report on Form 20‑F of Pacific Drilling S.A.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in
this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a‑15(f) and 15d‑15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal
control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Date: March 12, 2019
By:
Name:
Title:
/s/ Bernie G. Wolford Jr.
Bernie G. Wolford Jr.
Chief Executive Officer
Exhibit 12.2
I, Johannes P. Boots, certify that:
1.
I have reviewed this annual report on Form 20‑F of Pacific Drilling S.A.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in
this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a‑15(f) and 15d‑15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal
control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Date: March 12, 2019
By:
Name:
Title:
/s/ Johannes P. Boots
Johannes P. Boots
Chief Financial Officer
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code), I, Bernie G. Wolford Jr., Chief Executive Officer, hereby certify, to my knowledge, that:
1.
2.
the Company’s annual report on Form 20‑F for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Exhibit 13.1
Date: March 12, 2019
By:
Name:
Title:
/s/ Bernie G. Wolford Jr.
Bernie G. Wolford Jr.
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code), I, Johannes P. Boots, Chief Financial Officer, hereby certify, to my knowledge, that:
1.
2.
the Company’s annual report on Form 20‑F for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Exhibit 13.2
Date: March 12, 2019
By:
Name:
Title:
/s/ Johannes P. Boots
Johannes P. Boots
Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.1
The Board of Directors
Pacific Drilling S.A.:
We consent to the incorporation by reference in the registration statement (No. 333-228582) on Form S-8 of Pacific Drilling S.A. of our
report dated March 12, 2019, with respect to the consolidated balance sheets of Pacific Drilling S.A. and subsidiaries (the Company) as of
December 31, 2018 (Successor) and 2017 (Predecessor), the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for the periods of November 20, 2018 to December 31, 2018 (Successor), January 1, 2018 to
November 19, 2018 (Predecessor), and for the years ended December 31, 2017 and 2016 (Predecessor), and the related notes
(collectively, the “consolidated financial statements”), which report appears in the December 31, 2018 annual report on Form 20-F of
Pacific Drilling S.A.
Our report on the consolidated financial statements refers to a new basis of presentation in connection with the Company’s plan for
reorganization under Chapter 11, which became effective on November 19, 2018.
Houston, Texas
March 12, 2019
/s/ KPMG LLP
Exhibit 15.4
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
PACIFIC DRILLING VIII LIMITED, et
al.,
Debtors.
1
:
: Chapter 11
:
: Case No. 17-13203 (MEW)
:
:
:
(Jointly Administered)
AMENDED JOINT PLAN OF LIQUIDATION/REORGANIZATION
FOR PACIFIC DRILLING SERVICES INC. AND PACIFIC DRILLING VIII
LIMITED PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE
Albert Togut
Frank A. Oswald
Kyle J. Ortiz
Amanda C. Glaubach
TOGUT, SEGAL & SEGAL LLP
One Penn Plaza
New York, New York 10119
(212) 594-5000
Attorneys
for
the
Zonda
Plan
Debtors
Dated: January 22, 2019
New York, New York
1
The Zonda Plan Debtors in these chapter 11 cases, and if applicable, the last four digits of their U.S. taxpayer identification numbers are: Pacific
Drilling VIII Limited and Pacific Drilling Services, Inc. (5302).
TABLE OF CONTENTS
ARTICLE I
DEFINED TERMS AND RULES OF INTERPRETATION
ARTICLE II
ADMINISTRATIVE EXPENSE AND PRIORITY CLAIMS
2.1
2.2
2.3
Administrative Claims
Priority Tax Claims
Professional Fee Claims
ARTICLE III
CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
3.1
3.2
3.3
3.4
3.5
Classification in General
Summary of Classification
Treatment of Classes
Alternative Treatment
Special Provision Regarding Unimpaired Claims
ARTICLE IV
ACCEPTANCE OR REJECTION OF THIS PLAN
4.1
4.2
4.3
4.4
Acceptance by Class Entitled to Vote
Presumed Acceptance of this Plan
Elimination of Classes
Cramdown
ARTICLE V
MEANS FOR IMPLEMENTATION OF THIS PLAN IF THE ZONDA PLAN DEBTORS
PREVAIL IN THE ZONDA ARBITRATION
5.1
5.2
Continued Corporate Existence and Vesting of Assets
Sources of Cash for Distributions and Operations
i
Page
19
20
20
20
21
22
27
27
28
28
28
28
28
29
5.3
5.4
5.5
5.6
5.7
Restructuring Transactions.
Intercompany Claims.
Effectuating Documents; Further Transactions
Exemption from Certain Transfer Taxes and Recording Fees
Enforcement of Zonda Arbitration Award Against SHI.
ARTICLE VI
MEANS FOR IMPLEMENTATION OF THIS PLAN IF THE ZONDA PLAN DEBTORS
DO NOT PREVAIL IN THE ZONDA ARBITRATION
Continued Corporate Existence and Vesting of Assets in the Liquidation Trust.
Sources of Cash for Payment of Claims
Creation of the Liquidation Trust and Appointment of the Liquidation Trustee.
General Powers, Rights, and Responsibilities of the Liquidation Trustee.
Indemnification.
Issuance of Liquidation Trust Interests.
Federal Income Tax Treatment of the Liquidation Trust.
Liquidation Trust Funding.
Creation of the Liquidation Trust Funding Amount Escrow Account.
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10 Effectuating Documents; Further Transactions.
6.11 Dissolution.
6.12 Certain Securities Laws Matters.
ARTICLE VII
CORPORATE GOVERNANCE
7.1
7.2
7.3
7.4
7.5
7.6
Cancellation of Existing Securities and Agreements
Cancellation of Certain Existing Security Interests.
Preservation of Retained Actions
Corporate Action
Board of Directors and Officers.
Further Authorization.
ii
30
30
30
31
31
32
32
32
34
35
36
36
37
38
38
38
39
39
40
40
41
41
41
ARTICLE VIII
DISTRIBUTIONS
Distributions from Liquidation Trust to Holders of Allowed Zonda Deficiency Claims.
Distributions Generally
No Postpetition Interest on Claims
Date of Distributions
Distribution Record Date
Disbursing Agent
Delivery of Distributions
Unclaimed Property
Satisfaction of Claims
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10 Manner of Payment Under Plan
8.11 De Minimis Cash Distributions
8.12 No Distribution in Excess of Amount of Allowed Claim
8.13 Allocation of Distributions Between Principal and Interest
8.14 Setoffs and Recoupments
8.15 Rights and Powers of Disbursing Agent
8.16 Withholding and Reporting Requirements
8.17 Claims Paid or Payable by Third Parties
ARTICLE IX
PROCEDURES FOR DISPUTED CLAIMS
9.1
9.2
9.3
9.4
9.5
9.6
Allowance of Claims
Objections to Claims
Estimation of Claims
No Distributions Pending Allowance
Resolution of Claims
Disallowed Claims
ARTICLE X
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
10.1 Rejection of Executory Contracts and Unexpired Leases
10.2
Indemnification
iii
41
41
42
42
42
42
42
43
43
43
43
43
43
44
44
45
45
46
47
47
48
48
48
49
49
10.3 Claims Based on Rejection of Executory Contracts and Unexpired Leases.
10.4 Reservation of Rights.
ARTICLE XI
CONDITIONS PRECEDENT TO CONFIRMATION
AND CONSUMMATION OF THIS PLAN
11.1 Conditions Precedent to Confirmation of the Plan
11.2 Conditions Precedent to the Effective Date
11.3 Waiver of Conditions Precedent
ARTICLE XII
EFFECT OF PLAN CONFIRMATION
Injunction
12.1 Binding Effect
12.2 Releases and Related Matters
12.3 Discharge of the Zonda Plan Debtors
12.4
12.5 Exculpation and Limitation of Liability
12.6 Term of Bankruptcy Injunction or Stays
12.7 Post-Confirmation Date Retention of Professionals
12.8 Dissolution of PDVIII; Cooperation of Liquidation Trustee.
ARTICLE XIII
RETENTION OF JURISDICTION
13.1 Retention of Jurisdiction.
13.2
13.3 No Limitation on Enforcement by SEC on Non-Debtors.
Jurisdiction for Certain Other Agreements
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14.1 Payment of Statutory Fees
14.2 Amendment or Modification of this Plan
14.3 Substantial Consummation
14.4 Severability of Plan Provisions
14.5 Successors and Assigns
iv
50
50
51
51
52
52
53
56
57
57
58
58
58
58
60
60
61
61
61
61
61
Immediate Binding Effect
14.6 Revocation, Withdrawal, or Non-Consummation
14.7 Governing Law
14.8 Time
14.9
14.10 Entire Agreement
14.11 Notice
14.12 Exhibits
14.13 Filing of Additional Documents
14.14 Conflicts
v
62
62
62
62
63
63
64
64
65
INTRODUCTION
Pacific Drilling VIII Limited (BVI) (“ PDVIII
”) and Pacific Drilling Services Inc. (US) (“ PDSI
”), as
debtors and debtors in possession (the “ Zonda
Plan
Debtors
”), propose the following joint plan of reorganization for the
resolution of the outstanding Claims against and Interests in the Zonda Plan Debtors. Subject to certain restrictions and
requirements set forth in section 1127 of the Bankruptcy Code and Bankruptcy Rule 3019, the Zonda Plan Debtors reserve
the right to alter, amend, modify, revoke, or withdraw this Plan, with the consent of SHI, prior to its substantial
consummation.
ARTICLE I
DEFINED TERMS AND RULES OF INTERPRETATION
Defined
Terms
. As used herein, capitalized terms shall have the meanings set forth below. Any term that is
not otherwise defined herein, but that is used in the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning
given to that term in the Bankruptcy Code or the Bankruptcy Rules, as applicable.
1. 1 2017
Noteholders
means, collectively, the record holders of and owners of beneficial interests in the
2017 Notes.
1. 2 2017
Notes
means those certain 7.250% senior secured notes due 2017 issued by PDV pursuant to
that certain Indenture
dated November 28, 2012 among PDV as issuer, PDSA as guarantor, and Deutsche Bank Trust
Company Americas, in its capacity as indenture trustee.
1. 3 2020
Noteholders
means, collectively, the record holders of and owners of beneficial interests in the
2020 Notes.
1. 4 2020
Notes
means those certain 5.375% senior secured notes due 2020 issued by PDSA on June 3,
2013 pursuant to that certain Indenture
dated June 3, 2013 among PDSA, Pacific Drilling, Inc.; Pacific Drilling Finance S.à
r.l.; Pacific Drilling Limited; Pacific Drillship S.à r.l.; Pacific Scirocco Ltd.; Pacific Bora Ltd.; Pacific Mistral
Ltd.; Pacific Santa Ana (Gibraltar) Limited; Pacific Santa Ana S.à r.l.; and Pacific Drillship Nigeria Limited, PIDWAL,
and Deutsche Bank Trust Company Americas in its capacity as indenture trustee.
1. 5 Accrued
Professional
Compensation
means, at any date, and regardless of whether such amounts
are billed or unbilled, all of a Professional’s accrued and unpaid fees (including success fees) and reimbursable expenses for
services rendered in the Chapter 11 Cases through and including such date, whether or not such
Professional has filed a fee application for payment of such fees and expenses, (a) all to the extent that any such fees and
expenses have not been previously paid (regardless of whether a fee application has been filed for any such amount) and (b)
after applying any retainer that has been provided by the Zonda Plan Debtors to such Professional and not previously
applied. No amount of a Professional’s fees and expenses denied under a Final Order shall constitute Accrued Professional
Compensation.
1. 6 Ad
Hoc
Group
means those certain 2017 Noteholders, 2020 Noteholders, and Term Loan B Lenders
identified in the Fifth
Amended
Verified
Statement
of
the
Ad
Hoc
Group
of
Debtholders
Pursuant
to
Bankruptcy
Rule
2019
dated September 17, 2018 [Docket No. 596].
1
1. 7 Administrative
Claim
means a Claim for costs and expenses of administration of the Chapter 11
Cases under sections 328, 330, 363, 364(c)(1), 365, 503(b), or 507(b) of the Bankruptcy Code, including, but not limited
to: (a) any actual and necessary costs and expenses, incurred on or after the Petition Date and through the Effective Date, of
preserving the Estates and operating the businesses of the Zonda Plan Debtors; (b) Professional Fee Claims; (c) all fees
and charges assessed against the Estates under chapter 123 of title 28 of the United States Code; and (d) all other Claims
entitled to administrative Claim status pursuant to an order of the Bankruptcy Court.
1. 8 Affiliate
means, with respect to any Person, “affiliate” as defined in section 101(2) of the
Bankruptcy Code.
1. 9 Allowed
means, with respect to a Claim against any Zonda Plan Debtor, except as otherwise
provided herein, (a) a Claim that is (i) listed in the Schedules as of the Effective Date as neither disputed, contingent, nor
unliquidated, and for which no Proof of Claim has been timely filed, or (ii) evidenced by a valid Proof of Claim or request
for payment of Administrative Claim, as applicable, filed by the applicable Bar Date or Administrative Claims Bar Date,
and as to which the Zonda Plan Debtors or other parties in interest have not filed an objection to the allowance thereof by
the Claims Objection Deadline, or (b) a Claim that is Allowed under this Plan or any stipulation or settlement approved by,
or Final Order of, the Bankruptcy Court; provided
, however
, that any Claims allowed solely for the purpose of voting to
accept or reject this Plan pursuant to an order of the Bankruptcy Court will not be considered “Allowed Claims” under this
Plan. Notwithstanding the foregoing, a Claim shall not be Allowed and shall not be entitled to a distribution under this Plan
to the extent it has been
1
References to docket numbers in this Plan refer to Pacific
Drilling
S.A.,
et
al.,
Case No. 17-13193, unless otherwise specified.
2
satisfied prior to the Effective Date. If a Claim is Allowed only in part, references to Allowed Claims include and are
limited to the Allowed portion of such Claim. Notwithstanding anything to the contrary herein, no Claim that is disallowed
in accordance with Bankruptcy Rule 3003 or section 502(d) of the Bankruptcy Code is Allowed and each such Claim shall
be expunged without further action by the Zonda Plan Debtors and without further notice to any party or action, approval, or
order of the Bankruptcy Court.
1. 10 Amended
By-Laws
means, with respect to a Reorganized Zonda Debtor, where applicable, such
Reorganized Zonda Debtor’s amended or amended and restated by-laws or operating agreement, a substantially final form
of which will be contained in the Plan Supplement to the extent they contain material changes to the existing documents.
1. 11 Amended
Certificate
of
Incorporation
means, with respect to each Reorganized Zonda Debtor,
where applicable, such Reorganized Zonda Debtor’s amended or amended and restated certificate of incorporation, or
certificate of formation, a substantially final form of which will be contained in the Plan Supplement to the extent they
contain material changes to the existing documents.
1. 12 Assumed
Contracts
means those Executory Contracts and Unexpired Leases to be assumed by the
applicable Reorganized Zonda Debtors pursuant to the Plan.
1. 13 Avoidance
Action
means any claim or Cause of Action of an Estate arising out of or maintainable
pursuant to sections 510, 541, 542, 543, 544, 545, 547, 548, 549, 550, 551, or 553 of the Bankruptcy Code or under any
other similar applicable law, regardless of whether or not such action has been commenced prior to the Effective Date.
1. 14 Ballot
means each of the ballot forms distributed to each Holder of a Claim that is entitled to vote to
accept or reject this Plan and on which the Holder is to indicate, among other things, acceptance or rejection of this Plan.
1. 15 Bankruptcy
Code
means title 11 of the United States Code, as now in effect or hereafter amended,
to the extent such amendments apply to the Chapter 11 Cases.
1. 16 Bankruptcy
Court
means the United States Bankruptcy Court for the Southern District of New
York.
3
1. 17 Bankruptcy
Rules
means the Federal Rules of Bankruptcy Procedure and the local rules of the
Bankruptcy Court, as now in effect or hereafter amended.
1. 18 Bar
Date
means, as applicable: (a) the General Bar Date; (b) the later of (i) the General Bar Date
and (ii) 5:00 p.m. (prevailing Eastern Time) on the date that is thirty (30) days after entry of a Bankruptcy Court order
pursuant to which Executory Contracts or Unexpired Leases are rejected for Claims arising from such rejected agreements;
(c) the later of (i) the General Bar Date and (ii) 5:00 p.m. (prevailing Eastern Time) on the date that is thirty (30) days after
the date that notice of any applicable amendment or supplement to the Schedules is served on a claimant for those Claims
affected by any such amendment or supplement to the Schedules; and (d) May 11, 2018 at 5:00 p.m. (prevailing Eastern
Time) for Governmental Units.
1. 19 Bar
Date
Order
means the Order
Establishing
Bar
Dates
for
Filing
Proofs
of
Claim
and
Approving
Form
and
Manner
of
Notice
Thereof
[Docket No. 253].
1. 20 Business
Day
means any day, other than a Saturday, Sunday, or “legal holiday” (as defined in
Bankruptcy Rule 9006(a)).
1. 21 Cash
means legal tender of the United States of America and equivalents thereof.
1. 22 Cause
of
Action
means any action, proceeding, agreement, Claim, cause of action, controversy,
demand, debt, right, action, Avoidance Action, Lien, indemnity, guaranty, suit, obligation, liability, damage, judgment,
account, defense, offset, power, privilege, recoupment, cross-claim, counterclaim, third-party claim, indemnity claim,
contribution claim, or any other claim, known or unknown, contingent or non-contingent, matured or unmatured, suspected
or unsuspected, liquidated or unliquidated, disputed or undisputed, secured or unsecured, assertable directly or derivatively,
whether pending in litigation or otherwise, in contract or in tort, in law or in equity or pursuant to any other theory of law,
based in whole or in part upon any act or omission or other event occurring prior to the Effective Date.
1. 23 Chapter
11
Case(s)
means (a) when used with reference to a particular Zonda Plan Debtor, the case
under chapter 11 of the Bankruptcy Code commenced by such Zonda Plan Debtor in the Bankruptcy Court and (b) when
used with reference to all Zonda Plan Debtors, the cases under chapter 11 of the Bankruptcy Code commenced by the
Zonda Plan Debtors in the Bankruptcy Court.
1. 24 Claim
means a “claim” against the Zonda Plan Debtors as defined in section 101(5) of the
Bankruptcy Code.
4
1. 25 Claims
Objection
Deadline
means for all Claims, the later of: (a) 180 days after the Effective Date,
subject to extension by order of the Bankruptcy Court; (b) 90 days after the filing of a Proof of Claim or request for
payment of Administrative Expense Claims for such Claim; and (c) such other objection deadline as may be specifically
fixed by this Plan, the Confirmation Order, the Bankruptcy Rules, or a Final Order.
1. 26 Class
means a category of Claims or Interests, as described in Article III hereof.
1. 27 Confirmation
means the confirmation of this Plan by the Bankruptcy Court under section 1129 of
the Bankruptcy Code.
1. 28 Confirmation
Date
means the date on which the Bankruptcy Court enters the Confirmation Order
on the docket of the Bankruptcy Court.
1. 29 Confirmation
Hearing
means the hearing held by the Bankruptcy Court pursuant to section 1128 of
the Bankruptcy Code to consider confirmation of this Plan, as such hearing may be adjourned or continued from time to
time.
1. 30 Confirmation
Order
means the order of the Bankruptcy Court confirming this Plan pursuant to
section 1129 of the Bankruptcy Code, which shall be in form and substance acceptable to the Zonda Plan Debtors and SHI.
1. 31 Convenience
Claim
means any Claim against the Zonda Plan Debtors that would otherwise be a
General Unsecured Claim that is Allowed in the Convenience Claim Amount or less.
1. 32 Convenience
Claim
Amount
means $50,000.
1. 33 Cure
Amount
means all costs required of the Zonda Plan Debtors to cure any and all monetary
defaults, including pecuniary losses, pursuant to Bankruptcy Code section 365, arising under any Assumed Contract.
1. 34 Debtors
means, collectively, the Zonda Plan Debtors and the Non-Zonda Debtors.
1. 35 Disallowed
means all or such part of a Claim (a) that is disallowed by a Final Order of the
Bankruptcy Court or other court of competent jurisdiction or (b) proof of which was required to be filed but as to which a
Proof of Claim was not timely or properly filed; unless Allowed by a Final Order of the Bankruptcy Court or other court of
competent jurisdiction.
5
1. 36 Disbursing
Agent
means any entity in its capacity as a disbursing agent under Section 8.6 hereof,
including any Zonda Plan Debtor or the Liquidation Trust, as applicable, that acts in such a capacity.
1. 37 Disclosure
Statement
means the disclosure statement (including all exhibits and schedules thereto)
relating to this Plan, as amended, modified, or supplemented from time to time, which is in form and substance reasonably
acceptable to the Zonda Plan Debtors and SHI.
1. 38 Disputed
Claim
means (a) any Claim as to which the Zonda Plan Debtors have interposed an
objection or request for estimation in accordance with the Bankruptcy Code and the Bankruptcy Rules, or any Claim
otherwise disputed by the Zonda Plan Debtors, the Reorganized Zonda Debtors, or other party in interest in accordance with
applicable law, which objection has not been withdrawn or determined by a Final Order; (b) any Claim scheduled by the
Zonda Plan Debtors as contingent, unliquidated, or disputed; (c) any Claim which amends a claim scheduled by the Zonda
Plan Debtors as contingent, unliquidated, or disputed; or (d) any Claim prior to it having become an Allowed Claim.
1. 39 Distribution
Date
means a date or dates, including the Initial Distribution Date as determined by the
Disbursing Agent in accordance with the terms of this Plan, on which the Disbursing Agent makes a distribution to Holders
of Allowed Claims.
1. 40 Distribution
Record
Date
except as it relates to holders of public securities, means December 31,
2018.
1. 41 Do
Not
Prevail
means that the Zonda Arbitration Award has been issued and is final and
Unappealable and in favor of SHI.
1. 42 Effective
Date
means the Business Day this Plan becomes effective as provided in Article XI
hereof.
1. 43 Entity
means “entity” as defined in section 101(15) of the Bankruptcy Code.
1. 44 Estate
(s)
means, individually, the estate of any of the Zonda Plan Debtors and, collectively, the
estates of all of the Zonda Plan Debtors created under section 541 of the Bankruptcy Code.
1. 45 Exchange
Act
means the Securities Exchange Act of 1934, as now in effect or hereafter amended.
6
1. 46 Exculpated
Parties
means, collectively, the Released Parties.
1. 47 Executory
Contract
means a contract to which one or more of the Zonda Plan Debtors is a party
that is subject to assumption or rejection under section 365 of the Bankruptcy Code.
1. 48 Exhibit
means an exhibit annexed to either this Plan or as an appendix to the Disclosure Statement,
as amended, modified, or supplemented from time to time.
1. 49 Federal
Judgment
Rate
means the federal judgment rate, 28 U.S.C. § 1961, in effect as of the
Petition Date, compounded annually.
1. 50 Final
Order
means an order or judgment, the operation or effect of which has not been reversed,
stayed, modified, or amended, and as to which order or judgment (or any reversal, stay, modification, or amendment
thereof) (a) the time to appeal, seek certiorari, or request re-argument or further review or rehearing has expired and no
appeal, petition for certiorari, or request for re-argument or further review or rehearing has been timely filed, or (b) any
appeal that has been or may be taken or any petition for certiorari or request for re-argument, further review, or rehearing
that has been or may be filed has been resolved by the highest court to which the order or judgment was appealed, from
which certiorari was sought, or to which the request was made, and no further appeal, petition for certiorari, or request for
re‑argument, further review, or rehearing has been or can be taken or granted.
1. 51 GAAP
means United States generally accepted accounting principles.
1. 52 General
Bar
Date
means May 1, 2018 at 5:00 p.m. (prevailing Eastern Time), the date by which
each Holder of a Claim against any of the Zonda Plan Debtors must have filed a Proof of Claim unless such Claim falls
within one of the exceptions set forth in the Bar Date Order.
1. 53 General
Unsecured
Claim
means any Claim against any Zonda Plan Debtor other than an
Administrative Claim, a Priority Tax Claim, an Other Priority Claim, a Secured Tax Claim, an Other Secured Claim, a
Zonda Secured Claim, a Zonda Deficiency Claim, or an Intercompany Claim.
1. 54 Governmental
Unit
has the meaning set forth in section 101(27) of the Bankruptcy Code.
1. 55 Holder
means a holder of a Claim or Interest, as applicable.
7
1. 56 Impaired
means, when used in reference to a Claim or Interest, a Claim or Interest that is impaired
within the meaning of section 1124 of the Bankruptcy Code.
1. 57 Initial
Distribution
Date
means the date or dates on which the Disbursing Agent makes the first
distribution to Holders of Allowed Claims pursuant to the terms of this Plan.
1. 58 Insurance
Covered
Claim
means Proofs of Claim Nos. 53, 27, 7, and 149 filed in the PDSI Chapter
11 Case, which shall be classified in Class 7A.
1. 59 Intercompany
Claim
means any and all Claims between and among the Zonda Plan Debtors, the
Reorganized Non-Zonda Debtors, the Reorganized Zonda Debtors, and any non-Debtor affiliate.
1. 60 Interest
means any equity security in a Zonda Plan Debtor as defined in section 101(16) of the
Bankruptcy Code.
1. 61 IRC
means the Internal Revenue Code of 1986, as now in effect or hereafter amended.
1. 62 IRS
means the Internal Revenue Service.
1. 63 Lien
has the meaning set forth in section 101(37) of the Bankruptcy Code.
1. 64 Liquidation
Trust
means the trust established pursuant to this Plan and in accordance with the
Liquidation Trust Agreement.
1. 65 Liquidation
Trust
Agreement
means the agreement between the Zonda Plan Debtors and the
Liquidation Trustee as agreed to by the Zonda Plan Debtors and SHI and filed as part of the Plan Supplement and approved
pursuant to the Confirmation Order, as the same may be amended from time to time in accordance with its terms.
1. 66 Liquidation
Trust
Assets
means, from and after the Effective Date, all of the assets of the Zonda
Plan Debtors, including the Liquidation Trust Funding Amount, and all legal and equitable interests of the Zonda Plan
Debtors in Causes of Action and all legal or equitable defenses or counterclaims of the Zonda Plan Debtors to Claims and
any other assets to be vested in the Liquidation Trust pursuant to the Liquidation Trust Agreement.
8
1. 67 Liquidation
Trust
Funding
Amount
means an amount not less than two million dollars net of any
amounts necessary to pay all Administrative Claims, Priority Tax Claims, Secured Tax Claims, Other Secured Claims,
Other Priority Claims, Convenience Claims, and all fees due under 28 U.S.C. § 1930, and to fund the Professional Fee
Escrow Amount.
1. 68 Liquidation
Trust
Funding
Amount
Escrow
Account
means an escrow account to be funded with
the Liquidation Trust Funding Amount, which will be created by the Zonda Plan Debtors on the Confirmation Date.
1. 69 Liquidation
Trust
Funding
Reserve
means the reserve created by the Liquidation Trust with the
Liquidation Trust Funding Amount.
1. 70 Liquidation
Trust
Interests
means the beneficial interests in the Liquidation Trust allocable to the
Holders of Allowed Zonda Deficiency Claims (and any permitted successors, transferees, or assigns thereof).
1. 71 Liquidation
Trustee
means such Person or entity designated or appointed by SHI, in consultation
with the Zonda Plan Debtors, and approved pursuant to the Confirmation Order or the Liquidation Trust Agreement.
1. 72 New
First
Lien
Noteholders
means, collectively, the holders of the New First Lien Notes on the
Reorganized Non-Zonda Debtors Effective Date.
1. 73 New
First
Lien
Notes
means those certain new first lien notes that mature on October 1, 2023
pursuant to the New First Lien Notes Indenture in the initial aggregate principal amount of $750.0 million, all as set forth in
the New First Lien Notes Documentation.
1. 74 New
First
Lien
Notes
Documentation
means, collectively, the New First Lien Notes Indenture and
each other agreement, security agreement, pledge agreement, collateral assignment, mortgage, control agreement,
guarantee, certificate, document, or instrument executed and/or delivered in connection with the foregoing, whether or not
specifically mentioned herein or therein, as the same may be modified, supplemented, or replaced from time to time.
1. 75 New
First
Lien
Notes
Indenture
means that certain Indenture,
dated September 26, 2018, by and
among Pacific Drilling First Lien Escrow Issuer Limited and Wilmington Trust, National Association or its successors or
assigns, solely in their capacity as indenture trustee under the new first lien notes indenture, a copy of which is included in
the Non-Zonda Debtors Plan Supplement as Exhibit A.
9
1. 76 New
Intercreditor
Agreement
means that certain Intercreditor Agreement, to be dated as of the
Reorganized Non-Zonda Debtors Effective Date, by and among Wilmington Trust, National Association as first lien
collateral agent and Wilmington Trust, National Association as junior lien collateral agent, and acknowledged and agreed to
by the Company and Grantors (each as defined therein), a substantially final form of which is included in the Non-Zonda
Debtors Plan Supplement as Exhibit C (as amended, supplemented, or otherwise modified from time to time).
1. 77 New
Second
Lien
PIK
Toggle
Noteholders
means, collectively, the holders of the New Second
Lien PIK Toggle Notes on the Reorganized Non-Zonda Debtors Effective Date.
1. 78 New
Second
Lien
PIK
Toggle
Notes
means the new second lien PIK toggle notes that mature on
April 1, 2024, issued pursuant to the New Second Lien PIK Toggle Notes Indenture in the initial aggregate amount of
$274.0 million, all as set forth in the New Second Lien PIK Toggle Notes Documentation.
1. 79 New
Second
Lien
PIK
Toggle
Notes
Documentation
means, collectively, the New Second Lien
PIK Toggle Notes Indenture and each other agreement, security agreement, pledge agreement, collateral assignment,
mortgage, control agreement, guarantee, certificate, document, or instrument executed and/or delivered in connection with
the foregoing, whether or not specifically mentioned herein or therein, as the same may be modified, supplemented, or
replaced from time to time.
1. 80 New
Second
Lien
PIK
Toggle
Notes
Indenture
means that certain Indenture
, dated September 26,
2018, by and among Pacific Drilling Second Lien Escrow Issuer Limited and Wilmington Trust, National Association or its
successors and assigns, solely in their capacity as indenture trustee under the new second lien PIK toggle notes indenture, a
copy of which is included in the Non-Zonda Debtors Plan Supplement as Exhibit B.
1. 81 New
Secured
Debt
Documents
means collectively, the New First Lien Notes Documentation and
the New Second Lien PIK Toggle Notes Documentation.
1. 82 Non
-Zonda
Debtors
means PDSA; PDGL; Pacific Drillship (Gibraltar) Limited; Pacific Drilling,
Inc.; Pacific Drilling Finance S.à r.l.; Pacific Drilling Limited; Pacific Drillship S.à r.l.; Pacific Sharav S.à r.l.; Pacific
Drilling VII Limited; PDV; Pacific Scirocco Ltd.; Pacific Bora Ltd.; Pacific Mistral Ltd.; Pacific Santa Ana (Gibraltar)
Limited; Pacific Drilling Operations Limited; Pacific Drilling Operations, Inc.; Pacific Santa Ana S.à r.l.; Pacific
Drilling, LLC; Pacific Drillship Nigeria Limited; and Pacific Sharav Korlátolt Felelősségű Társaság.
10
1. 83 Non
-Zonda
Debtors
Chapter
11
Cases
means (a) when used with reference to a particular Non-
Zonda Debtor, the case under chapter 11 of the Bankruptcy Code commenced by such Non-Zonda Debtor in the Bankruptcy
Court and (b) when used with reference to all Non-Zonda Debtors, the cases under chapter 11 of the Bankruptcy Code
commenced by the Non-Zonda Debtors in the Bankruptcy Court.
1. 84 Non
-Zonda
Debtors
Confirmation
Order
means the Findings
of
Fact,
Conclusions
of
Law,
and
Order
Confirming
Fourth
Amended
Joint
Plan
of
Reorganization
for
Pacific
Drilling
S.A.
and
Certain
of
its
Affiliates
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No. 746].
1. 85 Non
-Zonda
Debtors
Disclosure
Statement
means the Modified
Third
Amended
Disclosure
Statement
for
the
Modified
Third
Joint
Plan
of
Reorganization
for
Pacific
Drilling
S.A.
and
Certain
of
its
Affiliates
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket. No. 621].
1. 86 Non
-Zonda
Debtors
Plan
means the Modified
Fourth
Amended
Joint
Plan
of
Reorganization
for
Pacific
Drilling
S.A.
and
Certain
of
its
Affiliates
Pursuant
to
Chapter
11
of
the
Bankruptcy
Court,
dated October 31, 2018
[Docket No. 746].
1. 87 Non
-Zonda
Debtors
Plan
Supplement
means the Amended
Plan
Supplement
in
Connection
with
the
Debtors’
Joint
Chapter
11
Plan
of
Reorganization
for
Certain
of
the
Debtors
, dated October 22, 2018 [Docket No.
690], as may be amended from time-to-time.
1. 88 Other
Priority
Claim
means any Claim accorded priority in right of payment under section 507(a)
of the Bankruptcy Code, other than an Administrative Claim or Priority Tax Claim.
1. 89 Other
Secured
Claim
means any Secured Claim against the Zonda Plan Debtors other than a
Secured Tax Claim or a Zonda Secured Claim.
1. 90 Pacific
Drilling
means, collectively, the Zonda Plan Debtors and their non-Zonda Plan Debtor
affiliates.
1. 91 Pacific
Zonda
means the drillship [Hull No. 2075] in connection with the Zonda Construction
Contract between SHI and the Zonda Plan Debtors.
1. 92 PDGL
means Non-Zonda Debtor Pacific Drilling (Gibraltar) Limited, a privately-held company
limited by shares organized under the laws of Gibraltar.
11
1. 93 PDSA
means Non-Zonda Debtor Pacific Drilling S.A., a publicly-traded limited liability company
(société
anonyme)
organized under the laws of Luxembourg.
1. 94 PDSI
means Zonda Plan Debtor Pacific Drilling Services, Inc., a privately-held Delaware
corporation.
1. 95 PDV
means Non-Zonda Debtor Pacific Drilling V Limited, a privately-held British Virgin Islands
company limited by shares.
1. 96 PDVIII
means Zonda Plan Debtor Pacific Drilling VIII Limited, a privately-held British Virgin
Islands company limited by shares.
1. 97 Person
means an individual, corporation, partnership, joint venture, association, joint stock
company, limited liability company, limited liability partnership, trust, estate, unincorporated organization, or other entity.
1. 98 Petition
Date
means November 12, 2017, the date on which the Zonda Plan Debtors filed their
voluntary chapter 11 petitions commencing these Chapter 11 Cases.
1. 99 PIDWAL
means non-Debtor Affiliate Pacific International Drilling West Africa Limited, a
privately-held Nigerian registered limited liability company.
1. 100 Plan
means this chapter 11 plan of reorganization, including the Exhibits and all supplements,
appendices, and schedules hereto, either in its current form or as the same may be altered, amended, supplemented, or
modified from time to time, which shall be in form and substance acceptable to the Zonda Plan Debtors and SHI.
1. 101 Plan
Documents
means any of the documents, other than this Plan, to be executed, delivered,
assumed, or performed in connection with the occurrence of the Effective Date, including, without limitation, the
documents to be included in the Plan Supplement, including, but not limited to, the Liquidation Trust Agreement, which
shall be subject to SHI’s consent, the New First Lien Notes Indenture, the New Second Lien PIK Toggle Notes Indenture,
the Amended Certificates of Incorporation of the applicable Reorganized Zonda Debtors, and the Amended By-Laws of the
applicable Reorganized Zonda Debtors, as applicable.
1. 102 Plan
Supplement
means any supplement to this Plan, and the compilation of documents, forms of
documents, and Exhibits to this Plan, as amended, modified, or supplemented from time to time, initial drafts of which shall
be filed by the
12
Zonda Plan Debtors as permitted herein on or before the Plan Supplement Filing Date, in form and substance satisfactory to
the applicable parties as provided in this Plan.
1. 103 Plan
Supplement
Filing
Date
means the date not later than seven (7) days before the Voting
Deadline, which date may be modified by agreement between the Zonda Plan Debtors and SHI.
1. 104 Prevail
means that the Zonda Arbitration Award has been issued and is final and Unappealable and
is in favor of the Zonda Plan Debtors.
1. 105 Priority
Tax
Claim
means any Claim of a Governmental Unit of the kind specified in section 507(a)
(8) of the Bankruptcy Code.
1. 106 Professional
means any professional employed in these Chapter 11 Cases pursuant to sections 327,
328, 363, or 1103 of the Bankruptcy Code or otherwise.
1. 107 Professional
Fee
Claim
means an Administrative Claim of a Professional for compensation for
services rendered or reimbursement of costs attributable to the Zonda Plan Debtors, expenses, or other charges incurred on
or after the Reorganized Non-Zonda Debtors Effective Date and prior to and including the Effective Date.
1. 108 Professional
Fee
Escrow
means an escrow account to be funded with the Professional Fee Escrow
Amount by the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidatrion Trust, on the Effective Date solely
for the purpose of paying all Allowed Professional Fee Claims.
1. 109 Professional
Fee
Escrow
Amount
means the aggregate Accrued Professional Compensation
incurred on or after the Reorganized Non-Zonda Debtors Effective Date through the Effective Date as estimated by the
Professionals in accordance with Section 2.3.
1. 110 Pro
Rata
means the proportion that an Allowed Claim in a particular Class bears to the aggregate
amount of Allowed Claims and Disputed Claims within such Class.
1. 111 Proof
of
Claim
means a written proof of Claim filed against any Zonda Plan Debtor in the Chapter
11 Cases.
1. 112 QPGL
means Quantum Pacific (Gibraltar) Limited.
1. 113 Reinstated
means, with respect to any Claim or Interest, the treatment provided for in section 1124
of the Bankruptcy Code.
13
1. 114 Released
Party
means each of: (a) the Zonda Plan Debtors; (b) the Reorganized Zonda Debtors; (c)
the Liquidation Trust; (d) the Liquidation Trustee; and (e) with respect to the foregoing Entities in clauses (a) through (d),
each of their (i) respective current and former Affiliates, predecessors, successors, assigns, subsidiaries, managed accounts,
or funds; and their (ii) current and former officers, managers, directors, equity holders (regardless of whether such interests
are held directly or indirectly), principals, members, employees, agents, independent contractors, management companies,
investment advisors, fund advisors, advisory board members, financial advisors, partners, attorneys, accountants,
investment bankers, consultants, representatives, and other professionals, each in their capacity as such; provided
, that
equity holders of the Zonda Plan Debtors shall not be a “Released Party” except solely in their capacity as Holders of
Claims against the Zonda Plan Debtors; provided
further
, that any Holder of a Claim or Interest that objects to or votes to
reject the Plan shall not be a “Released Party.”
1. 115 Releasing
Parties
means, collectively and in each case in their capacity as such: (a) each Released
Party; (b) each Holder of a Claim or Interest who was entitled to vote on the Plan and voted to accept the Plan; (c) each
Holder of a Claim or Interest who did not vote to accept the Plan but checked the box on the applicable Ballot or Notice of
Non-Voting Status indicating that they opt to grant the releases provided in the Plan; (d) each Holder of a Claim or Interest
to the fullest extent permitted by law; (e) with respect to each of the foregoing Entities in clauses (a) through (d), such
Entities’ or Persons’ successors and assigns.
1. 116 Reorganized
Non-Zonda
Debtors
means, collectively, the Non-Zonda Debtors from and after the
Reorganized Non-Zonda Debtors Effective Date.
1. 117 Reorganized
Non-Zonda
Debtors
Effective
Date
means the “Effective Date” as defined in the Non-
Zonda Debtors Plan.
1. 118 Reorganized
PDSA
means PDSA from and after the Non-Zonda Debtors Effective Date.
1. 119 Reorganized
Zonda
Debtors
means, collectively, the Zonda Plan Debtors from and after the
Effective Date, if the Zonda Plan Debtors Prevail in the Zonda Arbitration, but not if the Zonda Plan Debtors Do Not
Prevail in the Zonda Arbitration.
1. 120 Representative
means any Person’s or Entity’s current and former officers, managers, directors,
equity holders (regardless of whether such interests are held directly or indirectly), principals, members, employees, agents,
independent contractors, management companies, investment advisors, fund advisors, advisory
14
board members, financial advisors, partners, attorneys, accountants, investment bankers, consultants, representatives, and
other professionals, each in their capacity as such.
1. 121 Restructuring
Transactions
means if the Zonda Plan Debtors Prevail in the Zonda Arbitration, but
not if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, one or more transactions pursuant to section 1123(a)
(5)(D) of the Bankruptcy Code to occur on the Effective Date or as soon as reasonably practicable thereafter, that may be
necessary or appropriate to effect any transaction described in, approved by, contemplated by, or necessary to effectuate this
Plan, including (a) the consummation of the transactions provided for under or contemplated by the Plan Documents; (b)
the execution and delivery of appropriate agreements or other documents containing terms that are consistent with or
reasonably necessary to implement the Plan Documents, which agreement or other documents shall contain terms that are
consistent with or reasonably necessary to implement the terms of this Plan and the Plan Documents and that satisfy the
requirements of applicable law; (c) the execution and delivery of appropriate instruments of transfer, assignment,
assumption, or delegation of any property, right, liability, duty, or obligation on terms consistent with the terms of this Plan
and the Plan Documents; and (d) all other actions that the Zonda Plan Debtors or Reorganized Zonda Debtors, as
applicable, determine are necessary or appropriate.
1. 122 Retained
Actions
means all claims, Causes of Action, rights of action, suits, and proceedings,
whether in law or in equity, whether known or unknown, which any Zonda Plan Debtor or any Zonda Plan Debtor’s Estate
may hold against any Person, including, but not limited to: (a) claims and Causes of Action brought prior to the Effective
Date; (b) claims and Causes of Action against any Persons for failure to pay for products or services provided or rendered
by any of the Zonda Plan Debtors; (c) claims and Causes of Action seeking the recovery of any of the Zonda Plan Debtors’
or the Reorganized Zonda Debtors’ accounts receivable or other receivables or rights to payment created or arising in the
ordinary course of any of the Zonda Plan Debtors’ or the Reorganized Zonda Debtors’ businesses, including claim
overpayments and tax refunds; (d) all Avoidance Actions; and (e) any such claims, Causes of Action, rights of action,
suits, or proceedings listed in the Disclosure Statement or any schedules filed by the Zonda Plan Debtors in these Chapter
11 Cases; provided
, however
, that Retained Actions shall not include those claims, Causes of Action, rights of action,
suits, and proceedings, whether in law or in equity, whether known or unknown, released under Article XII herein.
1. 123 SEC
means the U.S. Securities and Exchange Commission.
15
1. 124 Securities
Act
means the Securities Act of 1933, as now in effect or hereafter amended.
1. 125 Schedules
means the Zonda Plan Debtors’ schedules of assets and liabilities and statements of
financial affairs, filed under section 521 of the Bankruptcy Code and the Bankruptcy Rules, as amended, supplemented, or
modified.
1. 126 Secured
Claim
means a Claim that is secured by a Lien on property in which a Zonda Plan Debtor’s
Estate has an interest or that is subject to setoff under section 553 of the Bankruptcy Code, to the extent of the value of the
Claim Holder’s interest in the applicable Estate’s interest in such property or to the extent of the amount subject to setoff, as
applicable, as determined pursuant to section 506(a) of the Bankruptcy Code or, in the case of setoff, pursuant to section
553 of the Bankruptcy Code.
1. 127 Secured
Tax
Claim
means any Secured Claim that, absent its secured status, would be entitled to
priority in right of payment under sections 502(i) and 507(a)(8) of the Bankruptcy Code (determined irrespective of any
time limitation therein and including any related Secured Claim for penalties).
1. 128 SHI
means Samsung Heavy Industries, Co., Ltd.
1. 129 SHI
Retained
Actions
means all claims, Causes of Action, rights of action, suits, and proceedings,
whether in law or in equity, whether known or unknown, which SHI may hold against any Person, including the claims,
causes of action, rights of subrogation, contribution, or indemnification, defenses, suits, debts, remedies, damages, demands,
losses, costs, and expenses (including professional fees and expenses) subject to Paragraph 112 of the Non-Zonda Debtors
Confirmation Order, and for the avoidance of doubt, subject to the Bar Date Order and any argument regarding the
applicability thereof.
1. 130 Term
Loan
B
Lenders
means, collectively, those lenders party to that certain Term Loan
Agreement, dated as of June 3, 2013 (as amended), among PDSA as borrower, the term loan B lenders, and Cortland
Capital Market Services LLC or its successors or assigns, in each case solely in their capacity as administrative agent under
that certain $750.0 million term loan facility among PDSA as borrower, the term loan B lenders, and Cortland Capital
Market Services LLC or its successors or assigns, in each case solely in their capacity as administrative agent under the
term loan credit facility.
1. 131 Third
-Party
Release
means the releases set forth in Section 12.2(b) of this Plan.
16
1. 132 Unappealable
means a final arbitration award in respect of which any challenge to the award or
appeal to the English High Court has been finally determined by the arbitral tribunal or the English High Court or English
Appellate Courts in accordance with sections 66 to 71 of the Arbitration Act 1996.
1. 133 Unexpired
Lease
means a lease to which one of more of the Zonda Plan Debtors is a party that is
subject to assumption or rejection under section 365 of the Bankruptcy Code.
1. 134 Unimpaired
means a Claim or Interest that is not impaired within the meaning of section 1124 of
the Bankruptcy Code.
1. 135 Voting
Deadline
means the date by which a Holder of a Claim entitled to vote on this Plan must
deliver a Ballot to accept or reject this Plan as set forth in the order of the Bankruptcy Court approving the instructions and
procedures relating to the solicitation of votes with respect to this Plan.
1. 136 Zonda
Arbitration
means the arbitration proceeding commenced by SHI against PDVIII and PDSI
in London on November 18, 2015, in response to PDVIII’s rescission of the Zonda Construction Contract.
1. 137 Zonda
Arbitration
Award
means (a) a final award or awards issued in connection with the Zonda
Arbitration in which liability and damages are determined between SHI, on the one hand, and PDVIII and PDSI, on the
other hand, and/or (b) separate final awards issued in connection with the Zonda Arbitration in which liability and damages
are determined between SHI and PDVIII and between SHI and PDSI.
1. 138 Zonda
Claims
means Proofs of Claim Nos. 164, 168, 169, 170, and 176 filed in these Chapter 11
Cases, which shall be classified in Classes 4A–4B and 5A–5B.
1. 139 Zonda
Construction
Contract
means that certain Contract
for
Construction
and
Sale
of
Drillship
(
Hull
No.
2075
) between PDVIII and SHI.
1. 140 Zonda
Deficiency
Claim
means a Claim arising out of or related to the Zonda Claims and the Zonda
Construction Contract, solely to the extent such Claim is not a Secured Claim.
1. 141 Zonda
Plan
Debtor
Release
means the releases contained in Section 12.2(a) herein.
1. 142 Zonda
Plan
Debtors
means PDVIII and PDSI.
17
1. 143 Zonda
Secured
Claim
means a claim arising out of or related to the Zonda Claims and the Zonda
Construction Contract, solely to the extent that such Claim is a Secured Claim.
Rules
of
Interpretation
and
Computation
of
Time
. For purposes of this Plan, unless otherwise provided
herein: (a) whenever from the context it is appropriate, each term, whether stated in the singular or the plural, shall include
both the singular and the plural; (b) unless otherwise provided in this Plan, any reference in this Plan to a contract,
instrument, release, or other agreement or document being in a particular form or on particular terms and conditions means
that such document shall be substantially in such form or substantially on such terms and conditions; (c) any reference in
this Plan to an existing document or schedule filed or to be filed means such document or schedule, as it may have been or
may be amended, modified, or supplemented pursuant to this Plan; (d) any reference to an entity as a Holder of a Claim or
Interest includes that entity’s successors and assigns; (e) all references in this Plan to Sections and Articles are references to
Sections and Articles of or to this Plan; (f) the words “herein,” “hereunder,” and “hereto” refer to this Plan in its entirety
rather than to a particular portion of this Plan; (g) captions and headings to Articles and Sections are inserted for
convenience of reference only and are not intended to be a part of or to affect the interpretation of this Plan; (h) subject to
the provisions of any contract, certificates of incorporation, by-laws, instrument, release, or other agreement or document
entered into in connection with this Plan, the rights and obligations arising under this Plan shall be governed by, and
construed and enforced in accordance with, federal law, including the Bankruptcy Code and Bankruptcy Rules; (i) the rules
of construction set forth in section 102 of the Bankruptcy Code shall apply; (j) in computing any period of time prescribed
or allowed by this Plan, the provisions of Bankruptcy Rule 9006(a) shall apply; (k) “including” means “including without
limitation”; and (l) with reference to any distribution under this Plan, “on” a date means on or as soon as reasonably
practicable after that date.
Exhibits
. All Exhibits are incorporated into and are a part of this Plan as if set forth in full herein, and, to the
extent not annexed hereto, such Exhibits shall be filed with the Bankruptcy Court no later than seven (7) days prior to the
Voting Deadline. Holders of Claims and Interests may obtain a copy of the Exhibits upon written request to the Zonda Plan
Debtors. Upon their filing, the Exhibits may be inspected (a) in the office of the clerk of the Bankruptcy Court or its
designee during normal business hours; (b) on the Bankruptcy Court’s website at http://nysb.uscourts.gov (registration
required); or (c) at our noticing agent’s website at https://cases.primeclerk.com/pacificdrilling/. The documents contained
in the Exhibits shall be approved by the Bankruptcy Court pursuant to the Confirmation Order.
18
Controlling
Document
. In the event of an inconsistency between this Plan and the Plan Supplement, the terms
of the relevant document in the Plan Supplement shall control (unless stated otherwise in such Plan Supplement
document). The provisions of this Plan and of the Confirmation Order shall be construed in a manner consistent with each
other so as to effect the purposes of each; provided,
that, if there is determined to be any inconsistency between any Plan
provision and any provision of the Confirmation Order that cannot be so reconciled, then, solely to the extent of such
inconsistency, the provisions of the Confirmation Order shall govern and any such provision of the Confirmation Order
shall be deemed a modification of this Plan and shall control and take precedence.
Applicability
of
Articles
V
and
VI.
This Plan contains two Articles that include provisions related to the means
for implementation of this Plan. For the avoidance of doubt, if the Zonda Plan Debtors Prevail in the Zonda Arbitration,
Article V governs and Article VI is rendered null and void as of the Effective Date. Alternatively, if the Zonda Plan
Debtors Do Not Prevail in the Zonda Arbitration Article VI governs and Article V is rendered null and void as of the
Effective Date.
Intercompany
Claims
and
Interests.
The summary table in Section 3.2 provides that Classes 8A–8B, 9A, and
9B are either Unimpaired or Impaired under the Plan, and are not entitled to vote, however, such Classes are consenting to
the Plan under either scenario.
ARTICLE II
ADMINISTRATIVE EXPENSE AND PRIORITY CLAIMS
In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims, Priority Tax Claims,
and Professional Fee Claims are not classified and are not entitled to vote on this Plan.
2. 1 Administrative
Claims
. Unless the Holder of an Allowed Administrative Claim agrees to less
favorable treatment, on or as soon as reasonably practicable after the later of (a) the Effective Date, (b) the date on which an
Administrative Claim becomes an Allowed Administrative Claim, or (c) the date on which an Allowed Administrative
Claim becomes payable under any agreement relating thereto, each Holder of such Allowed Administrative Claim shall
receive, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed
Administrative Claim, Cash equal to the unpaid portion of such Allowed Administrative Claim.
19
2. 2 Priority
Tax
Claims
. The legal and equitable rights of the Holders of Priority Tax Claims, if any,
are Unimpaired by this Plan. Unless the Holder of an Allowed Priority Tax Claim agrees to less favorable treatment, on the
Effective Date, each Holder of an Allowed Priority Tax Claim shall have such Claim Reinstated.
2. 3 Professional
Fee
Claims
.
(a) Professionals shall submit final fee applications seeking approval of all Professional Fee
Claims by the Bankruptcy Court no later than sixty (60) days after the Effective Date. These applications remain subject to
Bankruptcy Court approval under the standards established by the Bankruptcy Code, including the requirements of sections
327, 328, 330, 331, 363, 503(b), and 1103 of the Bankruptcy Code, as applicable. Payments to Professionals shall be made
upon entry of an order approving such Professional Fee Claims.
(b) The Reorganized Zonda Debtors or the Liquidation Trust, as applicable, are authorized to pay
compensation for services rendered or reimbursement of expenses incurred after the Effective Date in the ordinary course
without the need for Bankruptcy Court approval.
(c) On the Effective Date, the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the
Liquidation Trust, as applicable, will establish and fund the Professional Fee Escrow with Cash remaining in the PDSI bank
accounts on the Effective Date or from the Liquidation Trust Assets, as applicable, equal to the Professional Fee Escrow
Amount.
ARTICLE III
CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
3. 1 Classification
in
General
. Pursuant to section 1122 of the Bankruptcy Code, set forth below is a
designation of Classes of Claims against and Interests in the Zonda Plan Debtors. A Claim or Interest is placed in a
particular Class only to the extent that the Claim or Interest falls within the description of that Class and is classified in
other Classes to the extent that any portion of the Claim or Interest falls within the description of such other Classes. A
Claim is also placed in a particular Class for the purpose of receiving distributions pursuant to this Plan only to the extent
that such Claim is an Allowed Claim in that Class and such Claim has not been paid, released, or otherwise settled prior to
the Effective Date. Subject to the payment of any joint and several obligations between the Zonda Plan Debtors, each
Zonda Plan Debtor shall be responsible for satisfying the Claims and Administrative Claims against and Interests in such
Zonda Plan Debtor from such Zonda Plan Debtor’s assets.
20
3. 2 Summary
of
Classification
. For administrative convenience, this Plan organizes the Zonda Plan
Debtors into two (2) groups (each a “ Zonda
Plan
Debtor
Group
”) and assigns a letter to each Zonda Plan Debtor
Group. Notwithstanding this organizing principle, this plan is a separate plan of reorganization for each Zonda Plan
Debtor. For consistency, similarly designated Classes of Claims and Interests are assigned the same number across each of
the Zonda Plan Debtor Groups. Any non-sequential enumeration of the Classes is intentional to maintain consistency.
Letter
Zonda Plan Debtor Group
A
B
PDSI
PDVIII
The following table designates the Classes of Claims against and Interests in the Zonda Plan Debtors and
specifies which of those Classes are (a) Impaired or Unimpaired by this Plan, (b) entitled to vote to accept or reject this Plan
in accordance with section 1126 of the Bankruptcy Code, and (c) deemed to accept or reject this Plan. In accordance with
section 1123(a)(1) of the Bankruptcy Code, Administrative Claims, Priority Tax Claims, and Professional Fee Claims have
not been classified and, thus, are excluded from the Classes of Claims and Interests set forth in this Section 3.2. All of the
potential Classes for the Zonda Plan Debtors are set forth herein. Certain of the Zonda Plan Debtors may not have Holders
of Claims or Interests in a particular Class or Classes, and such Classes shall be treated as set forth in Section 4.3 hereof.
Class(es)
Designation
Impairment
Entitled to Vote
1A–1B
2A–2B
3A–3B
4A–4B
5A–5B
6A–6B
Secured Tax Claims
Unimpaired
No (deemed to accept)
Other Secured Claims
Unimpaired
No (deemed to accept)
Other Priority Claims
Unimpaired
No (deemed to accept)
Zonda Secured Claims
Zonda Deficiency Claims
Impaired
Impaired
Yes
Yes
Convenience Claims
Unimpaired
No (deemed to accept)
21
Class(es)
7A
8A–8B
9A
9B
Designation
Impairment
Entitled to Vote
Insurance Covered Claims
Unimpaired
No (deemed to accept)
Intercompany Claims
Unimpaired/
Impaired
No, but consenting to the Plan
under either scenario
PDSI Interests
PDVIII Interests
Unimpaired/
Impaired
No, but consenting to the Plan
under either scenario
Unimpaired/
Impaired
No, but consenting to the Plan
under either scenario
3. 3 Treatment
of
Classes
.
(a) Classes
1A
through
1B
–
Secured
Tax
Claims
(i) Claims
in
Class
: Classes 1A and 1B consist of all Secured Tax Claims.
(ii) Treatment
: Except to the extent that a Holder of an Allowed Secured Tax Claim agrees
to less favorable treatment, each Holder of an Allowed Secured Tax Claim shall receive, on account of and in full and final
satisfaction, settlement, release, and discharge of, and in exchange for, such Secured Tax Claim and any Lien securing such
Claim, Cash in the amount of such Allowed Secured Tax Claim: on or as soon as reasonably practicable after, the later of
(A) the Effective Date and (B) the date on which such Secured Tax Claim becomes an Allowed Secured Tax Claim.
All Allowed Secured Tax Claims that are not due and payable on or before the Effective Date shall be paid by
the Reorganized Zonda Debtors when such Claims become due and payable in the ordinary course of business in
accordance with the terms thereof.
Secured Tax Claims are conclusively deemed to have accepted this Plan pursuant to section 1126(f) of the Bankruptcy
Code. Therefore, the Holders of Secured Tax Claims are not entitled to vote to accept or reject this Plan.
(iii) Voting
: Claims in Classes 1A and 1B are Unimpaired, and the Holders of Allowed
(b) Classes
2A
through
2B
–
Other
Secured
Claims
(i) Claims
in
Class:
Classes 2A and 2B consist of all Other Secured Claims.
(ii) Treatment:
Except to the extent that a Holder of an Allowed Other Secured Claim
agrees to less favorable treatment, on or as soon as
22
reasonably practicable after (A) the Effective Date if such Other Secured Claim is an Allowed Other Secured Claim on the
Effective Date or (B) the date on which such Other Secured Claim becomes an Allowed Other Secured Claim, each Holder
of an Allowed Other Secured Claim shall receive from its respective Zonda Plan Debtor, in full and final satisfaction,
settlement, release, and discharge of, and in exchange for, such Allowed Other Secured Claim and any Lien securing such
Claim, at the option of the Zonda Plan Debtors: (x) payment in full in Cash, plus postpetition interest, if applicable; (y)
Reinstatement or such other treatment sufficient to render the Holder of such Claim Unimpaired pursuant to section 1124 of
the Bankruptcy Code; or (z) the return of the applicable collateral in satisfaction of the Allowed amount of such Other
Secured Claim.
(iii) Voting:
Claims in Classes 2A and 2B are Unimpaired, and the Holders of Allowed
Other Secured Claims are conclusively deemed to have accepted this Plan pursuant to section 1126(f) of the Bankruptcy
Code. Therefore, the Holders of Other Secured Claims are not entitled to vote to accept or reject this Plan.
(c) Classes
3A
through
3B
–
Other
Priority
Claims
(i) Claims
in
Class:
Classes 3A and 3B consist of all Other Priority Claims.
(ii) Treatment:
Except to the extent that a Holder of an Allowed Other Priority Claim
agrees to less favorable treatment, on or as soon as reasonably practicable after (A) the Effective Date if such Other Priority
Claim is an Allowed Other Priority Claim on the Effective Date or (B) the date on which such Other Priority Claim
becomes an Allowed Other Priority Claim, each Holder of an Allowed Other Priority Claim shall receive, in full and final
satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed Other Priority Claim, Cash equal to
the unpaid portion of such Allowed Other Priority Claim.
(iii) Voting:
Claims in Classes 3A and 3B are Unimpaired, and the Holders of Allowed
Other Priority Claims are conclusively deemed to have accepted this Plan pursuant to section 1126(f) of the Bankruptcy
Code. Therefore, the Holders of Other Priority Claims are not entitled to vote to accept or reject this Plan.
(d) Classes
4A
through
4B
–
Zonda
Secured
Claims
(i) Claims
in
Class:
Classes 4A and 4B consist of all Zonda Secured Claims.
(ii) Treatment
: Except to the extent that a Holder of an Allowed Zonda Secured Claim
agrees to less favorable treatment, on or as soon as
23
reasonably practicable after the Effective Date, each Holder of an Allowed Zonda Secured Claim shall receive in full and
final satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed Zonda Secured Claim (a) an
amount of existing Cash held by the Zonda Plan Debtors agreed to by SHI and the Liquidation Trustee, and at the option of
SHI, either (i) the proceeds of the sale or disposition of the Pacific
Zonda
, or (ii) the Pacific
Zonda
securing such Allowed
Zonda Secured Claim. If an Allowed Zonda Secured Claim is paid in full under this Section, the Liens securing such Zonda
Secured Claim shall be deemed released.
For the avoidance of doubt, the Zonda Secured Claims will be disallowed if the Zonda Plan Debtors Prevail in
the Zonda Arbitration.
Bankruptcy Code, each Holder of an Allowed Zonda Secured Claim is entitled to vote to accept or reject this Plan.
(iii) Voting
: Claims in Classes 4A and 4B are Impaired. Pursuant to section 1126 of the
(e) Classes
5A
through
5B
–Zonda
Deficiency
Claims
(i) Claims
in
Class:
Classes 5A and 5B consist of all Zonda Deficiency Claims.
(ii) Treatment:
Except to the extent that a Holder of an Allowed Zonda Deficiency Claim
agrees to less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an
Allowed Zonda Deficiency Claim shall receive, in full and final satisfaction, settlement, release, and discharge of, and in
exchange for, such Allowed Zonda Deficiency Claim its Pro Rata share of the Liquidation Trust Interests based on the
Allowed amount of its Claim.
For the avoidance of doubt, the Zonda Deficiency Claims will be disallowed if the Zonda Plan Debtors Prevail
in the Zonda Arbitration.
Bankruptcy Code, each Holder of an Allowed Zonda Deficiency Claim is entitled to vote to accept or reject this Plan.
(iii) Voting:
Claims in Classes 5A and 5B are Impaired. Pursuant to section 1126 of the
(f) Classes
6A
through
6B
–
Convenience
Claims
(i) Claims in Class: Classes 6A and 6B consist of all Convenience Claims.
to less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an Allowed
Convenience
(ii) Treatment: Except to the extent that a Holder of an Allowed Convenience Claim agrees
24
Claim shall receive, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed
Convenience Claim, payment in full in Cash.
(iii) Voting: Claims in Classes 6A and 6B are Unimpaired, and the Holders of Allowed
Convenience Claims are conclusively deemed to have accepted this Plan pursuant to section 1126(f) of the Bankruptcy
Code. Therefore, the Holders of Allowed Convenience Claims are not entitled to vote to accept or reject this Plan.
(g) Class
7A
–Insurance
Covered
Claims
(i) Claims
in
Class:
Class 7A consists of all Insurance Covered Claims.
(ii) Treatment:
Except to the extent that a Holder of an Allowed Insurance Covered Claim
agrees to less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an
Allowed Insurance Covered Claim shall receive, in full and final satisfaction, settlement, release, and discharge of, and in
exchange for, such Allowed Insurance Covered Claim, (A) payment in Cash in an amount equal to such Allowed Insurance
Covered Claim on the Effective Date; or (B) such other treatment as may be required so as to render such Allowed
Insurance Covered Claim Unimpaired. For the avoidance of doubt, Holders of Allowed Insurance Covered Claims will
look solely to applicable insurance for payment.
Covered Claims are conclusively deemed to have accepted this Plan pursuant to section 1126(f) of the Bankruptcy
Code. Therefore, the Holders of Allowed Insurance Covered Claims are not entitled to vote to accept or reject this Plan.
(iii) Voting:
Claims in Class 7A are Unimpaired, and the Holders of Allowed Insurance
(h) Classes
8A
through
8B
– Intercompany
Claims
(i) Claims
in
Class
: Classes 8A and 8B consist of all Intercompany Claims.
(ii) Treatment:
Except to the extent that a Holder of an Allowed Intercompany Claim
agrees to less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an
Allowed Intercompany Claim shall receive, in full and final satisfaction, settlement, release, and discharge of, and in
exchange for, such Allowed Intercompany Claim:
Intercompany Claims shall be paid, adjusted, continued, settled, Reinstated, discharged, or
(A) If the Zonda Plan Debtors Prevail in the Zonda Arbitration, all Allowed
25
eliminated, in each case to the extent determined to be appropriate by the Zonda Plan Debtors or the Reorganized
Zonda Debtors, as applicable; or
Intercompany Claims shall be paid, adjusted, continued, settled, Reinstated, discharged, or eliminated, in each case
to the extent determined to be appropriate by the Liquidation Trust.
(B) if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, Allowed
(iii) Voting:
Claims in Classes 8A and 8B are either Unimpaired, and each Holder of an
Allowed Intercompany Claim is conclusively presumed to have accepted this Plan under section 1126(f) of the Bankruptcy
Code, or Impaired, and each Holder of an Allowed Intercompany Claim is conclusively deemed to have rejected this Plan
pursuant to section 1126(g) of the Bankruptcy Code. However, Holders of Allowed Intercompany Claims have agreed to
be deemed to accept this Plan under either scenario.
(i) Class
9A
– PDSI
Interests
(i) Claims
in
Class
: Class 9A consists of all PDSI Interests.
(ii) Treatment
: Except to the extent that a Holder of an Allowed PDSI Interest agrees to
less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an Allowed PDSI
Interest shall receive, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed
PDSI Interest:
(A) If the Zonda Plan Debtors Prevail in the Zonda Arbitration, Holders of Allowed
PDSI Interests will receive all remaining assets of PDSI after distributions to Classes 1A–1B through 8A–8B; or
Interests will be extinguished.
(B) if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, all PDSI
(iii) Voting
: Claims in Class 9A are either Unimpaired, and each Holder of an Allowed
PDSI Interest is conclusively presumed to have accepted this Plan under section 1126(f) of the Bankruptcy Code, or
Impaired, and each Holder of an Allowed PDSI Interest is conclusively deemed to have rejected this Plan pursuant to
section
26
1126(g) of the Bankruptcy Code. However, Holders of Allowed PDSI Interests have agreed to be deemed to accept this
Plan under either scenario.
(j) Class
9B
–
PDVIII
Interests
(i) Claims
in
Class
: Class 9B consists of all PDVIII Interests.
(ii) Treatment
: Except to the extent that a Holder of an Allowed PDVIII Interest agrees to
less favorable treatment, on or as soon as reasonably practicable after the Effective Date, each Holder of an Allowed
PDVIII Interest shall receive, in full and final satisfaction, settlement, release, and discharge of, and in exchange for, such
Allowed PDVIII Interest:
PDVIII Interests will receive all remaining assets of PDVIII after distributions to Classes1A–1B through 8A–
8B; or
(A) If the Zonda Plan Debtors Prevail in the Zonda Arbitration, Holders of Allowed
Interests will be extinguished.
(B) if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, all PDVIII
(iii) Voting
: Claims in Class 9B are either Unimpaired, and each Holder of an Allowed
PDVIII Interest is conclusively presumed to have accepted this Plan under section 1126(f) of the Bankruptcy Code, or
Impaired, and each Holder of an Allowed PDVIII Interest is conclusively deemed to have rejected this Plan pursuant to
section 1126(g) of the Bankruptcy Code. However, Holders of Allowed PDVIII Interests have agreed to be deemed to
accept this Plan under either scenario.
3. 4 Alternative
Treatment
. Notwithstanding any provision herein to the contrary, any Holder of an
Allowed Claim may receive, instead of the distribution or treatment to which it is entitled hereunder, any other distribution
or treatment to which it and the Zonda Plan Debtors may agree in writing, with the consent of SHI; provided
, however
,
that under no circumstances may the Zonda Plan Debtors agree to provide any other distribution or treatment to any Holder
of an Allowed Claim that would adversely impair the distribution or treatment provided to any other Holder of an Allowed
Claim.
3. 5 Special
Provision
Regarding
Unimpaired
Claims
. Except as otherwise provided in this Plan,
nothing shall affect the Zonda Plan Debtors’ rights and defenses, both legal and equitable, with respect to any Unimpaired
Claims, including but
27
not limited to all rights with respect to legal and equitable defenses to setoffs against or recoupments of Unimpaired Claims.
ARTICLE IV
ACCEPTANCE OR REJECTION OF THIS PLAN
4. 1 Acceptance
by
Class
Entitled
to
Vote
. Classes 4A–4B and 5A–5B are the Classes of Claims of the
Zonda Plan Debtors that are entitled to vote to accept or reject this Plan. Classes 4A–4B and 5A–5B shall have accepted
this Plan if (a) the Holders of at least two-thirds in amount of the Allowed Claims actually voting in each Class have voted
to accept this Plan and (b) the Holders of more than one-half in number of the Allowed Claims actually voting in each Class
have voted to accept this Plan, not counting the vote of any Holder designated under section 1126(e) of the Bankruptcy
Code. If there are no votes cast in the Class that is entitled to vote on this Plan, then this Plan shall be deemed accepted by
such Class.
4. 2 Presumed
Acceptance
of
this
Plan
. Classes 1A–1B, 2A–2B, 3A–3B, 6A–6B, and 7A are
Unimpaired. Therefore, such Classes are deemed to have accepted this Plan by operation of law and are not entitled to vote
to accept or reject this Plan.
4. 3 Elimination
of
Classes
. To the extent applicable, any Class that does not contain any Allowed
Claims or any Claims temporarily allowed for voting purposes under Bankruptcy Rule 3018, as of the date of the
commencement of the Confirmation Hearing, shall be deemed to have been deleted from this Plan for purposes of (a) voting
to accept or reject this Plan and (b) determining whether it has accepted or rejected this Plan under section 1129(a)(8) of the
Bankruptcy Code.
4. 4 Cramdown
. The Zonda Plan Debtors request Confirmation of this Plan, as it may be modified from
time to time, under section 1129(b) of the Bankruptcy Code, to the extent applicable, subject to SHI’s express written
consent. The Zonda Plan Debtors reserve the right to modify this Plan to the extent, if any, that Confirmation pursuant to
section 1129(b) of the Bankruptcy Code requires modification.
ARTICLE V
MEANS FOR IMPLEMENTATION OF THIS PLAN IF THE ZONDA PLAN DEBTORS PREVAIL
IN THE ZONDA ARBITRATION
5. 1 Continued
Corporate
Existence
and
Vesting
of
Assets
. If the Zonda Plan Debtors Prevail in the
Zonda Arbitration, except as otherwise provided in this Plan, each Zonda Plan Debtor shall continue to exist after the
Effective Date as a separate
28
corporate Entity, limited liability company, partnership, or other form, as the case may be, with all the powers of a
corporation, limited liability company, partnership, or other form, as the case may be, pursuant to the applicable law in the
jurisdiction in which each applicable Zonda Plan Debtor is incorporated or formed and pursuant to the respective certificate
of incorporation, where applicable and bylaws (or other formation documents) in effect prior to the Effective Date, except to
the extent such certificate of incorporation and bylaws (or other formation documents) are amended by this Plan, the Plan
Supplement, or otherwise, and to the extent such documents are amended, such documents are deemed to be pursuant to this
Plan and require no further action or approval, as permitted by applicable law. On or after the Effective Date, each
Reorganized Zonda Debtor may take such action as permitted by applicable law and such Reorganized Zonda Debtor’s
organizational documents, as such Reorganized Zonda Debtor may determine is reasonable and appropriate, including
causing: (i) a Reorganized Zonda Debtor to be merged into another Reorganized Debtor or its Affiliate; (ii) a Reorganized
Zonda Debtor to be dissolved; (iii) the legal name of a Reorganized Zonda Debtor to be changed; (iv) a Reorganized
Zonda Debtor to reorganize under the laws of another jurisdiction; or (v) the closure of a Reorganized Zonda Debtor’s
Chapter 11 Case on the Effective Date or any time thereafter.
If the Zonda Plan Debtors Prevail in the Zonda Arbitration, except as otherwise provided herein, on the
Effective Date, all property of each Zonda Plan Debtor’s Estate, including any property held or acquired by each Zonda
Plan Debtor or Reorganized Zonda Debtor under this Plan or otherwise, will vest in such Reorganized Zonda Debtor free
and clear of all Claims, Liens, charges, other encumbrances, Interests, and other interests, except for the Liens and Claims
established under this Plan.
If the Zonda Plan Debtors Prevail in the Zonda Arbitration, on or after the Effective Date, each Reorganized
Zonda Debtor may operate its business and may use, acquire, and dispose of property and maintain, prosecute, abandon,
compromise, or settle any Claims or Causes of Action without supervision or approval by the Bankruptcy Court and free of
any restrictions of the Bankruptcy Code or Bankruptcy Rules, subject only to those restrictions expressly imposed by this
Plan or the Confirmation Order, as well as the documents and instruments executed and delivered in connection therewith,
including the documents, exhibits, instruments, and other materials comprising the Plan Supplement.
5. 2 Sources
of
Cash
for
Distributions
and
Operations
. If the Zonda Plan Debtors Prevail in the Zonda
Arbitration, all Cash necessary for the Reorganized Zonda Debtors to make payments required by this Plan and for post-
Confirmation operations shall be obtained from (a) existing Cash held by the Reorganized Zonda Debtors on the
29
Effective Date after giving effect to the Professional Fee Escrow, (b) proceeds from any Retained Actions, and (c) proceeds
from the Zonda Arbitration Award.
5. 3 Restructuring
Transactions.
If the Zonda Plan Debtors Prevail in the Zonda Arbitration, on or as
soon as practicable after the Effective Date, the Reorganized Zonda Debtors are authorized, without further order of the
Bankruptcy Court, to take all actions as may be necessary or appropriate to effect any transaction described in, approved by,
contemplated by, or necessary to satisfy the Zonda Plan Debtors’ springing obligations under the New First Lien Notes and
the New Second Lien PIK Toggle Notes including, without limitation: (a) the execution and delivery of all appropriate
agreements or other documents of merger, consolidation, restructuring, conversion, disposition, transfer, dissolution, or
liquidation containing terms that are consistent with the terms of this Plan and that satisfy the requirements of applicable
law and any other terms to which the applicable Entities may agree; (b) the execution and delivery of appropriate
instruments of transfer, assignment, assumption, or delegation of any asset, property, right, liability, debt, or obligation on
terms consistent with the terms of this Plan and having other terms for which the applicable parties agree; (c) rejection or
assumption, as applicable, of Executory Contracts and Unexpired Leases; (d) the filing and/or execution of appropriate
limited liability company agreements, certificates, or articles of incorporation or organization, reincorporation, merger,
consolidation, conversion, or dissolution pursuant to applicable state law; (e) the consummation of the transactions
contemplated by the New First Lien Notes Documentation, and the New Second Lien PIK Toggle Notes Documentation,
and the execution thereof; (f) all other actions that the applicable Entities determine to be necessary or appropriate,
including making filings or recordings that may be required by applicable law.
5. 4 Intercompany
Claims.
If the Zonda Plan Debtors Prevail in the Zonda Arbitration, Allowed
Intercompany Claims shall be paid, adjusted, continued, settled, Reinstated, discharged or eliminated, in each case to the
extent determined to be appropriate by the Zonda Plan Debtors or the Reorganized Zonda Debtors, as applicable. If the
Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, Allowed Intercompany Claims shall be paid, adjusted,
continued, settled, Reinstated, discharged or eliminated, in each case to the extent determined to be appropriate by the
Liquidation Trust.
5. 5 Effectuating
Documents;
Further
Transactions
. If the Zonda Plan Debtors Prevail in the Zonda
Arbitration, the chairman of the board of directors, president, chief executive officer, chief financial officer, manager, or
any other
30
appropriate officer of the Zonda Plan Debtors or, after the Effective Date, the Reorganized Zonda Debtors, shall be
authorized to execute, deliver, file, or record such contracts, instruments, releases, indentures, and other agreements or
documents, and take such actions as may be necessary or appropriate to effectuate and further evidence the terms and
conditions of this Plan. The secretary of the Zonda Plan Debtors, or, after the Effective Date, of the Reorganized Zonda
Debtors, shall be authorized to certify or attest to any of the foregoing actions.
5. 6 Exemption
from
Certain
Transfer
Taxes
and
Recording
Fees
. If the Zonda Plan Debtors Prevail
in the Zonda Arbitration, to the maximum extent provided by section 1146(a) of the Bankruptcy Code, any post-
Confirmation sale by any Zonda Plan Debtor or any transfer from any Entity pursuant to, in contemplation of, or in
connection with this Plan or pursuant to: (a) the issuance, distribution, transfer, or exchange of any debt, equity security, or
other interest in the Zonda Plan Debtors; or (b) the making, delivery, or recording of any deed or other instrument of
transfer under, in furtherance of, or in connection with, this Plan, including any deeds, bills of sale, assignments, or other
instruments of transfer executed in connection with any transaction arising out of, contemplated by, or in any way related to
this Plan, shall not be subject to any document recording tax, stamp tax, conveyance fee, intangibles or similar tax,
mortgage tax, real estate transfer tax, mortgage recording tax, Uniform Commercial Code filing or recording fee, or other
similar tax or governmental assessment, in each case to the extent permitted by applicable bankruptcy law, and the
appropriate state or local government officials or agents shall forego collection of any such tax or governmental assessment
and accept for filing and recordation any of the foregoing instruments or other documents without the payment of any such
tax or governmental assessment.
5. 7 Enforcement
of
Zonda
Arbitration
Award
Against
SHI
.
If the Zonda Plan Debtors Prevail in the
Zonda Arbitration, SHI shall have ten (10) days to satisfy the Zonda Arbitration Award during which time the Zonda Plan
Debtors or the Reorganized Zonda Debtors, as applicable, shall not take any actions against SHI to enforce such Zonda
Arbitration Award.
31
ARTICLE VI
MEANS FOR IMPLEMENTATION OF THIS PLAN IF THE ZONDA PLAN DEBTORS DO NOT
PREVAIL IN THE ZONDA ARBITRATION
6. 1 Continued
Corporate
Existence
and
Vesting
of
Assets
in
the
Liquidation
Trust.
If the Zonda Plan
Debtors Do Not Prevail in the Zonda Arbitration, except as otherwise provided herein, on the Effective Date, the proceeds
of the Liquidation Trust Funding Amount Escrow Account shall be transferred to the Liquidation Trust, free and clear as
provided in the Plan or the Liquidation Trust Agreement.
If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, except as otherwise provided in this Plan,
PDVIII shall be deemed dissolved on the Effective Date and its Chapter 11 Case shall be deemed closed without any further
order of the Bankruptcy Court, and PDSI shall continue to exist after the Effective Date as a separate corporate Entity, with
all the powers of a corporation, pursuant to the applicable law in Delaware, the jurisdiction in which PDSI is incorporated,
and pursuant to the respective certificate of incorporation, and amended and restated bylaws in effect prior to the Effective
Date, except to the extent such certificate of incorporation and amended and restated bylaws are amended by this Plan, the
Plan Supplement, or otherwise, and to the extent such documents are amended, such documents are deemed to be pursuant
to this Plan and require no further action or approval, as permitted by applicable law. On or after the Effective Date, PDSI
may, in the Liquidation Trust’s sole discretion, take such action as permitted by applicable law, and PDSI’s organizational
documents, as the Liquidation Trust may determine is reasonable and appropriate, including causing: (a) PDSI to be
merged into the Liquidation Trust; (b) PDSI to be dissolved; (c) the legal name of PDSI to be changed; (d) PDSI to
reorganize under the laws of another jurisdiction; or (e) the closure of a Zonda Plan Debtor’s Chapter 11 Case on the
Effective Date or any time thereafter. PDSI should be deemed dissolved upon termination of the Liquidation Trust, or the
wind down of the Liquidation Trust, as provided in the Plan or the Liquidation Trust Agreement.
6. 2 Sources
of
Cash
for
Payment
of
Claims
. If the Zonda Plan Debtors Do Not Prevail in the Zonda
Arbitration, all Cash necessary for the Liquidation Trust to make payments required by this Plan shall be obtained from (a)
existing Cash held by the Zonda Plan Debtors, (b) the disposition of the Pacific
Zonda
, (c) the disposition of the Zonda
Plan Debtors’ equipment on the Pacific
Zonda
, (d) proceeds from any Retained Actions, and (e) the Liquidation Trust
Funding Amount.
6. 3 Creation
of
the
Liquidation
Trust
and
Appointment
of
the
Liquidation
Trustee.
(a) Creation
of
the
Liquidation
Trust.
If the Zonda Plan Debtors Do Not Prevail in the Zonda
Arbitration, on the Effective Date, the Liquidation Trust shall be formed pursuant to this Plan and the Liquidation Trust
shall be established and become effective in accordance with the Liquidation Trust Agreement to liquidate the Liquidation
Trust Assets, including, without limitation, the prosecution of the Retained
32
Actions under the jurisdiction of the Bankruptcy Court and to enable the Liquidation Trustee to distribute the proceeds
thereof to Holders of Allowed Zonda Deficiency Claims in accordance with the Plan and the Liquidation Trust Agreement;
provided,
however,
that if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Zonda Plan Debtors or the
Reorganized Non-Zonda Debtors shall have ten (10) days to satisfy the Zonda Arbitration Award during which time the
Liquidation Trustee may not bring any Retained Actions. The Liquidation Trust, when established pursuant to the Plan and
the Liquidation Trust Agreement, will be an affiliate of the Zonda Plan Debtors (within the meaning and solely for purposes
of Sections 1125(e) and 1145(a) of the Bankruptcy Code). The Liquidation Trust shall be established for the sole purpose
of liquidating and distributing the assets of the Zonda Plan Debtors contributed to such Liquidation Trust in accordance with
Treasury Regulation section 301.7701-4(d), with no objective to continue or engage in the conduct of a trade or
business. The terms of the Liquidation Trust Agreement shall be satisfactory in form and substance to SHI, and shall be
established in consultation with the Zonda Plan Debtors. In the event of any conflict or inconsistency between the Plan and
the Liquidation Trust Agreement, as such conflict or inconsistency relates to the establishment of the Liquidation Trust, the
terms of the Plan shall govern.
(b) Liquidation
Trust
Agreement
and
Appointment
of
the
Liquidation
Trustee.
If the Zonda Plan
Debtors Do Not Prevail in the Zonda Arbitration, on the Effective Date, the Liquidation Trust Agreement shall be executed
by the Zonda Plan Debtors and the Liquidation Trustee and shall become effective without further action by any party. The
Liquidation Trustee shall be selected by SHI, in consultation with the Zonda Plan Debtors, and approved pursuant to the
Confirmation Order or the Liquidation Trust Agreement.
(c) Liquidation
Trust
Assets.
If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration,
the assets of the Liquidation Trust shall consist of the Liquidation Trust Assets. On the Effective Date, the proceeds of the
Liquidation Trust Funding Amount Escrow Account shall be released to the Liquidation Trust. Following the transfer of
the Liquidation Trust Assets to the Liquidation Trust, the Liquidation Trust will constitute a successor of the Zonda Plan
Debtors under the Plan (within the meaning and solely for purposes of Sections 1125(e) and 1145(a) of the Bankruptcy
Code). The Liquidation Trust Assets will be transferred free and clear, as provided in the Plan or the Liquidation Trust
Agreement. Such transfer shall be exempt from any stamp, real estate transfer, mortgage reporting, sales, use or other
similar tax, pursuant to § 1146(a) of the Bankruptcy Code.
33
6. 4 General
Powers,
Rights,
and
Responsibilities
of
the
Liquidation
Trustee
.
If the Zonda Plan
Debtors Do Not Prevail in the Zonda Arbitration, after the Effective Date, pursuant to the Liquidation Trust Agreement, the
Liquidation Trustee shall have the authority and right on behalf of the Zonda Plan Debtors without the need for Bankruptcy
Court approval (unless otherwise expressly indicated herein), to carry out and implement all provisions of the Zonda Plan,
including, without limitation, to:
(a) oversee and control the Liquidation Trust;
Court;
(b) collect and liquidate the Liquidation Trust Assets under the jurisdiction of the Bankruptcy
(c) assert, prosecute, pursue, compromise and settle in accordance with the Liquidation Trustee’s
reasonable business judgment, all Claims and Causes of Action, and enforce all legal or equitable remedies and defenses
belonging to the Zonda Plan Debtors or their Estates, including, without limitation, setoff, recoupment and any rights under
section 502(d) of the Bankruptcy Code;
(d) object to Claims in accordance with the Liquidation Trustee’s reasonable business judgment;
(e) make distributions to Holders of Allowed Zonda Deficiency Claims;
(f) exercise reasonable business judgment to direct and control the wind down, liquidation, sale,
and/or abandoning of the remaining assets of the Zonda Plan Debtors and in accordance with applicable law as necessary to
maximize distributions to Holders of Allowed Zonda Deficiency Claims;
(g) prosecute all Causes of Action (other than those Causes of Action that are released, waived,
or transferred pursuant to the Plan) on behalf of the Zonda Plan Debtors for the benefit of Holders of Allowed Zonda
Deficiency Claims, elect not to pursue any Causes of Action, and determine whether and when to compromise, settle,
abandon, dismiss, or otherwise dispose of any such Causes of Action, as the Liquidation Trustee may determine is in the
best interests of the Holders of Allowed Zonda Deficiency Claims;
(h) retain professionals to assist in performing the Liquidation Trustee’s duties under this Plan;
34
(i) maintain the books and records and accounts of the Liquidation Trust;
(j) invest the Cash of the Liquidation Trust (other than the Liquidation Trust Reserve), and any
income earned thereon;
(k) incur and pay reasonable and necessary expenses in connection with the performance of the
Liquidation Trustee’s duties under this Plan, including the reasonable fees and expenses of professionals retained by the
Liquidation Trust;
(l) administer the Liquidation Trust’s tax obligations, including (1) filing tax returns and paying
tax obligations, (2) requesting, if necessary, an expedited determination of any unpaid tax liability of the Liquidation Trust
under Bankruptcy Code section 505(b) for all taxable periods of such Zonda Plan Debtor ending after the Petition Date
through the liquidation of the Liquidation Trust as determined under applicable tax laws, and (3) representing the interest
and account of the Liquidation Trust before any taxing authority in all matters including, without limitation, any action, suit,
proceeding or audit;
relating to the Liquidation Trust that are required hereunder, by any Governmental Unit or under applicable law;
(m) prepare and file any and all informational returns, reports, statements, returns or disclosures
(n) arrange for the liquidation and/or dissolution of PDVIII in accordance with the applicable law
and to indemnify, out of the assets of the Liquidation Trust, any liquidator appointed under the applicable law, or to seek
any appropriate relief in furtherance of this Plan in any appropriate jurisdiction; and
(o) perform other duties and functions that are consistent with the implementation of this Plan.
6. 5 Indemnification
.
If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the
Liquidation Trust shall indemnify and hold harmless the Liquidation Trustee, solely in his or her capacity as the Liquidation
Trustee for any losses incurred in such capacity, except to the extent such losses were the result of the Liquidation Trustee’s
gross negligence, willful misconduct, or criminal conduct .
35
6. 6 Issuance
of
Liquidation
Trust
Interests.
(a) Liquidation
Trust
Interests
. If the Zonda Plan Debtors Do Not Prevail in the Zonda
Arbitration, Liquidation Trust Interests shall be distributed to Holders of Allowed Zonda Deficiency Claims on a Pro Rata
basis based on the Allowed amount of their Claims and in exchange for such claims. In such event, on or before the
Effective Date, the Zonda Plan Debtors shall deliver to the Liquidation Trust a list of each Person to receive Liquidation
Trust Interests as of the Effective Date pursuant to the Plan, including the Allowed amounts of the Zonda Deficiency Claims
and the address of each such Person.
(b) Register
of
Liquidation
Trust
Interests;
Non-Transferability
of
Liquidation
Trust
Interests;
Reports
. If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation Trust shall
maintain a register of the Holders of Liquidation Trust Interests. To the extent permitted in the Plan and the Liquidation
Trust Agreement, upon notice to the Liquidation Trust by any Holder or transferee of a Liquidation Trust Interest, the
Liquidation Trustee shall amend the register to reflect any transfer of a Liquidation Trust Interest by such Holder to a
transferee as set forth in the notice; provided,
however
, that the Liquidation Trust need not reflect any transfer (or make
any distribution to any transferee) and will give notice to such Holder that no transfer has been recognized in the event the
Liquidation Trust reasonably believes that such transfer (or the distribution to such transferee) may constitute a violation of
applicable laws or might cause the Liquidation Trust to be required to register Liquidation Trust Interests, or to become a
reporting company under the Exchange Act. The Liquidation Trust Interests may not be transferred or assigned, except by
will, intestate succession or operation of law, and will not be represented by certificates. Neither the Liquidation Trust nor
other persons affiliated with the Liquidation Trust nor PDSI will take any actions to facilitate or encourage any trading in
the Liquidation Trusts Interests or any instrument or interest tied to the value of the Liquidation Trust Interests. The
Liquidation Trust shall provide each Holder of Liquidation Trust Interests with periodic reports at least annually containing
unaudited financial information prepared in accordance with GAAP.
6. 7 Federal
Income
Tax
Treatment
of
the
Liquidation
Trust
.
If the Zonda Plan Debtors Do Not
Prevail in the Zonda Arbitration, the Liquidation Trust generally is intended to be treated for United States federal income
tax
36
purposes, (i) in part as a grantor trust that is a liquidating trust within the meaning of Treasury Regulations § 301.7701-4(d),
with no objective to continue or engage in the conduct of a trade or business, and (ii) in part as one or more disputed
ownership funds within the meaning of Treasury Regulations § 1.468B-9(b)(1). For United States federal income tax
purposes, the transfer of the Liquidation Trust Assets to the Liquidation Trust will be treated as a transfer of the Liquidation
Trust Assets from the Zonda Plan Debtors to the Holders of Liquidation Trust Interests, followed by the Holders of
Liquidation Trust Interests’ transfer of the Liquidation Trust Assets to the Liquidation Trust. The Holders of Liquidation
Trust Interests will thereafter be treated for U.S. federal income tax purposes as the grantors and deemed owners of their
respective shares of the Liquidation Trust Assets. The Holders of Liquidation Trust Interests shall include in their annual
taxable incomes, and pay tax to the extent due on, their allocable shares of each item of income, gain, deduction, loss and
credit, and all other such items shall be allocated by the Liquidation Trust to the Holders of Liquidation Trust Interests using
any reasonable allocation method.
The Liquidation Trustee will be required by the Liquidation Trust Agreement to file income tax returns for the
Liquidation Trust as a grantor trust of the Holders of the Liquidation Trust Interests (and file separate returns for the
disputed ownership fund(s) pursuant to Treasury Regulations § 1.468B-9(b)(1) and pay all taxes owed on any net income
or gain of the disputed ownership fund(s), on a current basis from Liquidation Trust Assets). In addition, the Liquidation
Trust Agreement will require consistent valuation by the Liquidation Trust and the Holders of Liquidation Trust Interests,
for all federal income tax and reporting purposes, of any property held by the Liquidation Trust. The Liquidation Trust
Agreement also will limit the investment powers of the Liquidation Trust in accordance with IRS Rev. Proc. 94-45 and will
require the Liquidation Trust to distribute at least annually to the Holders of Liquidation Trust Interests (as such may have
been determined at such time) its net income (net of any payment of or provision for taxes), except for amounts retained as
reasonably necessary to maintain the value of the Liquidation Trust Assets.
6.8 Liquidation
Trust
Funding.
If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, on
or as soon as practicable after the Effective Date, the Liquidation Trust Funding Reserve shall be established from the
Liquidation Trust Assets. Subject to the provisions of the Liquidation Trust Agreement, the Liquidation Trust Funding
Reserve shall be used to pay the expenses of the Liquidation Trust, including without limitation, costs and expenses of
counsel or other advisors and a sum to be provided on account of the fees of a liquidator in the British Virgin Islands which
shall not exceed $35,000 to give effect to the dissolution hereby contemplated and to provide such other indemnities to that
liquidation as the Liquidation Trustee shall in its sole discretion consider appropriate. The Liquidation Trust Agreement
shall provide for an allocation of the Liquidation Trust Funding Reserve across projected expenditures agreed to by SHI in
consultation with the Liquidation Trustee. Such expenses shall be paid as they are incurred without the
37
need for Bankruptcy Court approval. Additional funding of the Liquidation Trust Funding Reserve may only be authorized
in accordance with the terms of the Liquidation Trust Agreement.
6. 9 Creation
of
the
Liquidation
Trust
Funding
Amount
Escrow
Account.
On the Confirmation Date,
the Zonda Plan Debtors will fund and create the Liquidation Trust Funding Amount Escrow Account. The Liquidation
Trust Funding Amount will stay in the Liquidation Trust Funding Amount Escrow Account until the Zonda Arbitration
Award shall have been issued and shall be final and Unappealable. On the Effective Date, proceeds of the Liquidation Trust
Funding Amount Escrow Account will be released to the Zonda Plan Debtors if the Zonda Plan Debtors Prevail in the
Zonda Arbitration, or to the Liquidation Trust if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration.
6. 10 Effectuating
Documents;
Further
Transactions
.
If the Zonda Plan Debtors Do Not Prevail in the
Zonda Arbitration, subject to the Liquidation Trust Agreement, chairman of the board of directors, president, chief
executive officer, chief financial officer, manager, or any other appropriate officer of the Zonda Plan Debtors or, after the
Effective Date, PDSI, shall be authorized to execute, deliver, file, or record such contracts, instruments, releases, indentures,
and other agreements or documents, and take such actions as may be necessary or appropriate to effectuate and further
evidence the terms and conditions of this Plan. The secretary of the Zonda Plan Debtors, or, after the Effective Date, PDSI,
shall be authorized to certify or attest to any of the foregoing actions.
6. 11 Dissolution
.
(a) The Liquidation Trustee and Liquidation Trust shall be discharged and/or dissolved, as the
case may be, at such time as (i) all of the Liquidation Trust Assets have been distributed pursuant to the Plan and the
Liquidation Trust Agreement, (ii) the Liquidation Trustee determines, in its sole discretion, that the administration of any
remaining Liquidation Trust Assets is not likely to yield sufficient additional Liquidation Trust proceeds to justify further
pursuit, or (iii) all distributions required to be made by the Liquidation Trust under the Plan and the Liquidation Trust
Agreement have been made; provided,
however
, that in no event shall the Liquidation Trust be dissolved later than five (5)
years after the Effective Date of such Liquidation Trust unless the Bankruptcy Court approves an extension based on a
finding that such an extension is necessary for the Liquidation Trust to complete its liquidating purpose.
38
(b) If at any time the Liquidation Trustee determines, in reliance upon such professionals as the
Liquidation Trust may retain, that the expense of administering the Liquidation Trust so as to make a final distribution to
Holders of Allowed Zonda Deficiency Claims is likely to exceed the value of the assets remaining in the Liquidation Trust,
the Liquidation Trust may apply to the Bankruptcy Court for authority to (i) reserve any amount necessary to dissolve the
Liquidation Trust, (ii) donate any balance to a charitable organization (A) described in section 501(c)(3) of the IRC, (B)
exempt from United States federal income tax under section 501(a) of the IRC, (C) not a “private foundation,” as defined in
section 509(a) of the IRC, and (D) that is unrelated to the Zonda Plan Debtors, the Liquidation Trust, and any insider of the
Liquidation Trust, and (iii) dissolve such Liquidation Trust.
6. 12 Certain
Securities
Laws
Matters.
The Liquidation Trust Interests shall not be “securities” under
federal and state securities laws or, to the extent they are “securities,” their issuance shall be exempt from the registration
requirements of Section 5 of the Securities Act and any other applicable U.S. state or other law requiring registration prior
to the offering, issuance, distribution or sale of securities, in accordance with and pursuant to Section 1145 of the
Bankruptcy Code. The Plan prohibits, and the Liquidation Trust Agreement will prohibit, the transfer or assignment of the
Liquidation Trust Interests except by will, intestate succession or by operation of law. In addition, to the extent the
Liquidation Trust Interests are “securities,” the Liquidation Trust Interests will not be required to be registered under
Section 12(g) of the Exchange Act.
ARTICLE VII
CORPORATE GOVERNANCE
7. 1 Cancellation
of
Existing
Securities
and
Agreements.
Except as provided in this Plan or in the
Confirmation Order, on the Effective Date, all notes, stock (where permitted by applicable law), instruments, certificates,
agreements, side letters, fee letters, and other documents evidencing or giving rise to Claims against and Interests in the
Zonda Plan Debtors shall be cancelled, and the obligations of the Zonda Plan Debtors thereunder or in any way related
thereto shall be fully released, terminated, extinguished, and discharged, in each case without further notice to or order of
the Bankruptcy Court, act or action under applicable law, regulation, order, or rule, or any requirement of further action,
vote, or other approval or authorization by any Person. The Holders of or parties to such notes, stock, instruments,
certificates, agreements, side letters, fee letters, and other documents shall retain their rights vis-à-
39
vis each other but shall have no rights against any Zonda Plan Debtor arising from or relating to such notes, stock,
instruments, certificates, agreements, side letters, fee letters, and other documents or the cancellation thereof, except the
rights provided pursuant to this Plan and the Confirmation Order.
7. 2 Cancellation
of
Certain
Existing
Security
Interests
. Upon the full payment or other satisfaction of
an Allowed Secured Claim, or reasonably promptly thereafter, the Holder of such Allowed Secured Claim shall deliver to
the Zonda Plan Debtors or Reorganized Zonda Debtors, as applicable, and at their sole cost and expense, any collateral or
other property of a Zonda Plan Debtor held by such Holder, together with any termination statements, instruments of
satisfaction, or releases of all security interests with respect to its Allowed Secured Claim that may be reasonably required
to terminate any related financing statements, mortgages, mechanics’ or other statutory liens, or lis pendens, or similar
interests or documents.
7. 3 Preservation
of
Retained
Actions
. In accordance with section 1123(b)(3) of the Bankruptcy Code,
the Reorganized Zonda Debtors, or the Liquidation Trust, as applicable, will retain and may (but are not required to) enforce
all Retained Actions as follows: after the Effective Date, if the Zonda Plan Debtors Prevail in the Zonda Arbitration, the
Reorganized Zonda Debtors, and if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation Trust,
in their respective sole and absolute discretion, shall have the right to bring, settle, release, compromise, or enforce such
Retained Actions (or decline to do any of the foregoing), without further approval of the Bankruptcy Court. The
Reorganized Zonda Debtors or the Liquidation Trust, as applicable, or any successors, in the exercise of their sole
discretion, may pursue such Retained Actions so long as it is in the best interests of the Reorganized Zonda Debtors or the
Liquidation Trust, as applicable, or any of their respective successors holding such rights of action. The failure of the
Zonda Plan Debtors to specifically list any claim, right of action, suit, proceeding, or other Retained Action in this Plan, the
Disclosure Statement, the Plan Supplement, or otherwise does not, and will not be deemed to, constitute a waiver or release
by the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust, as applicable, of such claim, right of
action, suit, proceeding, or other Retained Action, and the Reorganized Zonda Debtors or the Liquidation Trust, as
applicable, will retain the right to pursue such claims, rights of action, suits, proceedings, and other Retained Actions in
their sole discretion and, therefore, no preclusion doctrine, collateral estoppel, issue preclusion, claim preclusion, estoppel
(judicial, equitable, or otherwise), or laches will apply to such claim, right of action, suit, proceeding, or other Retained
Action upon or after the Confirmation or consummation of this Plan.
40
7. 4 Corporate
Action.
Each of the matters provided for under this Plan involving the corporate
structure of any Zonda Plan Debtor or any corporate action to be taken by or required of any Zonda Plan Debtor or
Reorganized Zonda Debtor shall be deemed to have occurred and be effective as provided herein, and shall be authorized,
approved, and, to the extent taken prior to the Effective Date, ratified in all respects without any requirement of further
action by shareholders, members, creditors, directors, or managers of the Zonda Plan Debtors or Reorganized Zonda
Debtors, as applicable. To the extent permitted by applicable law the authorizations and approvals contemplated by this
Section 7.4 shall be effective notwithstanding any requirements under nonbankruptcy law.
7. 5 Board
of
Directors
and
Officers.
The composition of each board of directors or similar governing
body, as applicable, of the Reorganized Zonda Debtors, shall be disclosed prior to the entry of the Confirmation Order to
the extent required by section 1129(a)(5) of the Bankruptcy Code.
7. 6 Further
Authorization.
The Zonda Plan Debtors and the Reorganized Zonda Debtors and the
Liquidation Trust, as applicable, shall be entitled to seek such orders, judgments, injunctions, and rulings as they deem
necessary to carry out the intentions and purposes, and to give full effect to the provisions, of this Plan.
ARTICLE VIII
DISTRIBUTIONS
8. 1 Distributions
from
Liquidation
Trust
to
Holders
of
Allowed
Zonda
Deficiency
Claims.
The
provisions of this Article VIII shall not apply to distributions from the Liquidation Trust to Holders of Allowed Zonda
Deficiency Claims. Distributions from the Liquidation Trust to Holders of such Allowed Zonda Deficiency Claims shall be
administered in accordance with, and subject to, as applicable, the terms of the Liquidation Trust Agreement and Article VI
of this Plan.
8. 2 Distributions
Generally
. Subject to Section 8.1 hereof, the Disbursing Agent shall make Plan
distributions on behalf of the Zonda Plan Debtors in accordance with this Article VIII and other governing terms of this
Plan.
41
8. 3 No
Postpetition
Interest
on
Claims
. Postpetition interest shall not accrue or be paid on any General
Unsecured Claims and no Holder of a Claim shall be entitled to interest accruing on or after the Petition Date, except to the
extent permitted under this Plan or the Bankruptcy Code.
8. 4 Date
of
Distributions
. Unless otherwise provided in this Plan, any distributions and deliveries to
be made under this Plan shall be made on the Effective Date or as soon thereafter as is practicable.
8. 5 Distribution
Record
Date
. As of the close of business on the Distribution Record Date, the various
lists of Holders of Claims in each Class, as maintained by the Zonda Plan Debtors or their agents, shall be deemed closed,
and there shall be no further changes in the record Holders of any Claims after the Distribution Record Date. Neither the
Zonda Plan Debtors nor the Disbursing Agent shall have any obligation to recognize any transfer of a Claim occurring after
the close of business on the Distribution Record Date. In addition, with respect to payment of any Cure Amounts or
disputes over any Cure Amounts, neither the Zonda Plan Debtors nor the Disbursing Agent shall have any obligation to
recognize or deal with any party other than the non-Debtor party to the applicable Executory Contract or Unexpired Lease,
even if such non-Debtor party has sold, assigned, or otherwise transferred its Claim for a Cure Amount.
8. 6 Disbursing
Agent
. Subject to Section 8.1 hereof, all distributions under this Plan shall be made by
the Disbursing Agent or, if applicable, its agent on and after the Effective Date as provided herein. The Disbursing Agent
shall not be required to give any bond or surety or other security for the performance of its duties. The Reorganized Zonda
Debtors or the Liquidation Trustee, as applicable, shall use all commercially reasonably efforts to provide the Disbursing
Agent (if other than the Reorganized Zonda Debtors or the Liquidation Trustee, as applicable) with the amounts of Claims
and the identities and addresses of Holders of Claims, in each case, as set forth in the Zonda Plan Debtors’ or Reorganized
Zonda Debtors’ books and records. The Reorganized Zonda Debtors or the Liquidation Trustee, as applicable, shall
cooperate in good faith with the applicable Disbursing Agent (if other than the Reorganized Zonda Debtors or the
Liquidation Trustee, as applicable) to comply with the reporting and withholding requirements outlined in Section 8.16
hereof.
8. 7 Delivery
of
Distributions
. Subject to Sections 8.8, 8.11, 8.12, 8.14, and 8.16 of this Plan, the
Disbursing Agent will issue or cause to be issued the applicable consideration under this Plan and, subject to Bankruptcy
Rule 9010, will make all distributions as and when required by this Plan to Holders of Allowed Claims to the address of the
Holder of such claim on the books and records of the Zonda Plan
42
Debtors or their agents or the address in any written notice of address change delivered to the Zonda Plan Debtors or the
Disbursing Agent, including any addresses included on any transfers of Claim filed pursuant to Bankruptcy Rule 3001. In
the event that any distribution is returned as undeliverable, no distribution or payment shall be made to such recipient unless
and until the Disbursing Agent has been notified of the then-current address of recipient, at which time or as soon thereafter
as reasonably practicable such distribution shall be made without interest.
8. 8 Unclaimed
Property
. One year from the later of: (a) the Effective Date and (ii) the date that is ten
(10) Business Days after the date a Claim is first Allowed, all distributions payable on account of such Claim shall be
deemed unclaimed property under section 374(b) of the Bankruptcy Code and shall revert to the Reorganized Zonda
Debtors or their successors or assigns, and all claims of any other Person (including the Holder of a Claim in the same
Class) to such distribution shall be discharged and forever barred. The Reorganized Zonda Debtors, the Liquidation Trust,
as applicable, and the Disbursing Agent shall have no obligation to attempt to locate any Holder of an Allowed Claim other
than by reviewing the Zonda Plan Debtors’ books and records and the Bankruptcy Court’s filings.
8. 9 Satisfaction
of
Claims
. Unless otherwise provided herein, any distributions and deliveries to be
made on account of Allowed Claims under this Plan shall be in complete and final satisfaction, settlement, and discharge of
and exchange for such Allowed Claims.
8. 10 Manner
of
Payment
Under
Plan
. Except as specifically provided herein, at the option of the
Zonda Plan Debtors, the Reorganized Zonda Debtors or the Liquidation Trust, as applicable, any Cash payment to be made
under this Plan may be made by a check or wire transfer or as otherwise required or provided in applicable agreements or
customary practices of the Zonda Plan Debtors or the Liquidation Trust, as applicable.
8. 11 De
Minimis
Cash
Distributions
. The Disbursing Agent shall not have any obligation to make a
distribution that is less than $50.00 in Cash.
8. 12 No
Distribution
in
Excess
of
Amount
of
Allowed
Claim
. Notwithstanding anything to the contrary
in this Plan, no Holder of an Allowed Claim shall receive, on account of such Allowed Claim, Plan distributions in excess
of the Allowed amount of such Claim.
8. 13 Allocation
of
Distributions
Between
Principal
and
Interest
. Except as otherwise provided in this
Plan and subject to Section 3.3 of this Plan, to the extent that any Allowed Claim entitled to a distribution under this Plan is
comprised of
43
indebtedness and accrued but unpaid interest thereon, such distribution shall be allocated first to the principal amount (as
determined for federal income tax purposes) of the Claim and then to accrued but unpaid interest.
8. 14 Setoffs
and
Recoupments
. The Liquidation Trust or each Reorganized Zonda Debtor or its
designee as instructed by such Reorganized Zonda Debtor, as applicable, may, pursuant to section 553 of the Bankruptcy
Code or applicable nonbankruptcy law, offset or recoup against any Allowed Claim and the distributions to be made
pursuant to this Plan on account of such Allowed Claim any and all claims, rights, and Causes of Action that the
Liquidation Trust or a Reorganized Zonda Debtor or its successors, as applicable, may hold against the Holder of such
Allowed Claim after the Effective Date to the extent that such setoff or recoupment is either (a) agreed in amount among the
Liquidation Trust or relevant Reorganized Zonda Debtor(s), as applicable, and Holder of the Allowed Claim or (b)
otherwise adjudicated by the Bankruptcy Court or another court of competent jurisdiction; provided
, that neither the failure
to effect a setoff or recoupment nor the allowance of any Claim hereunder will constitute a waiver or release by the
Liquidation Trust or a Reorganized Zonda Debtor or its successor, as applicable, of any claims, rights, or Causes of Action
that the Liquidation Trust or a Reorganized Zonda Debtor or its successor or assign, as applicable, may possess against such
Holder.
8. 15 Rights
and
Powers
of
Disbursing
Agent
.
(a) Powers
of
the
Disbursing
Agent
. The Disbursing Agent shall be empowered to: (i) effect all
actions and execute all agreements, instruments, and other documents necessary to perform its duties under this Plan; (ii)
make all applicable distributions or payments provided for under this Plan; (iii) employ professionals to represent it with
respect to its responsibilities; and (iv) exercise such other powers (a) as may be vested in the Disbursing Agent by order of
the Bankruptcy Court (including any order issued after the Effective Date) or pursuant to this Plan or (2) as deemed by the
Disbursing Agent to be necessary and proper to implement the provisions of this Plan.
(b) Expenses
Incurred
on
or
After
the
Effective
Date
. Except as otherwise ordered by the
Bankruptcy Court and subject to the written agreement of the Reorganized Zonda Debtors, the amount of any reasonable
fees and expenses incurred by the Disbursing Agent on or after the Effective Date (including, without limitation, taxes) and
any reasonable compensation and expense reimbursement Claims (including, without limitation, for reasonable attorneys’
and other professional fees and expenses) made by the Disbursing Agent shall be paid in Cash by the Reorganized Zonda
Debtors or the Liquidation Trust, as applicable.
44
8. 16 Withholding
and
Reporting
Requirements
. In connection with this Plan and all instruments issued
in connection therewith and distributed thereon, the Reorganized Zonda Debtors or the Liquidation Trust, as applicable,
shall comply with all withholding and reporting requirements imposed by any federal, state, or local taxing authority, and
all distributions under this Plan shall be subject to any such withholding and reporting requirements. In the case of a non-
Cash distribution that is subject to withholding, the distributing party may withhold an appropriate portion of such
distributed property and sell such withheld property to generate the Cash necessary to pay over the withholding tax. Any
amounts withheld pursuant to the preceding sentence shall be deemed to have been distributed to and received by the
applicable recipient for all purposes of this Plan.
Notwithstanding the above, each Holder of an Allowed Claim or Interest that is to receive a distribution under
this Plan shall have the sole and exclusive responsibility for the satisfaction and payment of any tax obligations imposed on
such Holder by any governmental unit, including income, withholding, and other tax obligations, on account of such
distribution. The Reorganized Zonda Debtors or the Liquidation Trust, as applicable, have the right, but not the obligation,
to not make a distribution until such Holder has made arrangements satisfactory to any issuing or disbursing party for
payment of any such tax obligations.
The Reorganized Zonda Debtors or the Liquidation Trust, as applicable, may require, as a condition to receipt
of a distribution, that the Holder of an Allowed Claim complete and return a Form W-8 or W-9, as applicable to each such
Holder. If the Reorganized Zonda Debtors or the Liquidation Trust, as applicable, make such a request and the Holder fails
to comply before the date that is 180 days after the request is made, the amount of such distribution shall irrevocably revert
to the applicable Reorganized Zonda Debtor or the Liquidation Trust, as applicable, and any Claim in respect of such
distribution shall be discharged and forever barred from assertion against such Reorganized Zonda Debtor or the
Liquidation Trust, as applicable, or its respective property.
8. 17 Claims
Paid
or
Payable
by
Third
Parties
.
(a) Claims
Paid
by
Third
Parties.
The Zonda Plan Debtors, the Reorganized Zonda Debtors, or
the Liquidation Trust, as applicable, shall reduce a Claim, and such Claim shall be Disallowed without a Claims objection
having to be filed and without any further notice to or action, order, or approval of the Bankruptcy Court, to the extent that
the Holder of such Claim receives payment on account of such Claim from a party that is not a Zonda Plan Debtor, a
Reorganized Zonda Debtor, or the Liquidation Trust. Subject to the last sentence of this paragraph, to the extent a Holder
45
of a Claim receives a distribution on account of such Claim and receives payment from a party that is not a Zonda Plan
Debtor, a Reorganized Zonda Debtor, or the Liquidation Trust on account of such Claim, such Holder shall, within fourteen
(14) days of receipt thereof, repay or return the distribution to the applicable Reorganized Zonda Debtor, or the Liquidation
Trust, as applicable, to the extent the Holder’s total recovery on account of such Claim from the third party and under this
Plan exceeds the amount of such Claim as of the date of any such distribution under this Plan. The failure of such Holder to
timely repay or return such distribution shall result in the Holder owing the applicable Reorganized Zonda Debtor, or the
Liquidation Trust, as applicable, annualized interest at the Federal Judgment Rate on such amount owed for each Business
Day after the 14-day period specified above until the amount is repaid.
(b) Claims
Payable
by
Third
Parties
. Except as otherwise provided in this Plan, (i) no
distributions under this Plan shall be made on account of an Allowed Claim that is payable pursuant to one of the Zonda
Plan Debtors’ insurance policies until the Holder of such Allowed Claim has exhausted all remedies with respect to such
insurance policy, and (ii) to the extent that one or more of the Zonda Plan Debtors’ insurers agrees to satisfy in full or in
part a Claim (if and to the extent adjudicated by a court of competent jurisdiction), then immediately upon such insurers’
agreement, the applicable portion of such Claim may be expunged without a Claims objection having to be filed and
without any further notice to or action, order, or approval of the Bankruptcy Court.
(c) Applicability
of
Insurance
Proceeds
. Except as otherwise provided in this Plan, distributions
to Holders of Allowed Claims shall be in accordance with the provisions of any applicable insurance policy. Nothing
contained in this Plan shall constitute or be deemed a waiver of any Cause of Action that the Zonda Plan Debtors or any
Entity may hold against any other Entity, including insurers under any policies of insurance, nor shall anything contained
herein (i) constitute or be deemed a waiver by such insurers of any rights or defenses, including coverage defenses, held by
such insurers, or (ii) establish, determine, or otherwise imply any liability or obligation, including any coverage obligation,
of any insurer.
ARTICLE IX
PROCEDURES FOR DISPUTED CLAIMS
9. 1 Allowance
of
Claims
. After the Effective Date, if the Zonda Plan Debtors Prevail in the Zonda
Arbitration, each of the Zonda Plan Debtors or the Reorganized Zonda Debtors, or if the Zonda Plan Debtors Do Not
Prevail in the Zonda Arbitration, the Liquidation Trust, shall have and retain any and all rights and defenses
46
such Zonda Plan Debtor had with respect to any Claim immediately before the Effective Date. Except as expressly
provided in this Plan or in any order entered in these Chapter 11 Cases prior to the Effective Date (including the
Confirmation Order), no Claim shall become an Allowed Claim unless and until such Claim is deemed Allowed under this
Plan or the Bankruptcy Court has entered a Final Order, including the Confirmation Order (when it becomes a Final Order),
in these Chapter 11 Cases allowing such Claim.
9. 2 Objections
to
Claims
.
(a) Authority
. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, the Zonda Plan
Debtors, and after the Effective Date, the Reorganized Zonda Debtors, shall have authority to (i) file objections to any
Claim, and to withdraw any objections to any Claim that they may file, (ii) settle, compromise, or litigate to judgment any
objections to any Claim, and (iii) except as set forth above, resolve any Disputed Claim outside the Bankruptcy Court under
applicable governing law. Alternatively, if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Zonda Plan
Debtors and after the Effective Date, the Liquidation Trust shall have authority to (i) file objections to any Claim, and to
withdraw any objections to any Claim that he or she may file, (ii) settle, compromise, or litigate to judgment any objections
to any Claim, and (iii) except as set forth above, resolve any Disputed Claim after the Effective Date outside the Bankruptcy
Court under applicable governing law.
(b) Objection
Deadline
. As soon as practicable, but no later than the Claims Objection
Deadline, the Zonda Plan Debtors, and after the Effective Date, if the Zonda Plan Debtors Prevail in the Zonda Arbitration,
the Reorganized Zonda Debtors, or if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation
Trust, may file objections with the Bankruptcy Court and serve such objections on the Holders of the Claims to which such
objections are made. Nothing contained herein, however, shall limit the right of the Reorganized Zonda Debtors, or the
Liquidation Trust, as applicable, to object to Claims, if any, filed or amended after the Claims Objection Deadline. The
Claims Objection Deadline may be extended by the Bankruptcy Court upon motion by the Reorganized Zonda Debtors or
the Liquidation Trust, as applicable.
9. 3 Estimation
of
Claims
. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, the Reorganized
Zonda Debtors, and if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation Trust, may at any
time after the Effective Date request that the Bankruptcy Court estimate any contingent, unliquidated, or Disputed Claim
pursuant to section 502(c) of the Bankruptcy Code, regardless of whether the Zonda Plan Debtors, the Reorganized Zonda
Debtors, or Liquidation Trust previously objected to such Claim or whether the Bankruptcy Court has ruled on any
47
such objection, and the Bankruptcy Court will retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any appeal relating to any such objection. In the
event that the Bankruptcy Court estimates any contingent, unliquidated, or Disputed Claim, the amount so estimated shall
constitute either the Allowed amount of such Claim or a maximum limitation on such Claim, as determined by the
Bankruptcy Court. If the estimated amount constitutes a maximum limitation on the amount of such Claim, the Zonda Plan
Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust as applicable, may pursue supplementary proceedings to
object to the allowance of such Claim. All of the aforementioned objection, estimation, and resolution procedures are
intended to be cumulative and not exclusive of one another. Claims may be estimated and subsequently compromised,
settled, withdrawn, or resolved by any mechanism approved by the Bankruptcy Court.
9. 4 No
Distributions
Pending
Allowance
. If an objection to a Claim is filed as set forth in Section 9.2
hereof, no payment or distribution provided under this Plan shall be made on account of such Claim unless and until such
Disputed Claim becomes an Allowed Claim.
9. 5 Resolution
of
Claims
. Except as otherwise provided herein, or in any contract, instrument, release,
indenture, or other agreement or document entered into in connection with this Plan, in accordance with section 1123(b) of
the Bankruptcy Code, if the Zonda Plan Debtors Prevail in the Zonda Arbitration, the Reorganized Zonda Debtors, and if
the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation Trust, shall retain and may enforce, sue
on, settle, or compromise (or decline to do any of the foregoing) all Claims, Disputed Claims, rights, Causes of Action,
suits, and proceedings, whether in law or in equity, whether known or unknown, that the Zonda Plan Debtors or their
Estates may hold against any Person, without the approval of the Bankruptcy Court, the Confirmation Order, and any
contract, instrument, release, indenture, or other agreement entered into in connection herewith. The Reorganized Zonda
Debtors or the Liquidation Trust or their respective successors may pursue such retained Claims, rights, Causes of Action,
suits, or proceedings, as appropriate, in accordance with the best interests of the Zonda Plan Debtors and the Liquidation
Trust, as applicable.
9. 6 Disallowed
Claims
. All Claims held by persons or entities against whom or which any of the
Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust have commenced a proceeding asserting a
Cause of Action under sections 542, 543, 544, 545, 547, 548, 549, and/or 550 of the Bankruptcy Code shall be deemed
Disallowed Claims pursuant to section 502(d) of the Bankruptcy Code and Holders of such Claims shall not be entitled to
vote to accept or reject this Plan. Claims
48
that are deemed disallowed pursuant to this Section 9.6 shall continue to be Disallowed for all purposes until such Claim
has been settled or resolved by Final Order and any sums due to the Zonda Plan Debtor, the Reorganized Zonda Debtors, or
the Liquidation Trust from such party have been paid.
ARTICLE X
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
10. 1 Rejection
of
Executory
Contracts
and
Unexpired
Leases
. Except as otherwise provided in this
Plan, on the Effective Date, all Executory Contracts and Unexpired Leases of the Zonda Plan Debtors shall be deemed
rejected in accordance with the provisions and requirements of sections 365 and 1123 of the Bankruptcy Code, unless such
Executory Contract or Unexpired Lease (a) has previously been assumed by order of the Bankruptcy Court in effect as of
the Effective Date (which order may be the Confirmation Order); (b) is the subject of a motion to assume filed on or before
the Effective Date; or (c) is identified as an Executory Contract or Unexpired Lease to be assumed pursuant to the Plan
Supplement before the Effective Date; or (d) has expired or terminated pursuant to its own terms. The Confirmation Order
will constitute an order of the Bankruptcy Court under sections 365 and 1123(b) of the Bankruptcy Code approving the
assumptions or assumption and assignments or rejections described herein as of the Effective Date. Unless otherwise
indicated, all assumptions, assumptions and assignments, and rejections of Executory Contracts and Unexpired Leases in
this Plan will be effective as of the Effective Date. Each Executory Contract and Unexpired Lease assumed or assumed and
assigned pursuant to this Plan, or by Bankruptcy Court order, will vest in and be fully enforceable by the applicable
Reorganized Zonda Debtor or assignee in accordance with its terms, except as such terms may have been modified by order
of the Bankruptcy Court.
10. 2 Indemnification
. Except as otherwise specifically limited in this Plan, any obligations or rights of
the Zonda Plan Debtors to defend, indemnify, reimburse, or limit the liability of the Zonda Plan Debtors’ present and former
directors, officers, employees, agents, representatives, attorneys, accountants, financial advisors, restructuring advisors,
investment bankers, and consultants (the “ Covered
Persons
”) pursuant to the Zonda Plan Debtors’ certificates of
incorporation, by-laws, indemnification agreements, policy of providing employee indemnification, applicable law, or
specific agreement in respect of any claims, demands, suits, Causes of Action, or proceedings against such Covered Persons
based upon any act or omission related to such Covered Persons’ service with, for, or on behalf of the Zonda Plan Debtors
prior to the Effective Date, shall be treated as if they were Executory Contracts that are assumed
49
under this Plan and shall survive the Effective Date and remain unaffected thereby, and shall not be discharged, irrespective
of whether such defense, indemnification, reimbursement, or limitation of liability is owed in connection with an occurrence
before or after the Petition Date.
10. 3 Claims
Based
on
Rejection
of
Executory
Contracts
and
Unexpired
Leases.
Unless otherwise
provided by a Bankruptcy Court order, any Proofs of Claim asserting Claims arising from the rejection of the Zonda Plan
Debtors’ Executory Contracts and Unexpired Leases pursuant to this Plan or otherwise must be filed no later than thirty (30)
days after the Effective Date. Any Proofs of Claim arising from the rejection of the Zonda Plan Debtors’ Executory
Contracts or Unexpired Leases that are not timely filed shall be Disallowed automatically, forever barred from assertion,
and shall not be enforceable against the Zonda Plan Debtors or the Reorganized Zonda Debtors without the need for any
objection by any Person or further notice to or action, order, or approval of the Bankruptcy Court, and any Claim arising out
of the rejection of such Executory Contract or Unexpired Lease shall be deemed fully satisfied, released, and discharged,
notwithstanding anything in the Schedules or a Proof of Claim to the contrary. All Allowed Claims arising from the
rejection of the Zonda Plan Debtors’ Executory Contracts and Unexpired Leases shall be classified as General Unsecured
Claims and shall be treated in accordance with the particular provisions of this Plan for such Claims; provided,
however
,
that if the Holder of an Allowed Claim for rejection damages has an unavoidable security interest in any collateral to secure
obligations under such rejected Executory Contract or Unexpired Lease, the Allowed Claim for rejection damages shall be
treated as an Other Secured Claim to the extent of the value of such Holder’s interest in such collateral, with the deficiency,
if any, treated as a General Unsecured Claim.
10. 4 Reservation
of
Rights.
Nothing contained in this Plan shall constitute an admission by the Zonda
Plan Debtors that any particular contract is in fact an Executory Contract or Unexpired Lease or that the Zonda Plan Debtors
have any liability thereunder. If there is a dispute regarding whether a contract or lease is or was executory or unexpired at
the time of assumption or rejection, the Zonda Plan Debtors or the Reorganized Zonda Debtors, as applicable, shall have
forty-five (45) days following entry of a Final Order resolving such dispute to alter and to provide appropriate treatment of
such contract or lease.
50
ARTICLE XI
CONDITIONS PRECEDENT TO CONFIRMATION
AND CONSUMMATION OF THIS PLAN
11. 1 Conditions
Precedent
to
Confirmation
of
the
Plan
. The following are conditions precedent to the
confirmation of the Plan:
(a) an order, in form and substance acceptable to the Zonda Plan Debtors and SHI finding that
the Disclosure Statement contains adequate information pursuant to section 1125 of the Bankruptcy Code shall have been
entered by the Bankruptcy Court; and
(b) the Plan and the Plan Supplement and all of the schedules, documents, and exhibits contained
therein including, but not limited to the Liquidation Trust Agreement, shall be acceptable to the Zonda Plan Debtors and
SHI shall have been filed.
11. 2 Conditions
Precedent
to
the
Effective
Date
. The Zonda Plan Debtors shall request that the
Confirmation Order include a finding by the Bankruptcy Court that, notwithstanding Bankruptcy Rule 3020(e), the
Confirmation Order shall take effect immediately upon its entry. The following are conditions precedent to the occurrence
of the Effective Date, each of which must be satisfied or waived in accordance with the terms hereof:
(a) the Bankruptcy Court shall have entered the Confirmation Order, which shall be in form and
substance acceptable to the Zonda Plan Debtors and SHI, and the Confirmation Order shall have become a Final Order and
shall, among other things, provide that the Zonda Plan Debtors, the Reorganized Zonda Debtors, and/or the Liquidation
Trust, as applicable, are authorized to take all actions necessary or appropriate to enter into, implement, and consummate
the agreements and documents created in connection with this Plan;
contained therein (and any amendment thereto) shall have been filed with the Bankruptcy Court;
(b) the final version of the Plan Supplement and all of the schedules, documents, and exhibits
(c) the Professional Fee Escrow shall have been funded;
(d) all governmental and third-party approvals and consents, including Bankruptcy Court
approval, necessary in connection with the transactions contemplated by this Plan, if any, shall have been obtained, if any,
not be subject to
51
unfulfilled conditions, and be in full force and effect, and all applicable waiting periods shall have expired without any
action being taken or threatened by any competent authority that would restrain, prevent, or otherwise impose materially
adverse conditions on such transactions;
(e) all documents and agreements necessary to implement this Plan shall have (i) been tendered
for delivery and (ii) been effected or executed by all Entities party thereto, and all conditions precedent to the effectiveness
of such documents and agreements shall have been satisfied or waived pursuant to the terms of such documents or
agreements;
(f) if the Zonda Plan Debtors Prevail in the Zonda Arbitration, all documents and agreements
necessary for the Zonda Plan Debtors to comply with the terms of the New First Lien Notes Indenture and the New Second
Lien PIK Toggle Notes Indenture;
(g) both (i) the Zonda Arbitration Award shall have been issued and shall be final and
Unappealable, and (ii) if the Zonda Plan Debtors Do Not Prevail, the Zonda Plan Debtors or the Reorganized Non-Zonda
Debtors shall have, within ten (10) days of the Zonda Arbitration Award becoming final and Unappealable, either (1) not
satisfied the Zonda Arbitration Award, or (2) informed SHI in writing that they will not satisfy the Zonda Arbitration
Award; and
Escrow Account.
(h) the Zonda Plan Debtors shall have created and funded the Liquidation Trust Funding Amount
11. 3 Waiver
of
Conditions
Precedent
. Each of the conditions precedent in Sections 11.1 and 11.2
hereof may be waived only if waived in writing by the Zonda Plan Debtors if the Zonda Plan Debtors Prevail in the Zonda
Arbitration, or by SHI if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, without notice, leave or order of
the Bankruptcy Court or any formal action other than proceedings to confirm or consummate this Plan.
ARTICLE XII
EFFECT OF PLAN CONFIRMATION
12. 1 Binding
Effect
. Following the Effective Date, this Plan shall be binding upon and inure to the
benefit of the Zonda Plan Debtors, their Estates, the Liquidation Trust, all present and former Holders of Claims and
Interests, whether or not such Holders voted in favor of this Plan, and their respective successors and assigns.
52
12. 2 Releases
and
Related
Matters
.
(a) Releases
by
the
Zonda
Plan
Debtors
. Pursuant to section 1123(b) of the Bankruptcy Code,
and without limiting any other applicable provisions of, or releases contained in, this Plan, as of the Effective Date, the
Zonda Plan Debtors and their Estates, the Reorganized Zonda Debtors, as applicable, and any other person seeking to
exercise the rights of the Estates, to the extent permitted by applicable law, shall be deemed to have conclusively,
absolutely, unconditionally, irrevocably, and forever released, waived, and discharged any and all liabilities, whether known
or unknown, foreseen or unforeseen, existing or hereinafter arising, in law, equity, or otherwise that such Person or Entity
has, had, or may have against any Released Party (which release shall be in addition to the discharge of Claims and
termination of Interests provided herein and under the Confirmation Order and the Bankruptcy Code), in each case, relating
to a Zonda Plan Debtor, the Estates, the Chapter 11 Cases, the negotiation, consideration, formulation, preparation,
dissemination, implementation, Confirmation, or consummation of this Plan, the Non-Zonda Debtors Plan, the Exhibits, the
Disclosure Statement, the Non-Zonda Debtors Disclosure Statement, any amendments thereof or supplements thereto, the
Plan Supplement, the Non-Zonda Debtors Plan Supplement, the New Secured Debt Documents, the New Intercreditor
Agreement, or the Restructuring Transactions, or any other transactions in connection with the Chapter 11 Cases or any
contract, instrument, release, or other agreement or document created or entered into or any other act taken or omitted to be
taken in connection therewith or in connection with any other obligations arising under this Plan or the obligations assumed
hereunder; provided,
however,
that nothing in this Section 12.2(a) shall be deemed to release any potential litigation claims,
including, but not limited to, any Retained Actions, to be prosecuted by the Liquidation Trust, and any SHI Retained
Actions, to be prosecuted by SHI, subject to the Bar Date Order and any argument regarding the applicability thereof, if the
Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration or any defenses the Reorganized Non-Zonda Debtors may
have to such claims; provided,
further,
however,
that the foregoing provisions shall have no effect on: (i) the liability of
any Person or Entity that would otherwise result from the failure to perform or pay any obligation or liability under this Plan
or any contract, instrument, release, or other agreement or document (A) previously assumed, (B) entered into during the
Chapter 11 Cases, or (C) to be entered into, assumed, or delivered in connection with this Plan; or (ii) the liability of any
Released Party that would otherwise result from any act or omission of such Released Party to the extent that such act or
omission is determined in a Final Order to have constituted gross negligence or willful misconduct (including fraud). For
the avoidance of doubt, nothing in this Section 12.2(a) shall relieve any Released Party from any obligation or liability
under this Plan nor have any impact whatsoever with respect to any SHI Retained
53
Actions, subject to the Bar Date Order and any argument regarding the applicability thereof.
Entry of the Confirmation Order shall constitute the Bankruptcy Court’s approval, of the Zonda Plan Debtor
Release, which includes by reference each of the related provisions and definitions contained in this Plan, and further, shall
constitute the Bankruptcy Court’s finding that the Zonda Plan Debtor Release is: (1) essential to the Confirmation of this
Plan; (2) an exercise of the Zonda Plan Debtors’ business judgment; (3) in exchange for the good and valuable
consideration and substantial contributions provided by the Released Parties; (4) a good faith settlement and compromise of
the Claims released by the Zonda Plan Debtor Release; (5) in the best interests of the Zonda Plan Debtors and all Holders of
Claims and Interests; (6) fair, equitable, and reasonable; (7) given and made after due notice and opportunity for hearing;
and (8) a bar to any of the Zonda Plan Debtors, the Reorganized Zonda Debtors, and the Estates and each of their current
and former Affiliates, and such Entities’ and their current and former Affiliates’ current and former officers, managers,
directors, equity holders (regardless of whether such interests are held directly or indirectly), predecessors, successors,
assigns, subsidiaries, principals, members, employees, agents, managed accounts or funds, management companies, fund
advisors, advisory board members, financial advisors, partners, attorneys, accountants, investment bankers, consultants,
representatives, and other professionals, each in their capacity as such asserting any Claim or Cause of Action released
pursuant to the Zonda Plan Debtor Release.
(b) Releases
by
the
Releasing
Parties
. Without limiting any other applicable provisions of, or
releases contained in, this Plan, as of the Effective Date, in consideration for the obligations of the Zonda Plan Debtors
under this Plan, and the consideration and other contracts, instruments, releases, agreements, or documents to be entered
into or delivered in connection with this Plan, each Releasing Party shall be deemed to have conclusively, absolutely,
unconditionally, irrevocably, and forever released, waived, and discharged any and all liabilities whether known or
unknown, foreseen or unforeseen, existing or hereinafter arising, in law, equity, or otherwise, that such Releasing Party has,
had, or may have against any Released Party (which release shall be in addition to the discharge of Claims and termination
of Interests provided herein and under the Confirmation Order and the Bankruptcy Code), in each case, relating to a Zonda
Plan Debtor, the Estates, the Chapter 11 Cases, the negotiation, consideration, formulation, preparation, dissemination,
implementation, Confirmation, or consummation of this Plan, the Exhibits, the Disclosure Statement, any amendments
thereof or supplements thereto, the Plan Supplement, the New Secured Debt Documents, the New Intercreditor Agreement,
or the Restructuring Transactions or any other transactions in connection with the Chapter 11 Cases or any contract,
instrument, release, or other agreement or document created or entered into or any other act taken
54
or omitted to be taken in connection therewith or in connection with any other obligations arising under this Plan or the
obligations assumed hereunder; provided,
however,
that nothing in this Section 12.2(b) shall be deemed to release any
potential litigation claims, including, but not limited to, any Retained Actions, to be prosecuted by the Liquidation Trust,
and any SHI Retained Actions, to be prosecuted by SHI subject to the Bar Date Order and any argument regarding the
applicability thereof, if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration or any defenses the Reorganized
Non-Zonda Debtors may have to such claims; provided,
further,
however,
that the foregoing provisions of this Section
12.2(b) shall have no effect on: (i) the liability of any Person or Entity that would otherwise result from the failure to
perform or pay any obligation or liability under this Plan or any contract, instrument, release, or other agreement or
document (A) previously assumed, (B) entered into during the Chapter 11 Cases, or (C) to be entered into, assumed, or
delivered in connection with this Plan; (ii) the liability of any Released Party that would otherwise result from any act or
omission of such Released Party to the extent that such act or omission is determined in a Final Order to have constituted
gross negligence or willful misconduct (including fraud); or (iii) any non-Released Party. For the avoidance of doubt,
nothing in this provision shall relieve any Released Party from any obligation or liability under this Plan nor have any
impact whatsoever with respect to any SHI Retained Actions, subject to the Bar Date Order and any argument regarding the
applicability thereof.
Entry of the Confirmation Order shall constitute the Bankruptcy Court’s approval, of the Third-Party Release,
which includes by reference each of the related provisions and definitions contained herein, and, further, shall constitute the
Bankruptcy Court’s finding that the Third-Party Release is: (1) essential to the Confirmation of this Plan; (2) given in
exchange for the good and valuable consideration and substantial contributions provided by the Released Parties; (3) a good
faith settlement and compromise of the Claims released by the Third-Party Release; (4) in the best interests of the Zonda
Plan Debtors and their Estates; (5) fair, equitable, and reasonable; (6) given and made after due notice and opportunity for
hearing; and (7) a bar to any of the Releasing Parties asserting any Claim or Cause of Action released pursuant to the Third-
Party Release.
(c) Waiver
of
Statutory
Limitation
on
Releases
. Without limiting any other applicable provisions
of, or releases contained in, this Plan, each Releasing Party in each of the releases contained in this Plan (including under
this Section 12.2) expressly acknowledges that although ordinarily a general release may not extend to claims which the
releasing party does not know or suspect to exist in his favor, which if known by it may have materially affected its
settlement with the party released, it has carefully considered and taken into account in determining to enter into the above
releases the possible existence of such unknown losses or claims. Without limiting the
55
generality of the foregoing, each Releasing Party expressly waives any and all rights conferred upon it by any statute or rule
of law which provides that a release does not extend to claims which the claimant does not know or suspect to exist in its
favor at the time of executing the release, which if known by it may have materially affected its settlement with the
Released Party, including the provisions of California Civil Code Section 1542. The releases contained in Article XII of
this Plan are effective regardless of whether those released matters are presently known, unknown, suspected or
unsuspected, foreseen or unforeseen.
12. 3 Discharge
of
the
Zonda
Plan
Debtors
.
(a) Upon the Effective Date, except as provided in this Plan or the Confirmation Order, the
Zonda Plan Debtors, and each of them, shall be deemed discharged and released under section 1141(d)(1)(A) of the
Bankruptcy Code from any and all Claims, including, but not limited to, demands and liabilities that arose before the
Effective Date, and all debts of the kind specified in section 502 of the Bankruptcy Code, whether or not (i) a Proof of
Claim based upon such debt is filed or deemed filed under section 501 of the Bankruptcy Code, (ii) a Claim based upon
such debt is Allowed under section 502 of the Bankruptcy Code, (iii) a Claim based upon such debt is or has been
Disallowed by order of the Bankruptcy Court, or (iv) the Holder of a Claim based upon such debt accepted this Plan; and
no Claim shall be made in any liquidation of any Zonda Plan Debtor under any applicable law.
(b) As of the Effective Date, except as provided in this Plan or the Confirmation Order, all
Persons shall be precluded from asserting against the Zonda Plan Debtors or the Reorganized Zonda Debtors any other or
further Claims, debts, rights, Causes of Action, claims for relief, liabilities, or Interests relating to the Zonda Plan Debtors
based upon any act, omission, transaction, occurrence, or other activity of any nature that occurred prior to the Effective
Date. In accordance with the foregoing, except as provided in this Plan or the Confirmation Order, the Confirmation Order
shall be a judicial determination of discharge of all such Claims and other debts and liabilities against the Zonda Plan
Debtors, pursuant to sections 524 and 1141 of the Bankruptcy Code, and such discharge shall void any judgment obtained
against the Zonda Plan Debtors at any time, to the extent that such judgment relates to a discharged Claim.
(c) For the avoidance of doubt, this Section 12.3 shall not apply to any Claims, debts, rights,
Causes of Action, claims for relief, liabilities, or Interests arising under the New Secured Debt Documents, whether
executed prior to, on, or after the Effective Date.
56
12. 4 Injunction
. Except as otherwise provided in this Plan or the Confirmation Order, from and after
the Effective Date, (a) to the extent a party’s Claim is discharged pursuant to this Plan or the Confirmation Order, such
party shall be permanently enjoined from pursuing such Claim against the parties that have been discharged pursuant to this
Plan or the Confirmation Order, and (b) to the extent a party’s Claim has been released pursuant to this Plan or the
Confirmation Order, such Releasing Party shall be permanently enjoined from pursuing such Claim against the applicable
Released Party, including (i) commencing or continuing in any manner any action or other proceeding of any kind,
including on account of any Claims, Interests, Causes of Action, or liabilities that have been Released; (ii) enforcing,
levying, attaching, collecting, or recovering by any manner or means any judgment, award, decree, or order; (iii) creating,
perfecting, or enforcing any Lien, Claim, or encumbrance of any kind; (iv) asserting any right of setoff, subrogation, or
recoupment of any kind against any debt, liability, or obligation due to the Zonda Plan Debtors, Reorganized Zonda
Debtors, or Released Parties; and (v) commencing or continuing any act, in any manner, or in any place to assert any Claim,
or send any notice or invoice in respect of any Claim that has been discharged or released under this Plan or that does not
otherwise comply with or is inconsistent with the provisions of this Plan, or from making or threatening to make or assert
any claim in any liquidation of any Zonda Plan Debtor under any applicable law; provided
, however
, that nothing
contained in this Plan shall (A) preclude an Entity from obtaining benefits directly and expressly provided to such Entity
pursuant to the terms of this Plan; (B) be construed to prevent any Entity from defending against Claims objections or
collection action, whether by asserting a right of setoff, recoupment, or otherwise, to the extent permitted by law; or (C)
enjoining or precluding any Entity that is not a Releasing Party from taking any of the foregoing enforcement actions
against QPGL or any member of the Ad Hoc Group or its assets or property on account of any Claims, Interests,
obligations, suits, judgments, damages, demands, debts, rights, Causes of Action, or liabilities that such Entity has not
waived, discharged, compromised, or released pursuant to this Plan or that have not been exculpated pursuant to Section
12.5.
12. 5 Exculpation
and
Limitation
of
Liability
. From and after the Effective Date, the Exculpated Parties
shall neither have nor incur any liability to any Person or Entity, and no Holder of a Claim or Interest, no other party in
interest, and none of their respective Representatives, each in their capacity as such, shall have any right of action against
any Exculpated Party for any act taken or omitted to be taken before the Effective Date based on the Chapter 11 Cases, the
negotiation, consideration, formulation, preparation, dissemination, implementation, Confirmation, or consummation of this
Plan, the Exhibits, the Disclosure Statement, any amendments thereof or supplements thereto, the Plan Supplement, the
New Secured Debt Documents, the New Intercreditor Agreement, or the Restructuring Transactions or any
57
other transactions in connection with the Chapter 11 Cases or any contract, instrument, release, or other agreement or
document created or entered into or any other act taken or omitted to be taken in connection therewith or in connection with
any other obligations arising under this Plan or the obligations assumed hereunder; provided
, however
, that the foregoing
provisions of this Section 12.5 shall have no effect on: (a) the liability of any Person or Entity that would otherwise result
from the failure to perform or pay any obligation or liability under this Plan or any contract, instrument, release, or other
agreement or document (i) previously assumed, (ii) entered into during the Chapter 11 Cases, or (iii) to be entered into or
delivered in connection with this Plan; or (b) the liability of any Exculpated Party from any obligation or liability under this
Plan.
12. 6 Term
of
Bankruptcy
Injunction
or
Stays
. Except as provided otherwise in this Plan, from and
after the entry of an order or other deemed action under this Plan closing these Chapter 11 Cases, the automatic stay of
section 362(a) of the Bankruptcy Code shall terminate.
12. 7 Post
-Confirmation
Date
Retention
of
Professionals
. Upon the Confirmation Date, any
requirement that professionals comply with sections 327 through 331 of the Bankruptcy Code in seeking retention or
compensation for services rendered after such date will terminate and the Reorganized Zonda Debtors or the Liquidation
Trust, as applicable, will employ and pay professionals in the ordinary course of business.
12. 8 Dissolution
of
PDVIII;
Cooperation
of
Liquidation
Trustee
. If the Zonda Plan Debtors Do Not
Prevail in the Zonda Arbitration, the Liquidation Trustee shall reasonably cooperate to execute, deliver, file, or record such
contracts, instruments, releases, and other agreements or documents, and take such actions as may be necessary or
appropriate to effectuate the dissolution of PDVIII in accordance with the laws of the British Virgin Islands and any other
applicable law.
ARTICLE XIII
RETENTION OF JURISDICTION
13. 1 Retention
of
Jurisdiction
. Pursuant to sections 105(c) and 1142 of the Bankruptcy Code and
notwithstanding entry of the Confirmation Order and the occurrence of the Effective Date, the Bankruptcy Court shall retain
jurisdiction (unless otherwise indicated) over all matters arising in, arising out of, and/or related to, the Chapter 11 Cases
and this Plan to the fullest extent permitted by law, including, among other things, jurisdiction to:
58
(a) resolve any matters related to the assumption, assumption and assignment, or rejection of any
Executory Contract or Unexpired Lease to which any Zonda Plan Debtor is a party or with respect to which any Zonda Plan
Debtor may be liable and to hear, determine, and, if necessary, liquidate any Claims arising therefrom;
(b) decide or resolve any motions, adversary proceedings, contested, or litigated matters, and any
other matters and grant or deny any applications involving the Zonda Plan Debtors that may be pending on the Effective
Date (which jurisdiction shall be non-exclusive as to any such non-core matters);
(c) enter such orders as may be necessary or appropriate to implement or consummate the
provisions of this Plan, and all contracts, instruments, releases, and other agreements or documents created in connection
with this Plan, the Disclosure Statement, the Plan Supplement, or the Confirmation Order;
(d) resolve any cases, controversies, suits, or disputes that may arise in connection with the
consummation, interpretation, or enforcement of this Plan or any contract, instrument, release, or other agreement or
document that is executed or created pursuant to this Plan, or any entity’s rights arising from or obligations incurred in
connection with this Plan or such documents;
(e) modify this Plan before or after the Effective Date pursuant to section 1127 of the Bankruptcy
Code or modify the Confirmation Order, or any contract, instrument, release, or other agreement or document created in
connection with this Plan or the Confirmation Order, or remedy any defect or omission or reconcile any inconsistency in
any Bankruptcy Court order, this Plan, the Confirmation Order, or any contract, instrument, release, or other agreement or
document created in connection with this Plan or the Confirmation Order, in such manner as may be necessary or
appropriate to consummate this Plan;
(f) hear and determine all applications for compensation and reimbursement of expenses of
Professionals under this Plan or under sections 330, 331, 503(b), and 1129(a)(4) of the Bankruptcy Code; provided
,
however
, that from and after the Effective Date the payment of fees and expenses by the Reorganized Zonda Debtors,
including professional fees, shall be made in the ordinary course of business and shall not be subject to the approval of the
Bankruptcy Court;
(g) issue injunctions, enter and implement other orders, or take such other actions as may be
necessary or appropriate to restrain interference by any Entity with consummation, implementation, or enforcement of this
Plan or the Confirmation Order;
59
of this Plan;
(h) adjudicate controversies arising out of the administration of the Estates or the implementation
(i) resolve any cases, controversies, suits, or disputes that may arise in connection with Claims,
including without limitation, the Bar Date, related notice, claim objections, allowance, disallowance, estimation, and
distribution;
Zonda Debtors, or the Liquidation Trust;
(j) hear and determine Retained Actions by or on behalf of the Zonda Plan Debtors, Reorganized
(k) enter and implement such orders as are necessary or appropriate if the Confirmation Order is
for any reason or in any respect modified, stayed, reversed, revoked, or vacated, or distributions pursuant to this Plan are
enjoined or stayed;
(l) determine any other matters that may arise in connection with or relate to this Plan, the
Disclosure Statement, the Confirmation Order, the Plan Supplement, or any contract, instrument, release, or other
agreement or document created in connection with this Plan, the Plan Supplement, the Disclosure Statement, or the
Confirmation Order;
rulings entered in connection with the Chapter 11 Cases;
(m) enforce all orders, judgments, injunctions, releases, exculpations, indemnifications, and
may be authorized under the Bankruptcy Code; and
(n) hear and determine such other matters as may be provided in the Confirmation Order or as
(o) enter an order closing the Chapter 11 Cases.
13. 2 Jurisdiction
for
Certain
Other
Agreements
. This Plan shall not modify the jurisdictional
provisions of the New Secured Debt Documents or the New Intercreditor Agreement. Notwithstanding anything herein to
the contrary, on and after the Effective Date, the Bankruptcy Court’s retention of jurisdiction pursuant to this Plan shall not
govern the enforcement or adjudication of any rights or remedies with respect to or as provided in the New Secured Debt
Documents or the New Intercreditor Agreement, and the jurisdictional provisions of such documents shall control.
13. 3 No
Limitation
on
Enforcement
by
SEC
on
Non-Debtors
. Notwithstanding any language to the
contrary contained herein, in the Disclosure Statement, or in the Confirmation Order, no provision of this Plan or the
Confirmation Order shall (a) preclude the SEC from enforcing its police or regulatory powers; or
60
(b) enjoin, limit, impair, or delay the SEC from commencing or continuing any claims, causes of action, proceedings, or
investigations against any non-Debtor person or non-Debtor entity in any forum.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14. 1 Payment
of
Statutory
Fees
. All fees payable pursuant to section 1930 of title 28 of the United
States Code shall be paid by the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust, as
applicable, on the earlier of when due or the Effective Date.
14. 2 Amendment
or
Modification
of
this
Plan
. Subject to section 1127 of the Bankruptcy Code and, to
the extent applicable, sections 1122, 1123, and 1125 of the Bankruptcy Code, the Zonda Plan Debtors reserve the right to
alter, amend, or modify this Plan at any time prior to or after the Confirmation Date but prior to the substantial
consummation of this Plan, subject to the express written consent of SHI. A Holder of a Claim that has accepted this Plan
shall be deemed to have accepted this Plan, as altered, amended, or modified, if the proposed alteration, amendment, or
modification does not materially and adversely change the treatment of the Claim of such Holder.
14. 3 Substantial
Consummation
. On the Effective Date, this Plan shall be deemed to be substantially
consummated under sections 1101 and 1127(b) of the Bankruptcy Code.
14. 4 Severability
of
Plan
Provisions
. If, prior to the Confirmation Date, any term or provision of this
Plan is determined by the Bankruptcy Court to be invalid, void, or unenforceable, the Bankruptcy Court shall have the
power to alter and interpret such term or provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be invalid, void, or unenforceable, and such term or
provision shall then be applicable as altered or interpreted. Notwithstanding any such holding, alteration, or interpretation,
the remainder of the terms and provisions of this Plan shall remain in full force and effect and shall in no way be affected,
impaired, or invalidated by such holding, alteration, or interpretation. The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision of this Plan, as it may have been altered or interpreted in
accordance with the foregoing, is valid and enforceable pursuant to its terms.
14. 5 Successors
and
Assigns
. This Plan shall be binding upon and inure to the benefit of the Zonda
Plan Debtors, and their respective successors and assigns,
61
including the Reorganized Zonda Debtors or the Liquidation Trust, as applicable. The rights, benefits, and obligations of
any Entity named or referred to in this Plan shall be binding on, and shall inure to the benefit of, any heir, executor,
administrator, successor, or assign of such Entity.
14. 6 Revocation
,
Withdrawal,
or
Non-Consummation
. The Zonda Plan Debtors reserve the right to
revoke or withdraw this Plan at any time prior to the Confirmation Date and to file other plans of reorganization, subject to
the express written consent of SHI. If the Zonda Plan Debtors revoke or withdraw this Plan, or if Confirmation or
consummation of this Plan does not occur, then (a) this Plan shall be null and void in all respects; (b) any settlement or
compromise embodied in this Plan (including the fixing or limiting to an amount any Claim or Class of Claims), assumption
or rejection of Executory Contracts or Unexpired Leases effected by this Plan, and any document or agreement executed
pursuant to this Plan shall be deemed null and void; and (c) nothing contained in this Plan, and no acts taken in preparation
for consummation of this Plan, shall (i) constitute or be deemed to constitute a waiver or release of any Claims by or
against, or any Interests in, the Zonda Plan Debtors or any other Person, (ii) prejudice in any manner the rights of the Zonda
Plan Debtors or any Person in any further proceedings involving the Zonda Plan Debtors, or (iii) constitute an admission of
any sort by the Zonda Plan Debtors or any other Person.
14. 7 Governing
Law
. Except to the extent that the Bankruptcy Code or other federal law is applicable,
or to the extent an Exhibit hereto or a schedule in the Plan Supplement provides otherwise, the rights, duties, and
obligations arising under this Plan shall be governed by, and construed and enforced in accordance with, the laws of the
State of New York, without giving effect to the principles of conflict of law thereof.
14. 8 Time
. In computing any period of time prescribed or allowed by this Plan, unless otherwise set
forth herein or determined by the Bankruptcy Court, the provisions of Bankruptcy Rule 9006 shall apply.
14. 9 Immediate
Binding
Effect
. Notwithstanding Bankruptcy Rules 3020(e), 6004(h), or 7062 or
otherwise, upon the occurrence of the Effective Date, the terms of this Plan and Plan Supplement shall be immediately
effective and enforceable and deemed binding upon and inure to the benefit of the Zonda Plan Debtors, the New First Lien
Noteholders, the New Second Lien PIK Toggle Noteholders, the Holders of Claims and Interests, the Released Parties, the
Exculpated Parties, and each of their respective successors and assigns, including the Reorganized Zonda Debtors or the
Liquidation Trust, as applicable.
62
14. 10 Entire
Agreement
. On the Effective Date, this Plan, the Plan Supplement, and the Confirmation
Order shall supersede all previous and contemporaneous negotiations, promises, covenants, agreements, understandings and
representations on such subjects, all of which have become merged and integrated into this Plan.
14. 11 Notice
. All notices, requests, and demands to or upon the Zonda Plan Debtors, Reorganized Zonda
Debtors, and SHI to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when actually delivered or, in the case of notice by facsimile or other electronic transmission,
when received and telephonically confirmed, addressed as follows:
PDVIII
11700 Katy Freeway, #175
Houston, TX 77079
(713) 334-6662
Attention: Bernie G. Wolford Jr. and Lisa Buchanan
Email: b.wolford@pacificdrilling.com,
l.buchanan@pacific drilling.com
and
TOGUT, SEGAL & SEGAL LLP
One Penn Plaza, Suite 3335
New York, New York 10019
(212) 594-5000
Attention: Albert Togut, Frank A. Oswald, Kyle J. Ortiz, and Amanda C. Glaubach
E-mail: altogut@teamtogut.com, frankoswald@teamtogut.com, kortiz@teamtogut.com,
aglaubach@teamtogut.com
Attorneys for the Zonda Plan Debtors
63
-and-
DLP Piper LLP (US)
1201 North Market Street
Suite 2100
Wilmington, Delaware 19801-1147
Attention: R. Craig Martin and Joshua D. Morse
E-mail: Craig.Martin@dlapiper.com, Joshua.Morse@dlapiper.com
Counsel for SHI
14. 12 Exhibits
. All Exhibits to this Plan are incorporated and are a part of this Plan as if set forth in full
herein.
14. 13 Filing
of
Additional
Documents
. On or before substantial consummation of this Plan, the Zonda
Plan Debtors shall file such agreements and other documents as may be necessary or appropriate to effectuate and further
evidence the terms and conditions of this Plan.
64
14. 14 Conflicts
. In the event that provisions of the Disclosure Statement and provisions of this Plan
conflict, the terms of this Plan shall govern.
Dated: January 22, 2019
New York, New York
PACIFIC DRILLING SERVICES, INC.
By:
/s/
Lisa
Manget
Buchanan
Name: Lisa Manget Buchanan
Title: Senior Vice President, General
Counsel, and Secretary
PACIFIC DRILLING VIII LIMITED.
By:
/s/
Lisa
Manget
Buchanan
Name: Lisa Manget Buchanan
Title: Senior Vice President, General
Counsel, and Secretary
65
Exhibit 15.5
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
PACIFIC DRILLING VIII LIMITED, et
al
.,
Debtors
1
:
: Chapter 11
:
: Case No. 17-13203 (MEW)
:
:
:
:
:
(Jointly Administered)
FINDINGS OF FACT, CONCLUSIONS OF
LAW, AND ORDER CONFIRMING AMENDED
JOINT PLAN OF LIQUIDATION/REORGANIZATION FOR
PACIFIC DRILLING SERVICES, INC. AND PACIFIC DRILLING VIII
LIMITED PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE
WHEREAS, Pacific Drilling VIII Limited (“ PDVIII ”) and Pacific Drilling Services, Inc. (“
PDSI ”), as debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the “ Zonda
Plan Debtors ”), as “proponents of the plan” within the meaning of section 1129 of title 11 of the United States
Code (the “ Bankruptcy Code ”), filed the Amended
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No. 30], dated as of January 22, 2019 (the “ Proposed Plan ” and, as modified by this Order, the “
Plan ”) and the Disclosure
Statement
for
the
Joint
Plan
of
Reorganization/Liquidation
for
Pacific
Drilling
Services,
Inc.
and
2
1
The Zonda Plan Debtors in these chapter 11 cases and, if applicable, the last four digits of their U.S. taxpayer identification numbers
are: Pacific Drilling VIII Limited and Pacific Drilling Services, Inc. (5302).
2
Capitalized terms used but not otherwise herein defined shall have the meanings ascribed to such terms in (a) the Plan, a copy of
which is annexed hereto as Exhibit A , or (b) the Zonda
Plan
Debtors’
Memorandum
of
Law
in
Support
of
Confirmation
of
Amended
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
, dated as of January 22, 2019 [Docket No. 32] (the “ Confirmation Brief ”), as applicable. Any term used in
the Plan or this Confirmation Order that is not defined in the Plan or this Confirmation Order, but that is used in the Bankruptcy
Code or the Federal Rules of Bankruptcy Procedure (the “ Bankruptcy Rules ”), shall have the meaning ascribed to such term in the
Bankruptcy Code or the Bankruptcy Rules, as applicable.
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No. 14], dated as of
December 21, 2018 (the “ Disclosure Statement ”);
WHEREAS, on December 21, 2018, the Zonda Plan Debtors filed the Zonda
Plan
Debtors’
Motion
for
an
Order
Approving
(I)
The
Disclosure
Statement;
(II)
Procedures
for
Solicitation;
(III)
Forms
of
Ballots
and
Notices;
(IV)
Procedures
for
Tabulation
of
Votes;
and
(V)
Procedures
for
Objections
to
Approval
of
the
Disclosure
Statement
and
Confirmation
of
the
Plan
[Docket No. 15] (the “ Solicitation Procedures
Motion ”);
WHEREAS, on December 21, 2018, the Zonda Plan Debtors filed the Zonda
Plan
Debtors’
Ex
Parte
Application
for
Entry
of
an
Order
(I)
Approving
Certain
Key
Dates
Relating
to
Confirmation
of
the
Zonda
Plan
and
Approval
of
Related
Disclosure
Statement,
(II)
Shortening
Notice
with
Respect
Thereto,
(III)
Approving
Form
and
Manner
of
Combined
Hearing
Notice,
and
(IV)
Granting
Related
Relief
[Docket No. 16]
(the “ Scheduling Motion ”);
WHEREAS, on December 28, 2018, the United States Bankruptcy Court for the Southern
District of New York (the “ Court ”) entered the Order
(I)
Approving
Certain
Key
Dates
Relating
to
Confirmation
of
the
Zonda
Plan
and
Approval
of
Related
Disclosure
Statement,
(II)
Shortening
Notice
with
Respect
Thereto,
(III)
Approving
Form
and
Manner
of
Combined
Hearing
Notice,
and
(IV)
Granting
Related
Relief
[Docket No. 18] (the “ Scheduling Order ”), which among other things, scheduled a combined hearing to
consider approval of the Disclosure Statement and confirmation of the Proposed Plan (the “ Combined Hearing
”) for January 24, 2019 at 10:00 a.m. (prevailing Eastern Time);
WHEREAS, pursuant to the Scheduling Order and the procedures for solicitation of votes to
accept or reject the Proposed Plan (the “ Solicitation Procedures ”), the Court established January 14, 2019, at
5:00 p.m. (prevailing Eastern Time) as the deadline to vote on the Proposed Plan (the “ Voting Deadline ”) and
January 17, 2019, at 4:00 p.m. (prevailing Eastern Time) as the
2
deadline to file any objection to the Proposed Plan, the Disclosure Statement, or the Solicitation Procedures
Motion (the “ Objection Deadline ”);
WHEREAS, on December 28, 2018, the Zonda Plan Debtors filed the Notice
of
(I)
Combined
Hearing
to
Consider
Approval
of
Disclosure
Statement
and
Plan
Confirmation
and
(II)
Deadline
for
Objection
to
Plan
and
Disclosure
Statement
[Docket No. 19] (the “ Combined Hearing Notice ”);
WHEREAS , on December 31, 2018, as set forth in the Affidavit
of
Service
of
Solicitation
Materials
[Docket No. 22], dated as of January 4, 2019, admitted into evidence at the Combined Hearing (the “
Solicitation Materials Declaration ”), the Zonda Plan Debtors, through the Solicitation Agent, caused copies of
the following documents to be served, via first class mail, to the voting Classes under the Proposed Plan
(Class 4A – Zonda Secured Claims, Class 4B – Zonda Secured Claims, Class 5A – Zonda Deficiency
Claims, and Class 5B – Zonda Deficiency Claims): (a) the Disclosure Statement with the Proposed Plan
annexed thereto; (b) the Disclosure Statement Approval Order (as defined in the Solicitation Procedures
Motion) without exhibits; (c) the Combined Hearing Notice; and (d) the appropriate Ballot, along with a
postage-prepaid return envelope;
WHEREAS, on December 31, 2018, as set forth in the Solicitation Materials Declaration, the
Zonda Plan Debtors, through the Solicitation Agent, caused copies of the following to the served, via first class
mail, to Holders of Claims and Interests in Classes 1A–1B, 2A–2B, 3A–3B, 6A–6B, 7A, 8A–8B, 9A and 9B of
the Proposed Plan: (a) the Disclosure Statement Approval Order; (b) the Combined Hearing Notice; and (c)
the Notice of Non-Voting Status, which notice: (i) identified the treatment of Classes that are either
Unimpaired or consenting to their treatment under the Proposed Plan; (ii) set forth the manner in which a copy
of the Disclosure Statement and Proposed Plan may be obtained; (iii) provided notice of the
3
Combined Hearing and the Objection Deadline, as well as procedures for filing objections and responses to
approval of the Disclosure Statement or Confirmation of the Proposed Plan; and (iv) provided disclosure
regarding the releases, injunctions, and exculpations provided for in the Proposed Plan and an opportunity to
“opt in” to the releases through the Voting Agent;
WHEREAS , on January 7, 2019, the Zonda Plan Debtors filed the Plan
Supplement
in
Connection
with
the
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No. 23] (collectively, and as
thereafter amended, modified, or supplemented from time to time, the “ Plan Supplement ”);
WHEREAS, on January 16, 2019, the Zonda Plan Debtors filed the Notice
of
Filing
of
Exhibit
C
to
the
Disclosure
Statement
for
the
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No. 26], which
included the Liquidation Analysis;
WHEREAS , the Declaration
of
Jeffrey
W.
Kopa
of
AlixPartners,
LLP
in
Support
of
Confirmation
of
Amended
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
(the “ Kopa Declaration ” or the “ Confirmation Declaration ”) was attached as
Exhibit A to the Confirmation Brief in support of Confirmation of the Proposed Plan and was admitted into
evidence at the Combined Hearing;
WHEREAS , the Declaration of James
Daloia
of
Prime
Clerk
Regarding
the
Solicitation
of
Votes
and
Tabulation
of
Ballots
Cast
on
the
Joint
Plan
of
Liquidation/Reorganization
for
Pacific
Drilling
Services,
Inc.
and
Pacific
Drilling
VIII
Limited
Pursuant
to
Chapter
11
of
the
Bankruptcy
Code
[Docket No.
28], dated January 17, 2019 (the “ Voting Report ”), attesting and certifying the method and results of the
tabulation for Claims in Class 4A – Zonda Secured Claims, Class 4B – Zonda Secured Claims, Class 5A –
Zonda
4
Deficiency Claims, and Class 5B – Zonda Deficiency Claims (collectively, the “ Undersecured Claims ”)
entitled to vote to accept or reject the Proposed Plan; was previously filed in these Chapter 11 Cases in support
of Confirmation of the Proposed Plan and was admitted into evidence at the Combined Hearing (collectively
with the Confirmation Declarations and the Solicitation Materials Declaration, the “ Declarations ”);
WHEREAS , the Combined Hearing was held on January 24, 2019; and
WHEREAS , the Court made certain rulings at the Combined Hearing that are reflected below,
NOW, THEREFORE , based on the Declarations, the record of the Combined Hearing,
including all the evidence proffered or adduced, and the arguments of counsel made, at the Combined Hearing,
the entire record of the Chapter 11 Cases, and the record of the PDSA case, through November 16, 2018; and
after due deliberation thereon and sufficient cause appearing therefor,
IT IS HEREBY ORDERED, FOUND AND DETERMINED THAT:
DEEMED MODIFICATIONS TO THE PROPOSED PLAN
The changes set forth below shall be deemed to be incorporated in the Proposed Plan, and all
references in this Order to the “Plan” shall constitute references to the Proposed Plan as modified by the
changes set forth in items I through V, below.
I. Typographical Corrections . The definition of “Professional Fee Escrow” in section
1.108 of the Proposed Plan is deemed to be modified to substitute the phrase “Liquidation Trust” in place of the
words “Liquidatrion Trust.”
II. Definition of Releasing Parties . The Proposed Plan provides for certain consensual
releases. In that regard, and for the reasons stated on the record at the Combined
5
Hearing, section 1.115 of the Proposed Plan is deemed to have been modified so that it shall read as follows:
1.115 Releasing
Party
means, collectively and in each case in their capacity as such: (a) each
Released Party, (b) each Holder of a Claim or Interest who was entitled to vote on the Plan and voted
to accept the Plan; (c) each Holder of a Claim or Interest who did not vote to accept the Plan but
checked the box on the applicable Ballot or Notice of Non-Voting Status indicating that they opt to
grant the releases provided in the Plan; and (d) with respect to each of the foregoing Entities in
clauses (a) through (c), such Entities’ or Persons’ successors and assigns.
III. Discharge Provisions . Sections 2.1, 3.3 and 8.9 of the Proposed Plan provide that
payments that are to be made under the Proposed Plan will be made in “full and final satisfaction, settlement,
release and discharge” or in “complete and final satisfaction, settlement, and discharge” of the underlying
claims or obligations. Section 12.3(a) of the Proposed Plan also contemplates a discharge of the Zonda Plan
Debtors. However, the Proposed Plan contemplates the possibility of liquidation in the event the Zonda Plan
Debtors do not Prevail in the Zonda Arbitration (as the terms “Prevail” and “Zonda Arbitration” are defined in
the Proposed Plan). The releases that Releasing Parties have provided consensually pursuant to section 12.2 of
the Proposed Plan are enforceable and will be enforced regardless of whether a liquidation occurs. However, if
a liquidation occurs the Zonda Plan Debtors will not be entitled to a discharge of obligations pursuant to section
1141 of the Bankruptcy Code. It is not enough just to eliminate the reference to a “discharge” in sections 2.1,
3.3, 8.9 and 12.3(a) because the remaining terms, which propose that all payments are to be in “full” or
“complete” satisfaction, “release” and “settlement” of all of the underlying obligations, would (if approved) be
the same as granting a discharge. If section 1141 does not permit a discharge, the Court may not grant the same
thing just by using different words that have the same effect. Accordingly:
(a) The consensual releases set forth in Section 12.2 of the Proposed Plan shall be
approved and enforced as set forth in this Order and on behalf of “Releasing
6
Parties” as that term is defined above, regardless of whether the Proposed Plan results in a liquidation;
(b) To the extent that the Zonda Plan Debtors Prevail in the Zonda Arbitration, the
Debtors will continue in operations and will be entitled to a discharge, in which case the provisions of
sections 2.1, 3.3, 8.9 and 12.3(a) of the Proposed Plan that contemplate that payments are in full
satisfaction, settlement, release and discharge of the underlying obligations shall be effective and shall
be enforced; and
(c) To the extent that the Debtors do not Prevail in the Zonda Arbitration, the
provisions in sections 2.1, 3.3, 8.9 and 12.3(a) of the Proposed Plan that state that the proposed
payments are made in full or complete satisfaction, settlement, release and/or discharge of the
underlying obligations shall not be applicable, and such underlying obligations shall be released only to
the extent they have been released consensually by Releasing Parties pursuant to section 12.2 of the Plan
and this Confirmation Order.
(d) Nothing in the modifications described in subparagraphs (a) through (c) above is
intended to foreclose an argument that as a matter of non-bankruptcy law the payment, in full, of a claim
or expense obligation constitutes a “satisfaction” of that claim or expense obligation.
(e) In addition, and for the avoidance of doubt: notwithstanding the technical issue as
to whether certain claims are fully settled, released, satisfied or discharged, all assets of the Zonda
Debtors shall be applied to the payment of claims and expenses only in the manner and in the order set
forth in the Plan, and creditors shall be enjoined from interfering with the distributions and payments
contemplated by the Plan.
7
IV. Effect of a Failure to List Claims . For the reasons stated on the record at the
Combined Hearing, the last sentence of section 7.3 of the Proposed Plan is modified to state as follows:
“The failure of the Zonda Plan Debtors to specifically list any claim, right of action, suit,
proceeding, or other Retained Action in this Plan, the Disclosure Statement, the Plan
Supplement, or otherwise does not, and will not be deemed to, constitute a waiver or release
by the Zonda Plan Debtors, the Reorganized Zonda Plan Debtors, or the Liquidation Trust, as
applicable, of such claim, right of action, suit, proceeding, or other Retained Action, and the
Reorganized Zonda Debtors or the Liquidation Trust, as applicable, will retain the right to
pursue such claims, rights of action, suits, proceedings, and other Retained Actions in their
sole discretion and, therefore, the failure to list a claim, right of action, suit, proceeding or
other Retained Action shall not result in any limitation of the right to pursue the same upon
and after the Confirmation or consummation of this Plan based on any preclusion doctrine,
collateral estoppel, issue preclusion, claim preclusion, estoppel (judicial, equitable, or
otherwise), or laches.
V. Unclaimed Property . For the reasons set forth on the record at the Combined Hearing,
the last sentence of section 8.8 of the Proposed Plan is modified to state as follows:
“The Reorganized Debtors, the Liquidation Trust, as applicable, and the Disbursing Agent
shall use reasonable efforts to locate any Holder of an Allowed Claim whose distribution is
returned as undeliverable.”
FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. Findings of Fact and Conclusions of Law.
1. The findings and conclusions set forth herein, together with the findings of fact and
conclusions of law set forth in the record of the Combined Hearing, constitute the Court’s findings of fact and
conclusions of law pursuant to Bankruptcy Rule 7052, made applicable to this proceeding pursuant to
Bankruptcy Rule 9014. To the extent any of the following findings of fact constitute conclusions of law, they
are adopted as such. To the extent any of the following conclusions of law constitute findings of fact, they are
adopted as such.
8
B. Exclusive Jurisdiction; Venue; Core Proceeding (28 U.S.C. §§ 157(b)(2), 1334(a)).
2. The Court has jurisdiction over the Chapter 11 Cases pursuant to 28 U.S.C. §§ 157 and
1334. Venue is proper under 28 U.S.C. §§ 1408 and 1409. Confirmation of the Plan is a core proceeding
pursuant to 28 U.S.C. § 157(b)(2)(L), and the Court has exclusive jurisdiction to determine whether the Plan
complies with the applicable provisions of the Bankruptcy Code and should be confirmed.
C. Commencement and Administration of the Chapter 11 Cases.
3. On November 12, 2017 (the “ Petition Date ”), each Zonda Plan Debtor commenced with
this Court a voluntary case under chapter 11 of the Bankruptcy Code. The Zonda Plan Debtors are authorized
to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections
1107(a) and 1108 of the Bankruptcy Code. On September 7, 2018, the U.S. Trustee appointed an official
committee of unsecured creditors (the “ Committee ”) pursuant to the Notice
of
Appointment
of
Official
Committee
of
Unsecured
Creditors
, filed in the PDSA case [Docket No. 519]. The Committee was disbanded
on September 28, 2018 pursuant to the Notice
of
Disbandment
of
Official
Committee
of
Unsecured
Creditors
,
filed in the PDSA case [Docket No. 626]. No trustee, examiner, or committee of equity holders has been
appointed in these Chapter 11 Cases.
4. On November 7, 2018, the Zonda Plan Debtors and the Non-Zonda Debtors filed a
Motion
for
an
Order
(I)
Amending
the
Debtors’
Joint
Administration
Order,
and
(II)
Granting
Related
Relief
[Docket No. 7] (the “ Zonda Joint Administration Motion ”). On November 16, 2018, the Court entered the
Order
(I)
Amending
the
Debtors’
Joint
Administration
Order,
and
(II)
Granting
Related
Relief
[Docket No. 9]
(the “ Zonda Joint Administration Order ”), which among other things, provided for the Zonda Plan Debtors’
cases to be separately administered from
9
the main PDSA case. Pursuant to the Zonda Joint Administration Order, these Chapter 11 Cases are being
jointly administered for procedural purposes only pursuant to Bankruptcy Rule 1015(b).
D. Judicial Notice.
5. The Court takes judicial notice of the docket of the Chapter 11 Cases, and the docket of
the PDSA case through November 16, 2018, maintained by the Clerk of the Court and/or its duly-appointed
agent, including, without limitation, all pleadings and other documents filed, all orders entered, and the
evidence and arguments made, proffered, or adduced at the hearings held before the Court during the pendency
of the Chapter 11 Cases, and in the PDSA case through November 16, 2018, including, but not limited to, the
Combined Hearing.
E. Burden of Proof.
6. The Zonda Plan Debtors have satisfied their burden of proving by a preponderance of the
evidence that the Plan satisfies the requirements of section 1129(a) of the Bankruptcy Code.
F. Section 1129(b) Inapplicable.
7. Section 1129(b) of the Bankruptcy Code is not applicable to the Plan because all four of
the Impaired classes voted to accept the Plan.
G. Transmittal and Mailing of Materials; Notice.
8. The Solicitation Packages, which were transmitted and served as set forth in the
Solicitation Materials Declaration, have been transmitted and served in compliance with the Solicitation
Procedures Motion, the Scheduling Order, the Bankruptcy Code, the Bankruptcy Rules, and the Local
Rules. Such transmittal and service were adequate and sufficient, and no other or further notice is or shall be
required.
10
H. Voting.
9. Votes to accept or reject the Plan have been solicited and tabulated fairly, in good faith,
and in a manner consistent with the Bankruptcy Code, the Bankruptcy Rules, the Solicitation Procedures
Motion, and the Scheduling Order.
I. Plan Supplement.
10. The Zonda Plan Debtors filed the Plan Supplement, which includes (a) the Liquidation
Trust Agreement, (b) the Schedule of Assumed Executory Contracts and Unexpired Leases, and (c) the
information required to be disclosed in accordance with section 1129(a)(5) of the Bankruptcy Code. All such
materials comply with the terms of the Plan, and the filing and notice of such documents is good and proper in
accordance with the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and all other applicable rules,
laws, and regulations, and no other or further notice is or shall be required.
J. Bankruptcy Rule 3016(a).
11. In accordance with Bankruptcy Rule 3016(a), the Plan is dated and identifies the Zonda
Plan Debtors as the proponents of the Plan.
Compliance with the Requirements of Section 1129 of the Bankruptcy Code
K. Plan Compliance with Bankruptcy Code – 11 U.S.C. § 1129(a)(1).
12. The Plan complies with all applicable provisions of the Bankruptcy Code, thereby
satisfying section 1129(a)(1) of the Bankruptcy Code.
L. Proper Classification – 11 U.S.C. §§ 1122, 1123(a)(1).
13. In addition to Administrative Expense Claims, Professional Fee Claims, and Priority Tax
Claims, which need not be classified, the Plan designates the following nine Classes of Claims and
Interests: Classes 1A–1B (Secured Tax Claims), Classes 2A–2B (Other Secured Claims), Classes 3A–3B
(Other Priority Claims), Classes 4A–4B (Zonda Secured Claims), Classes
11
5A–5B (Zonda Deficiency Claims), Classes 6A– 6B (Convenience Claims), Class 7A (Insurance Covered
Claims), Classes 8A–8B (Intercompany Claims), Class 9A (PDSI Interests), and Class 9B (PDVIII
Interests). The Claims and Interests placed in each Class are substantially similar to other Claims and Interests,
as the case may be, in each such Class.
Valid business, factual, and legal reasons exist for separately
classifying the various Classes of Claims and Interests created under the Plan, and such classification does not
unfairly discriminate between Holders of Claims and Interests. Accordingly, the Plan satisfies sections 1122
and 1123(a)(1) of the Bankruptcy Code.
3
M. Specified Unimpaired Classes – 11 U.S.C. § 1123(a)(2).
14. Article III of the Plan specifies that Classes 1A–1B (Secured Tax Claims), Classes 2A–
2B (Other Secured Claims), Classes 3A–3B (Other Priority Claims), Classes 6A–6B (Convenience Claims),
Class 7A (Insurance Covered Claims), Classes 8A–8B (Intercompany Claims), Class 9A (PDSI Interests), and
Class 9B (PDVIII Interests), are either Unimpaired under the Plan or are consenting to their treatment under the
Plan, thereby satisfying section 1123(a)(2) of the Bankruptcy Code.
N. Specified Treatment of Impaired Classes – 11 U.S.C. § 1123(a)(3).
15. Article III of the Plan designates Class 4A (Zonda Secured Claims), Class 4B (Zonda
Secured Claims), Class 5A (Zonda Deficiency Claims), and Class 5B (Zonda Deficiency Claims) as Impaired
and specifies the treatment of Claims in such Classes, thereby satisfying section 1123(a)(3) of the Bankruptcy
Code.
3
The Zonda Plan Debtors do not believe that they own the Pacific
Zonda.
The Zonda Plan Debtors expect to Prevail in the Zonda
Arbitration, but if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Zonda Plan Debtors expect SHI will be
required to look to the Pacific
Zonda
to satisfy all or a portion of its Zonda Secured Claim.
12
O. No Discrimination – 11 U.S.C. § 1123(a)(4).
16. The Plan provides for the same treatment of each Claim or Interest in each respective
Class or subclass pertaining to each Zonda Plan Debtor Group unless the Holder of a particular Claim or
Interest has agreed to a less favorable treatment of its Claim or Interest, thereby satisfying section 1123(a)(4) of
the Bankruptcy Code.
P. Implementation of Plan – 11 U.S.C. § 1123(a)(5).
17. The Plan and the various documents and agreements referred to therein or set forth in the
Plan Supplement provide adequate and proper means for the Plan’s implementation, thereby satisfying section
1123(a)(5) of the Bankruptcy Code, including, without limitation, (a) the vesting of the assets of the Zonda Plan
Debtors in the Reorganized Zonda Debtors or the Liquidation Trust, as applicable, and the cancellation of
existing security agreements and interests, except as provided pursuant to the Plan and this Confirmation Order,
(b) if the Zonda Plan Debtors Prevail in the Zonda Arbitration: (i) the continued corporate existence of the
Zonda Plan Debtors, (ii) sources of cash for distributions and operations, and (iii) the consummation of the
transactions contemplated by the New First Lien Notes Documentation and the New Second Lien PIK Toggle
Notes Documentation, and (c) if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration: (i) the
continued corporate existence of PDSI, and the dissolution of PDVIII, (ii) the sources of cash for payment of
claims, (iii) the creation of the Liquidation Trust, (iv) the appointment of the Liquidation Trustee, and (v) the
creation of the Liquidation Trust Funding Amount Escrow Account.
Q. Nonvoting Equity Securities – 11 U.S.C. § 1123(a)(6).
18. The certificates of incorporation, articles of incorporation, limited liability company
agreements, operating agreements, or similar governing documents, as applicable, of the Zonda Plan Debtors
have been or shall be amended on or prior to the Effective Date to prohibit
13
the issuance of non-voting equity securities to the extent prohibited by section 1123(a)(6) of the Bankruptcy
Code, thereby satisfying section 1123(a)(6) of the Bankruptcy Code.
R. Selection of Officers, Directors, or Trustees – 11 U.S.C. § 1123(a)(7).
19. The Plan Supplement and Section 7.5 of the Plan contain provisions with respect to the
selection of directors and officers of the Reorganized Zonda Debtors that are consistent with the interests of
creditors, equity security holders, and public policy. The Plan also provides that the Liquidation Trustee will be
approved in accordance with the Liquidation Trust Agreement, which is consistent with the interests of the
Holders of the Liquidation Trust Interests and public policy, thereby satisfying section 1123(a)(7) of the
Bankruptcy Code.
S. Impairment/Unimpairment of Classes of Claims and Equity Interests – 11 U.S.C. § 1123(b)(1).
20. As contemplated by section 1123(b)(1) of the Bankruptcy Code, Class 4A (Zonda
Secured Claims), Class 4B (Zonda Secured Claims), Class 5A (Zonda Deficiency Claims), and Class 5B
(Zonda Deficiency Claims) are Impaired under the Plan. Classes 1A–1B (Secured Tax Claims), Classes 2A–2B
(Other Secured Claims), Classes 3A–3B (Other Priority Claims), Classes 6A–6B (Convenience Claims), Class
7A (Insurance Covered Claims), and Classes 8A–8B (Intercompany Claims) are Unimpaired under the
Plan. Class 9A (PDSI Interests) and Class 9B (PDVIII Interests) are either Unimpaired under the Plan or
Impaired under the Plan but are not entitled to vote.
T. Assumption and Rejection of Executory Contracts and Unexpired Leases – 11 U.S.C. § 1123(b)
(2).
21. Article X of the Plan governing the assumption and rejection of Executory Contracts and
Unexpired Leases satisfies the requirements of section 365(b) of the Bankruptcy Code and, accordingly, the
requirements of section 1123(b)(2) of the Bankruptcy Code.
14
U. Preservation of Claims and Causes of Action – 11 U.S.C. § 1123(b)(3).
22. In accordance and compliance with section 1123(b)(3)(B) of the Bankruptcy Code,
Section 7.3 of the Plan appropriately provides for the preservation of Retained Actions in the Reorganized
Zonda Debtors, or the Liquidation Trust, as applicable, as follows: after the Effective Date if the Zonda Plan
Debtors Prevail in the Zonda Arbitration, the Reorganized Zonda Debtors, and if the Zonda Plan Debtors Do
Not Prevail in the Zonda Arbitration, the Liquidation Trust, in their respective sole and absolute discretion,
shall have the right to bring, settle, release, compromise, or enforce Retained Actions (or decline to do any of
the foregoing), without further approval of the Court. The provisions regarding the Retained Actions in the
Plan are appropriate and are in the best interests of the Zonda Plan Debtors or the Liquidation Trust, as
applicable.
V. Modification of Rights – 11 U.S.C. § 1123(b)(5).
23. In accordance and compliance with section 1123(b)(5) of the Bankruptcy Code, the Plan
properly modifies the rights of Holders of Claims in Class 4A (Zonda Secured Claims), Class 4B (Zonda
Secured Claims), Class 5A (Zonda Deficiency Claims), and Class 5B (Zonda Deficiency Claims). The Plan
also leaves unaffected the rights of Holders of Claims and Interests in Classes 1A–1B (Secured Tax Claims),
Classes 2A–2B (Other Secured Claims), Classes 3A–3B (Other Priority Claims), Classes 6A–6B (Convenience
Claims), Class 7A (Insurance Covered Claims), Classes 8A–8B (Intercompany Claims), Class 9A (PDSI
Interests), and Class 9B (PDVIII Interests).
W. Additional Plan Provisions – 11 U.S.C. § 1123(b)(6).
24. The provisions of the Plan are appropriate and consistent with the applicable provisions
of the Bankruptcy Code, thereby satisfying section 1123(b) of the Bankruptcy Code.
15
The failure to specifically address a provision of the Bankruptcy Code in this Confirmation Order shall not
diminish or impair the effectiveness of this Confirmation Order.
X. Zonda Plan Debtors Are Not Individuals – 11 U.S.C. § 1123(c).
25. The Zonda Plan Debtors are not individuals and, accordingly, section 1123(c) of the
Bankruptcy Code is inapplicable in these Chapter 11 Cases.
Y. Cure of Defaults – 11 U.S.C. § 1123(d).
26. The Plan does not provide for the cure of any defaults by the Zonda Plan Debtors. Thus,
section 1123(d) of the Bankruptcy Code is not applicable in these Chapter 11 Cases.
Z. Zonda Plan Debtors’ Compliance with Bankruptcy Code – 11 U.S.C. § 1129(a)(2).
27. The Zonda Plan Debtors have complied with the applicable provisions of the Bankruptcy
Code, thereby satisfying section 1129(a)(2) of the Bankruptcy Code. Specifically:
a. the Zonda Plan Debtors are proper debtors under section 109 of the Bankruptcy Code;
b. the Zonda Plan Debtors have complied with applicable provisions of the Bankruptcy
Code, except as otherwise provided or permitted by orders of this Court; and
c. the Zonda Plan Debtors have complied with the applicable provisions of the Bankruptcy
Code, the Bankruptcy Rules, the Local Rules, the Solicitation Procedures Motion, and the
Scheduling Order in transmitting the Disclosure Statement, the Plan, the Ballots, and
related documents and notices and in soliciting and tabulating votes on the Plan.
AA. Plan Proposed in Good Faith – 11 U.S.C. § 1129(a)(3).
28. The Zonda Plan Debtors have proposed the Plan and all other agreements, documents,
and instruments necessary to effectuate the Plan in good faith and not by any means forbidden by law, thereby
satisfying section 1129(a)(3) of the Bankruptcy Code. The Zonda Plan Debtors’ good faith is evident from the
facts and record of these Chapter 11 Cases, the Disclosure Statement, and the record of the Combined Hearing
and other proceedings held in these Chapter
16
11 Cases. The Plan, the Plan Documents, and other agreements and documents contemplated thereby are based
upon extensive, arms’-length, good faith negotiations between and among the Zonda Plan Debtors and Samsung
Heavy Industries, Inc. (“ SHI ”), and represents the culmination of several months of discussions among the
foregoing parties. The Plan was proposed with the legitimate and honest purpose of maximizing the value of
the Zonda Plan Debtors’ Estates and effectuating a successful reorganization or orderly liquidation of the Zonda
Plan Debtors. Further, the Plan’s classification, indemnification, exculpation, release, settlement, and
injunction provisions, including, without limitation, Article XII of the Plan, have been negotiated in good faith
and at arms’ length, consistent with sections 105, 1123(b)(3)(A), 1123(b)(6), 1129, and 1142 of the Bankruptcy
Code.
BB. Payments for Services or Costs and Expenses – 11 U.S.C. § 1129(a)(4).
29. Any payment made or to be made by any of the Zonda Plan Debtors for services or for
costs and expenses incurred prior to the Effective Date in connection with these Chapter 11 Cases, or in
connection with the Plan and incidental to these Chapter 11 Cases, has been approved by, or is subject to the
approval of, the Court as reasonable, thereby satisfying section 1129(a)(4) of the Bankruptcy Code.
CC. Directors, Officers, and Insiders – 11 U.S.C. § 1129(a)(5).
30. Upon and following the Effective Date, the individuals identified in the Plan Supplement
shall be the directors of the Reorganized Zonda Debtors, or the Zonda Plan Debtors, as applicable, along with
such additional directors as may be designated consistent with the terms of the Plan. The officers of the
respective Zonda Plan Debtors immediately before the Effective Date shall serve as the initial officers of each
of the respective Reorganized Zonda Debtors on or after the Effective Date and in accordance with any
employment agreement with the Reorganized Zonda Debtors and applicable nonbankruptcy law. After the
Effective Date, the selection of
17
officers of the Reorganized Zonda Debtors shall be as provided by their respective organizational
documents. Except as otherwise provided in the Plan Supplement, and to the extent applicable, the members of
the board of directors for each of the Reorganized Zonda Debtors shall be determined as set forth in the
Reorganized Zonda Debtors’ organizational documents. The identity and affiliations of the persons proposed to
serve as the initial directors and officers of the Reorganized Zonda Debtors or the Zonda Plan Debtors, as
applicable, after confirmation of the Plan have been fully disclosed, and the appointment to, or continuance in,
such offices of such persons is consistent with the interests of holders of Claims against and Interests in the
Reorganized Zonda Debtors and with public policy. The Plan also provides that the Liquidation Trustee will be
approved pursuant to the Liquidation Trust Agreement, which is consistent with the interests of the Holders of
the Liquidation Trust Interests and with public policy. The Zonda Plan Debtors have complied with section
1129(a)(5) of the Bankruptcy Code.
DD. No Rate Changes – 11 U.S.C. § 1129(a)(6).
31. The Plan does not provide for rate changes by any of the Reorganized Zonda
Debtors. Thus, section 1129(a)(6) of the Bankruptcy Code is not applicable in these Chapter 11 Cases.
EE. Best Interests of Creditors – 11 U.S.C. § 1129(a)(7).
32. The Plan satisfies section 1129(a)(7) of the Bankruptcy Code. The Disclosure Statement,
the Plan Supplement, the Kopa Declaration, the Voting Report, and the other evidence proffered or adduced at
the Combined Hearing (a) is persuasive and credible, (b) has not been controverted by other evidence, and
(c) establishes that each Holder of an Impaired Claim or Interest either has accepted the Plan or will receive or
retain under the Plan, on account of such Claim or Interest, property of a value, as of the Effective Date, that is
not less than the amount
18
such Holder would receive or retain if the Zonda Plan Debtors were liquidated under chapter 7 of the
Bankruptcy Code on such date in both liquidation scenarios.
FF. Acceptance by Certain Classes – 11 U.S.C. § 1129(a)(8).
33. Classes 1A–1B (Secured Tax Claims), Classes 2A–2B (Other Secured Claims),
Classes 3A–3B (Other Priority Claims), Classes 6A–6B (Convenience Claims), Class 7A (Insurance Covered
Claims), Classes 8A–8B (Intercompany Claims), Class 9A (PDSI Interests), and Class 9B (PDVIII Interests)
are either Unimpaired under the Plan, or Impaired under the Plan but consenting to the Plan under either
scenario, and are deemed to have accepted the Plan pursuant to section 1126(f) of the Bankruptcy Code. Class
4A (Zonda Secured Claims), Class 4B (Zonda Secured Claims), Class 5A (Zonda Deficiency Claims), and
Class 5B (Zonda Deficiency Claims) have voted to accept the Plan in accordance with section 1126(c) of the
Bankruptcy Code. Accordingly, section 1129(a)(8) of the Bankruptcy Code is satisfied.
GG. Treatment of Administrative Expense Claims, Priority Tax Claims, and Other Priority Claims
– 11 U.S.C. § 1129(a)(9).
34. The treatment of Administrative Expense Claims, Priority Tax Claims, and Professional
Fee Claims, pursuant to Sections 2.1, 2.2, and 2.3 of the Plan, respectively, satisfies the requirements of
sections 1129(a)(9)(A), (C), and (D) of the Bankruptcy Code, as applicable. The treatment of Other Priority
Claims pursuant to Section 3.3(c) of the Plan satisfies the requirements of section 1129(a)(9)(B) of the
Bankruptcy Code. On the Effective Date, the Zonda Plan Debtors or the Reorganized Zonda Debtors, as
applicable, will have sufficient Cash to pay Allowed Administrative Expense Claims, Priority Tax Claims, and
Other Priority Claims, and to fund the Professional Fee Escrow.
HH. Acceptance by Impaired Classes – 11 U.S.C. § 1129(a)(10).
35. Class 4A (Zonda Secured Claims), Class 4B (Zonda Secured Claims), Class 5A (Zonda
Deficiency Claims), and Class 5B (Zonda Deficiency Claims) voted to accept the Plan
19
by the requisite majorities, determined without including any acceptance of the Plan by any insider, thereby
satisfying the requirements of section 1129(a)(10) of the Bankruptcy Code.
II. Feasibility – 11 U.S.C. § 1129(a)(11).
36. The Disclosure Statement, the Plan Supplement, the Kopa Declaration, and the other
evidence proffered or adduced at the Combined Hearing (a) is persuasive and credible, (b) has not been
controverted by other evidence, and (c) establishes that if the Zonda Plan Debtors Prevail in the Zonda
Arbitration or if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Plan is feasible and that
Confirmation of the Plan is not likely to be followed by the need for further liquidation or further financial
reorganization, thereby satisfying the requirements of section 1129(a)(11) of the Bankruptcy Code.
JJ. Payment of Statutory Fees – 11 U.S.C. § 1129(a)(12).
37. Pursuant to Section 12.1 of the Plan, all fees payable under section 1930 of chapter 123
of title 28 of the United States Code, together with any interest pursuant to section 3717 of title 31 of the United
States Code, will be paid on the Effective Date and thereafter as may be required until the cases are closed,
dismissed, or converted to chapter 7. Thus, the Plan satisfies the requirements of section 1129(a)(12) of the
Bankruptcy Code.
KK. Benefit Plans – 11 U.S.C. § 1129(a)(13).
38. The Zonda Plan Debtors have no obligations to provide retiree benefits, and if PDSI had
any such obligations those obligations were assumed and assigned pursuant to the First through Ninth Omnibus
Assumption and Assignment Motions, filed in the PDSA case [Docket Nos. 641-643, 645, 655-658 and 695],
and therefore, section 1129(a)(13) of the Bankruptcy Code is inapplicable in these Chapter 11 Cases.
20
LL. Domestic Support Obligations – 11 U.S.C. § 1129(a)(14).
39. The Zonda Plan Debtors are not required by a judicial or administrative order, or by
statute, to pay any domestic support obligations, and therefore, section 1129(a)(14) of the Bankruptcy Code is
inapplicable in these Chapter 11 Cases.
MM. The Zonda Plan Debtors Are Not Individuals – 11 U.S.C. § 1129(a)(15).
40. The Zonda Plan Debtors are not individuals, and therefore, section 1129(a)(15) of the
Bankruptcy Code is inapplicable in these Chapter 11 Cases.
NN. No Applicable Nonbankruptcy Law Regarding Transfers – 11 U.S.C. § 1129(a)(16).
41. Each of the Zonda Plan Debtors that is a corporation is a moneyed, business, or
commercial corporation or trust, and therefore, section 1129(a)(16) of the Bankruptcy Code is inapplicable in
these Chapter 11 Cases.
OO. Only One Plan – 11 U.S.C. § 1129(c).
42. Because the Plan is the only chapter 11 plan filed in these Chapter 11 Cases, the Plan
satisfies section 1129(c) of the Bankruptcy Code.
PP. Principal Purpose of the Plan – 11 U.S.C. § 1129(d).
43. Because the principal purpose of the Plan is not the avoidance of taxes or the avoidance
of the application of section 5 of the Securities Act of 1933, the Plan satisfies section 1129(d) of the Bankruptcy
Code.
QQ. Small Business Case – 11 U.S.C. § 1129(e).
44. None of these Chapter 11 Cases is a “small business case,” as that term is defined in the
Bankruptcy Code, and, accordingly, section 1129(e) of the Bankruptcy Code is inapplicable.
RR. Good Faith Solicitation – 11 U.S.C. § 1125(e).
45. Based on the record before the Court in these Chapter 11 Cases, the Zonda Plan Debtors
and their directors, officers, employees, members, agents, advisors, and professionals
21
have acted in “good faith” within the meaning of section 1125(e) of the Bankruptcy Code in compliance with
the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, the Solicitation
Procedures Motion, and the Scheduling Order in connection with all of their respective activities relating to the
solicitation of acceptances or rejections of the Plan and their participation in the activities described in section
1125 of the Bankruptcy Code, and are entitled to the protections afforded by section 1125(e) of the Bankruptcy
Code and the exculpation provisions in Section 12.5 of the Plan.
SS. Injunctions, Exculpations, and Releases.
46. The Court has jurisdiction under sections 1334(a) and (b) of the United States Code to
approve the injunctions or stays, injunction against interference with the Plan, releases, and exculpations as set
forth in the Plan, including those set forth in Article XII of the Plan. The Zonda Plan Debtor Release under
Section 12.2(a) of the Plan is reasonable in scope and no objections have been filed. The Third Party Release as
set forth in Section 12.2(b) of the Plan is subject to the exceptions set forth therein and the exceptions set forth
in paragraphs 82 and 83 of this Order, has been provided consensually, is integral to the Plan, and is therefore
consistent with prior case law, permissible, and reasonable. The exculpation provisions in Section 12.5 of the
Plan are subject to the exceptions set forth therein and in paragraphs 82 and 83 of this Order, are consistent with
prior case law, reasonable in scope, integral to the Plan, and appropriate.
TT. Implementation.
47. All documents necessary to implement the Plan, including those contained in the Plan
Supplement, and all other relevant and necessary documents have been negotiated in good faith and at arms’
length and shall, upon completion of documentation and execution, be valid, binding, and enforceable
agreements and not be in conflict with any federal or state law.
22
UU. Executory Contracts and Unexpired Leases.
48. The Zonda Plan Debtors have exercised reasonable business judgment in determining
whether to assume or reject Executory Contracts and Unexpired Leases pursuant to Section 10.1 of the
Plan. Each rejection of an Executory Contract or Unexpired Lease pursuant to Section 10.1 of the Plan shall be
legal, valid, and binding upon the Reorganized Zonda Debtors and their successors and assigns and all non-
Zonda Plan Debtor parties and their successors and assigns to such Executory Contract or Unexpired Lease, all
to the same extent as if such rejection had been effectuated pursuant to an order of the Court under section 365
of the Bankruptcy Code entered before entry of this Confirmation Order.
VV. Good Faith.
49. The Released Parties will be acting in good faith if they proceed to (a) consummate the
Plan and the agreements, settlements, transactions, and transfers contemplated thereby, and (b) take the actions
authorized and directed by this Confirmation Order or the Plan.
WW. Conditions Precedent to Effective Date.
50. Without limiting any applicable restrictions or rights of certain parties, the conditions
precedent to the Effective Date set forth in Section 11.2 of the Plan may be waived in writing in whole or in
part by the Zonda Plan Debtors if the Zonda Plan Debtors Prevail in the Zonda Arbitration, or by SHI if the
Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, without notice or order of the Court.
XX. Satisfaction of Confirmation Requirements.
51. The Plan satisfies the requirements for confirmation set forth in section 1129 of the
Bankruptcy Code.
23
YY. Objections.
52. All parties have had a full and fair opportunity to litigate all issues raised, or which might
have been raised, in any objection to the Plan, and any such objections have been fully and fairly litigated.
ZZ. Retention of Jurisdiction.
53. The Court may, and upon the Effective Date shall, retain exclusive jurisdiction over all
matters arising out of, and related to, the Chapter 11 Cases, including the matters set forth in Section 13.1 of the
Plan and section 1142 of the Bankruptcy Code.
ACCORDINGLY, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED THAT:
I. Confirmation.
54. The Plan annexed hereto as Exhibit A and each of its provisions, as modified pursuant to
section 1127 of the Bankruptcy Code, are hereby approved and CONFIRMED under section 1129 of the
Bankruptcy Code. The terms of the Plan and the Plan Supplement, each as may be modified, are incorporated
by reference into and are an integral part of the Plan and this Confirmation Order.
II. Plan Supplement.
55. The documents contained in the Plan Supplement and any amendments, modifications,
and supplements thereto, and all documents and agreements introduced into evidence by the Zonda Plan
Debtors at the Combined Hearing (including all exhibits and attachments thereto and documents referred to
therein), and the execution, delivery, and performance thereof by the Zonda Plan Debtors, are authorized and
approved.
III. Modifications to the Plan.
56. The modifications to the Plan, including, without limitation, the modifications to the Plan
and the Plan Supplement since the commencement of solicitation, constitute technical changes and do not
materially adversely affect or change the treatment of any
24
Claims. Accordingly, pursuant to Bankruptcy Rule 3019 and in accordance with Section 14.2 of the Plan, such
modifications do not require additional disclosure under section 1125 of the Bankruptcy Code or re-solicitation
of votes under section 1126 of the Bankruptcy Code, nor do they require that Holders of Claims be afforded an
opportunity to change previously cast acceptances or rejections of the Plan. To the extent any creditor or party
in interest has not accepted the modifications to the Plan in writing, the treatment of Claims of any such
creditors under the Plan, as modified, is not adverse and, pursuant to Local Rule 3019-1, Holders of Claims who
voted to accept the solicitation version of the Plan are deemed to accept the Plan as modified. Prior to the
Effective Date, and subject to the prior written consent of SHI, the Zonda Plan Debtors may make additional
appropriate technical adjustments and modifications to the Plan and the documents contained in the Plan
Supplement without further order or approval of the Court.
IV. Omission of Reference to Particular Plan Provisions.
57. The failure to specifically describe or include any particular provision of the Plan in this
Confirmation Order shall not diminish or impair the effectiveness of such provision, it being the intent of this
Court that the Plan be approved and confirmed in its entirety.
V. Solicitation and Notice.
58. The Combined Hearing Notice complied with the terms of the Scheduling Order, was
appropriate and satisfactory based on the circumstances of these Chapter 11 Cases, and was in compliance with
the applicable provisions of the Bankruptcy Code, the Bankruptcy Rules, and the Local Rules. The solicitation
of votes on the Plan and the Solicitation Packages complied with the solicitation procedures in the Solicitation
Procedures Motion and the Scheduling Order, were appropriate and satisfactory based upon the circumstances
of these Chapter 11 Cases, and were in compliance with the applicable provisions of the Bankruptcy Code, the
Bankruptcy Rules, and the Local Rules. The Zonda Plan Debtors solicited acceptances of the Plan in good faith
and
25
in compliance with the applicable provisions of the Bankruptcy Code, including, without limitation, sections
1125(a) and (e) of the Bankruptcy Code, and any applicable nonbankruptcy law, rule, or regulation governing
the adequacy of disclosure in connection with such solicitation. The Zonda Plan Debtors and each of their
respective directors, officers, employees, affiliates, agents, financial advisors, professionals, accountants, and
attorneys participated in good faith and in compliance with the applicable provisions of the Bankruptcy Code in
the solicitation of votes under the Plan, and therefore are not, and on account of such solicitation will not be,
liable at any time for any violation of any applicable law, rule, or regulation governing the solicitation of
acceptances or rejections of the Plan.
VI. Vesting of Assets.
59. On the Effective Date, pursuant to sections 1141(b) and (c) of the Bankruptcy Code, if
the Zonda Plan Debtors Prevail in the Zonda Arbitration, all property of each Zonda Plan Debtor’s Estate,
including, but not limited to, all rights, claims, and Causes of Action, shall vest in such Reorganized Zonda
Debtors free and clear of all Claims, liens, encumbrances, charges, and other interests, except as provided
pursuant to the Plan or this Confirmation Order. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, on
or after the Effective Date, the Reorganized Zonda Debtors may operate their businesses and may use, acquire,
and dispose of property free of any restrictions of the Bankruptcy Code or the Bankruptcy Rules and in all
respects as if there were no pending cases under any chapter or provision of the Bankruptcy Code, except as
provided in the Plan or in this Confirmation Order. If the Zonda Plan Debtors Do Not Prevail in the Zonda
Arbitration, except as provided in the Plan or this Confirmation Order, on the Effective Date, the proceeds of
the Liquidation Trust Funding Amount Escrow Account and the Liquidation Trust Assets shall be transferred to
the Liquidation Trust, free and clear as provided in the Plan and the Liquidation Trust Agreement.
26
60. This Confirmation Order is binding on all filing agents, filing officers, title agents, title
companies, recorders of mortgages, recorders of deeds, registrars of deeds, registrars of patents, trademarks, or
other intellectual property, administrative agencies, governmental departments, secretaries of state, federal,
state, and local officials, and all other Persons and Entities who may be required by operation of law, the duties
of their office, or contract, to accept, file, register, or otherwise record or release any documents or instruments,
or who may be required to report or insure any title or state of title in or to any lease (collectively, the “
Recordation Officers ”). Each and every Recordation Officer is authorized, from and after the Effective Date,
to strike all Claims, Interests, Liens, or other encumbrances in or against the Zonda Plan Debtors’ assets from
their records, official and otherwise, without further order of the Court or act of any party. Each and every
Recordation Officer is authorized to file, record, and/or register any and all documents and instruments
presented to consummate or memorialize the Plan and the Plan Documents.
61. The terms and provisions of the Plan and this Confirmation Order shall upon the
Effective Date be binding in all respects upon (a) the Zonda Plan Debtors and their affiliates, (b) all known and
unknown creditors of, and holders of equity security interests in, any Zonda Plan Debtor, including any holders
of Claims, Interests, Liens, and other encumbrances, (c) the Released Parties, and (d) all interested parties, and
all successors and assigns of any of the foregoing.
62. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, the Reorganized Zonda
Debtors and the Zonda Plan Debtors, shall be discharged, on the Effective Date, from all Claims, Interests,
Liens, other encumbrances, and liabilities of any kind or nature whatsoever, to the fullest extent permitted under
section 1141 of the Bankruptcy Code, except as otherwise specifically set forth in the Plan or this Confirmation
Order; provided,
however,
for the avoidance
27
of doubt, if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, and the Liquidation Trust is
formed, there shall be no discharge.
63. Pursuant to section 1141(c) and 363(f) of the Bankruptcy Code, on the Effective Date, all
Persons are forever prohibited and enjoined from taking any action against the Reorganized Zonda Debtors, the
Zonda Plan Debtors, or the Liquidation Trust, as applicable, based on any Claims, Interests, Liens, and other
encumbrances, to the extent such Claims, Interests, Liens, and other encumbrances are released or discharged
pursuant to the terms of the Plan and this Confirmation Order.
VII. Plan Implementation Authorization.
64. The Reorganized Zonda Debtors, the Zonda Plan Debtors, or the Liquidation Trust, as
applicable, and their respective directors, officers, members, agents, and attorneys, and financial advisors are
authorized and empowered from and after the date hereof to negotiate, execute, issue, deliver, implement, file,
or record any contract, instrument, release, or other agreement or document related to the Plan, including the
Liquidation Trust Agreement, any other document included in the Plan Supplement, or any document related or
ancillary thereto (each according to their terms), as the same may be modified, amended, and supplemented,
and to take any action necessary or appropriate to implement, effectuate, consummate, or further evidence the
Plan in accordance with its terms, or take any or all corporate actions authorized to be taken pursuant to the
Plan whether or not specifically referred to in the Plan or any Plan Document, without further order of the
Court. To the extent applicable, any or all such documents shall be accepted upon presentment by each of the
respective state filing offices and recorded in accordance with the applicable law and shall become effective in
accordance with their terms and the provisions of applicable law. Pursuant to the applicable provisions of the
business corporation laws of the British Virgin Islands, and the general corporate law of Delaware, or any other
28
jurisdiction, as applicable, no action of the Zonda Plan Debtors’ boards of directors or the Reorganized Zonda
Debtors’ boards of directors will be required to authorize the Reorganized Zonda Debtors, the Zonda Plan
Debtors, or the Liquidation Trust, as applicable, to enter into, execute and deliver, adopt, or amend, as the case
may be, any such contract, instrument, release, or other agreement or document related to the Plan, and
following the Effective Date, each of the Plan Documents will be a legal, valid, and binding obligation of the
Reorganized Zonda Debtors, the Zonda Plan Debtors, or the Liquidation Trust, as applicable, enforceable
against the Reorganized Zonda Debtors, the Zonda Plan Debtors, or the Liquidation Trust in accordance with
the respective terms thereof.
VIII. Restructuring Transactions.
65. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, subject to the terms of the
Plan and the Plan Documents, from and after the Effective Date, the Reorganized Zonda Debtors, are
authorized to take all actions as may be necessary or appropriate to satisfy the Zonda Plan Debtors’ springing
obligations under the New First Lien Notes and the New Second Lien PIK Toggle Notes, including, without
limitation: (a) the execution and delivery of all appropriate agreements or other documents of merger,
consolidation, restructuring, conversion, disposition, transfer, dissolution, or liquidation containing terms that
are consistent with the terms of the Plan and that satisfy the requirements of applicable law and any other terms
to which the applicable Entities may agree; (b) the execution and delivery of appropriate instruments of
transfer, assignment, assumption, or delegation of any asset, property, right, liability, debt, or obligation on
terms consistent with the terms of the Plan and having other terms for which the applicable parties agree; (c)
rejection or assumption, as applicable, of Executory Contracts and Unexpired Leases; (d) the filing and/or
execution of appropriate limited liability company agreements, certificates, or articles of incorporation or
organization, reincorporation, merger,
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consolidation, conversion, or dissolution pursuant to applicable law, and amendments or amendments and
restatements of the foregoing; (e) the consummation of the transactions contemplated by the New First Lien
Notes Documentation and the New Second Lien PIK Toggle Notes Documentation, and the execution thereof;
and (f) all other actions that the applicable Entities determine to be necessary or appropriate to give effect to
the Plan, including making filings or recordings that may be required by applicable law.
IX. Certain Securities Law Matters.
66. If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation Trust
Interests, which will be distributed to the Holders of Allowed Zonda Deficiency Claims on account of such
Claims, shall not be “securities” under federal and state securities laws, or to the extent they are “securities,”
their issuance shall be exempt from the registration requirements of section 5 of the Securities Act and any
other applicable United States laws requiring registration prior to the offering, issuance, distribution, or sale of
securities in accordance with, and pursuant to, section 1145 of the Bankruptcy Code. The Plan and Liquidation
Trust Agreement prohibit the transfer or assignment of the Liquidation Trust Interests except by will, intestate
succession or by operation of law. To the extent that the Liquidation Trust Interests are “securities,” the
Liquidation Trust Interests will be not be required to be registered under Section 12(g) of the Exchange Act.
X. Plan Classification Controlling.
67. The classification of Claims and Interests for purposes of the distributions to be made
under the Plan shall be governed solely by the terms of the Plan. The classifications set forth on the Ballots
tendered to or returned by the Zonda Plan Debtors’ creditors in connection with voting on the Plan (a) were set
forth on the Ballots for purposes of voting to accept or reject the Plan, (b) do not necessarily represent, and in
no event shall be deemed to modify or otherwise
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affect, the actual classification of such Claims and Interests under the Plan for distribution purposes, and (c)
shall not be binding on the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust as
applicable.
XI. Preservation of Claims and Causes of Action.
68. The preservation of Retained Actions pursuant to Section 7.3 of the Plan, is fair and
reasonable and is approved.
XII. General Powers, Rights, and Responsibilities of the Liquidation Trustee.
69. If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation
Trustee shall have authority and right to carry out and implement all provisions of the Plan on behalf of the
Zonda Plan Debtors, as provided in the Liquidation Trust Agreement and Section 6.4 of the Plan.
XIII. Directors and Officers of the Reorganized Zonda Debtors or the Zonda Plan Debtors, as
Applicable.
70. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, the officers of the respective
Zonda Plan Debtors immediately before the Effective Date shall serve as the initial officers of each of the
respective Reorganized Zonda Debtors on or after the Effective Date and in accordance with any employment
agreement with the Reorganized Zonda Debtors and applicable nonbankruptcy law. After the Effective Date,
the selection of officers of the Reorganized Zonda Debtors shall be as provided by their respective
organizational documents. If the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration, the Liquidation
Trustee will select the composition of the boards of directors and officers of the Zonda Plan Debtors. To the
extent applicable, the members of the board of directors for each of the Reorganized Zonda Debtors after the
Effective Date shall be determined as set forth in the Reorganized Zonda Debtors’ organizational documents.
The Zonda Plan Debtors have disclosed the identities of the members of each board of directors of the
Reorganized Zonda Debtors if the Zonda Plan Debtors Prevail in
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the Zonda Arbitration and if the Zonda Plan Debtors Do Not Prevail in the Zonda Arbitration as required
pursuant to section 1129(a)(5) of the Bankruptcy Code.
XIV. Distributions Under the Plan.
71. The provisions of Article VIII and Section 6.4 of the Plan, including, without limitation,
the provisions governing distributions, are fair and reasonable and are approved.
XV. Disputed Claims.
72. The provisions of Article IX of the Plan, including, without limitation, the provisions
governing procedures for resolving Disputed Claims, are fair and reasonable and are approved.
XVI. Executory Contracts.
73. In accordance with Section 10.1 of the Plan, on the Effective Date, except as otherwise
provided in the Plan, each Executory Contract and Unexpired Lease not previously rejected, assumed, or
assumed and assigned by the Zonda Plan Debtors during these Chapter 11 Cases or pursuant to the Plan shall be
deemed automatically rejected pursuant to sections 365 and 1123 of the Bankruptcy Code, unless such
Executory Contract or Unexpired Lease (a) has previously been assumed by order of the Bankruptcy Court in
effect as of the Effective Date (which order may be this Confirmation Order); (b) is the subject of a motion to
assume filed on or before the Effective Date; (c) is identified on the Schedule of Assumed Executory Contracts
or Unexpired Leases filed in the Plan Supplement; or (d) has expired or terminated pursuant to its own terms.
74. Subject to the occurrence of the Effective Date, entry of this Confirmation Order by the
Court shall constitute approval of the assumptions provided for in the Plan pursuant to sections 365(a) and 1123
of the Bankruptcy Code and a determination by the Court that the Reorganized Zonda Debtors have provided
adequate assurance of future performance under such
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assumed Executory Contracts and Unexpired Leases. In accordance with the Plan, all Executory Contracts and
Unexpired Leases not listed on the Schedule of Assumed Executory Contracts and Unexpired Leases on the
Effective Date shall be deemed rejected by the Zonda Plan Debtors. Any objection to the rejection of an
Executory Contract or Unexpired Lease (each, a “ Rejection Objection ”) shall be scheduled for a hearing
before the Court at a time and date to be scheduled by the Zonda Plan Debtors, the Reorganized Zonda Debtors,
or the Liquidation Trust, as applicable, in consultation with the Court.
XVII. Approval of Liquidation Trust.
75. The Formation of the Liquidation Trust pursuant to Article VI of the Plan and the
Liquidation Trust Agreement, filed as Exhibit A to the Plan Supplement, is approved.
XVIII. Exemption from Certain Transfer Taxes.
76. If the Zonda Plan Debtors Prevail in the Zonda Arbitration, to the fullest extent permitted
by applicable law, all sale transactions and asset transfers consummated by the Zonda Plan Debtors and
approved by the Bankruptcy Court on and after the Confirmation Date through and including the Effective
Date, including any issuance, sale, and/or transfer effectuated under the Plan, the sale by the Zonda Plan
Debtors of any owned property pursuant to section 363(b) or 1123(b)(4) of the Bankruptcy Code, any
assumption, assignment, and/or sale by the Zonda Plan Debtors of their interests in Executory Contracts or
Unexpired Leases pursuant to section 365(a) of the Bankruptcy Code, and the creation, modification,
consolidation, or recording of any mortgage or security interest pursuant to the terms of the Plan shall constitute
a “transfer under a plan” within the purview of section 1146 of the Bankruptcy Code, and shall not be subject to
any stamp, real estate transfer, mortgage recording, or other similar tax. This Confirmation Order is and shall
be binding upon and shall govern the acts of all entities, including, without limitation, all Recordation Officers.
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XIX. Federal Income Tax Treatment of the Liquidation Trust.
77. The Federal Income Tax Treatment of the Liquidation Trust pursuant to Section 6.7 of
the Plan is approved.
XX. [Reserved] .
78. [Reserved]
XXI. Term of Injunctions or Stays.
79. Unless otherwise provided in the Plan or in this Confirmation Order, all injunctions or
stays arising under or entered during the Chapter 11 Cases under section 105 or 362 of the Bankruptcy Code, or
otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the later of the
Effective Date and the date indicated in the order providing for such injunction or stay. Notwithstanding
anything to the contrary in the Plan or this Confirmation Order, neither the Plan nor this Confirmation Order
shall limit, impair, or otherwise affect the Court’s ability to enter an order lifting any stay that is in effect.
XXII. Releases, Exculpations, and Injunctions.
80. Subject to this Confirmation Order, the release, exculpation, and injunction provisions set
forth in Article XII of the Plan approved and shall be effective and binding on all persons and entities to the
extent provided and limited therein and in paragraphs 82 and 83 of this Order.
XXIII. Governmental Units.
81. As to any Governmental Unit, nothing in the Plan or this Confirmation Order shall limit
or expand the scope of discharge, release, or injunction to which the Zonda Plan Debtors or Reorganized Zonda
Debtors are entitled to under the Bankruptcy Code, if any. The discharge, release, and injunction provisions
contained in the Plan and Confirmation Order are not intended and shall not be construed to bar any
Governmental Unit from, subsequent to this Confirmation Order, pursuing any police or regulatory action.
34
82. Accordingly, notwithstanding anything contained in the Plan or this Confirmation Order
to the contrary, nothing in the Plan or Confirmation Order shall discharge, release, impair, or otherwise
preclude: (a) any liability to any Governmental Unit that is not a “claim” within the meaning of section 101(5)
of the Bankruptcy Code; (b) any Claim of any Governmental Unit arising on or after the Confirmation
Date; (c) any valid right of setoff or recoupment of any Governmental Unit against any of the Zonda Plan
Debtors; or (d) any liability of the Zonda Plan Debtors or Reorganized Zonda Debtors under police or
regulatory statutes or regulations to any Governmental Unit as the owner, lessor, lessee, or operator of property
that such entity owns, operates, or leases after the Confirmation Date. Nor shall anything in this Confirmation
Order or the Plan: (i) enjoin or otherwise bar any Governmental Unit from asserting or enforcing, outside the
Bankruptcy Court, any liability described in the preceding sentence; or (ii) divest any court, commission, or
tribunal of jurisdiction to determine whether any liabilities asserted by any Governmental Unit are discharged
or otherwise barred by this Confirmation Order, the Plan, or the Bankruptcy Code.
83. Moreover, nothing in this Confirmation Order or the Plan shall release or exculpate any
non-Zonda Plan Debtor, including any Released Parties, from any liability to any Governmental Unit,
including, but not limited to, any liabilities arising under the Internal Revenue Code, the environmental laws, or
the criminal laws against the Released Parties, nor shall anything in this Confirmation Order or the Plan enjoin
any Governmental Unit from bringing any claim, suit, action, or other proceeding against the Released Parties
for any liability whatsoever; provided,
however
, that the foregoing sentence shall not limit the scope of
discharge, if any, granted to the Zonda Plan Debtors under sections 524 and 1141 of the Bankruptcy Code.
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XXIV. Governmental Approvals.
84. Each federal, state, commonwealth, local, foreign, or other governmental agency is
directed and authorized to accept the validity of (a) any and all documents, trust agreements, mortgages, and
instruments, and (b) all actions of the Zonda Plan Debtors that are necessary or appropriate to effectuate,
implement, or consummate the transactions contemplated by the Plan, this Confirmation Order, and the
agreements created or contemplated by the Plan or this Confirmation Order, without payment of any recording
tax, stamp tax, transfer tax, or similar tax imposed by state or local law.
XXV. Injunction Against Interference with Plan.
85. Upon entry of this Confirmation Order, all Holders of Claims or Interests and other
parties in interest, along with their respective present or former employees, agents, officers, directors,
principals, and affiliates, shall be enjoined from taking any actions to interfere with the implementation or
consummation of the Plan.
XXVI. Notice of Entry of Confirmation Order and Effective Date.
86. On or before the fourteenth (14th) day following the date of entry of this Confirmation
Order, the Zonda Plan Debtors or Reorganized Zonda Debtors, as applicable, shall serve notice of entry of this
Confirmation Order pursuant to Bankruptcy Rules 2002(f)(7), 2002(k), and 3020(c) on all creditors and interest
holders, the U.S. Trustee, and other parties in interest, by causing notice of entry of this Confirmation Order
(the “ Notice of Confirmation ”), to be delivered to such parties by first-class mail, postage prepaid. The Zonda
Plan Debtors or the Reorganized Zonda Debtors, as applicable, shall also post the Notice of Confirmation on
the website maintained by the Solicitation Agent, at http://cases.primeclerk.com/pacificdrilling/ (the “ Case
Website ”). The notice described herein is adequate under the circumstances, and no other or further notice is
necessary.
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XXVII. Notice of Effective Date.
87. As soon as practicable after the occurrence of the Effective Date, the Reorganized Zonda
Debtors or the Liquidation Trust, as applicable, shall serve notice of the Effective Date on all creditors and
interest holders, the U.S. Trustee, and other parties in interest, by causing notice of the Effective Date in the
form annexed hereto as Exhibit B (“ Notice of Effective Date ”) to be delivered to such parties by first-class
mail, postage prepaid. The Reorganized Zonda Debtors or the Liquidation Trust, as applicable, shall also post
the Notice of Effective Date on the Case Website. The Notice of Effective Date shall include notice of the
deadline for (a) filing Proofs of Claim arising out of rejection of Executory Contracts or Unexpired Leases upon
the Effective Date and (b) filing Administrative Claims.
XXVIII. Retention of Jurisdiction.
88. Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, this Court shall retain
exclusive jurisdiction with respect to all matters arising from or related to the Chapter 11 Cases, the Plan, and
the implementation of this Confirmation Order, including, without limitation, those matters set forth in Article
XIII of the Plan, including, all Retained Actions by or on behalf of the Zonda Plan Debtors, Reorganized Zonda
Debtors, or the Liquidation Trust.
XXIX. Payment of Statutory Fees.
89. All fees payable pursuant to section 1930 of title 28 of the United States Code, together
with any interest pursuant to section 3717 of title 31 of the United States Code, shall continue to be paid by the
Zonda Plan Debtors, the Reorganized Zonda Debtors, or the Liquidation Trust, as applicable, on the earlier of
when due or the Effective Date. All applicable post-confirmation statutory fees shall continue to be paid until
the cases are closed, dismissed, or converted to chapter 7.
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XXX. Payment of Professionals After the Effective Date.
90. The Reorganized Zonda Debtors or the Liquidation Trust, as applicable, are authorized to
pay compensation for services rendered or reimbursement of expenses incurred after the Effective Date in the
ordinary course without the need for Bankruptcy Court approval.
XXXI. Funding of Professional Fee Escrow.
91. On the Effective Date, the Zonda Plan Debtors, the Reorganized Zonda Debtors, or the
Liquidation Trust, as applicable, shall establish and fund the Professional Fee Escrow with Cash equal to the
Professional Fee Escrow Amount.
XXXII. Documents, Mortgages, and Instruments.
92. Each federal, state, commonwealth, local, foreign, or other governmental agency is
hereby authorized to accept any and all documents, mortgages, and instruments necessary or appropriate to
effectuate, implement, or consummate the transactions contemplated by the Plan.
XXXIII. Activities in Anticipation of the Effective Date.
93. The Zonda Plan Debtors are hereby authorized and empowered to take all necessary
steps, and pay all related expenses, in anticipation of the Effective Date, including, without limitation,
effectuating the transactions contemplated by the Plan and this Confirmation Order.
XXXIV. Substantial Consummation.
94. On the Effective Date, the Plan shall be deemed to be substantially consummated
pursuant to sections 1101 and 1127(b) of the Bankruptcy Code.
XXXV. Severability.
95. This Confirmation Order shall constitute a judicial determination and shall provide that
each term and provision of the Plan, as it may be amended in accordance with Section 14.2 of the Plan, is (a)
valid and enforceable pursuant to its terms, (b) integral to the Plan and may
38
not be deleted or amended other than in accordance with Section 14.2 of the Plan, and (c) non-severable and
mutually dependent.
XXXVI. Immediate Binding Effect.
96. Pursuant to section 1141, as applicable, and the other applicable provisions of the
Bankruptcy Code, on or after entry of this Confirmation Order and subject to the occurrence of the Effective
Date, the terms of the Plan (including all documents and agreements executed pursuant thereto or in connection
therewith), the Plan Supplement, and this Confirmation Order shall be immediately effective and enforceable
and shall bind the Zonda Plan Debtors, the Reorganized Zonda Debtors, the Liquidation Trust the Released
Parties, the Exculpated Parties, all Holders of Claims and Interests (irrespective of whether such Claims or
Interests are Impaired under the Plan or whether the Holders of such Claims or Interests accepted or are deemed
to have accepted the Plan), any other person giving, acquiring, or receiving property under the Plan, any and all
non-Zonda Plan Debtor parties to Executory Contracts and Unexpired Leases with any of the Zonda Plan
Debtors, any other party in interest in these Chapter 11 Cases, and the respective heirs, executors,
administrators, successors, or assigns, if any, of any of the foregoing. On the Effective Date, the releases,
discharges, exculpations, and injunctions set forth in the Plan and approved by this Order shall be effective and
binding on Persons who may have had standing to assert any released, discharged, exculpated, or enjoined
Causes of Action after the Effective Date.
XXXVII. Conflicts Between Confirmation Order and the Plan.
97. To the extent of any inconsistency between the provisions of the Plan and this
Confirmation Order, the terms and provisions contained in this Confirmation Order shall govern. The
provisions of this Confirmation Order are integrated with each other and are non-severable and mutually
dependent unless expressly stated by further order of this Court.
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XXXVIII. Stay of Confirmation.
98. The requirements under Bankruptcy Rule 3020(e) that an order confirming a plan is
stayed until the expiration of 14 days after entry of the order are hereby waived. This Confirmation Order shall
take effect immediately and shall not be stayed pursuant to Bankruptcy Rules 3020(e), 6004(g), 6006(d), or
7062.
XXXIX. Modifications and Amendments.
99. The Plan may be amended, modified, or supplemented by the Zonda Plan Debtors in
accordance with Section 14.2 of the Plan.
XL. Final Order.
100. This Confirmation Order is a final order and the period in which an appeal must be filed
shall commence upon the entry hereof.
XLI. Post-Confirmation Reporting.
101. The Zonda Plan Debtors shall continue to file post-confirmation monthly operating
reports until the cases are closed, dismissed, or converted to chapter 7, and shall file the reports required under
Local Rule 3020.
Dated: January 30, 2019
New York, New York
/s/ Michael E. Wiles
THE HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
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Exhibit A
Modified Amended Joint Plan of Liquidation/Reorganization
Exhibit B
Notice of Effective Date