<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 1-7746
---------------
TRANSOCEAN OFFSHORE INC.
(Exact name of registrant as specified in its charter)
---------------
CAYMAN ISLANDS N/A
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 GREENWAY PLAZA
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 232-7500
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1999, 100,563,304 ordinary shares, par value $.01 per share,
of Transocean Offshore Inc. were outstanding.
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<PAGE>
TRANSOCEAN OFFSHORE INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 1999
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998............. 2
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998........................... 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998....................... 4
Notes to Condensed Consolidated Financial Statements........... 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..... 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 25
ITEM 2. Changes in Securities and Use of Proceeds...................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders............ 25
ITEM 6. Exhibits and Reports on Form 8-K............................... 26
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Offshore Inc. and
consolidated subsidiaries included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. When used herein the term "Company" means
Transocean Offshore Inc., a Cayman Islands exempted company limited by shares,
its consolidated subsidiaries and its predecessors, unless the context indicates
otherwise.
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Revenues $235,565 $251,577 $541,924 $509,890
-------- -------- -------- --------
Costs and Expenses
Operating and maintenance 120,236 114,549 266,827 246,497
Depreciation and amortization 32,294 28,103 64,295 56,181
General and administrative 7,341 7,723 14,010 14,691
-------- -------- -------- --------
159,871 150,375 345,132 317,369
-------- -------- -------- --------
Operating Income 75,694 101,202 196,792 192,521
-------- -------- -------- --------
Other Income (Expense), Net
Equity in earnings of joint ventures 3,312 2,557 6,536 4,890
Interest income 698 1,084 1,246 1,952
Interest expense, net of amounts capitalized (551) (5,575) (2,939) (12,682)
Gain on termination of cash flow sharing agreement -- (96) -- 21,290
Other, net 817 (362) (770) 853
-------- -------- -------- --------
4,276 (2,392) 4,073 16,303
-------- -------- -------- --------
Income Before Income Taxes 79,970 98,810 200,865 208,824
Income Taxes 23,591 29,149 59,255 61,603
-------- -------- -------- --------
Net Income $ 56,379 $ 69,661 $141,610 $147,221
======== ======== ======== ========
Earnings Per Share
Basic $0.56 $0.70 $ 1.41 $ 1.47
======== ======== ======== ========
Diluted $0.56 $0.69 $ 1.41 $ 1.46
======== ======== ======== ========
Weighted Average Shares Outstanding
Basic 100,359 100,082 100,344 99,879
-------- -------- -------- --------
Diluted 100,818 101,006 100,786 100,854
-------- -------- -------- --------
Dividends Paid Per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(In thousands, except share data)
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 55,384 $ 69,453
Accounts Receivable 177,572 217,494
Deferred Income Taxes 11,255 --
Materials and Supplies 35,219 33,928
Prepayments 5,946 9,596
Costs Incurred on Drilling Services Projects in Progress -- 31,161
---------- ----------
Total Current Assets 285,376 361,632
---------- ----------
Property and Equipment 2,908,285 2,659,020
Less Accumulated Depreciation 584,198 530,949
---------- ----------
Property and Equipment, net 2,324,087 2,128,071
---------- ----------
Goodwill, net 666,280 675,243
Investments in and Advances to Joint Ventures 35,818 55,544
Other Assets 21,035 30,453
---------- ----------
Total Assets $3,332,596 $3,250,943
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 44,269 $ 40,939
Accrued Income Taxes 120,907 58,711
Current Portion of Long-Term Debt 27,868 18,672
Deferred Income Taxes -- 1,420
Other Current Liabilities 60,012 72,679
---------- ----------
Total Current Liabilities 253,056 192,421
---------- ----------
Long-Term Debt 701,471 813,953
Deferred Income Taxes 234,415 229,979
Other Long-Term Liabilities 29,709 35,947
---------- ----------
Total Long-Term Liabilities 965,595 1,079,879
---------- ----------
Preference Shares, $0.10 par value; 50,000,000 shares
authorized, none issued and outstanding -- --
Ordinary Shares, $0.01 par value; 150,000,000 shares authorized,
100,563,304 shares issued and outstanding at June 30, 1999,
and 104,335,127 shares issued, including shares in treasury,
and 100,551,127 shares outstanding at December 31, 1998 1,043 1,043
Less Ordinary Shares in Treasury, at cost;
3,784,000 shares at December 31, 1998 -- (144,297)
Additional Paid-in Capital 1,390,623 1,535,201
Retained Earnings 722,279 586,696
---------- ----------
Total Shareholders' Equity 2,113,945 1,978,643
---------- ----------
Total Liabilities and Shareholders' Equity $3,332,596 $3,250,943
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 141,610 $ 147,221
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 64,295 56,181
Deferred income taxes (8,238) 21,029
Equity in earnings of joint ventures (6,536) (4,890)
Gain on disposal of assets (21) (3,735)
Deferred income, net (4,432) (4,901)
Deferred expenses, net 3,859 3,096
Other, net 6,160 6,964
Changes in operating assets and liabilities
Accounts receivable 38,046 (33,111)
Accounts payable 3,911 (13,548)
Income taxes receivable/payable, net 62,196 13,000
Other current assets 32,837 (1,191)
Other current liabilities (13,278) (9,755)
--------- ---------
Net Cash Provided by Operating Activities 320,409 176,360
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (252,556) (241,736)
Proceeds from disposal of assets, net 1,912 6,440
Joint ventures and other investments 26,254 3,394
--------- ---------
Net Cash Used in Investing Activities (224,390) (231,902)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit facility (100,900) 45,200
Dividends paid (6,028) (6,015)
Repayment of notes payable (2,307) (2,308)
Proceeds from issuance of ordinary shares under
stock-based compensation plans 772 6,661
Other, net (1,625) (479)
--------- ---------
Net Cash Provided by (Used in) Financing Activities (110,088) 43,059
--------- ---------
Net Decrease in Cash and Cash Equivalents (14,069) (12,483)
--------- ---------
Cash and Cash Equivalents at Beginning of Period 69,453 54,225
--------- ---------
Cash and Cash Equivalents at End of Period $ 55,384 $ 41,742
========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
BASIS OF CONSOLIDATION - The accompanying condensed consolidated financial
statements of the Company have been prepared without audit in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission. Accordingly, pursuant to such rules and
regulations, these financial statements do not include all disclosures required
by generally accepted accounting principles for complete financial statements.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. In connection with the preparation of these financial
statements, management was required to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues, expenses and
disclosure of contingent liabilities. Actual results could differ from such
estimates. The accompanying condensed consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the year ended December 31, 1998.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash payments for interest and income
taxes, net were $26.7 million and $5.3 million, respectively, for the six months
ended June 30, 1999 and $27.7 million and $28.7 million, respectively, for the
six months ended June 30, 1998. Non-cash financing activities for the six
months ended June 30, 1999 included $144.3 million for the cancellation of
treasury shares (see Note 6). This has been reflected in the condensed
consolidated balance sheets as a decrease in Additional Paid-In Capital.
GOODWILL - Goodwill is amortized on a straight-line basis over 40 years (the
period when benefits are expected to be derived). Accumulated amortization as
of June 30, 1999 and December 31, 1998 totaled $51.7 million and $42.7 million,
respectively.
CAPITALIZED INTEREST - Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company capitalized interest costs on
construction work in progress of $11.6 million and $21.3 million for the three
and six months ended June 30, 1999 and $8.4 million and $15.0 million in the
corresponding periods of 1998.
RECLASSIFICATIONS - Certain reclassifications have been made to prior period
amounts to conform with the current period's presentation.
INTERIM FINANCIAL INFORMATION - The financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods. Such adjustments are considered to be of a
normal recurring nature unless otherwise identified.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB 133 to delay the
required effective date for adoption of SFAS 133 to fiscal years beginning
after June 15, 2000. Because of the Company's limited use of derivatives to
manage its exposure to fluctuations in foreign exchange rates and interest
rates, management does not anticipate that the adoption of the new statement
will have a material
5
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
effect on the results of operations or the financial position of the Company.
The Company will adopt SFAS No. 133 as of January 1, 2001.
NOTE 2 - UPGRADE AND EXPANSION OF DRILLING FLEET
The Company's investments in its existing fleet and previously announced fleet
additions continue to require significant capital expenditures. Capital
expenditures totaled $252.6 million during the six months ended June 30, 1999.
The following table summarizes actual and projected expenditures (including
capitalized interest) for the Company's major construction projects.
<TABLE>
<CAPTION>
Discoverer Discoverer Discoverer
(Expenditures in millions) Enterprise Spirit Deep Seas
---------- -------------- ------------
<S> <C> <C> <C>
Cumulative at December 31, 1998 $ 302 $124 $ 106
Actual for the six months ended June 30, 1999 87 83 49
-------- ---- ------------
Cumulative at June 30, 1999 389 207 155
Projected through completion 40 140 190
-------- ---- ------------
Projected Total Costs $ 429 $347 $ 345
======== ==== ============
NOTE 3 - DEBT
Debt is comprised of the following:
June 30, December 31,
1999 1998
---------- ------------
(In thousands)
Revolving Credit Facility $219,100 $320,000
Project Financing Agreement 186,990 186,990
8.00% Debentures, net of discount 199,256 199,243
7.45% Notes 100,000 100,000
6.90% Notes Payable 23,077 25,384
Other 916 1,008
-------- ------------
Total Debt 729,339 832,625
Less Current Maturities 27,868 18,672
-------- ------------
Total Long-Term Debt $701,471 $813,953
======== ============
</TABLE>
Project Financing Agreement - In connection with the construction of the
Discoverer Enterprise and the completed upgrade of the Transocean Amirante, the
Company's wholly owned subsidiary, Transocean Enterprise Inc., entered into a
project financing agreement effective December 27, 1996 with a group of banks
led by ABN AMRO Bank, N.V., as agent (the "Project Financing Agreement").
Approximately $323 million is available in two tranches for drawdowns during the
construction period. The first tranche of approximately $62.9 million is to be
repaid upon completion of construction and acceptance of the two rigs by Amoco
Production Company ("Amoco"). It bears an interest rate of LIBOR plus 0.35
percent. The Company expects to lend Transocean Enterprise Inc. the necessary
funds to repay the $62.9 million through
6
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
borrowings under the Revolving Credit Facility; accordingly, the $62.9 million
due in 1999 was not classified as current because it is the intent of management
to refinance such amount on a long-term basis. The second tranche of
approximately $259.9 million (of which $124.1 million in borrowings were
outstanding as of June 30, 1999) bears an interest rate of LIBOR plus 0.85
percent during the construction period and is convertible to term financing upon
completion of construction and acceptance of the two rigs by Amoco. The term
financing, which is to be paid out of cash flows from the two rigs, matures over
a period of five years. Amoco has contracted the Transocean Amirante for a
period of up to five years and the Discoverer Enterprise for a period of five
years following their respective acceptance dates. The Company expects the term
financing to consist of borrowings under a lease securitization facility
provided by the agent at a floating interest rate (which has been converted to a
fixed rate by the interest rate swap transactions described below) plus a margin
of 0.36 percent for amounts fully amortized by cash flows from the Amoco
contracts and a margin of 0.62 percent for the remaining amounts, if any.
The Project Financing Agreement originally required acceptance of the two
drilling units by Amoco, repayment of the first tranche and conversion of the
second tranche to term financing no later than December 31, 1998. Although the
Transocean Amirante was accepted by Amoco and commenced operations in July 1997,
the Discoverer Enterprise is not expected to be completed until the third
quarter of 1999 due to construction delays. As a result, during December 1998,
Transocean Enterprise Inc. amended the Project Financing Agreement to extend the
outside date for acceptance of the Discoverer Enterprise, repayment of the first
tranche and conversion of the second tranche to term financing from December 31,
1998 to August 31, 1999. The Company expects that the Project Financing
Agreement will be further amended to extend such outside date to October 31,
1999.
During June 1999, Transocean Enterprise Inc. amended the terms of its interest
rate swap transactions, which effectively lock in a fixed interest rate for the
term financing under the Project Financing Agreement, to adjust the payment
schedule for the anticipated construction delays. In connection with the
amendment, the fixed rate Transocean Enterprise Inc. will pay increased from an
average of 6.583 percent to 6.7025 percent. The net unrealized loss on the
interest rate swaps was approximately $4.5 million as of June 30, 1999.
7
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the computation of
basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Income for basic
and diluted earnings per share $ 56,379 $ 69,661 $141,610 $147,221
======== ======== ======== ========
Weighted-average shares
for basic earnings per share 100,359 100,082 100,344 99,879
Effect of dilutive securities
Employee stock options and unvested stock grants 459 924 442 975
-------- -------- -------- --------
Adjusted weighted-average shares and assumed
conversions for diluted earnings per share 100,818 101,006 100,786 100,854
======== ======== ======== ========
Basic earnings per share $ 0.56 $ 0.70 $ 1.41 $ 1.47
======== ======== ======== ========
Diluted earnings per share $ 0.56 $ 0.69 $ 1.41 $ 1.46
======== ======== ======== ========
</TABLE>
NOTE 5 - SEGMENTS
The Company has two reportable segments: Mobile Units and Drilling Services.
The Mobile Units segment primarily operates drilling rigs for customers,
principally at a contractually determined price per day (dayrate). Drilling
Services primarily involves providing personnel and equipment other than rigs
for oil and gas exploration and production on either a dayrate or fixed price
basis. For both segments, performance is evaluated based on operating income
before general and administrative expenses.
8
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Mobile Units
U.S. Gulf of Mexico $ 91,021 $ 64,801 $187,075 $136,256
Europe 92,993 112,628 206,771 223,107
Other Western Hemisphere 32,941 40,169 66,216 66,093
Other Eastern Hemisphere 4,888 16,026 12,649 31,266
-------- -------- -------- --------
Total Mobile Units 221,843 233,624 472,711 456,722
-------- -------- -------- --------
Drilling Services 13,722 17,953 69,213 53,168
-------- -------- -------- --------
TOTAL OPERATING REVENUES $235,565 $251,577 $541,924 $509,890
======== ======== ======== ========
OPERATING INCOME (LOSS) (A)
Mobile Units
U.S. Gulf of Mexico $ 56,078 $ 38,499 $117,074 $ 79,843
Europe 7,205 39,081 47,902 76,148
Other Western Hemisphere 21,838 21,875 42,410 37,961
Other Eastern Hemisphere (410) 10,085 1,411 15,746
Other (b) (3,511) (3,600) (7,534) (5,051)
-------- -------- -------- --------
Total Mobile Units 81,200 105,940 201,263 204,647
-------- -------- -------- --------
Drilling Services 2,211 3,308 10,293 3,203
-------- -------- -------- --------
Total Operating Income for
Reportable Segments 83,411 109,248 211,556 207,850
Corporate Expenses (7,717) (8,046) (14,764) (15,329)
-------- -------- -------- --------
TOTAL OPERATING INCOME 75,694 101,202 196,792 192,521
-------- -------- -------- --------
Equity in earnings of joint ventures 3,312 2,557 6,536 4,890
Interest income 698 1,084 1,246 1,952
Interest expense, net of amounts
capitalized (551) (5,575) (2,939) (12,682)
Gain on termination of cash flow sharing agreement -- (96) -- 21,290
Other, net 817 (362) (770) 853
-------- -------- -------- --------
OTHER INCOME (EXPENSE), NET 4,276 (2,392) 4,073 16,303
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES $ 79,970 $ 98,810 $200,865 $208,824
======== ======== ======== ========
</TABLE>
(a) After depreciation and amortization expense.
(b) Other includes operations and engineering overhead expenses not allocated
to geographic areas of operations.
9
<PAGE>
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - CORPORATE REORGANIZATION
Effective May 14, 1999, the Company completed a corporate reorganization that
resulted in it becoming a Cayman Islands corporation rather than a Delaware
corporation ("Transocean-Delaware"), which had no material effect on the
condensed consolidated financial statements of the Company. In the
reorganization, each share of Transocean-Delaware's common stock was converted
into one ordinary share of the Company and all treasury shares were cancelled.
NOTE 7 - PROPOSED BUSINESS COMBINATION
On July 12, 1999, the Company announced the signing of a definitive merger
agreement (the "Merger Agreement") among the Company, Sedco Forex Merger
Subsidiary, Ltd., a wholly owned subsidiary of the Company ("Merger Sub"),
Schlumberger Limited ("Schlumberger") and Sedco Forex Holdings Limited, a wholly
owned subsidiary of Schlumberger ("Sedco Forex"). On the same date,
Schlumberger and Sedco Forex separately entered into a definitive distribution
agreement (the "Distribution Agreement"). Pursuant to the Merger Agreement and
the Distribution Agreement, Sedco Forex, which constitutes or will constitute a
substantial portion of the offshore contract drilling business of Schlumberger,
will be spun off to the stockholders of Schlumberger (the "Distribution"), and
promptly merged with and into Merger Sub (the "Merger"), thereby becoming a
wholly-owned subsidiary of the Company. The Schlumberger stockholders will
receive shares of the Company in exchange for their shares of Sedco Forex in the
Merger. The Distribution and the Merger are expected to be free of U.S. federal
income taxes.
Following the Distribution and the Merger, Schlumberger stockholders will own 52
percent of the diluted shares in the combined company, which will be renamed
"Transocean Sedco Forex Inc." The diluted ratio of ownership in the share
capital of the resulting company is fixed by the Merger Agreement and not
subject to adjustment. Based on the outstanding diluted share count of the
Company on June 30, 1999 (approximately 101 million shares), Schlumberger
stockholders would receive approximately 109 million shares in the combined
company. Using the Schlumberger shares outstanding on June 30, 1999,
Schlumberger stockholders would receive approximately one newly issued
Transocean Sedco Forex share for every five Schlumberger shares held. The 109
million shares to be issued in the Merger would be valued at approximately $3.2
billion using the average of the closing prices of the Company's ordinary shares
over the seven-day period commencing three days before July 12, 1999, the date
on which the Merger was announced. The Merger will be accounted for as a
purchase, with Sedco Forex as the accounting acquiror.
At the effective time of the Merger, Sedco Forex will have approximately $435
million in debt, subject to adjustment based on agreed levels of working capital
and capital expenditures, among other matters. Transocean Sedco Forex will be
required to refinance all or a substantial portion of this amount immediately
following the Merger.
The transactions described above have been approved, as appropriate, by the
board of directors of each of the Company and Schlumberger and are expected to
close by December 31, 1999, subject to the approval of the shareholders of both
companies, various regulatory approvals, registration of the shares to be issued
in the Merger with the Securities and Exchange Commission, and other customary
closing conditions.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in connection with the information
contained in the Company's consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. When used herein the term "Company" means Transocean Offshore
Inc., a Cayman Islands exempted company limited by shares, its consolidated
subsidiaries and its predecessors, unless the context indicates otherwise.
OVERVIEW
Transocean Offshore Inc. is a leading international provider of deepwater and
harsh-environment contract drilling services for oil and gas wells. The Company
currently owns, has ownership interests in or operates 29 mobile offshore
drilling rigs. Transocean's fleet consists of seven fourth-generation
semisubmersibles, thirteen second- and third-generation semisubmersibles, three
drillships, including the Discoverer Enterprise which is currently undergoing
sea trials, and six jackup rigs. The Company also has under construction two
additional Discoverer Enterprise-class drillships, to be named Discoverer Spirit
and Discoverer Deep Seas. The Company contracts these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
The Company also provides additional drilling services, including international
turnkey drilling, coiled tubing drilling and integrated drilling services to
customers worldwide.
OPERATING RESULTS
Comparative data relating to the Company's operating revenues and operating
income by segment and geographic area follows. In the table and related
discussion below, the "Mobile Units" segment primarily consists of the results
of operations for drilling rigs operated for customers, primarily at a
contractually determined price per day (dayrate). The "Drilling Services"
segment primarily includes results from providing personnel and equipment other
than rigs for oil and gas exploration and production on either a dayrate or
fixed price basis.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Mobile Units
U.S. Gulf of Mexico $ 91,021 $ 64,801 $187,075 $136,256
Europe 92,993 112,628 206,771 223,107
Other Western Hemisphere 32,941 40,169 66,216 66,093
Other Eastern Hemisphere 4,888 16,026 12,649 31,266
-------- -------- -------- --------
Total Mobile Units 221,843 233,624 472,711 456,722
-------- -------- -------- --------
Drilling Services 13,722 17,953 69,213 53,168
-------- -------- -------- --------
TOTAL OPERATING REVENUES $235,565 $251,577 $541,924 $509,890
======== ======== ======== ========
OPERATING INCOME (LOSS) (a)
Mobile Units
U.S. Gulf of Mexico $ 56,078 $ 38,499 $117,074 $ 79,843
Europe 7,205 39,081 47,902 76,148
Other Western Hemisphere 21,838 21,875 42,410 37,961
Other Eastern Hemisphere (410) 10,085 1,411 15,746
Other (b) (3,511) (3,600) (7,534) (5,051)
-------- -------- -------- --------
Total Mobile Units 81,200 105,940 201,263 204,647
-------- -------- -------- --------
Drilling Services 2,211 3,308 10,293 3,203
-------- -------- -------- --------
Total Operating Income for
Reportable Segments 83,411 109,248 211,556 207,850
Corporate Expenses (7,717) (8,046) (14,764) (15,329)
-------- -------- -------- --------
TOTAL OPERATING INCOME 75,694 101,202 196,792 192,521
-------- -------- -------- --------
Equity in earnings of joint ventures 3,312 2,557 6,536 4,890
Interest income 698 1,084 1,246 1,952
Interest expense, net of amounts
capitalized (551) (5,575) (2,939) (12,682)
Gain on termination of cash flow sharing agreement -- (96) -- 21,290
Other, net 817 (362) (770) 853
-------- -------- -------- --------
OTHER INCOME (EXPENSE), NET 4,276 (2,392) 4,073 16,303
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES $ 79,970 $ 98,810 $200,865 $208,824
======== ======== ======== ========
</TABLE>
(a) After depreciation and amortization expense.
(b) Other includes operations and engineering overhead expenses not allocated
to geographic areas of operations.
12
<PAGE>
QUARTER ENDED JUNE 30, 1999, COMPARED TO QUARTER ENDED JUNE 30, 1998
Net income for the three months ended June 30, 1999 was $56.4 million or $0.56
per share, diluted, compared to $69.7 million or $0.69 per share, diluted, for
the three months ended June 30, 1998, a decrease of $13.3 million or $0.13 per
share, diluted. The decrease for 1999 as compared to 1998 resulted primarily
from decreases in rig utilization, caused by depressed exploration and
production spending levels, higher operating and maintenance costs and higher
depreciation expense, partially offset by higher other income.
Revenues were $235.6 million for the three months ended June 30, 1999, compared
to $251.6 million for the three months ended June 30, 1998, a decrease of $16.0
million or 6.4 percent. Operating income was $75.7 million for the three months
ended June 30, 1999 compared to $101.2 million for the three months ended June
30, 1998, a decrease of $25.5 million or 25.2 percent. The decrease in revenues
for the three months ended June 30, 1999 resulted primarily from decreased
utilization from the three months ended June 30, 1998, while the decrease in
operating income resulted primarily from decreased utilization, higher operating
and maintenance costs and higher depreciation expense.
Revenues and operating income from Mobile Units decreased for the three months
ended June 30, 1999 compared to the three months ended June 30, 1998. Fleetwide
rig utilization decreased to 81 percent for the three months ended June 30, 1999
from 98 percent for the three months ended June 30, 1998, reflecting the fact
that six rigs were idle for all or part of the second quarter of 1999. The
average dayrate for the Company's semisubmersible drilling rigs and drillships
was approximately $128,100 for the three months ended June 30, 1999, compared to
approximately $116,900 for the three months ended June 30, 1998, an increase of
9.6 percent. This increase slightly offsets the effect of decreased
utilization. The average dayrate for the Company's jackup rigs decreased 47
percent as compared to the prior year quarter.
In the U.S. Gulf of Mexico, the increase in revenues and operating income
resulted from higher average dayrates earned for the three months ended June 30,
1999, as well as from the results of one rig working in the region that had been
in the shipyard undergoing a conversion in the three months ended June 30, 1998.
In Europe, the decreases in revenues and operating income resulted from
decreased utilization due to three rigs, which worked the entire three months
ended June 30, 1998, being idle for all or part of the three months ended June
30, 1999, as well as higher downtime and maintenance expenses on one rig that
underwent a scheduled survey during the 1999 period. In Other Western
Hemisphere, the decrease in revenues and operating income resulted from one rig
working in the U.S. Gulf of Mexico during the three months ended June 30, 1999
that had worked in the region a portion of the three months ended June 30, 1998,
and from one semisubmersible moving to the U.S. Gulf of Mexico that had worked
in the region the entire three months ended June 30, 1998. These negative
variances are partially offset by an increase in the average dayrates during the
three months ended June 30, 1999. In Other Eastern Hemisphere, the significant
decrease in revenues and operating income resulted from lower average dayrates
and utilization. Two jackup rigs that had worked the entire three months ended
June 30, 1998 were idle the entire three months ended June 30, 1999.
Revenues and operating income from Drilling Services decreased for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998.
This decrease is primarily the result of lower daywork activity relating to the
turnkey drilling project in Mexico, which was completed in the three months
ended June 30, 1999, a lower level of activity in Europe and no drilling
services activity in India during the 1999 period.
Depreciation and amortization expense increased by $4.2 million for the three
months ended June 30, 1999 over the three months ended June 30, 1998. The
increase was due primarily to additional depreciation
13
<PAGE>
resulting from the capitalization of property and equipment associated with the
Company's completed major upgrade and construction projects.
Other income, net increased to $4.3 million for the three months ended June 30,
1999 compared to Other expense, net of $2.4 million for the three months ended
June 30, 1998. Net interest expense decreased for the three months ended June
30, 1999 due primarily to the increased capitalization of interest on the
Company's construction projects.
Income tax expense decreased by $5.6 million due primarily to lower pre-tax
earnings for the three months ended June 30, 1999 compared to the three months
ended June 30, 1998. The Company's effective tax rate remained the same for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998, and was lower than the U.S. Statutory rate due primarily to the permanent
reinvestment of earnings of certain foreign operations.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net income for the six months ended June 30, 1999 was $141.6 million or $1.41
per share, diluted, compared to $147.2 million or $1.46 per share, diluted, for
the six months ended June 30, 1998, a decrease of $5.6 million or $0.05 per
share, diluted. The decrease for the six months ended June 30, 1999 resulted
primarily from a decrease in rig utilization caused by depressed exploration and
production spending levels, higher operating and maintenance costs and higher
depreciation expense, partially offset by an increase in average dayrates and
lower net interest expense. In the six months ended June 30, 1998, the Company
recognized a one-time $21.3 million pre-tax gain ($13.8 million after tax or
$0.14 per share, diluted) on the termination of a cash flow sharing agreement
with Global Marine Inc. ("Global Marine").
Revenues were $541.9 million for the six months ended June 30, 1999, compared to
$509.9 million for the six months ended June 30, 1998, an increase of $32.0
million or 6.3 percent. Operating income was $196.8 million for the six months
ended June 30, 1999 compared to $192.5 million for the six months ended June 30,
1998, an increase of $4.3 million or 2.2 percent. The increase in revenues and
operating income for the six months ended June 30, 1999 resulted primarily from
higher revenues and operating income from the turnkey drilling services
operations in Mexico, which were completed in the second quarter of 1999, and
increased dayrates from the six months ended June 30, 1998.
Revenues from Mobile Units increased while operating income decreased for the
six months ended June 30, 1999, compared to the six months ended June 30, 1998.
The average dayrate for the Company's semisubmersible drilling rigs and
drillships was approximately $130,200 for the six months ended June 30, 1999,
compared to approximately $114,700 for the six months ended June 30, 1998, an
increase of 13.5 percent. One rig worked in the six months ended June 30, 1999
that had been in the shipyard undergoing a conversion during the prior year
period. Partially offsetting these increases, the Company's fleetwide rig
utilization decreased to 85 percent for the six months ended June 30, 1999 from
98 percent for the six months ended June 30, 1998.
In the U.S. Gulf of Mexico, the significant increase in revenues and operating
income for the six months ended June 30, 1999, resulted primarily from including
the results of one additional rig that was in the shipyard undergoing a
conversion during the six months ended June 30, 1998 and the results of another
rig for the entire six months ended June 30, 1999, compared to a portion for the
six months ended June 30, 1998. In Europe, decreases in revenues and operating
income resulted from decreased utilization due to three rigs being idle all or a
portion of the six months ended June 30, 1999, as well as higher downtime and
maintenance expenses on one rig that underwent a survey in the six months ended
June 30, 1999. These rigs
14
<PAGE>
worked the entire six months ended June 30, 1998. In Other Western Hemisphere,
the increase in revenues resulted primarily from higher average dayrates, while
the increase in operating income resulted primarily from lower operating and
maintenance expenses due partially to the fact that one semisubmersible that had
worked in the region during the six months ended June 30, 1998 was working in
the U.S. Gulf of Mexico during the six months ended June 30, 1999. In Other
Eastern Hemisphere, the significant decrease in revenues and operating income
resulted from lower average dayrates and utilization. Two rigs that had worked
the entire six months ended June 30, 1998 were idle for all or a portion of the
six months ended June 30, 1999.
Revenues and operating income from Drilling Services increased for the six
months ended June 30, 1999, compared to the six months ended June 30, 1998.
This increase primarily reflects higher revenues and operating income from
turnkey and subsequent daywork operations associated with the turnkey drilling
project in Mexico.
Depreciation and amortization expense increased by $8.1 million for the six
months ended June 30, 1999, compared to the six months ended June 30, 1998. The
increase was due primarily to additional depreciation resulting from the
capitalization of property and equipment associated with the Company's completed
major upgrade and construction projects.
Other income, net decreased to $4.1 million for the six months ended June 30,
1999, compared to Other income, net of $16.3 million for the six months ended
June 30, 1998. Net interest expense decreased significantly for the six months
ended June 30, 1999, compared to the six months ended June 30, 1998 primarily
due to the increased capitalization of interest on the Company's construction
projects. In addition, the six months ended June 30, 1998 include a $21.3
million pre-tax gain on the termination of a cash flow sharing agreement with
Global Marine.
Income tax expense decreased by $2.3 million due primarily to lower pre-tax
earnings for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998. The Company's effective tax rate remained the same for the
six months ended June 30, 1999 compared to the six months ended June 30, 1998
and was lower than the U.S. Statutory rate due primarily to the permanent
reinvestment of earnings of certain foreign operations.
MARKET OUTLOOK
Rig utilization for the second quarter 1999 averaged 81 percent (versus 90
percent, first quarter 1999) fleetwide and 87 percent (versus 93 percent, first
quarter 1999) for the Company's 20 fully owned and active floating drilling
units. The decrease in fleetwide utilization was primarily due to three
additional rigs, the Transocean John Shaw, the Transocean 97 and the Shelf
Explorer, becoming idle upon the expiration of existing contracts in the second
quarter, and to the Polar Pioneer being in the shipyard for 37 days for a
scheduled survey. Average dayrates during the second quarter of 1999 declined
to $111,500 (versus $117,500, first quarter 1999) fleetwide and $128,100 (versus
$132,100, first quarter 1999) for the Company's floaters, due primarily to the
Transocean Richardson, the Transocean 96 and the Transocean Nordic commencing
new lower-rate contracts during the second quarter. As of June 30, 1999, the
Company had 69% of its fleet days committed for the remainder of 1999 (including
the Discoverer Enterprise, which is expected to be placed in service during the
third quarter of 1999) and 44% for the year 2000.
Reduced exploration and development activity, resulting from the sustained
period of low oil prices from late 1997 through early 1999 and industry
consolidation over the same time period, continued in the second quarter despite
the upturn in prices since February 1999. Rig availability has also increased
as a result of
15
<PAGE>
expiring contracts and construction by drilling contractors of new rigs that are
capable of competing with the Company's deepwater and harsh-environment rigs.
This decline in exploration and development activity and increased rig
availability has created a highly competitive market for contract drilling
services, with corresponding reductions in utilization and dayrates for all
classes of offshore rigs.
Oil prices have continued to rally from lows experienced in 1998 and have
recently reached prices in excess of $20 per barrel, a level not seen since
early 1997. This increase suggests that there could be an improving long-
term fundamental outlook for the offshore drilling business. The Company has
recently experienced an increase in customer inquiries in all of its principal
market areas, but this has not yet led to increases in dayrates or rig
utilization. It is expected that in the near term, customers will continue a
cautious approach to exploration and development spending until these commodity
price gains prove to be sustainable.
The Company's efforts to secure contracts for its drilling units becoming
available due to contract expirations have been and will continue to be
adversely affected by continuing market weakness. Some units have been
contracted at lower rates in order to secure work and others have been stacked.
As of July 31, 1999, three of the Company's jackups and three semisubmersibles
were stacked. However, the Company has been successful in securing a 30-month
contract for the Discoverer Seven Seas, announced in June 1999, and shorter-term
work for three other rigs coming off contract and for two stacked rigs, the
Transocean John Shaw and the Shelf Explorer. In addition to the loss of
revenues associated with stacking rigs, the Company has incurred and may incur
additional expenses associated with severance and related payments to rig
operating personnel made redundant as a result of idled rigs.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash flows provided by operations were $320.4 million for the six months ended
June 30, 1999, compared to $176.4 million for the six months ended June 30,
1998, an increase of $144.0 million. The increase in cash provided by
operations was primarily due to increases provided by net working capital
components, partially offset by lower cash flows from net income in the 1999
period over the 1998 period.
Cash flows used in investing activities in the first six months of 1999 were
$224.4 million, compared to $231.9 million in the first six months of 1998. The
Company received $26.3 million of capital distributions in respect of an equity
investment in the first six months of 1999 compared to $3.3 million received in
the first six months of 1998. Partially offsetting these distributions
received, capital expenditures increased by $10.8 million in the first six
months of 1999 as compared to the first six months of 1998.
Cash flows used in financing activities were $110.1 million in the first six
months of 1999, compared to cash flows provided by financing activities of $43.1
million in the first six months of 1998. The increase in cash used in financing
activities was primarily due to net repayments on the revolving line of credit
during the first six months of 1999 compared to net borrowings during the first
six months of 1998.
CAPITAL EXPENDITURES
The Company's investments in its existing fleet and previously announced fleet
additions continue to require significant capital expenditures. Capital
expenditures totaled $253 million during the six months ending June 30, 1999 and
are expected to be approximately $310 million during the remainder of the year,
including
16
<PAGE>
amounts that will be spent on the construction of the deepwater drillships
Discoverer Enterprise, Discoverer Spirit and Discoverer Deep Seas.
The following table summarizes actual and projected expenditures (including
capitalized interest) for the Company's major construction projects.
<TABLE>
<CAPTION>
Discoverer Discoverer Discoverer
(Expenditures in millions) Enterprise Spirit Deep Seas
- -------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Cumulative at December 31, 1998 $302 $124 $106
Actual for the six months ended
June 30, 1999 87 83 49
---- ---- ----
Cumulative at June 30, 1999 389 207 155
Projected--July 1, 1999 through December 31, 1999 40 120 115
Projected--2000 -- 20 75
---- ---- ----
Projected Total Costs $429 $347 $345
==== ==== ====
</TABLE>
The amounts shown for the Discoverer Enterprise include certain costs not
expected to be incurred in connection with the construction of the Discoverer
Spirit and Discoverer Deep Seas, including: engineering design costs that will
not be repeated because the Discoverer Spirit and Discoverer Deep Seas are the
same design as the Discoverer Enterprise; lifting and other construction costs
that will be contracted on a lump sum rather than a time and materials basis;
incremental capitalized interest and administrative costs attributable to
project delays, some of which were due to weather and other factors beyond the
control of the Company; and costs and delays associated with commissioning and
testing several items of drilling equipment that are based on new designs or
technology. The Discoverer Enterprise is expected to be completed during the
third quarter of 1999; the Discoverer Spirit and the Discoverer Deep Seas are
expected to be completed in the first and third quarters of 2000, respectively.
As with any major construction project that takes place over an extended period
of time, the actual costs, the timing of expenditures, and the project
completion date may vary from estimates based on numerous factors, including
modification of the design, actual terms of awarded contracts, weather, exchange
rates, shipyard labor conditions and the market demand for components and
resources required for drilling unit construction. The Company intends to fund
the cash requirements relating to these capital commitments through available
cash balances, borrowings under the Credit Agreement referred to below and other
commercial bank or capital market financings, including potential public
offerings under the Company's shelf registration statement (discussed below)
and, in the case of the Discoverer Enterprise, financing under the Project
Financing Agreement referred to below.
MERGERS AND ACQUISITIONS
The Company, from time to time, reviews possible mergers and acquisitions of
businesses and drilling units, and may in the future make significant capital
commitments for such purposes. Any such transaction could involve the payment
by the Company of a substantial amount of cash and the issuance of a substantial
number of ordinary shares. The Company would expect to fund the cash
requirements of any such transaction through cash balances on hand, the
incurrence of additional debt, sales of assets or ordinary shares, or a
combination thereof. See "--Proposed Business Combination".
17
<PAGE>
AUTHORIZED STOCK REPURCHASE
In May 1997, the Company's Board of Directors authorized the repurchase of up to
$200 million worth of its ordinary shares from time to time on the open market
or in privately negotiated transactions. After purchases made during 1997,
approximately $105 million remains available under this authority. The Board of
Directors, from time to time, reviews the possibility of repurchasing ordinary
shares in light of prevailing share prices and the financial position of the
Company.
DEBT
Project Financing Agreement - In connection with the construction of the
Discoverer Enterprise and the completed upgrade of the Transocean Amirante, the
Company's wholly owned subsidiary, Transocean Enterprise Inc., entered into a
project financing agreement effective December 27, 1996 with a group of banks
led by ABN AMRO Bank, N.V., as agent (the "Project Financing Agreement").
Approximately $323 million is available in two tranches for drawdowns during the
construction period. The first tranche of approximately $62.9 million is to be
repaid upon completion of construction and acceptance of the two rigs by Amoco
Production Company ("Amoco"). It bears an interest rate of LIBOR plus 0.35
percent. The Company expects to lend Transocean Enterprise Inc. the necessary
funds to repay the $62.9 million through borrowings under the Revolving Credit
Facility. The second tranche of approximately $259.9 million (of which $124.1
million in borrowings were outstanding as of June 30, 1999) bears an interest
rate of LIBOR plus 0.85 percent during the construction period and is
convertible to term financing upon completion of construction and acceptance of
the two rigs by Amoco. The term financing, which is to be paid out of cash flows
from the two rigs, matures over a period of five years. Amoco has contracted the
Transocean Amirante for a period of up to five years and the Discoverer
Enterprise for a period of five years following their respective acceptance
dates. The Company expects the term financing to consist of borrowings under a
lease securitization facility provided by the agent at a floating interest rate
(which has been converted to a fixed rate by the interest rate swap transactions
described below) plus a margin of 0.36 percent for amounts fully amortized by
cash flows from the Amoco contracts and a margin of 0.62 percent for the
remaining amounts, if any.
The Project Financing Agreement originally required acceptance of the two
drilling units by Amoco, repayment of the first tranche and conversion of the
second tranche to term financing no later than December 31, 1998. Although the
Transocean Amirante was accepted by Amoco and commenced operations in July 1997,
the Discoverer Enterprise is not expected to be completed until the third
quarter of 1999 due to construction delays. As a result, during December 1998,
Transocean Enterprise Inc. amended the Project Financing Agreement to extend the
outside date for acceptance of the Discoverer Enterprise, repayment of the first
tranche and conversion of the second tranche to term financing from December 31,
1998 to August 31, 1999. The Company expects that the Project Financing
Agreement will be further amended to extend such outside date to October 31,
1999.
During June 1999, Transocean Enterprise Inc. amended the terms of its interest
rate swap transactions, which effectively lock in a fixed interest rate for the
term financing under the Project Financing Agreement, to adjust the payment
schedule for the anticipated construction delays. In connection with the
amendment, the fixed rate Transocean Enterprise Inc. will pay increased from an
average of 6.583 percent to 6.7025 percent. The net unrealized loss on the
interest rate swaps was approximately $4.5 million as of June 30, 1999.
Credit Agreement - The Company entered into a credit agreement dated as of July
30, 1996 with a group of banks led by ABN AMRO Bank, N.V. (the "Credit
Agreement"). The Credit Agreement, as subsequently amended, provides for
borrowing by the Company under a revolving credit facility in the amount of $540
18
<PAGE>
million (the "Revolving Credit Facility"). Loans under the Credit Agreement
bear interest, at the option of the Company, at a base rate or LIBOR plus a
margin (0.25 percent at June 30, 1999) that varies depending on the Company's
funded debt to total capital ratio or its public senior unsecured debt rating.
The Credit Agreement requires compliance with various restrictive covenants,
including an interest coverage ratio, which could limit the Company's ability to
pay dividends in the future. The Credit Agreement has a maturity date of July
2002. As of June 30, 1999, $286.7 million was available for borrowings under
the Revolving Credit Facility.
LETTERS OF CREDIT
The Company had letters of credit outstanding at June 30, 1999 totaling $34.2
million, including $28.6 million relating to a legal dispute with Kvaerner
Installasjon a.s. See Part II. Item 1. Legal Proceedings. The remaining $5.6
million guarantees various insurance and contract bidding activities.
SHELF REGISTRATION
The Company has filed with the Securities and Exchange Commission (the "SEC") a
$450 million shelf registration statement on Form S-3 for the proposed offering
from time to time of senior or subordinated debt securities, preferred stock,
common stock and warrants to purchase debt securities, preferred stock, common
stock or other securities. A recently filed amendment to this registration
statement has not yet been declared effective by the SEC.
DERIVATIVE INSTRUMENTS
The Company enters into a variety of derivative financial instruments in
connection with the management of its exposure to fluctuations in foreign
exchange rates and interest rates. The Company does not enter into derivative
transactions for speculative purposes; however, for accounting purposes certain
transactions may not meet the current criteria for hedge accounting.
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments, which do not qualify as hedges for accounting purposes, are
recognized currently based on the change in market value of the derivative
instruments. At June 30, 1999 and 1998, the Company did not have any foreign
exchange derivative instruments not qualifying as hedges.
The Company uses interest rate swap agreements to effectively convert a portion
of its floating rate debt to a fixed rate basis, reducing the impact of interest
rate changes on future income. Interest rate swaps are designated as a hedge of
underlying future interest payments. The interest rate differential to be
received or paid on the swaps is recognized over the lives of the swaps as an
adjustment to interest expense. At June 30, 1999, the net unrealized loss on
open interest rate swaps was approximately $4.5 million.
SOURCES OF LIQUIDITY
The Company believes that its cash and cash equivalents, cash generated from
operations, borrowings available under its Credit Agreement, Project Financing
Agreement and access to other financing sources will be adequate to meet its
anticipated short-term and long-term liquidity requirements, including scheduled
debt repayments and capital expenditures for new rig construction and upgrade
projects.
19
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB 133 to delay the required effective date for adoption of
SFAS 133 to fiscal years beginning after June 15, 2000. Because of the Company's
limited use of derivatives to manage its exposure to fluctuations in foreign
exchange rates and interest rates, management does not anticipate that the
adoption of the new statement will have a significant effect on the results of
operations or the financial position of the Company. The Company will adopt SFAS
133 as of January 1, 2001.
CORPORATE REORGANIZATION
On May 13, 1999, the stockholders approved a corporate reorganization that
resulted in the Company becoming a Cayman Islands corporation rather than a
Delaware corporation. In the reorganization, which was effected May 14, 1999,
(i) Transocean Offshore Inc., a Delaware corporation ("Transocean-Delaware"),
merged with and into Transocean Offshore (Texas) Inc., a Texas corporation
("Transocean-Texas"), (ii) following, such merger, Transocean-Texas converted to
and registered by way of continuation as a Cayman Islands exempted company
limited by shares named "Transocean Offshore Inc." and (iii) following such
conversion and continuation, the Company contributed a significant portion of
its assets to a newly formed Delaware subsidiary. The Company believes the
reorganization will give it greater flexibility in seeking to lower its
worldwide effective corporate income tax rate and allow it to restructure its
business to improve operational efficiencies, including improved worldwide cash
management. In addition, the Company anticipates that the reorganization may
increase its access to international capital markets, broaden its investor base
by making its securities more attractive to non-U.S. investors and may result in
a more favorable corporate structure for expansion of its current business
through creation of foreign joint ventures and future acquisition opportunities.
In the reorganization, each share of Transocean-Delaware's common stock was
converted into one ordinary share of the Company. The shares of the Company are
listed on the New York Stock Exchange under "RIG," the same symbol under which
the Transocean-Delaware common stock was previously listed.
PROPOSED BUSINESS COMBINATION
On July 12, 1999, the Company announced the signing of a definitive merger
agreement (the "Merger Agreement") among the Company, Sedco Forex Merger
Subsidiary, Ltd., a wholly owned subsidiary of the Company ("Merger Sub"),
Schlumberger Limited ("Schlumberger") and Sedco Forex Holdings Limited, a wholly
owned subsidiary of Schlumberger ("Sedco Forex"). On the same date,
Schlumberger and Sedco Forex separately entered into a definitive distribution
agreement (the "Distribution Agreement"). Pursuant to the Merger Agreement and
the Distribution Agreement, Sedco Forex, which constitutes or will constitute a
substantial portion of the offshore contract drilling business of Schlumberger,
will be spun off to the stockholders of Schlumberger (the "Distribution"), and
promptly merged with and into Merger Sub (the "Merger"), thereby becoming a
wholly-owned subsidiary of the Company. The Schlumberger stockholders will
receive shares of the Company in exchange for their shares of Sedco Forex in the
Merger. The Distribution and the Merger are expected to be free of U.S. federal
income taxes.
Following the Distribution and the Merger, Schlumberger stockholders will own 52
percent of the diluted shares in the combined company, which will be renamed
"Transocean Sedco Forex Inc." The diluted ratio of ownership in the share
capital of the resulting company is fixed by the Merger Agreement and not
subject to adjustment. Based on the outstanding diluted share count of the
Company on June 30, 1999 (approximately
20
<PAGE>
101 million shares), Schlumberger stockholders would receive approximately 109
million shares in the combined company. Using the Schlumberger shares
outstanding on June 30, 1999, Schlumberger stockholders would receive
approximately one newly issued Transocean Sedco Forex share for every five
Schlumberger shares held. The 109 million shares to be issued in the Merger
would be valued at approximately $3.2 billion using the average of the closing
prices of the Company's ordinary shares over the seven-day period commencing
three days before July 12, 1999, the date on which the Merger was announced. The
Merger will be accounted for as a purchase, with Sedco Forex as the accounting
acquiror.
At the effective time of the Merger, Sedco Forex will have approximately $435
million in debt, subject to adjustment based on agreed levels of working capital
and capital expenditures, among other matters. Transocean Sedco Forex will be
required to refinance all or a substantial portion of this amount immediately
following the Merger.
The transactions described above have been approved, as appropriate, by the
board of directors of each of the Company and Schlumberger and are expected to
close by December 31, 1999, subject to the approval of the shareholders of both
companies, various regulatory approvals, registration of the shares to be issued
in the Merger with the Securities and Exchange Commission, and other customary
closing conditions.
YEAR 2000 ISSUE
The Company has instituted a plan to address the Year 2000 issue for its
computer systems, microprocessors, operational and control systems and other
significant computer-based devices and applications. It is possible that
certain of these systems will not be able to process dates beginning in the year
2000, as many such systems are based on storing two digits to identify a
particular year rather than a full four digits and are not designed to take into
account the start of a new century. In addition, like every other business
enterprise, the Company is at risk from year 2000 failures on the part of its
major business counterparts, including suppliers and service providers, as well
as potential failures in public and private infrastructure services, including
electricity, water, gas, transportation and communications.
The Company's Year 2000 plan focuses on Year 2000 compliance in two distinct
areas--(i) rig-based operational systems and control devices and (ii) all other
business, financial and engineering systems, including third-party systems upon
which the Company may rely. The Company's efforts are directed towards areas
that are reasonably within its control. The plan is being implemented under the
direction of senior management by the Company's information systems and
technology personnel and operations personnel with appropriate expertise. The
five phases of the Company's plan--inventory, assessment, remediation, testing
and verification, and contingency planning--are in varying stages of completion,
and ultimate completion of the plan is expected by December 31, 1999.
Inventory - The Company conducted a survey of computer systems, computer-
controlled equipment, control systems, and electronic devices, including
equipment with embedded microprocessors, onboard each rig to identify those
systems and devices to be reviewed for Year 2000 compliance. With respect to
business, financial and engineering systems, the Company surveyed all of its
internal hardware and software systems worldwide. Key third-party businesses
whose year 2000 failures would most significantly impact the Company were
identified. The inventory phase is substantially complete.
Assessment - Once each at-risk system or device was identified, users were asked
to assess how critical the system or device is to the safety and operations of
the Company. For rig-based systems, the Company has requested letters of
compliance from its third-party vendors and suppliers for all at-risk items
identified in the survey and, in addition, is conducting its own tests where
possible to verify compliance. The assessment
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phase for rig-based systems, applications and devices is approximately 95
percent complete. With respect to business, financial and engineering systems,
letters of compliance have been requested from all vendors of standard systems,
and the Company is conducting tests of selected systems to provide an enhanced
degree of confidence for Year 2000 compliance. The assessment phase for these
systems is substantially complete. Compliance information has been obtained from
the Company's third-party vendors and suppliers for a majority of the identified
systems or devices.
Remediation - Critical systems and devices identified by the survey that are
likely to be affected by the Year 2000 issue are in the process of being
modified or replaced. A number of these systems and devices had already been
identified for renewal or replacement in connection with the Company's ongoing
maintenance programs. In some cases, systems or equipment are covered by
warranties, while other vendors are providing software upgrades at minimal
costs. The Company believes its Year 2000 compliance plan has adequately
identified and addressed Year 2000 issues with respect to critical operational
and safety systems and devices. With respect to business, financial and
engineering systems, replacement or modification of known non-compliant systems
has commenced. The remediation phase is approximately 90 percent complete with
respect to rig-based systems, applications and devices and is approximately 75
percent complete with respect to business, financial and engineering systems.
The Company's remediation phase is expected to be substantially completed by
October 31, 1999 except for the replacement of the
maintenance/purchasing/inventory system on certain European rigs, which is
scheduled for the fourth quarter of 1999. To the extent that certain of these
rigs are not operating in the fourth quarter of 1999, or are not anticipated to
operate in the first quarter of 2000, the Company may choose to delay the
replacement of this system until such rigs are returned to service. Any such
delay is not expected to have a material impact on the results of operations of
the Company.
Testing and Verification - The testing and verification phase includes
establishing a test environment, performing systems testing (with third parties
if necessary) and verifying the results. The verification process entails
having experienced personnel review test results, computer screens and printouts
against pre-established criteria to ensure system or device compliance. In the
case of program logic chips, access to internal programs is frequently not
possible; however, a review of program diagrams is completed to determine if any
date or time dependency exists. All internal systems and devices identified as
critical operational and safety systems and devices, along with critical
business hardware and software systems are being tested. With respect to rig-
based systems, the Company has instituted an ongoing compliance procedure that
starts with the results of the initial survey followed by analysis, vendor
participation, corrective action, testing and continuous reappraisal. Testing
and verification is currently underway and is expected to continue throughout
1999. The Company has received compliance information and has successfully
completed testing of its corporate and field-based accounting software systems.
The Company has initiated written and telephonic communications with key third-
party businesses as well as public and private providers of infrastructure
services to ascertain and evaluate their efforts in addressing Year 2000
compliance. Although there have been no indications that such third-party
providers have significant Year 2000 compliance issues, there can be no
assurance that such companies will not experience compliance problems.
Contingency Planning - The Company has developed or, in some cases, is still in
the process of developing specific contingency plans for critical operational
and business systems and devices in the event of Year 2000-related disruptions.
The Company's rig-based operations manuals also include documented policies and
procedures in the event of an emergency or equipment failure. The effect of
significant Year 2000 disruptions with direct suppliers of materials and
supplies needed for ongoing rig operations is being considered. An overall
corporate contingency plan will be compiled with input from both operations
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personnel and information systems and technology personnel and is expected to be
completed in the fourth quarter of 1999.
The Company believes that the reasonably likely worst case scenario is that
there will be some localized disruptions of systems that will affect individual
business and operations processes, facilities or suppliers for a short time
rather than systemic or long-term problems affecting its business operations as
a whole. The Company's drilling units are composed of many stand-alone systems
provided by a wide diversity of manufacturers. As such, the Company believes
the risk of a failure that would affect the functionality or safety of the fleet
is minimal, and the Company does not believe that the Year 2000 issue will have
a significant effect on the operations of its drilling units.
The Company's contingency planning efforts are being designed to identify
systems or other aspects of its business or that of its suppliers that it
believes would be most likely to experience Year 2000 problems, as well as those
business operations in which a localized disruption could have the potential for
causing a wider problem by interrupting the flow of materials or data. Because
there is uncertainty as to which activities may be affected and the exact nature
of the problems that may arise, the contingency planning efforts will focus on
minimizing the scope and duration of any disruptions by having sufficient
personnel and other resources in place to permit a flexible response to specific
problems as they may arise.
Costs - The Company has expended approximately $0.9 million through June 30,
1999 and expects additional expenditures of approximately $2 million to complete
implementation of its Year 2000 plan, some of which will be capitalized. The
Company does not separately track the internal costs of employees who are not
working full-time on the Company's Year 2000 plan.
Although the Company's failure to implement fully its Year 2000 compliance plan
or the occurrence of an unexpected Year 2000 problem could result in the
disruption of normal business activities or operations and have a material
adverse effect on the Company's results of operations, liquidity or financial
condition, based upon the work performed to date and the anticipated completion
of the plan during December 1999, the Company does not believe that such matters
will have a material adverse effect. During the remainder of 1999, the Company
will continue its efforts described above to address potential disruptions in
areas where the Company's operations rely on third parties. In particular, the
Company's operations in international locations could be at a greater risk of
being adversely affected by the failure of third-party businesses to adequately
address the Year 2000 problem. While such failure could affect the operations
of the Company, either directly or indirectly, in a significant manner, the
Company cannot estimate either the likelihood or the potential cost of such
failures.
The nature and focus of the Company's efforts to address the Year 2000 problem
may be revised periodically as interim goals are achieved or new issues are
identified.
FORWARD-LOOKING INFORMATION
The statements included in this quarterly report regarding future financial
performance and results of operations and other statements that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements to the effect that the Company or management "anticipates,"
"believes," "estimates," "expects," "predicts," or "projects" a particular
result or course of events, or that such result or course of events "may" or
"should" occur, and similar expressions, are also intended to identify forward-
looking statements. Forward-looking statements in this quarterly report
include, but are not limited to, statements involving expected capital
expenditures, liquidity requirements, financial arrangements, the timing of
23
<PAGE>
completion of capital projects, the Company's plans and expectations with regard
to Year 2000 issues, the Company's expectations with regard to market outlook,
the proposed business combination between the Company and Sedco Forex, and the
anticipated effects of the reorganization of the Company as a Cayman Islands
corporation. Such statements are subject to numerous risks, uncertainties and
assumptions, including but not limited to uncertainties relating to the level of
activity in offshore oil and gas exploration, development and production
(particularly in deepwater and harsh-environment regions), exploration success
by producers, oil and gas prices, work stoppages by Spanish shipyard workers,
competition and market conditions in the contract drilling industry, delays or
cost overruns on construction projects, the ability to enter into and the terms
of future contracts, risks inherent in turnkey contracts, the availability of
qualified personnel, the outcome of periodic wage negotiations with unions
representing certain Norwegian offshore workers, operating hazards, political
and other uncertainties inherent in foreign operations (including exchange and
currency fluctuations), the impact of governmental laws and regulations, the
adequacy of sources of liquidity, the effect of litigation and contingencies,
the success of the Company in implementing its Year 2000 compliance plan, the
failure of financial and other service providers to be Year 2000 compliant on a
timely basis, and other factors discussed in this quarterly report and in the
Company's other filings with the Securities and Exchange Commission. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
indicated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Debt--Project Financing
Agreement" and "--Liquidity and Capital Resources--Derivative Instruments."
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has certain claims pending involving a dispute of work performance
by and amounts owed to the Kvaerner shipyard in Norway and contested tax
assessments by the municipality of Rio de Janeiro, Brazil. These matters have
been previously discussed and reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. There have been no material
developments in these previously reported matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective May 14, 1999, the Company completed a corporate reorganization that
resulted in the Company becoming a Cayman Islands corporation rather than a
Delaware corporation. A description of the reorganization and of the Company's
ordinary shares is included in the Company's Proxy Statement/Prospectus filed
with the Securities and Exchange Commission on April 12, 1999 and its Current
Report on Form 8-K dated May 14, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on May 13, 1999 there were represented in
person or by proxy 84,314,847 shares out of 100,560,300 entitled to vote as of
the record date, constituting a quorum. Two matters were submitted to a vote of
stockholders. The first matter submitted was the approval of the reorganization
and the approval and adoption of the Agreement and Plan of Merger and Conversion
attached to and described in the Proxy Statement/Prospectus relating to the
meeting. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Corporate Reorganization". Of those shares
represented in person or by proxy, 65,945,101 were eligible to vote on this
matter with the remainder of such shares representing broker non-votes. The
reorganization was approved and the Agreement and Plan of Merger and Conversion
was approved and adopted by the stockholders with 63,910,038 shares voting for
approval and adoption, 1,657,879 voting against and 377,184 abstaining from
voting.
The second matter was the election of Class III Directors as set forth in the
Company's Proxy Statement/Prospectus relating to the meeting. With respect to
such election, the following number of votes were cast as to the Class III
Director nominees: Robert J. Lanigan, 84,047,260 votes for and 267,587 votes
withheld; Max L. Lukens, 84,067,880 votes for and 246,967 votes withheld; and W.
Dennis Heagney, 84,069,080 votes for and 245,767 votes withheld.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
- ------ ---------------
*3.1 Memorandum of Association of the Company (incorporated by reference to
Annex B to the Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4 (Registration No. 333-75899)).
*3.2 Articles of Association of the Company (incorporated by reference to
Annex C to the Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4 (Registration No. 333-75899)).
*4.1 Second Supplemental Indenture dated as of May 14, 1999 between the
Company and Chase Bank of Texas, National Association, as trustee
(incorporated by reference to Exhibit 4.5 to the Company's Post-
Effective Amendment No. 1 to Registration Statement on Form S-3
(Registration No. 333-59001-99)).
10.1 Form of Employment Agreements dated May 14, 1999 between J. Michael
Talbert, W. Dennis Heagney, Robert L. Long, Jon C. Cole, Donald R.
Ray, Eric B. Brown, Barbara S. Koucouthakis and Alan A. Broussard,
individually, and Transocean Offshore Inc.
*10.2 Amendment No. 1 to Employee Stock Purchase Plan of the Company dated
as of May 14, 1999 (incorporated by reference to Exhibit 4.4 to the
Company's Post-Effective Amendment No. 1 to Registration Statement on
Form S-8 (Registration No. 333-58203-99)).
*10.3 Amendment No. 1 to Long Term Incentive Plan of the Company dated as of
May 14, 1999 (incorporated by reference to Exhibit 4.4 to the
Company's Post-Effective Amendment No. 1 to Registration Statement on
Form S-8 (Registration No. 333-58211-99)).
27.1 Financial Data Schedule.
- -------------------
* Incorporated by reference as indicated.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 17, 1999 reporting
under Item 5. thereof the completion of the corporate reorganization of the
Company and including as an exhibit the press release relating thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 10, 1999.
TRANSOCEAN OFFSHORE INC.
By: /s/ Robert L. Long
--------------------------------
Robert L. Long
Senior Vice President
(Principal Financial Officer)
By: /s/ Barbara S. Koucouthakis
---------------------------------
Barbara S. Koucouthakis
Vice President and Controller
(Principal Accounting Officer)
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<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Transocean Offshore Deepwater Drilling Inc., a
Delaware corporation (the "Company"), Transocean Offshore Inc., a Cayman Islands
exempted company limited by shares (the "Parent"), and ___________________ (the
"Executive"), dated as of the 14th day of May, 1999.
The Parent is the successor to Transocean Offshore Inc., a Delaware
corporation ("Transocean-Delaware"), as a result of the transactions
contemplated by the Agreement and Plan of Merger and Conversion between
Transocean-Delaware and Transocean Offshore (Texas) Inc. dated as of March 12,
1999. This Agreement replaces a similar prior agreement between the Executive
and Transocean-Delaware, which prior agreement is superseded and revoked as of
the execution and effectiveness of this Agreement. This Agreement will take
effect at 10:49 p.m. (Houston, Texas, time) on May 14, 1999. The Boards of
Directors of the Company and the Parent (the "Boards") have determined that it
is in the best interests of the Company, the Parent and their shareholders to
assure that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below). The Boards believe it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Boards have caused the
Company and the Parent to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of
Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Company is terminated prior to the
date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i)
was at the request of a third party who has taken steps reasonably
calculated to effect a Change of Control or (ii) otherwise arose in
connection with or anticipation of a Change of Control, then for all
<PAGE>
purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date
hereof, and on each annual anniversary of such date (such date and
each annual anniversary thereof shall be hereinafter referred to as
the "Renewal Date"), unless previously terminated, the Change of
Control Period shall be automatically extended so as to terminate
three years from such Renewal Date, unless at least 60 days prior to
the Renewal Date the Company shall give notice to the Executive that
the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding
ordinary shares of the Parent (the "Outstanding Parent Ordinary
Shares") or (ii) the combined voting power of the then outstanding
voting securities of the Parent entitled to vote generally in the
election of directors (the "Outstanding Parent Voting Securities");
provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i)
any acquisition directly from the Parent, (ii) any acquisition by the
Parent, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Parent or any corporation or
other entity controlled by the Parent or (iv) any acquisition by any
corporation or other entity pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 2;
or
(b) Individuals who, as of the date hereof, constitute the Board of the
Parent (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board of the Parent; provided, however, that
for purposes of this Section 2 any individual becoming a director
subsequent to the date hereof whose election, or nomination for
election by the Parent's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with
2
<PAGE>
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of the Parent; or
(c) Consummation of a scheme of arrangement, reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Parent (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Parent Ordinary Shares and
Outstanding Parent Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 50% of, respectively, the then outstanding ordinary shares or
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation or other
entity resulting from such Business Combination (including, without
limitation, a corporation or other entity which as a result of such
transaction owns the Parent or all or substantially all of the
Parent's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding Parent Ordinary
Shares and Outstanding Parent Voting Securities, as the case may be,
(ii) no Person (excluding any corporation or other entity resulting
from such Business Combination or any employee benefit plan (or
related trust) of the Parent or such corporation or other entity
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then outstanding
ordinary shares or shares of common stock of the corporation or other
entity resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation or
other entity except to the extent that such ownership existed prior to
the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the
Board of the Parent, providing for such Business Combination; or
(d) Approval by the shareholders of the Parent of a complete liquidation
or dissolution of the Parent.
3. Employment Period. The Company hereby agrees to continue the Executive in
its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the
period
3
<PAGE>
commencing on the Effective Date and ending on the third anniversary
of such date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant
of those held, exercised and assigned at any time during the 120-
day period immediately preceding the Effective Date and (B) the
Executive's services shall be performed at the location where the
Executive was employed immediately preceding the Effective Date
or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during
normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently
such responsibilities. During the Employment Period it shall not
be a violation of this Agreement for the Executive to (A) serve
on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at
educational institutions and (C) manage personal investments, so
long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of
the Company in accordance with this Agreement. It is expressly
understood and agreed that, to the extent that any such
activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto)
subsequent to the Effective Date shall not thereafter be deemed
to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), which shall
be paid at a monthly rate, at least equal to twelve times the
highest
4
<PAGE>
monthly base salary paid or payable, including any base salary
which has been earned but deferred, to the Executive by the
Company and its affiliated companies in respect of the twelve-
month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the
last salary increase awarded to the Executive prior to the
Effective Date and thereafter at least annually. Any increase in
Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased. As used in this Agreement,
the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the
Employment Period, an annual bonus (the "Annual Bonus") in cash
at least equal to the Executive's highest bonus under the
Company's Performance Award and Cash Bonus Plan, or any
comparable bonus under any predecessor or successor plan, for the
last three full fiscal years prior to the Effective Date
(annualized in the event that the Executive was not employed by
the Company for the whole of such fiscal year) (the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later
than the end of the third month of the fiscal year next following
the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and
programs applicable generally to other peer executives of the
Company and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent, if
any, that such distinction is applicable), savings opportunities
and retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as
in effect at any time during the 120-day period immediately
preceding the Effective Date or if more
5
<PAGE>
favorable to the Executive, those provided generally at any time
after the Effective Date to other peer executives of the Company
and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in and shall receive all
benefits under welfare benefit plans, practices, policies and
programs provided by the Company and its affiliated companies
(including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company and
its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with
benefits which are less favorable, in the aggregate, than the
most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to
the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its
affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and
its affiliated companies in effect for the Executive at any time
during the 120-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without
limitation, tax and financial planning services, payment of club
dues, and, if applicable, use of an automobile and payment of
related expenses, in accordance with the most favorable plans,
practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time
during the 120-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
6
<PAGE>
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to exclusive
personal secretarial and other assistance, at least equal to
the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as provided generally at
any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable
plans, policies, programs and practices of the Company and its
affiliated companies as in effect for the Executive at any time
during the 120-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the
Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the
Executive written notice in accordance with Section 12(b) of this
Agreement of its intention to terminate the Executive's employment.
In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by
the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned
to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" shall mean the absence of the Executive
from the Executive's duties with the Company on a full-time basis for
180 consecutive business days as a result of incapacity due to mental
or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to
the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement,
"Cause" shall mean:
7
<PAGE>
(i) The willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of
its affiliates (other than any such failure resulting from
incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive
by the Parent Board (as defined herein) or the Chief Executive
Officer of the Company which specifically identifies the manner
in which the Parent Board or Chief Executive Officer believes
that the Executive has not substantially performed the
Executive's duties; or
(ii) The willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Parent.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the
best interests of the Company. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Parent
Board or upon the instructions of the Chief Executive Officer or a
senior officer of the Company or Parent or based upon the advice of
counsel for the Company or Parent shall be conclusively presumed to be
done, or omitted to be done, by the Executive in good faith and in the
best interests of the Company. The cessation of employment of the
Executive shall not be deemed to be for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Parent Board at a meeting of the Parent Board
called and held for such purpose (after reasonable notice is provided
to the Executive and the Executive is given an opportunity, together
with counsel, to be heard before the Parent Board), finding that, in
the good faith opinion of the Parent Board, the Executive is guilty of
the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail. As used in this
Section, "Parent Board" means the board of directors of the Parent,
except that in the event that the Parent no longer owns 50% of the
outstanding voting securities of the Company, then Parent Board shall
mean the Board of Directors of the Company.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean:
8
<PAGE>
(i) The assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this
Agreement, or any other action by the Company which results in a
diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) Any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith
and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(iii) The Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company
business to a substantially greater extent than required
immediately prior to the Effective Date;
(iv) Any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this
Agreement; or
(v) Any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in
this Agreement to the contrary notwithstanding, a termination by the
Executive for any reason during the 30-day period immediately
following the first anniversary of the Effective Date shall be deemed
to be a termination for Good Reason for all purposes of this
Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section
12(b) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as
9
<PAGE>
defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than
thirty days after the giving of such notice). The failure by the
Executive or the Company to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good Reason or
Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by
the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the
date on which the Company notifies the Executive of such termination
and (iii) if the Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of
death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability. If, during
the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall
terminate employment for Good Reason:
(i) The Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the
following amounts:
A. The sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid,
(2) the product of (x) the higher of (i) the Recent Annual
Bonus and (ii) the Annual Bonus paid or payable, including
any bonus or portion thereof which has been earned but
deferred (and annualized for any fiscal year consisting of
less than twelve full months or during which the Executive
was employed for less than twelve full months), for the most
recently completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the "Highest
Annual Bonus") and (y) a fraction, the numerator of which is
the number of days in the current fiscal year
10
<PAGE>
through the Date of Termination, and the denominator of
which is 365 and (3) any compensation previously deferred by
the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case
to the extent not theretofore paid (the sum of the amounts
described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. The amount equal to the product of (1) three and (2) the sum
of (x) the Executive's Annual Base Salary and (y) the
Highest Annual Bonus; and
C. An amount equal to the excess of (a) the actuarial
equivalent of the benefit under the Company's qualified
defined benefit retirement plan (the "Retirement Plan")
(utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Company's
Supplemental Retirement Plan immediately prior to the
Effective Date and assuming benefits commence at age 65),
and any excess or supplemental retirement plan in which the
Executive participates (together, the "SERP") which the
Executive would receive if the Executive's employment
continued for three years after the Date of Termination
assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's
compensation in each of the three years is that required by
Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial
equivalent of the Executive's actual benefit (paid or
payable), if any, under the Retirement Plan and the SERP as
of the Date of Termination;
(ii) Should the Executive move his residence in order to pursue other
business opportunities within three years of the Date of
Termination (or until his normal retirement date, whichever is
sooner), the Company shall reimburse him for any expenses
incurred in that relocation (including taxes payable on the
reimbursement) which are not reimbursed by another employer;
provided, however, that the Executive shall be entitled to such
reimbursement with respect to only one such relocation, the
Executive shall be entitled to specify the relocation for which
reimbursement hereunder is to be made. Benefits under this
provision will include the assistance, at no cost to the
Executive, in selling his home and other assistance which was
customarily provided to executives transferred within the Company
or between the Company and its affiliated companies prior to the
Effective Date;
11
<PAGE>
(iii) For three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Company shall
continue benefits to the Executive and/or the Executive's family
at least equal to those which would have been provided to them
in accordance with the plans, programs, practices and policies
described in Section 4(b)(iv) of this Agreement if the
Executive's employment had not been terminated or, if more
favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company
and its affiliated companies and their families, provided,
however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to
those provided under such other plan during such applicable
period of eligibility. For purposes of determining eligibility
(but not the time of commencement of benefits) of the Executive
for retiree benefits pursuant to such plans, practices, programs
and policies, the Executive shall be considered to have remained
employed until three years after the Date of Termination and to
have retired on the last day of such period;
(iv) The Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of
which shall be selected by the Executive in his sole discretion;
and
(v) To the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive
is eligible to receive under any plan, program, policy or
practice or contract or agreement of the Company and its
affiliated companies (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for payment of
Accrued Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the Executive's estate
or beneficiary,
12
<PAGE>
as applicable, in a lump sum in cash within 30 days of the Date of
Termination. With respect to the provision of Other Benefits, the term
Other Benefits as utilized in this Section 6(b) shall include, without
limitation, and the Executive's estate and/or beneficiaries shall be
entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the
estates and beneficiaries of peer executives of the Company and such
affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect
to other peer executives and their beneficiaries at any time during
the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive's estate and/or the Executive's
beneficiaries, as in effect on the date of the Executive's death with
respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the
Executive, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations
shall be paid to the Executive in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c)
shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at
least equal to the most favorable of those generally provided by the
Company and its affiliated companies to disabled executives and/or
their families in accordance with such plans, programs, practices and
policies relating to disability, if any, as in effect generally with
respect to other peer executives and their families at any time during
the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive and/or the Executive's family, as in
effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their
families.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this
Agreement shall terminate without further obligations to the Executive
other than the obligation to pay to the Executive (x) his Annual Base
Salary through the Date of Termination, (y) the amount of any
compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the
Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other
Benefits. In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of
Termination.
13
<PAGE>
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor, subject
to Section 12(f), shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any
plan, policy, practice or program of, or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice
or program, or contract or agreement except as explicitly modified by this
Agreement.
8. Full Settlement. The Company's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company or its affiliated companies may
have against the Executive or others. In no event shall the Executive be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether
or not the Executive obtains other employment. The Company agrees to pay as
incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Executive or others
of the validity or enforceability of, or liability under, any provision of
this Agreement or any guarantee of performance thereof (including as a
result of any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case interest on any delayed
payment at the applicable Federal rate provided for in Section
7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any
payment or distribution by the Company, the Parent and any affiliated
company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the Code or
any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with
14
<PAGE>
any such interest and penalties, are hereinafter collectively referred
to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such
that after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes), including,
without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments. Notwithstanding the
foregoing provisions of this Section 9(a), if it shall be determined
that the Executive is entitled to a Gross-Up Payment, but that the
Payments do not exceed 110% of the greatest amount (the "Reduced
Amount") that could be paid to the Executive such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up
Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment, and the
assumptions to be utilized in arriving at such determination, shall be
made by Ernst & Young, L.L.P. or such other certified public
accounting firm as may be designated by the Executive (the "Accounting
Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt
of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, the
Executive shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder). All fees
and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section
9, shall be paid by the Company to the Executive within five days of
the receipt of the Accounting Firm's determination. Any determination
by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments
which will not have been made by the Company should have been made
("Underpayment") consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies
pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that
15
<PAGE>
has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
(i) Give the Company any information reasonably requested by the
Company relating to such claim;
(ii) Take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by
the Company;
(iii) Cooperate with the Company in good faith in order effectively
to contest such claim; and
(iv) Permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such
16
<PAGE>
contest to a determination before any administrative tribunal, in a
court of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section
9(c)) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is
made that the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary capacity
for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained
by the Executive during the Executive's employment by the Company or any of
its affiliated companies and which shall not be or become public knowledge
(other than by acts by the Executive or representatives of the Executive in
violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior
written consent of the Company or as may otherwise be required by law or
legal process, communicate or divulge any such information, knowledge or
data to anyone other than the Company and those designated by it. In no
event shall an asserted violation of the provisions of this
17
<PAGE>
Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company and the Parent shall not be assignable
by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and the Parent and their respective successors and assigns.
(c) The Company and the Parent will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Company or
the Parent to assume expressly and agree to perform this Agreement in
the same manner and to the same extent that the Company or the Parent
would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" and "Parent" shall mean the
Company and the Parent as hereinbefore defined and any respective
successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICT OF LAWS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement
may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and
legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed
as follows:
If to the Executive:
18
<PAGE>
If to the Company:
Transocean Offshore Deepwater Drilling Inc.
4 Greenway Plaza
Houston, Texas 77046
Attention: General Counsel
If to the Parent:
Transocean Offshore Inc.
4 Greenway Plaza
Houston, Texas 77046
Attention: General Counsel
or to such other address as either party shall have furnished to the
other in writing in accordance herewith. Notice and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to
assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 5(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision or
right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the
Executive and the Company, the employment of the Executive by the
Company is "at will" and, subject to Section 1(a) hereof, prior to the
Effective Date, the Executive's employment and/or this Agreement may
be terminated by either the Executive or the Company at any time prior
to the
19
<PAGE>
Effective Date, in which case the Executive shall have no further
rights under this Agreement. From and after the Effective Date, this
Agreement shall supersede any other agreement between the parties with
respect to the subject matter hereof.
13. Guarantee. The Parent hereby absolutely, irrevocably and unconditionally
guarantees the full payment and performance of all obligations of the Company
under this Agreement as same may hereafter be amended from time to time by
Executive and Company. Parent's guarantee and undertakings hereunder shall
continue in force until all of Company's obligations under this Agreement and
all of Parent's obligations have been duly performed.
20
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from their respective Boards of Directors,
the Parent and the Company have caused these presents to be executed in their
name on their behalf, all as of the day and year first above written.
----------------------------------
[Executive]
TRANSOCEAN OFFSHORE INC.
By:
--------------------------------
TRANSOCEAN OFFSHORE
DEEPWATER DRILLING INC.
By:
--------------------------------
21
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<PAGE>
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
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<PP&E> 2,908,285 2,346,262
<DEPRECIATION> 584,198 491,673
<TOTAL-ASSETS> 3,332,596 2,949,445
<CURRENT-LIABILITIES> 253,056 164,345
<BONDS> 701,471 771,021
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