<PAGE>
================================================================================
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, 2000
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 SEDCO FOREX 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, 2000, 210,585,225 ordinary shares, par value $.01 per share,
were outstanding.
================================================================================
<PAGE>
TRANSOCEAN SEDCO FOREX INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 2000
Page
----
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999............. 1
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999........................... 2
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999....................... 3
Notes to Condensed Consolidated Financial Statements............. 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk... 17
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings............................................ 18
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 18
ITEM 6. Exhibits and Reports on Form 8-K............................. 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Sedco Forex Inc.
and consolidated subsidiaries (the "Company") 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 accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the audited combined financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Revenues $299,243 $162,432 $600,092 $351,590
------------------------------------------------- -------- -------- -------- --------
Costs and Expenses
Operating and maintenance 184,151 92,792 370,148 239,498
Depreciation and amortization 64,851 33,170 129,426 63,739
General and administrative 9,527 4,068 22,405 8,184
------------------------------------------------- -------- -------- -------- --------
258,529 130,030 521,979 311,421
-------- -------- -------- --------
Operating Income 40,714 32,402 78,113 40,169
------------------------------------------------- -------- -------- -------- --------
Other Income (Expense), Net
Equity in earnings of joint ventures 2,122 1,818 4,992 2,527
Interest income 1,951 1,902 2,912 4,169
Interest expense, net of amounts capitalized (304) (3,817) (304) (6,911)
Other, net 2,544 (264) 3,492 (349)
------------------------------------------------- -------- -------- -------- --------
6,313 (361) 11,092 (564)
-------- -------- -------- --------
Income Before Income Taxes 47,027 32,041 89,205 39,605
Income Tax Expense 11,084 4,683 20,785 911
------------------------------------------------- -------- -------- -------- --------
Net Income $ 35,943 $ 27,358 $ 68,420 $ 38,694
================================================= ======== ======== ======== ========
Earnings Per Share (Pro Forma prior to
effective date of the merger)
Basic $ 0.17 $0.25 $ 0.33 $0.35
================================================= ======== ======== ======== ========
Diluted $ 0.17 $0.25 $ 0.32 $0.35
================================================= ======== ======== ======== ========
Weighted Average Shares Outstanding (Pro Forma
prior to effective date of the merger)
Basic 210,387 109,564 210,271 109,564
------------------------------------------------- -------- -------- -------- --------
Diluted 211,700 109,636 211,368 109,636
------------------------------------------------- -------- -------- -------- --------
Dividends Paid Per Share $ 0.03 $ -- $ 0.06 $ --
================================================= ======== ======== ======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
(In thousands, except share data)
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 169,297 $ 165,673
Accounts Receivable, less allowance for doubtful
accounts of $31,396 and $27,109 287,544 292,628
Materials and Supplies 79,565 77,058
Deferred Income Taxes 20,759 12,562
Other Current Assets 14,751 10,945
----------------------------------------------------------- ---------- ----------
Total Current Assets 571,916 558,866
----------------------------------------------------------- ---------- ----------
Property and Equipment 5,776,384 5,498,116
Less Accumulated Depreciation 1,236,688 1,153,614
----------------------------------------------------------- ---------- ----------
Property and Equipment, net 4,539,696 4,344,502
----------------------------------------------------------- ---------- ----------
Goodwill, net 1,051,507 1,067,594
Investments in and Advances to Joint Ventures 104,635 101,892
Other Assets 46,523 67,316
----------------------------------------------------------- ---------- ----------
Total Assets $6,314,277 $6,140,170
=========================================================== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 73,138 $ 144,538
Accrued Income Taxes 79,564 111,853
Current Portion of Long-Term Debt 54,982 78,584
Other Current Liabilities 185,906 193,546
----------------------------------------------------------- ---------- ----------
Total Current Liabilities 393,590 528,521
----------------------------------------------------------- ---------- ----------
Long-Term Debt 1,412,720 1,187,578
Deferred Income Taxes 411,278 383,991
Other Long-Term Liabilities 120,477 129,941
----------------------------------------------------------- ---------- ----------
Total Long-Term Liabilities 1,944,475 1,701,510
----------------------------------------------------------- ---------- ----------
Preference Shares, $0.10 par value; 50,000,000 shares
authorized, none issued and outstanding -- --
Ordinary Shares, $0.01 par value; 300,000,000 shares
authorized, 210,582,666 shares issued and outstanding
at June 30, 2000, and 210,119,501 shares issued and
outstanding at December 31, 1999 2,106 2,101
Additional Paid-in Capital 3,918,309 3,908,038
Retained Earnings 55,797 --
----------------------------------------------------------- ---------- ----------
Total Shareholders' Equity 3,976,212 3,910,139
----------------------------------------------------------- ---------- ----------
Total Liabilities and Shareholders' Equity $6,314,277 $6,140,170
=========================================================== ========== ==========
</TABLE>
See accompanying notes
2
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 68,420 $ 38,694
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 129,426 63,739
Deferred income taxes 18,978 (2,533)
1999 Charges -- 33,475
Equity in earnings of joint ventures (4,992) (2,527)
Deferred income, net (15,639) (13,000)
Deferred expenses, net (1,798) --
Amortization of debt discount and issue costs 1,937 --
Other, net (4,787) --
Changes in operating assets and liabilities
Accounts receivable 2,566 45,956
Accounts payable and accrued liabilities (68,009) (10,581)
Receivable/payable with related parties, net -- 9,209
Income taxes receivable/payable, net (32,288) (9,474)
Other current assets (9,812) (2,452)
------------------------------------------------------------------ --------- ---------
Net Cash Provided by Operating Activities 84,002 150,506
------------------------------------------------------------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (307,802) (250,425)
Proceeds from sale of coiled tubing drilling services business 24,871 --
Other proceeds from disposal of assets, net 3,370 524
Other, net 1,863 --
------------------------------------------------------------------ --------- ---------
Net Cash Used in Investing Activities (277,698) (249,901)
------------------------------------------------------------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Zero Coupon
Convertible Debentures 489,246 --
Net repayments on Revolving Credit Agreement (235,000) --
Repayments on Secured Loan Agreement (44,132) --
Repayments on Secured Rig Financing (8,142) (8,423)
Repayments on Notes Payable (2,308) --
Proceeds from issuance of ordinary shares under
stock-based compensation plans 10,729 --
Dividends paid (12,623) --
Proceeds from debt to related parties -- 163,577
Repayments of debt to related parties -- (64,721)
Advances and other to related parties, net -- (84,144)
Other, net (450) 3,493
------------------------------------------------------------------ --------- ---------
Net Cash Provided by Financing Activities 197,320 9,782
------------------------------------------------------------------ --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 3,624 (89,613)
------------------------------------------------------------------ --------- ---------
Cash and Cash Equivalents at Beginning of Period 165,673 174,481
------------------------------------------------------------------ --------- ---------
Cash and Cash Equivalents at End of Period $ 169,297 $ 84,868
================================================================== ========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
Transocean Sedco Forex Inc. (together with its majority owned subsidiaries and
predecessors, the "Company", unless the context requires otherwise) is a leading
international provider of deepwater and harsh environment contract drilling
services for oil and gas wells. As of July 31, 2000, the Company owns, has
partial ownership interests in, operates, or has under construction 72 mobile
offshore drilling units. The Company contracts these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco Forex
Holdings Limited ("Sedco Forex") was completed. Sedco Forex was the offshore
contract drilling service business of Schlumberger Limited ("Schlumberger") and
was spun-off immediately prior to the merger transaction. As a result of the
merger, Sedco Forex became a wholly owned subsidiary of Transocean Offshore
Inc., which changed its name to Transocean Sedco Forex Inc. The merger was
accounted for as a purchase, with Sedco Forex as the acquiror for accounting
purposes.
The balance sheets presented in these condensed financial statements, the
statement of cash flows for the six months ended June 30, 2000 and the
statements of operations for the three and six months ended June 30, 2000
represent the consolidated financial position, results of operations and cash
flows of the merged company. The statement of cash flows for the six months
ended June 30, 1999 and the statements of operations for the three and six
months ended June 30, 1999 reflect the operating results and cash flows of Sedco
Forex and not those of historical Transocean Offshore Inc. Intercompany
transactions and accounts have been eliminated. The equity method of accounting
is used for investments in joint ventures owned 50 percent or less.
The condensed financial statements for the period prior to the merger
represent the offshore contract drilling service business of Schlumberger, which
comprised certain businesses, operations, assets and liabilities of Sedco Forex
and its subsidiaries and of Schlumberger and its subsidiaries, as defined in a
distribution agreement. Although Sedco Forex was not a separate public company
prior to the merger, the condensed financial statements are presented as if
Sedco Forex had existed as an entity separate from its parent, Schlumberger.
The condensed financial statements include the historical revenues and expenses
that were directly related to the offshore contract drilling service business of
Schlumberger during the three and six months ended June 30, 1999 and have been
prepared using Schlumberger's historical results of operations of Sedco Forex.
Prior to the merger, certain Schlumberger corporate expenses, including
centralized research and engineering, legal, accounting, employee benefits, real
estate, insurance, information technology services, treasury and other corporate
and infrastructure costs, although not directly attributable to Sedco Forex's
operations, were allocated to Sedco Forex on bases that Schlumberger and Sedco
Forex considered to be a reasonable reflection of the utilization of services
provided or the benefit received by Sedco Forex (see Note 7). The financial
information for the period prior to the merger included herein may not reflect
the combined operating results and cash flows of Sedco Forex had Sedco Forex
been a separate, stand-alone entity during the period presented.
Because Sedco Forex was historically not operated as a separate, stand-alone
entity, and in many cases Sedco Forex's results were included in the
consolidated financial statements of Schlumberger on a divisional basis, there
are no separate meaningful historical equity accounts for Sedco Forex prior to
the merger.
4
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - GENERAL
BASIS OF CONSOLIDATION - The accompanying condensed financial statements of the
Company have been prepared without audit in accordance with accounting
principles generally accepted in the United States 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 accounting principles generally accepted in the United States for
complete financial statements. Operating results for the three and six month
periods ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000 or for any future period.
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 financial statements and notes thereto should be read in conjunction
with the audited combined financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash payments for interest and income
taxes, net were $45.4 million and $34.1 million, respectively, for the six
months ended June 30, 2000 and $10.8 million and $19.3 million, respectively,
for the six months ended June 30, 1999.
GOODWILL - The excess of the purchase price over the estimated fair value of net
assets acquired is accounted for as goodwill and is amortized on a straight-line
basis over 40 years. The amortization period is based on the nature of the
offshore drilling industry, long-lived drilling equipment and the long-standing
relationships with core customers. Accumulated amortization as of June 30, 2000
totaled $13.4 million.
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 $22.8 million and $45.9 million for the three
and six months ended June 30, 2000 and $6.7 million and $11.7 million for the
corresponding periods of 1999.
CHANGE IN ESTIMATE - As a result of the merger, the Company conformed its
policies relating to estimated rig lives and salvage values. Estimated useful
lives of its offshore drilling units now range from 18 to 35 years, reflecting
maintenance history and market demand for these drilling units. Depreciation
expense for the three and six months ended June 30, 2000 was reduced by
approximately $18 million (net $0.08 per diluted share) and $35 million (net
$0.17 per diluted share), respectively, as a result of conforming these
policies.
INCOME TAXES - Income taxes have been provided based upon the tax laws and rates
in the countries in which operations are conducted and income is earned. There
is no expected relationship between the provision for or benefit from income
taxes and income or loss before income taxes because the countries have taxation
regimes which vary not only with respect to nominal rate, but also in terms of
the availability of deductions, credits and other benefits. Variations also
arise because income earned and taxed in any particular country or countries
fluctuates from year to year.
SEGMENTS - The Company's operations share similar economic characteristics and
have been aggregated into one reportable segment. The Company operates in one
industry segment, offshore contract drilling services. The Company provides
these services with different types of offshore drilling equipment located in
several geographic regions. The location of the Company's rigs and the
allocation of resources to build or upgrade rigs is determined by the activities
and needs of customers.
5
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, as amended.
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 effective date for the adoption of SFAS No. 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 currency exchange
rates and interest rates, management does not anticipate that the adoption of
the new statement will have a material 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 3 - PRO FORMA COMBINED OPERATING RESULTS
Unaudited pro forma combined operating results of Sedco Forex and Transocean
Offshore Inc. for the six months ended June 30, 1999, assuming the merger (see
Note 1) had been completed as of January 1, 1999, are summarized as follows:
Six months ended June 30, 1999
---------------------------------------- ---------
(In thousands, except per share data)
Operating revenues $893,514
Operating income 215,948
Net income 172,022
Earnings per share:
Basic $ 0.82
Diluted 0.82
The pro forma information includes adjustments for additional depreciation
based on the fair market value of the drilling and other property and equipment
acquired, the amortization of goodwill arising from the transaction, decreased
interest expense for related party debt replaced by borrowings under the Term
Loan Agreement (see Note 5), decreased interest income associated with the
reduction of cash balances and related adjustments for income taxes. The pro
forma information is not necessarily indicative of the results of operations had
the transaction been effected on the assumed date or the results of operations
for any future periods.
6
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - UPGRADE AND EXPANSION OF DRILLING FLEET
Capital expenditures, including capitalized interest, totaled $308 million
during the six months ended June 30, 2000 and include $55 million, $57 million,
$51 million, $51 million and $66 million spent on the construction of the Sedco
Express, Sedco Energy, Cajun Express, Discoverer Spirit and Discoverer Deep
Seas, respectively. The Company also spent $25 million on the construction of
the Trident 20 during the six months ended June 30, 2000, which was offset by
$30 million in client reimbursements for the estimated incremental cost to
construct the rig in the Caspian Sea.
NOTE 5 - DEBT
Debt is comprised of the following:
June 30, December 31,
2000 1999
--------------------------------------------------- ---------- ------------
(In thousands)
Zero Coupon Convertible Debentures(1) $ 490,715 $ --
Term Loan Agreement 400,000 400,000
Revolving Credit Agreement -- 235,000
Secured Loan Agreement 191,042 235,174
8.00% Debentures 197,815 197,774
7.45% Notes 94,027 93,916
Secured Rig Financing 77,003 85,145
6.90% Notes Payable 17,041 19,153
Other 59 --
--------------------------------------------------- ---------- ----------
Total Debt 1,467,702 1,266,162
Less Current Maturities 54,982 78,584
--------------------------------------------------- ---------- ----------
Total Long-Term Debt $1,412,720 $1,187,578
=================================================== ========== ==========
(1) Net of unamortized discount and issue costs.
Zero Coupon Convertible Debentures - In May 2000, the Company issued Zero
Coupon Convertible Debentures due May 2020 with a face value at maturity of
$865.0 million. The Zero Coupon Convertible Debentures were issued at a price to
the public of $579.12 per debenture and accrue original issue discount at a rate
of 2.75% per annum compounded semi-annually to reach a face value at maturity of
$1,000 per debenture. The Company will pay no interest on the debentures prior
to maturity and has the right to redeem the debentures after three years for a
price equal to the issuance price plus accrued original issue discount to the
date of redemption. A debenture holder has the right to require the Company to
repurchase the debentures on the third, eighth and thirteenth anniversary of
issuance at the issuance price plus accrued original issue discount to the date
of repurchase. The Company may pay this repurchase price with either cash or
ordinary shares or a combination of cash and ordinary shares. The debentures are
convertible into ordinary shares of the Company at the option of the holder at
any time at a ratio of 8.1566 shares per debenture subject to adjustments if
certain events take place.
Secured Loan Agreement - In January 2000, the Company agreed to cancel the
remaining 14 months of a contract with BP Amoco for its semisubmersible rig, the
Transocean Amirante, for a cash settlement of $25.1 million, which was
recognized as revenue during the first quarter of 2000. The cash received was
used to repay borrowings under the Secured Loan Agreement relating to the
Transocean Amirante and the security interest in the rig was released by the
banks. An interest rate swap agreement related to the Secured Loan Agreement
was also amended to reflect the reduced amounts subject to the swap (see Note
11).
7
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following:
June 30, December 31,
2000 1999
---------------------------------------- -------- -----------
(In thousands)
Accrued Payroll and Employee Benefits $ 66,922 $ 63,082
Contract Disputes and Legal Claims 52,654 50,454
Deferred Gain on Sale of Rigs 26,209 26,167
Accrued Taxes, Other than Income 14,789 14,390
Accrued Interest 9,008 10,056
Other 16,324 29,397
---------------------------------------- -------- --------
$185,906 $193,546
======== ========
NOTE 7 - RELATED PARTY TRANSACTIONS
The financial statements for the three and six months ended June 30, 1999
include allocations from Schlumberger of certain corporate expenses, including
centralized research and engineering, legal, accounting, employee benefits, real
estate, insurance, information technology services, treasury and other corporate
and infrastructure costs. These allocations were determined on bases that
Schlumberger and Sedco Forex considered to be a reasonable reflection of the
utilization of services provided or the benefit received by Sedco Forex. The
allocation methods included relative revenues, headcount, square footage,
transaction processing costs, adjusted operating expenses and others. These
allocations resulted in charges of $18.0 million and $34.6 million to operating
and maintenance expense and $1.5 million and $3.1 million to general and
administrative expense for the three and six months ended June 30, 1999,
respectively. The Company incurred expenses amounting to approximately $3
million and $6 million in the three and six months ended June 30, 2000,
respectively, for transitional services provided by Schlumberger.
During 1999, Sedco Forex had long-term debt due to Schlumberger. These loans
bore interest at rates based on fifty basis points over LIBOR and were used to
finance both Sedco Forex's existing fleet of rigs and ongoing major construction
projects. Interest expense on related party indebtedness aggregated $8.8
million and $15.0 million for the three and six months ended June 30, 1999,
respectively. On December 31, 1999, the Company repaid these loans in
connection with the merger.
NOTE 8 - 1999 CHARGES
Operating and maintenance expense for the six months ended June 30, 1999
includes charges totaling $42.0 million, of which $13.2 million relates to
termination and severance benefits and $28.8 million relates to potential legal
claims.
NOTE 9 - SALE OF COILED TUBING DRILLING SERVICES BUSINESS
In February 2000, the Company sold its coiled tubing drilling services
business to Schlumberger. The net proceeds from the sale were $24.9 million and
no gain or loss was recognized on the sale. The Company's interest in its
Transocean-Nabors Drilling Technology LLC and DeepVision L.L.C. joint ventures
were excluded from the sale.
8
<PAGE>
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 - 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,
-----------------------------------------
2000 1999 2000 1999
-------- -------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income for basic and diluted earnings per share $ 35,943 $ 27,358 $ 68,420 $ 38,694
--------------------------------------------------------- -------- -------- -------- --------
Weighted-average shares outstanding (Pro forma
prior to effective date of the merger):
Shares for basic earnings per share 210,387 109,564 210,271 109,564
Effect of dilutive securities:
Employee stock options and unvested stock grants 1,313 72 1,097 72
--------------------------------------------------------- -------- -------- -------- --------
Adjusted weighted-average shares and assumed
conversions for diluted earnings per share 211,700 109,636 211,368 109,636
========================================================= ======== ======== ======== ========
Earnings per share (Pro forma prior to effective date
of merger):
Basic $ 0.17 $ 0.25 $ 0.33 $ 0.35
========================================================= ======== ======== ======== ========
Diluted $ 0.17 $ 0.25 $ 0.32 $ 0.35
========================================================= ======== ======== ======== ========
</TABLE>
Ordinary shares subject to issuance pursuant to the conversion feature of the
Zero Coupon Convertible Debentures (see Note 5) are not included in the
calculation of adjusted weighted-average shares and assumed conversions for
diluted earnings per share because the effect of including those shares is anti-
dilutive.
Sedco Forex did not have a separate capital structure prior to the spin-off
from Schlumberger and merger with Transocean Offshore Inc. (see Note 1).
Accordingly, historical earnings per share has not been presented for the
periods prior to the merger. Pro forma earnings per share for the three and six
months ended June 30, 1999 was calculated using the Transocean Sedco Forex
shares issued pursuant to the merger agreement and the dilutive effect of
Transocean Sedco Forex stock options granted to former Sedco Forex employees at
the time of the merger, as applicable.
NOTE 11 - SUBSEQUENT EVENTS
In July 2000, the Company sold a second-generation semisubmersible, the
Transocean Discoverer. Net proceeds from the sale of the rig, which had been
idle in the U. K. sector of the North Sea since February 2000, totaled
approximately $43 million and will result in an estimated net gain of $9
million, or $0.04 per diluted share, in the third quarter of 2000.
In August 2000, the Company repaid all amounts outstanding under the Secured
Loan Agreement using cash on hand and borrowings under the Revolving Credit
Agreement. The Company also terminated the related interest rate swap
agreement. The Company expects to recognize a net gain of $1.4 million, or
$0.01 per diluted share, on these transactions in the third quarter of 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the audited
combined financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
OVERVIEW
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco Forex
Holdings Limited ("Sedco Forex") was completed. Sedco Forex was the offshore
contract drilling service business of Schlumberger Limited ("Schlumberger") and
was spun-off immediately prior to the merger transaction. As a result of the
merger, Sedco Forex became a wholly owned subsidiary of Transocean Offshore
Inc., which changed its name to Transocean Sedco Forex Inc. The merger was
accounted for as a purchase, with Sedco Forex as the acquiror for accounting
purposes.
Transocean Sedco Forex Inc. (together with its subsidiaries and predecessors,
unless the context requires otherwise, the "Company", "we" or "our") is a
leading international provider of deepwater and harsh environment contract
drilling services for oil and gas wells. As of July 31, 2000, the Company owns,
has partial ownership interests in, operates, or has under construction 72
mobile offshore drilling units. The Company's active fleet consists of twelve
high-specification semisubmersibles, thirty second- and third-generation
semisubmersibles, one Discoverer Enterprise-class drillship, four other
drillships, sixteen jackup rigs and three tenders. The Company has under
construction two Discoverer Enterprise-class drillships, three Sedco Express-
class semisubmersibles and one independent-leg cantilevered jackup. In addition,
the fleet includes six swamp barges and two land drilling rigs. The Company
contracts these drilling rigs, related equipment and work crews primarily on a
dayrate basis to drill offshore wells.
The balance sheets presented in the condensed financial statements, the
statement of cash flows for the six months ended June 30, 2000 and the
statements of operations for the three and six months ended June 30, 2000
represent the consolidated financial position, results of operations and cash
flows of the merged company. The statement of cash flows for the six months
ended June 30, 1999 and the statements of operations for the three and six
months ended June 30, 1999 reflect the operating results and cash flows of Sedco
Forex and not those of historical Transocean Offshore Inc. At the time of the
merger, Sedco Forex owned, had ownership interests in or operated 40 mobile
offshore drilling rigs and had four such rigs under construction.
OPERATING RESULTS
Quarter ended June 30, 2000 compared to Quarter ended June 30, 1999
Net income for the three months ended June 30, 2000 was $35.9 million, or
$0.17 per diluted share, on revenues of $299.2 million and reflect the results
of the combined company. Net income for the corresponding period in 1999 was
$27.4 million, or $0.25 per pro forma diluted share, on revenues of $162.4
million. The results for the three months ended June 30, 1999 reflect Sedco
Forex historical results only and not those of Transocean Offshore Inc.
Operating revenues for the three months ended June 30, 2000 were $299.2
million compared to $162.4 million for the same period in 1999, an increase of
$136.8 million or 84 percent. The increase was primarily as a result of the
merger. Revenues relating to former Sedco Forex operations totaled $144.5
million for the second quarter of 2000, representing a $17.9 million or an 11
percent decrease over the comparable 1999 period. The decrease in revenues
related to former Sedco Forex rigs resulted from lower dayrates for these rigs,
which declined from an average of $67,200 for the second quarter of 1999 to an
average of $56,400 for the same period in 2000. However, utilization for the
former Sedco Forex rigs increased from 65 percent for the second quarter of 1999
to 78 percent for the second quarter of 2000.
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Operating and maintenance expense for the three months ended June 30, 2000 was
$184.2 million compared to $92.8 million for the same period in 1999, an
increase of $91.4 million or 98 percent. The increase was primarily as a result
of the merger. Operating and maintenance expense for the second quarter of 1999
included $18.0 million in allocated costs from Schlumberger. A large portion of
operating and maintenance expense consists of employee-related costs and is
fixed or only semi-variable. Accordingly, operating and maintenance expense does
not vary in direct proportion to activity.
Depreciation and amortization expense increased $31.7 million or 95 percent,
from $33.2 million in the second quarter of 1999 to $64.9 million in the same
period of 2000. Depreciation expense increased primarily due to the addition of
the former Transocean Offshore Inc. rigs and equipment at fair value. In
addition, $6.7 million of amortization of goodwill resulting from the merger was
recorded in the second quarter of 2000. Depreciation expense was reduced by
approximately $18 million (net $0.08 per diluted share) for the second quarter
of 2000 as a result of the Company conforming its policies relating to estimated
rig lives and salvage values.
General and administrative expense for the three months ended June 30, 2000
was $9.5 million compared to $4.1 million for the same period in 1999, an
increase of $5.4 million or 132 percent. The increase is primarily attributable
to the merger and reflects the costs to manage a larger, more complex and
geographically diverse organization. General and administrative expense for the
three months ended June 30, 1999 included an allocation of corporate overhead by
Schlumberger that amounted to approximately $1.5 million.
Other income was $6.3 million for the three months ended June 30, 2000
compared to other expense of $0.4 million for the corresponding period of 1999.
The Company capitalized $22.8 million of interest relating to construction
projects during the second quarter of 2000 compared to $6.7 million for the same
period in 1999. Other income for the three months ended June 30, 2000 included a
gain of $1.7 million, or a net $.01 per diluted share, on the sale of a tender
rig held for sale and a $0.5 million net foreign currency exchange gain compared
to a $0.3 million net foreign currency exchange loss for the same period in
1999.
Income tax expense for the three months ended June 30, 2000 was $11.1 million
compared to $4.7 million for the second quarter of 1999. The Company operates
internationally and provides for income taxes based on the tax laws and rates in
the countries in which it operates and income is earned. There is no expected
relationship between the provision for income taxes and income before income
taxes.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net income for the six months ended June 30, 2000 was $68.4 million, or $0.32
per diluted share, on revenues of $600.1 million and reflect the results of the
combined company. The results also include a cash settlement of $25.1 million,
or a net $0.08 per diluted share, relating to an agreement with BP Amoco to
cancel the remaining 14 months of firm contract time on the semisubmersible
Transocean Amirante. Net income for the corresponding period in 1999 was $38.7
million, or $0.35 per pro forma diluted share, on revenues of $351.6 million.
Operating and maintenance expense for the six months ended June 30, 1999
included charges for severance costs and provisions for potential legal claims
totaling $42.0 million, or a net $0.30 per pro forma diluted share. The results
for the six months ended June 30, 1999 reflect Sedco Forex historical results
only and not those of Transocean Offshore Inc.
Operating revenues for the six months ended June 30, 2000 were $600.1 million
compared to $351.6 million for the same period in 1999, an increase of $248.5
million or 71 percent. The increase was primarily as a result of the merger.
Revenues for the six months ended June 30, 2000 include the $25.1 million
settlement relating to the Transocean Amirante contract cancellation. Revenues
relating to former Sedco Forex operations totaled $267.5 million for the six
months ended June 30, 2000, representing a $84.1 million or 24 percent decrease
over the comparable 1999 period. The decrease in revenues related to former
Sedco Forex rigs resulted from lower utilization and dayrates for these rigs,
which declined from an average of 70 percent and $69,400, respectively, for the
first six months of 1999 to an average of 69 percent and $58,200, respectively,
for the same period in 2000.
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Operating and maintenance expense for the six months ended June 30, 2000 was
$370.1 million compared to $239.5 million for the same period in 1999, an
increase of $130.6 million or 55 percent. The increase was primarily as a result
of the merger. Operating and maintenance expense for the 1999 period included
charges totaling $42.0 million relating to severance liabilities and provisions
for potential legal claims and $34.6 million in allocations of costs by
Schlumberger. A large portion of operating and maintenance expense consists of
employee-related costs and is fixed or only semi-variable. Accordingly,
operating and maintenance expense does not vary in direct proportion to
activity.
Depreciation and amortization expense increased $65.7 million or 103 percent,
from $63.7 million in the first six months of 1999 to $129.4 million in the same
period of 2000. Depreciation expense increased primarily due to the addition of
the former Transocean Offshore Inc. rigs and equipment at fair value. In
addition, $13.4 million of amortization of goodwill resulting from the merger
was recorded in the first six months of 2000. Depreciation expense was reduced
by approximately $35 million (net $0.17 per diluted share) for the first six
months of 2000 as a result of the Company conforming its policies relating to
estimated rig lives and salvage values.
General and administrative expense for the six months ended June 30, 2000 was
$22.4 million compared to $8.2 million for the same period in 1999, an increase
of $14.2 million or 173 percent. The increase is primarily attributable to the
merger and reflects the costs to manage a larger, more complex and
geographically diverse organization. General and administrative expense for the
six months ended June 30, 1999 included an allocation of corporate overhead by
Schlumberger that amounted to approximately $3.1 million.
Other income was $11.1 million for the six months ended June 30, 2000 compared
to other expense of $0.6 million for the same period in 1999. The Company
capitalized $45.9 million of interest relating to construction projects during
the six months ended June 30, 2000 compared to $11.7 million for the same period
in 1999. Other income for the six months ended June 30, 2000 included a gain of
$1.7 million, or a net $0.1 per diluted share, on the sale of a tender rig held
for sale and a $1.1 million net foreign currency exchange gain compared to a
$0.3 million net foreign currency exchange loss for the same period in 1999.
Income tax expense for the six months ended June 30, 2000 was $20.8 million
compared to $0.9 million for the second quarter of 1999. Sedco Forex recognized
a $9.5 million deferred tax benefit during the 1999 period relating to charges
for potential legal claims. The Company operates internationally and provides
for income taxes based on the tax laws and rates in the countries in which it
operates and income is earned. There is no expected relationship between the
provision for income taxes and income before income taxes.
1999 PRO FORMA OPERATING RESULTS
Unaudited pro forma combined results for Transocean Sedco Forex Inc. for the
six months ended June 30, 1999 reflected net income of $172.0 million or $0.82
per diluted share on pro forma revenues of $893.5 million. The pro forma
operating results assume the spin-off and merger was completed on January 1,
1999. See Note 3 to the condensed financial statements. These pro forma
results do not reflect the effects of reduced depreciation expense related to
conforming the estimated lives of Sedco Forex rigs and the elimination of
certain allocated costs from Schlumberger, which will not be incurred in the
future. The pro forma financial data should not be relied on as an indication
of operating results that Transocean Sedco Forex Inc. would have achieved had
the spin-off and merger taken place earlier or of the future results that
Transocean Sedco Forex Inc. may achieve.
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MARKET OUTLOOK
Fleet utilization for the second quarter of 2000 averaged 75 percent for our
61 fully owned or chartered and active mobile offshore drilling units (i.e.,
excluding newbuilds under construction, managed rigs and partially owned rigs
which are not operated by us). Fleet utilization and revenues for the second
quarter of 2000 were negatively impacted by the Discoverer Enterprise's
operation at zero dayrate during a significant portion of the quarter due to
blow-out prevention equipment failures, repairs and evaluation. The rig resumed
operations under an existing contract in early July 2000. Fleet utilization for
the same units was 63 percent for the first quarter of this year. Combined
semisubmersible and drillship ("floater") utilization for active units was also
75 percent during the second quarter of 2000, compared to utilization of 62
percent for the same units during the first quarter of 2000. Average fleet
dayrates continued to decline during the second quarter as previously idle rigs
returned to operating status at competitive spot market rates. Also, as working
rigs completed previously negotiated contracts, subsequent contracts commenced
at lower market rates. Average dayrates during the second quarter of 2000 were
$69,100 for these 61 rigs and $85,900 for floaters, compared to average dayrates
of $75,400 and $95,500, respectively, for the first quarter of 2000.
The increased fleet activity in the second quarter of 2000 resulted from
improved market conditions. Commodity prices remained at relatively strong
levels as world crude oil consumption grew. Upstream spending levels of the
large, global exploration and production companies are now beginning to reflect
the improvement in these commodity prices. If market conditions remain
favorable, we believe the offshore areas of the U.S. Gulf of Mexico, Brazil and
West Africa should continue to offer drilling opportunities which are
particularly well suited for our high specification fleet. Even with higher
utilization, dayrates may not increase significantly in the near term. Also,
the contract drilling market historically has been highly competitive and
cyclical, and we are unable to predict the extent to which current market
conditions will continue. A decline in oil prices could reduce demand for the
Company's contract drilling services and adversely affect both utilization and
dayrates.
As of July 31, 2000, 52 of the 60 (see "Liquidity and Capital Resources -
Acquisitions and Dispositions") active and fully owned or chartered mobile
offshore drilling units were either operating or had signed contracts for future
operations, including 37 of 41 floaters. On July 31, 2000, we had approximately
72% of our fleet days committed to firm contracts for the remainder of 2000.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash flows provided by operations were $84.0 million for the six months ended
June 30, 2000, compared to $150.5 million for the same period in 1999, a
decrease of $66.5 million. The decrease in cash provided by operations was
primarily due to changes in net working capital components.
Cash flows used in investing activities increased $27.8 million from $249.9
million for the six months ended June 30, 1999 to $277.7 million for the same
period in 2000. The increase in cash used in investing activities resulted
primarily from an increase in capital expenditures relating to rig construction
and upgrade projects, partially offset by $24.9 million in proceeds from the
sale of the coiled tubing drilling services business in the first six months of
2000.
Cash flows provided by financing activities increased $187.5 million from $9.8
million in the second quarter of 1999 to $197.3 million for the same period in
2000. During the second quarter of 2000, the Company received $489.2 million in
net proceeds from the issuance of the Zero Coupon Convertible Debentures
partially offset by the repayment of its Revolving Credit Agreement and by
repayments on its Secured Loan Agreement. During the second quarter of 1999,
Sedco Forex obtained additional long-term funding from related parties, which
was offset by repayments of advances and long-term debt to related parties.
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CAPITAL EXPENDITURES
Capital expenditures, including capitalized interest, totaled $308 million
during the six months ended June 30, 2000. The Company's investments in its
existing fleet and previously announced fleet additions, including the Sedco
Express-class semisubmersibles, the Trident 20 and the Discoverer Enterprise-
class drillships, continue to require significant capital expenditures and are
expected to be approximately $382 million for the remainder of 2000.
The following table summarizes projected expenditures (including capitalized
interest) during the remainder of 2000 for the Company's major construction
projects.
Expenditures - Projected Projected
Six Months Ended Expenditures - Recorded Value
June 30, 2000 Remainder of 2000 At Completion
----------------------- ----------------- ----------------- --------------
(In millions)
Sedco Express $ 55 $ 57 $ 360
Sedco Energy 57 58 360
Cajun Express 51 41 300
Discoverer Spirit 51 30 320
Discoverer Deep Seas 66 54 315
Trident 20 (1) (5) 35 130
----------------------- ---- ---- ------
$275 $275 $1,785
==== ==== ======
(1) Expenditures for the first six months of 2000 are net of $30 million in
client reimbursements for the estimated incremental cost to construct the
rig in the Caspian Sea.
The Company has under construction three Sedco Express-class semisubmersibles.
The Sedco Express is expected to be delivered in the fourth quarter of 2000,
when it will begin a three-year contract with Elf in West Africa. The Sedco
Energy is expected to be delivered in the fourth quarter of 2000, when it will
begin a five-year contract with Texaco in West Africa. The Cajun Express is also
expected to be delivered in the fourth quarter of 2000, when it will begin a
three-year contract with Marathon in the U. S. Gulf of Mexico.
The Company has two Discoverer Enterprise-class drillships under construction.
The Discoverer Spirit is expected to be delivered late in the third quarter of
2000, when it will begin a five-year contract with Unocal in the U.S. Gulf of
Mexico. The Discoverer Deep Seas is expected to be delivered late in the fourth
quarter of 2000, when it will begin a five-year contract with Chevron in the
U. S. Gulf of Mexico.
The Company also has an independent-leg cantilevered jackup, the Trident 20,
under construction in Azerbaijan. This rig will be 75 percent owned by the
Company through a joint venture. The rig is expected to be operational in the
fourth quarter of 2000, when it will begin a three-year contract for Elf and
other parties to a rig sharing agreement in the Caspian Sea.
As with any major construction project that takes place over an extended
period of time, the actual costs, the timing of expenditures and delivery dates
may vary from estimates based on numerous factors, including actual terms of
awarded construction contracts, weather, exchange rates, shipyard labor
conditions, the market demand for components and resources required for drilling
unit construction, testing and commissioning of the rig and rig systems,
acceptance by the client and mobilization from the shipyard to the location of
initial operations. The drilling contracts for the Sedco Express-class
semisubmersibles and the Trident 20 have late delivery clauses that may allow
customers to terminate or shorten the term of the contract if delivery of the
unit is sufficiently delayed. The Company intends to fund the cash requirements
relating to these capital commitments through available cash balances,
borrowings under the Revolving Credit Agreement referred to below and other
commercial bank or capital market financings.
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DEBT
Zero Coupon Convertible Debentures - In May 2000, the Company issued Zero
Coupon Convertible Debentures due May 2020 with a face value at maturity of
$865.0 million. The Zero Coupon Convertible Debentures were issued at a price to
the public of $579.12 per debenture and accrue original issue discount at a rate
of 2.75% per annum compounded semi-annually to reach a face value at maturity of
$1,000 per debenture. The Company will pay no interest on the debentures prior
to maturity and has the right to redeem the debentures after three years for a
price equal to the issuance price plus accrued original issue discount to the
date of redemption. A debenture holder has the right to require the Company to
repurchase the debentures on the third, eighth and thirteenth anniversary of
issuance at the issuance price plus accrued original issue discount to the date
of repurchase. The Company may pay this repurchase price with either cash or
ordinary shares or a combination of cash and ordinary shares. The debentures are
convertible into ordinary shares of the Company at the option of the holder at
any time at a ratio of 8.1566 shares per debenture subject to adjustments if
certain events take place. The Company used the net proceeds ($489.2 million
after underwriter discount and issue costs) from the financing to repay
outstanding borrowings under the Revolving Credit Agreement, to repay other
indebtedness and for general corporate purposes.
Secured Loan Agreement - In January 2000, the Company agreed to cancel the
remaining 14 months of a contract with BP Amoco for its semisubmersible rig, the
Transocean Amirante, for a cash settlement of $25.1 million. The cash received
was used to repay borrowings under the Secured Loan Agreement relating to the
Transocean Amirante and the security interest in the rig was released by the
banks. An interest rate swap agreement related to the Secured Loan Agreement was
also amended to reflect the reduced amounts subject to the swap. At June 30,
2000, $191.0 million was outstanding and was being repaid in monthly
installments through December 2004.
In August 2000, the Company repaid all amounts outstanding under the Secured
Loan Agreement using cash on hand and borrowings under the Revolving Credit
Agreement. The Company also terminated the related interest rate swap
agreement. The Company expects to recognize a net gain of $1.4 million, or
$0.01 per diluted share, on these transactions in the third quarter of 2000.
Revolving Credit Agreement - The Company is a party to a $540 million
revolving credit agreement, as amended, with a group of banks led by ABN AMRO
Bank, NV, as agent, dated as of July 30, 1996 (the "Revolving Credit
Agreement"). As of June 30, 2000, the entire amount was available for borrowing.
Letters of Credit - The Company had letters of credit outstanding at June 30,
2000 totaling $92.9 million, including a letter of credit relating to the legal
dispute with Kvaerner Installasjon valued at $25.8 million and a letter of
credit relating to the legal dispute with the India Customs Department, Mumbai
valued at $11.2 million. The remaining amount guarantees various insurance, rig
construction and contract bidding activities.
ACQUISITIONS AND DISPOSITIONS
In February 2000, the Company sold its coiled tubing drilling services
business to Schlumberger. The net proceeds from the sale were $24.9 million and
no gain or loss was recognized on the sale. The Company's interests in its
Transocean-Nabors Drilling Technology LLC and DeepVision L.L.C. joint ventures
were excluded from the sale. The proceeds from the sale were used to repay debt
and for general corporate purposes.
In July 2000, the Company sold a second-generation semisubmersible, the
Transocean Discoverer. Net proceeds from the sale of the rig, which had been
idle in the U. K. sector of the North Sea since February 2000, totaled
approximately $43 million and will result in an estimated net gain of $9
million, or $0.04 per diluted share, in the third quarter of 2000. The proceeds
from the sale will be used for general corporate purposes.
The Company, from time to time, reviews possible acquisitions of businesses
and drilling units, and may in the future make significant capital commitments
for such purposes. Any such acquisition could involve the payment by the Company
of a substantial amount of cash and the issuance of a substantial number of
ordinary shares or other securities. The Company would expect to fund the cash
portion of any such acquisition through cash balances on hand, the incurrence of
additional debt, sales of assets, ordinary shares or other securities or a
combination thereof.
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DERIVATIVE INSTRUMENTS
The Company, from time to time, may enter 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 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, 2000, the Company did not have any foreign exchange
derivative instruments.
The Company, from time to time, may use 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,
2000, the net market value of open interest rate swaps was a $0.1 million loss.
See "Debt - Secured Loan Agreement."
SOURCES OF LIQUIDITY
The Company believes that its cash and cash equivalents, cash generated from
operations, borrowings available under its Revolving Credit 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.
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, as amended. 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 No. 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 currency 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 No. 133 as of January 1, 2001.
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," "budgets," "estimates," "expects," "forecasts," "intends," "plans,"
"predicts," or "projects" a particular result or course of events, or that such
result or course of events "could," "might," "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, results and effects of
legal proceedings, liabilities for tax issues, the timing and cost of completion
of capital projects, timing of delivery of drilling units, customer spending
levels, utilization rates, dayrates and the Company's other expectations with
regard to market outlook. 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 and
development, exploration success by producers, oil and gas prices, demand for
offshore rigs, competition and market conditions in the contract drilling
industry, our ability to successfully integrate the operations of Transocean
Offshore Inc. and Sedco Forex, delays or cost overruns on construction projects
and possible cancellation of drilling contracts as a result of delays or
performance, work stoppages by shipyard workers
16
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where our newbuilds are being constructed, our ability to enter into and the
terms of future contracts, the availability of qualified personnel, labor
relations and the outcome of negotiations with unions representing workers,
operating hazards, political and other uncertainties inherent in non-U.S.
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 and other factors discussed in this
quarterly report and in the Company's other filings with the Securities and
Exchange Commission ("SEC"), which are available free of charge on the SEC's
website at www.sec.gov. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those indicated. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of the
date of the particular statement, and we undertake no obligation to publicly
update or revise any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates has
changed since December 31, 1999 due to the issuance of the Zero Coupon
Convertible Debentures, repayment of the Secured Loan Agreement, termination of
the Company's interest rate swaps and related changes in borrowings under the
Revolving Credit Agreement. See "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Debt." The Company's exposure to market risk for changes in
interest rates now relates primarily to the Company's long-term debt
obligations.
The table below presents expected cash flows and related weighted-average
interest rates expected by maturity dates relating to debt obligations as of
June 30, 2000 adjusted for the August 2000 repayment of the Secured Loan
Agreement. Weighted-average variable rates are based on estimated LIBOR rates
as of June 30, 2000, plus applicable margins. The fair value of fixed rate debt
is based on the estimated yield to maturity for each debt issue as of June 30,
2000.
<TABLE>
<CAPTION>
As of June 30, 2000:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REST OF EXPECTED MATURITY DATE FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 06/30/00
------ ----- ------ ------ ------ ---------- -------- ----------
(In millions, except interest rate percentages)
LONG-TERM DEBT
Fixed Rate (a) $ 10.9 $22.6 $ 24.0 $ 18.9 $ 19.0 $1,165.0 $1,260.4 $896.5
Average interest rate 4.9% 4.9% 4.8% 4.7% 4.6% 5.4% 4.9%
Variable Rate $191.0 $ - $100.0 $150.0 $150.0 - $ 591.0 $591.0
Average interest rate 7.1% 7.1% 7.1% 7.1% 7.1% - 7.1%
</TABLE>
--------------
(a) Reflects payment of face value of debt at maturity. Balances at June 30,
2000 include discounts, issue costs on the Zero Coupon Convertible
Debentures and merger related fair market value adjustments.
FOREIGN EXCHANGE RISK
The Company's exposure to foreign exchange risk has not materially changed
since December 31, 1999. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Derivative Instruments."
17
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 2000, the Company received notice of a request for arbitration
from DCN International ("DCN"). DCN is the shipyard located in Brest, France,
with which the Company contracted the construction of two of the Company's Sedco
Express-class semisubmersibles. DCN has requested arbitration of disputes
stemming from certain variation orders requested by DCN and rejected by the
Company during construction of the units. DCN is seeking approximately $35
million for these disputed variation orders. The two Sedco Express-class rigs
have been delivered by DCN, and these variation orders are part of a larger
dispute with DCN regarding the appropriate payment to DCN for construction of
the units. The Company is in the process of preparing its response to the
request for arbitration and does not expect that the outcome of the disputes
with DCN will have a material adverse effect on the Company's business or
financial position.
The Company has certain other actions or claims pending involving the Indian
Customs Department, Mumbai; Kvaerner Installasjon a.s; the municipality of Rio
de Janeiro, Brazil; Global Marine Drilling Company; RIGCO North America LLC; and
the operator of a pipeline damaged in the Gulf of Mexico and certain other
related joint owners and producers. These matters have been previously discussed
and reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000. There have been no material developments in these
previously reported matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual General Meeting of Transocean Sedco Forex Inc. on May 11, 2000
there were represented in person or by proxy 170,435,101 shares out of
210,381,811 entitled to vote as of the record date, constituting a quorum.
The matter submitted to a vote of shareholders was the reelection of Class I
Directors as set forth in the Company's Proxy Statement relating to the meeting.
With respect to such election, the following number of votes were cast as to the
Class I Director nominees: Victor E. Grijalva, 169,535,813 votes for and 899,288
votes withheld; Arthur Lindenauer, 169,528,142 votes for and 906,959 votes
withheld; Kristian Siem, 169,533,257 votes for and 901,844 votes withheld; and
J. Michael Talbert, 169,536,349 votes for and 898,752 votes withheld. There were
no abstentions or broker non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
------ ---------------------------------------------------------------------
*2.1 Agreement and Plan of Merger dated as of July 12, 1999 among
Schlumberger Limited, Sedco Forex Holdings Limited, Transocean
Offshore Inc. and Transocean SF Limited (incorporated by reference to
Annex A to the Joint Proxy Statement/Prospectus dated October 27, 1999
included in the Company's Registration Statement on Form S-4
(Registration No. 333-89727))
*2.2 Distribution Agreement dated as of July 12, 1999 between Schlumberger
Limited and Sedco Forex Holdings Limited (incorporated by reference to
Annex B to the Joint Proxy Statement/Prospectus dated October 27, 1999
included in the Company's Registration Statement on Form S-4
(Registration No. 333-89727))
*4.1 Third Supplemental Indenture dated as of May 24, 2000 between
Transocean Sedco Forex Inc. and Chase Bank of Texas National
Association, as trustee (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed on May 24, 2000)
*4.2 Form of Zero Coupon Convertible Debenture due May 24, 2020 (contained
in Exhibit 4.1)
27.1 Financial Data Schedule.
-------------------
* Incorporated by reference as indicated.
(b) Reports on Form 8-K
The Company filed Amendment No. 2 to its Current Report on Form 8-K/A on
April 4, 2000 to correct the number of shares issued in the merger between
Transocean Offshore Inc. and Sedco Forex Holdings Limited as disclosed under
Items 2. and 7. of its Current Report on Form 8-K/A filed March 10, 2000.
Included in Item 7. were condensed combined financial statements of Sedco Forex
Holdings Limited and unaudited condensed pro forma combined financial statements
of the Company.
The Company filed a Current Report on Form 8-K on May 24, 2000 reporting
under Item 5. thereof the completion of the Company's public offering of
$865,000,000 aggregate principle amount of Zero Coupon Convertible Debentures
and reporting under Item 7. thereof exhibits 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, hereunto duly authorized, on August 9, 2000.
TRANSOCEAN SEDCO FOREX INC.
By: /s/ Robert L. Long
--------------------------------
Robert L. Long
Executive Vice President
(Principal Financial Officer)
By: /s/ Ricardo Rosa
--------------------------------
Ricardo Rosa
Vice President and Controller
(Principal Accounting Officer)
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