<PAGE> 1
Rule 424(b)(5)
Reg. No. 333-2680
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 12, 1996)
<TABLE>
<S> <C> <C>
7,523,140 SHARES
[DIAMOND OFFSHORE LOGO] DIAMOND OFFSHORE DRILLING, INC.
COMMON STOCK
</TABLE>
---------------------
All of the shares of common stock, par value $0.01 per share ("Diamond
Offshore Common Stock"), of Diamond Offshore Drilling, Inc., a Delaware
corporation ("Diamond Offshore"), offered hereby (the "Offered Shares") will be
sold by Alphee S.A., a Luxembourg corporation ("Alphee"), and Forvaltnings AB
Ratos, a Swedish corporation ("Ratos" and, together with Alphee, the "Selling
Stockholders"). See "Selling Stockholders." Diamond Offshore will not receive
any of the proceeds from the sale of the Offered Shares.
Of the 7,523,140 Offered Shares, 6,018,140 Offered Shares are being offered
initially in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein) and 1,505,000 Offered Shares are being offered
outside the United States and Canada (the "International Offering" and, together
with the U.S. Offering, the "Offerings") by the International Managers (as
defined herein). The public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
Pursuant to the Plan of Acquisition dated as of February 9, 1996, as amended
(as so amended, the "Plan of Acquisition"), among Diamond Offshore, Diamond
Offshore (USA) Inc., a Delaware corporation ("Diamond Offshore (USA)"), AO
Acquisition Limited, a Bermuda company ("Acquisition Sub"), and Arethusa
(Off-Shore) Limited, a Bermuda company ("Arethusa"), and the Amalgamation
Agreement dated as of February 9, 1996 (the "Amalgamation Agreement") between
Arethusa and Acquisition Sub, Diamond Offshore acquired Arethusa (the
"Acquisition") on the terms set forth in the Plan of Acquisition and
Amalgamation Agreement. The Acquisition was consummated on April 29, 1996 (the
"Effective Time"). Arethusa shareholders received 17,893,344 shares of Diamond
Offshore Common Stock, representing approximately 26.4% of the total Diamond
Offshore Common Stock currently outstanding, of which the Selling Stockholders
received an aggregate of 8,375,455 shares.
Diamond Offshore Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "DO." On May 20, 1996, the closing price of the Diamond
Offshore Common Stock on the NYSE was $49 3/8 per share.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE OFFERED SHARES, SEE "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE ACCOMPANYING PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE UNDERWRITING SELLING
TO PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $49.25 $1.48 $47.77
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $370,514,645 $11,134,247 $359,380,398
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Diamond Offshore, Loews Corporation and the Selling Stockholders have agreed
to indemnify the several Underwriters (as defined herein) against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Diamond Offshore has agreed to pay certain expenses of the Offerings
estimated at $500,000. The Selling Stockholders have agreed to pay certain
other expenses of the Offerings estimated at $167,500. The Underwriters have
agreed to pay certain expenses of the Selling Stockholders estimated at
$100,000.
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Managers options, exercisable within 30 days after the date of
this Prospectus Supplement, to purchase up to 601,814 and 150,501 additional
shares of Diamond Offshore Common Stock, respectively, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Selling Stockholders
will be $407,566,159, $12,247,674 and $395,318,485, respectively. See
"Underwriting."
---------------------
The Offered Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Offered Shares will be made in New York, New York on or about
May 24, 1996.
---------------------
MERRILL LYNCH & CO.
CS FIRST BOSTON
SALOMON BROTHERS INC
---------------------
The date of this Prospectus Supplement is May 20, 1996.
<PAGE> 2
IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF DIAMOND
OFFSHORE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THESE OFFERINGS, CERTAIN PERSONS AFFILIATED WITH PERSONS
PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN
ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE DIAMOND OFFSHORE COMMON STOCK
PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and, including those rigs
acquired as a result of the Acquisition, consists of 30 semisubmersible rigs
(including three of the world's 13 fourth-generation semisubmersibles), 19
jack-up rigs owned and/or operated by Diamond Offshore and one drillship.
Diamond Offshore also operates 10 land rigs deployed in South Texas. Except for
two jack-up rigs operated pursuant to bareboat charter contracts, all of Diamond
Offshore's offshore and land rigs are wholly owned.
On April 29, 1996, Diamond Offshore consummated the Acquisition, thereby
adding to its fleet Arethusa's 13 owned and/or operated mobile offshore drilling
rigs. Arethusa provided drilling services worldwide to international and
government-controlled oil and gas companies. Arethusa's eight semisubmersible
rigs now owned by Diamond Offshore are located in the Gulf of Mexico and
offshore Brazil and Arethusa's five jack-up rigs now owned by Diamond Offshore
are located offshore India, Indonesia and Egypt, in the Gulf of Mexico and in
the Dutch sector of the North Sea.
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
For the period from April 12 through May 20, 1996, the high and low closing
prices of Diamond Offshore Common Stock as reported by the NYSE were $52 5/8 and
$44 1/4 per share, respectively. For the high and low closing prices for earlier
periods, see "Management -- Price Range of Diamond Offshore Common Stock" in the
accompanying Prospectus.
S-2
<PAGE> 3
USE OF PROCEEDS
Diamond Offshore will not receive any of the proceeds from the sale of the
Offered Shares by the Selling Stockholders.
SELLING STOCKHOLDERS
All of the Offered Shares being offered hereby are being offered by Alphee
and Ratos. The following table sets forth information, as of the date of this
Prospectus Supplement, relating to beneficial ownership (as defined in Rule
13d-3 of the Securities Exchange Act of 1934, as amended) of Diamond Offshore
Common Stock by each Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP NUMBER OF SHARES OF OWNERSHIP OF
OF DIAMOND OFFSHORE DIAMOND OFFSHORE DIAMOND OFFSHORE
COMMON STOCK PRIOR TO COMMON COMMON STOCK AFTER
THE OFFERINGS STOCK TO BE SOLD(1) THE OFFERINGS(1)
NAME OF --------------------- ------------------- -------------------
SELLING STOCKHOLDER NUMBER PERCENT NUMBER NUMBER PERCENT
- ----------------------------------- --------- ------- ------------------- ------- -------
<S> <C> <C> <C> <C> <C>
Alphee S.A......................... 4,708,248 6.9% 4,234,771 473,477 0.7%
11, Avenue de la Gare
1611 Luxembourg
Forvaltnings AB Ratos.............. 3,667,207 5.4% 3,288,369 378,838 0.6%
Drottninggatan 2
Stockholm, Sweden
</TABLE>
- ---------------
(1) In addition to the shares of Diamond Offshore Common Stock indicated, the
Selling Stockholders have granted the U.S. Underwriters and the
International Managers options, exercisable within 30 days after the date
of this Prospectus Supplement, to purchase up to 601,814 and 150,501
additional shares of Diamond Offshore Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, (a)
the number of shares of Diamond Offshore Common Stock to be sold by Alphee
and Ratos will be 4,658,248 and 3,617,207, respectively, and (b) beneficial
ownership of Diamond Offshore Common Stock after the Offerings by Alphee
and Ratos will be 50,000 (.07%) and 50,000 (.07%), respectively.
See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and the Selling
Stockholders," "-- Registration Rights of Selling Stockholders" and "Plan of
Distribution" in the accompanying Prospectus for additional information with
respect to the Selling Stockholders.
S-3
<PAGE> 4
CAPITALIZATION
The following table sets forth the capitalization of Diamond Offshore as of
March 31, 1996 and as adjusted as of such date after giving effect to the
Acquisition. This table should be read in conjunction with the Consolidated
Financial Statements (including the Notes thereto) and the Unaudited Pro Forma
Consolidated Condensed Financial Statements included elsewhere in this
Prospectus Supplement.
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
-------------------------
HISTORICAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ 15,000 $ 82,477
--------- ----------
Stockholders' equity:
Common stock, $.01 par value........................... 500 679
Additional paid-in capital............................. 665,107 1,215,605
Accumulated deficit.................................... (152,712) (152,712)
Cumulative translation adjustment...................... (1,263) (1,263)
--------- ----------
Total stockholders' equity........................... 511,632 1,062,309
--------- ----------
Total capitalization........................................ $ 526,632 $ 1,144,786
========= ==========
</TABLE>
S-4
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical and pro
forma financial data for Diamond Offshore. The selected consolidated financial
data were derived from the Consolidated Financial Statements (including the
Notes thereto) of Diamond Offshore included in this Prospectus Supplement and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements (including the Notes thereto) of Diamond Offshore included in this
Prospectus Supplement. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of results to be anticipated for
the entire year.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
THREE MONTHS MARCH 31,
ENDED ---------------------
MARCH 31, 1996 1996 1995
-------------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues.......................................... $147,662 $106,868 $ 70,760
Operating expenses:
Contract drilling..................................... 86,454 66,157 61,751
General and administrative............................ 5,552 3,103 3,140
Depreciation(1)....................................... 20,018 12,069 14,988
Gain on sale of assets................................ (157) (157) (389)
Operating income (loss)................................. 35,795 25,696 (8,730)
Interest expense........................................ (1,291) -- (8,486)
Other income (expense), net............................. 484 434 355
Income tax benefit (expense)............................ (7,861) (7,398) 5,289
Net income (loss)....................................... 27,127 18,732 (11,572)
Net income per share.................................... .40 0.37 --
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA MARCH 31,
MARCH 31, 1996 1996
-------------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 109,185 $ 70,480
Drilling and other property and equipment, net....................... 1,083,485 533,645
Goodwill and other assets............................................ 28,956 3,984
Total assets......................................................... 1,295,738 658,185
Long-term debt....................................................... 71,874 15,000
Stockholders' equity................................................. 1,062,309 511,632
</TABLE>
- ---------------
(1) Effective January 1, 1996, Diamond Offshore revised the estimated useful
lives for certain classes of its offshore drilling rigs. The estimated
useful lives of Diamond Offshore's offshore drilling rigs, after the change
in estimate, range from 10 to 25 years. The effect of such change reduced
depreciation expense and increased net income for the three months ended
March 31, 1996 by approximately $2.1 million and $1.5 million ($0.03 per
share), respectively.
S-5
<PAGE> 6
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma consolidated condensed financial statements as of
and for the three months ended March 31, 1996 have been prepared based on the
historical financial statements of Diamond Offshore and Arethusa as of and for
the three months ended March 31, 1996. Such historical financial statements are
unaudited but, in the opinion of management, include all adjustments necessary,
consisting only of normal recurring accruals. The unaudited pro forma
consolidated condensed income statement for the year ended December 31, 1995 has
been prepared based on the historical financial statements of Diamond Offshore
as of and for the year ended December 31, 1995 and based on pro forma income
statement data for Arethusa that reflect adjustments to Arethusa's historical
consolidated income statement for the year ended September 30, 1995 in
connection with (i) the acquisition of the Arethusa Yatzy, (ii) the sale of the
Treasure Stawinner and (iii) the dividend and capital distribution of $61.0
million ($3.00 per share of common stock, par value $0.10 per share, of Arethusa
("Arethusa Common Stock")) as if each had occurred at the beginning of fiscal
year 1995. The pro forma income statement for the three months ended March 31,
1996 gives effect to the Acquisition. The pro forma income statement for the
year ended December 31, 1995 gives effect to (i) the Acquisition, (ii) the
initial public offering of Diamond Offshore Common Stock in October 1995 (the
"Diamond Offshore Initial Public Offering") and, in connection therewith, the
use of the proceeds to repay all of Diamond Offshore's then outstanding
indebtedness to Loews Corporation, a Delaware corporation ("Loews"), and to fund
the payment of a special dividend to Loews and (iii) interest expense for
working capital borrowings, and commitment and other fees, under Diamond
Offshore's $150.0 million credit facility with a group of banks (the "Diamond
Offshore Bank Credit Facility"). The Acquisition was accounted for under the
purchase method of accounting using a purchase price of $560.7 million, which
was calculated based on a seven-day average of the closing price of Diamond
Offshore Common Stock at the time the Acquisition was announced. The pro forma
consolidated condensed balance sheet was prepared assuming such transactions
were consummated on March 31, 1996 and give effect to events directly
attributable to the transactions, including those that are nonrecurring. The pro
forma consolidated condensed income statement was prepared assuming the
transactions were consummated as of the beginning of the period presented and
give effect to events directly attributable to the transactions which are
expected to have a continuing impact on the combined entity. These pro forma
consolidated condensed financial statements should be read in conjunction with
the other financial information of Diamond Offshore and Arethusa presented
elsewhere in this Prospectus Supplement and the accompanying Prospectus. The pro
forma consolidated condensed financial statements are presented for illustrative
purposes only and are not necessarily indicative of actual results that would
have been achieved had the transactions been consummated on such dates, and are
not necessarily indicative of future results. The allocation of the purchase
price is preliminary, as valuation and other studies have not been finalized. It
is not expected that the final allocation of the purchase price will produce
materially different results from those presented herein.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL(A)
--------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and other current assets............ $ 32,932 $ 49,722 $ (16,549)(b) $ 66,105
Accounts receivable...................... 87,624 29,568 -- 117,192
Drilling and other property and
equipment, net......................... 533,645 230,853 318,987(c) 1,083,485
Goodwill and other assets................ 3,984 2,071 22,901(d) 28,956
--------- -------- -------- ----------
Total assets................... $ 658,185 $ 312,214 $ 325,339 $1,295,738
========= ======== ======== ==========
Current liabilities...................... $ 50,076 $ 20,536 $ 3,500(e) $ 74,112
Long-term debt........................... 15,000 56,874 -- 71,874
Deferred credits and other liabilities... 81,477 1,884 4,082(f) 87,443
Common stock............................. 500 2,033 (1,854)(g) 679
Additional paid-in capital............... 665,107 218,800 331,698(g) 1,215,605
Accumulated earnings (deficit)........... (152,712) 12,087 (12,087) (152,712)
Cumulative translation adjustment........ (1,263) -- -- (1,263)
--------- -------- -------- ----------
Total liabilities and
stockholders' equity......... $ 658,185 $ 312,214 $ 325,339 $1,295,738
========= ======== ======== ==========
</TABLE>
S-6
<PAGE> 7
- ---------------
(a) There are no significant adjustments required to the historical financial
statements of Diamond Offshore or Arethusa to conform accounting policies
of the two companies.
(b) Adjustment for fair values of identifiable current assets acquired and for
certain events directly attributable to the transaction. Such items
include:
<TABLE>
<S> <C>
Severance, consulting, and salary continuation plans...................... $ (5,526)(1)
Financial advisory services............................................... (7,500)(2)
Legal, accounting, and other.............................................. (2,500)(3)
Office lease cancellation................................................. (1,023)(4)
--------
$(16,549)
========
</TABLE>
- ---------------
(1) Under the Plan of Acquisition, from and after the Effective Time,
Diamond Offshore and Arethusa and their respective subsidiaries will
honor in accordance with their terms certain Arethusa employment,
severance, consulting and salary continuation plans.
(2) Arethusa has agreed to pay Merrill Lynch, Pierce, Fenner & Smith
Incorporated a fee of $7.5 million for financial advisory services in
connection with the Acquisition upon the closing of the Acquisition.
(3) Adjustment for legal, accounting, printing and other nonrecurring
charges expected to be incurred in connection with the Acquisition.
(4) Arethusa is committed under a lease agreement for office space that
continues until August 30, 2002. The lease may be canceled in December
1996 for a lump-sum payment of approximately $1.0 million. Such payment
has no future economic benefit to the combined company and is
incremental to other costs incurred by either Arethusa or Diamond
Offshore in the conduct of activities prior to the Effective Time.
(c) Adjustment for fair values, based on current appraisals, of the eight
semisubmersible drilling rigs, three jack-up drilling rigs, and other
property and equipment owned by Arethusa.
(d) Adjustment for fair values of identifiable assets and for the excess of the
cost of Arethusa over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed.
(e) Adjustment for the estimated unfunded termination liability related to the
Arethusa defined benefit plan.
(f) Adjustment for fair values of liabilities assumed and for the deferred tax
liability for estimated future tax effects of differences between the tax
bases and the fair value amounts assigned to identifiable assets and
liabilities of Arethusa, offset by net operating loss carryforwards of
Arethusa of approximately $30.0 million. As a result of the Acquisition,
Diamond Offshore will have available to it certain Arethusa net operating
loss carryforwards to reduce future U.S. federal income taxes payable. Due
to the change in ownership of Arethusa resulting from the Acquisition,
there will be annual limitations on the amount of Arethusa tax
carryforwards available to be utilized by Diamond Offshore.
(g) The pro forma financial statements reflect the purchase of 100% of the
outstanding shares of Arethusa Common Stock for a total consideration of
$560.7 million which is comprised of the following:
<TABLE>
<S> <C>
Diamond Offshore Common Stock to be issued............................ $539,296(1)
Options assumed....................................................... 11,381(2)
--------
Total equity consideration............................................ 550,677
Transaction costs..................................................... 10,000(3)
--------
Total consideration................................................... $560,677
========
</TABLE>
S-7
<PAGE> 8
- ---------------
(1) The value of the Diamond Offshore Common Stock to be issued in the
Acquisition is calculated based on a seven-day average of the closing
price of Diamond Offshore Common Stock at the time the Acquisition
was announced (December 7, 1995) of $30.14.
(2) Amount represents the fair value of the Arethusa Options assumed by
Diamond Offshore pursuant to the Amalgamation Agreement. The fair
value is based on a seven-day average of the closing price of Diamond
Offshore Common Stock at the time the Acquisition was announced
(December 7, 1995), the Amalgamation Ratio (as defined herein) and
the option exercise price including the $3.00 reduction, which was
approved by Arethusa shareholders at Arethusa's annual general
meeting of shareholders on April 29, 1996.
(3) Amounts represent transaction costs directly associated with the
Acquisition. See (b) above.
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................................... $106,868 $ 40,794 $ -- $ 147,662
Operating expenses:
Contract drilling.............................. 66,157 20,297 -- 86,454
General and administrative..................... 3,103 2,449 -- 5,552
Depreciation and amortization.................. 12,069 8,277 (328) (a) 20,018
Gain on sale of assets......................... (157) -- -- (157)
-------- -------- ------- --------
Total operating expenses................ 81,172 31,023 (328) 111,867
-------- -------- ------- --------
Operating income (loss).......................... 25,696 9,771 328 35,795
Other income (expense):
Interest expense............................... -- (1,291) -- (1,291)
Other, net..................................... 434 50 -- 484
-------- -------- ------- --------
Income (loss) before income tax (expense)
benefit........................................ 26,130 8,530 328 34,988
Income tax (expense) benefit..................... (7,398) (348) (115) (b) (7,861)
-------- -------- ------- --------
Net income....................................... $ 18,732 $ 8,182 $ 213 $ 27,127
======== ======== ======= ========
Net income per common share...................... $ 0.37 $ 0.40 $ 0.40
======== ======== ========
Weighted average common shares outstanding....... 50,000 20,333 67,893(c)
======== ======== ========
</TABLE>
- ---------------
(a) To record the adjustment to depreciation expense and amortization of
goodwill resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for depreciation
and a 20-year amortization period for goodwill.
(b) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization.
(c) Weighted average shares outstanding as if the issuance of 17.9 million
shares to be issued by Diamond Offshore in consideration of the Arethusa
Common Stock had taken place on January 1, 1996.
S-8
<PAGE> 9
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
DIAMOND PRO FORMA
OFFSHORE ARETHUSA(A) ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................................... $336,584 $ 120,166 $ -- $ 456,750
Operating expenses:
Contract drilling.............................. 259,560 86,532 -- 346,092
General and administrative..................... 13,857 9,033 -- 22,890
Depreciation and amortization.................. 52,865 29,008 3,897(b) 85,770
Gain on sale of assets......................... (1,349) -- -- (1,349)
-------- -------- ------- --------
Total operating expenses................ 324,933 124,573 3,897 453,403
-------- -------- ------- --------
Operating income (loss).......................... 11,651 (4,407) (3,897) 3,347
Other income (expense):
Interest expense............................... (27,052) (6,697) 26,296(c) (7,453)
Other, net..................................... 1,598 4,048 -- 5,646
-------- -------- ------- --------
Income (loss) before income tax benefit
(expense)...................................... (13,803) (7,056) 22,399 1,540
Income tax benefit (expense)..................... 6,777 (1,440) (7,840)(d) (2,503)
-------- -------- ------- --------
Net income (loss)................................ $ (7,026) $ (8,496) $ 14,559 $ (963)
======== ======== ======= ========
Net income per common share...................... $ 0.20(f) $ (0.42) $ (0.01)
======== ======== ========
Weighted average common shares outstanding....... 50,000(f) 20,333 67,893(e)
======== ======== ========
</TABLE>
- ---------------
(a) Pro forma income statement data for Arethusa reflect (i) the acquisition of
the Arethusa Yatzy, which occurred on May 3, 1995, (ii) the sale of the
Treasure Stawinner, which occurred June 30, 1995, and (iii) the dividend
and capital distribution of $61.0 million ($3.00 per share of Arethusa
Common Stock) as if each had occurred at the beginning of fiscal year 1995.
Set forth below in this footnote (a) are the historical amounts, and the
adjustments thereto, upon which the pro forma Arethusa amounts are based.
ARETHUSA PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
HISTORICAL DIVIDEND/
------------------- YATZY STAWINNER CAPITAL PRO
ARETHUSA YATZY(1) ACQUISITION SALE DISTRIBUTION FORMA
-------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Contract drilling revenue............. $122,147 $12,315 $ -- $(14,296)(6) $ -- $120,166
Operating expenses:
Direct costs........................ 87,953 8,060 (623)(5) (8,483)(6) -- 86,532
(375)(2)
General and administrative.......... 8,658 -- 375(2) -- -- 9,033
Depreciation........................ 29,547 -- 1,352(3) (1,891)(6) -- 29,008
-------- ------- ------- -------- ------- --------
Total operating expenses..... 126,158 8,060 729 (10,374) -- 124,573
-------- ------- ------- -------- ------- --------
Operating income (loss)............... (4,011) 4,255 (729) (3,922) -- (4,407)
Other income (expense):
Interest expense.................... (6,311) -- (1,168)(4) 782(6) -- (6,697)
Interest income..................... 5,692 -- -- (1,453)(7) 4,239
Gain (loss) on sale of assets....... 27,820 -- -- (27,885)(6) -- (65)
Other, net.......................... (126) -- -- -- -- (126)
-------- ------- ------- -------- ------- --------
Income (loss) before income taxes..... 23,064 4,255 (1,897) (31,025) (1,453) (7,056)
Tax provision......................... (1,440) -- -- -- -- (1,440)
-------- ------- ------- -------- ------- --------
Net income (loss)..................... $ 21,624 $ 4,255 $(1,897) $(31,025) $(1,453) $ (8,496)
======== ======= ======= ======== ======= ========
Net income (loss) per common share.... $ 1.06 $ (0.42)
======== ========
Weighted average common shares
outstanding......................... 20,333 20,333
======== ========
</TABLE>
S-9
<PAGE> 10
- ---------------
(1) The historical financial information of the Yatzy operations for the
period from October 1, 1994, through May 2, 1995 is based upon Arethusa
records, as manager of the rig. The previous owner of the rig prepared
financial information only on a semi-annual, calendar year basis; and
was unable to provide the complete financial information for the twelve
months ended September 30, 1995. Financial statement captions for which
Yatzy historical information is not presented (historical depreciation
and interest expense) would have been adjusted to reflect Arethusa's
cost basis in the Arethusa Yatzy and Arethusa's financing of the rig.
Pro forma Yatzy acquisition adjustments (3) and (4) discussed below
provide fully for depreciation using Arethusa's cost basis in the
Arethusa Yatzy and interest based on Arethusa's financing of the rig.
Additionally, it is management's understanding that there are no other
significant transactions or activities related to the historical
operations of Yatzy which would have a material impact on the
as-adjusted pro forma income statement. Therefore, management believes
the resulting pro forma income statement is in compliance with Article
11 of Regulation S-X.
(2) To reclassify and eliminate the management fee paid to Arethusa from
direct costs to general and administrative expenses.
(3) To reflect depreciation expense calculated based upon Arethusa's cost
and estimated useful life of 25 years, which is consistent with
Arethusa's previously established depreciation policy.
(4) To adjust for additional interest expense associated with Arethusa's
$30.0 million note entered into in connection with the acquisition of
the Arethusa Yatzy.
(5) To adjust for a reduction in insurance expense resulting from
Arethusa's lower insured value for the Arethusa Yatzy.
(6) To reflect the elimination of historical operations, interest expense
and gain on sale of assets for the Treasure Stawinner.
(7) To reflect the reduction in interest income resulting from the dividend
and capital distribution made to shareholders in fiscal 1995.
(b) To record the additional depreciation expense and amortization of goodwill
resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for
depreciation and a 20-year amortization period for goodwill.
(c) To adjust interest expense, assuming that the Diamond Offshore Initial
Public Offering and repayment of indebtedness occurred on January 1, 1995.
(d) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization and interest expense.
(e) Weighted average shares outstanding as if both the October 1995 issuance of
15.0 million shares by Diamond Offshore through the Diamond Offshore
Initial Public Offering and the 17.9 million shares to be issued by Diamond
Offshore in consideration of the Arethusa Common Stock had taken place on
January 1, 1995.
(f) After the Diamond Offshore Initial Public Offering, Diamond Offshore had
50.0 million shares of Diamond Offshore Common Stock outstanding. Assuming
the Diamond Offshore Initial Public Offering had occurred at January 1,
1995, Diamond Offshore would have recognized net income of $10.0 million,
or $0.20 per share of Diamond Offshore Common Stock, after adjusting for
the after-tax effects of a reduction in interest expense.
S-10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with Diamond
Offshore's Consolidated Financial Statements (including the Notes thereto)
included elsewhere in this Prospectus Supplement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 21,465 $ 11,703 $ 9,762
Other Semisubmersibles..................................... 52,995 35,511 17,484
Jack-ups................................................... 20,136 16,926 3,210
Turnkey.................................................... 13,626 3,143 10,483
Land....................................................... 5,102 5,475 (373)
Other...................................................... -- -- --
Eliminations............................................... (6,456) (1,998) (4,458)
-------- -------- -------
Total Revenues..................................... $106,868 $ 70,760 $ 36,108
======== ======== =======
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 7,898 $ 8,294 $ (396)
Other Semisubmersibles..................................... 31,490 30,774 716
Jack-ups................................................... 14,927 15,506 (579)
Turnkey.................................................... 14,128 4,598 9,530
Land....................................................... 4,772 4,709 63
Other...................................................... (602) (132) (470)
Eliminations............................................... (6,456) (1,998) (4,458)
-------- -------- -------
Total Contract Drilling Expense.................... $ 66,157 $ 61,751 $ 4,406
======== ======== =======
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 13,567 $ 3,409 $ 10,158
Other Semisubmersibles..................................... 21,505 4,737 16,768
Jack-ups................................................... 5,209 1,420 3,789
Turnkey.................................................... (502) (1,455) 953
Land....................................................... 330 766 (436)
Other...................................................... 602 132 470
General and Administrative Expense......................... (3,103) (3,140) 37
Depreciation Expense....................................... (12,069) (14,988) 2,919
Gain on Sale of Assets..................................... 157 389 (232)
-------- -------- -------
Total Operating Income (Loss)...................... $ 25,696 $ (8,730) $ 34,426
======== ======== =======
</TABLE>
REVENUES. The $9.8 million increase in revenues from fourth-generation
semisubmersibles resulted from improvements in dayrates ($6.3 million) and
increases in utilization ($3.5 million). The improvement in utilization for 1996
was partially attributable to the relocation between markets of two
fourth-generation rigs during the comparable period of the prior year, reducing
the days worked for these rigs during that period. The $17.5 million increase in
revenues from other semisubmersibles was primarily attributable to increases in
dayrates in both the North Sea and the Gulf of Mexico. These increases were
partially offset by a reduction in revenues of approximately $4.8 million due to
the Ocean Princess and the Ocean Baroness being out of service while
modifications were being performed prior to these rigs beginning term contracts
in the North Sea and South America, respectively. The $3.2 million increase in
revenues from jack-ups resulted from increased
S-11
<PAGE> 12
utilization and dayrates in the Gulf of Mexico. The $10.5 million increase in
turnkey revenues resulted from projects of greater magnitude completed during
the first quarter of 1996 as compared to those completed during the same period
of the prior year. In addition, Diamond Offshore performed overall project
management services for two customers during the current year, generating
approximately $2.7 million which is included in turnkey revenue for the first
quarter of 1996.
CONTRACT DRILLING EXPENSE. Contract drilling expense for fourth-generation
semisubmersibles, other semisubmersibles, and jack-ups was relatively unchanged
from the first quarter of the prior year. The $9.5 million increase in turnkey
expense resulted from more extensive turnkey wells drilled, project management
services provided and cost overruns on one turnkey well during the current year.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense of
$3.1 million for the quarter ended March 31, 1996 was unchanged from the
comparable period of the prior year.
DEPRECIATION EXPENSE. Depreciation expense of $12.1 million for the quarter
ended March 31, 1996 included a change in accounting estimate to increase the
estimated useful lives for certain classes of rigs which reduced depreciation
expense by approximately $2.1 million, as compared to the quarter ended March
31, 1995. Partially offsetting this decrease were increases in depreciation for
three rig upgrades performed in 1995 and capital expenditures associated with
Diamond Offshore's continuing rig enhancement program. In addition, depreciation
expense for the comparable period of the prior year included a $2.1 million
write-down in the carrying value of a semisubmersible.
INTEREST EXPENSE. Diamond Offshore incurred $0.2 million of interest
expense for the quarter ended March 31, 1996 as compared to $8.5 million for the
same period of the prior year. This decrease was attributable to a reduction in
the outstanding indebtedness resulting from the repayment of Diamond Offshore's
loan from Loews in connection with the Diamond Offshore Initial Public Offering
in October 1995. The $0.2 million of interest expense for 1996 has been
capitalized to the cost of construction on the Ocean Quest and Ocean Star. See
Notes 3 and 5 to Diamond Offshore's Consolidated Financial Statements included
in this Prospectus Supplement.
INCOME TAX (EXPENSE) BENEFIT. The income tax (expense) benefit for the
quarter ended March 31, 1996 was $(7.4) million as compared to $5.3 million for
the comparable period of the prior year. This change resulted primarily from the
increase of $43.0 million in Diamond Offshore's income before income tax
(expense) benefit.
NET INCOME (LOSS). Net income for the quarter ended March 31, 1996
increased $30.3 million to $18.7 million, as compared to a net loss of $(11.6)
million for the comparable period of the prior year. The increase resulted
primarily from an increase in operating income of $34.4 million and a decrease
in interest expense of $8.5 million, partially offset by an increase in income
tax expense of $12.7 million.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances, including 3-D seismic,
horizontal drilling, and subsea completion procedures. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates through the first quarter of 1996. Customers
are continuing to contract rigs serving those markets under term contracts (as
opposed to contracts let on a single well or well-to-well basis). In the Gulf of
Mexico, the Ocean Valiant's contract has been extended through 1996 at an
increased dayrate. Contracts for Diamond Offshore's other semisubmersibles in
the Gulf of Mexico continue to be primarily on a well-to-well or multi-well
basis. However, term contract opportunities are becoming more prevalent. Diamond
Offshore's drillship, the Ocean Clipper I, is scheduled to be upgraded during
1996 and 1997 to operate in the ultra-deep water market of the Gulf of Mexico
with dynamic positioning capabilities, in connection with a four-year term
contract with a major oil company that has been agreed to in principle. The oil
company has an option to terminate the contract prior to its scheduled
termination date upon payment to Diamond Offshore of a termination fee. See
" -- Capital Resources" in this Prospectus Supplement.
S-12
<PAGE> 13
In the North Sea, the Ocean Alliance is contracted for work through late
1996 and has received an increase in its dayrate. Diamond Offshore's three other
marketed semisubmersibles in the North Sea are all committed under term
contracts. The Ocean Nomad, which was relocated from South America, began its
two-year contract in late November 1995. The Ocean Princess has completed the
modifications necessary for its two-year contract which commenced in late March
1996. The Ocean Guardian is currently drilling pursuant to a one-year term
contract expiring during the third quarter of 1996. Of the remaining
semisubmersibles in Diamond Offshore's fleet, the Ocean Baroness completed
modifications and began, in early April 1996, a three-year term contract for
drilling offshore Brazil. In addition, the Ocean Zephyr, also operating offshore
Brazil, is contracted to July 1997.
The market for jack-up rigs in the Gulf of Mexico appears to have
stabilized and has shown some signs of strengthening in recent months. Dayrates
have improved from those earned in early 1995; however, volatile natural gas
prices and an oversupply of rigs prevented significant improvements through
early 1996.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and Diamond Offshore cannot predict the extent to
which current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the three months ended March
31, 1996 increased by $13.0 million to $23.7 million, as compared to $10.7
million for the comparable period of the prior year. This increase was
attributable to a $30.3 million increase in net income for the first quarter of
1996, partially offset by an increase of $13.1 million in accounts receivable,
as compared to a decrease in accounts receivable of $4.6 million for the same
period of the prior year. Cash used in investing activities increased $36.8
million primarily due to capital expenditures for major upgrades of $32.7
million and $8.2 million for the purchase during the first quarter of 1996 of
the land and eight-story building in which Diamond Offshore has its corporate
headquarters. Cash provided by financing activities for the three months ended
March 31, 1996 increased $19.2 million primarily due to net borrowings of $15.0
million on the Diamond Offshore Bank Credit Facility as compared to $6.0 million
net repayments on Diamond Offshore's indebtedness during the same period of the
prior year.
Diamond Offshore uses funds available under the Diamond Offshore Bank
Credit Facility, together with cash flow from operations, to fund its capital
expenditure and working capital requirements. The Diamond Offshore Bank Credit
Facility is a revolving line of credit for a five-year term providing a maximum
credit commitment of $150.0 million until the second anniversary, at which time
and at the end of each six-month period thereafter, the commitment will decrease
by $12.5 million to a final maximum credit commitment of $75.0 million during
the last six months. Borrowings under the Diamond Offshore Bank Credit Facility
bear interest, at Diamond Offshore's option, at a per annum rate equal to a base
rate (equal to the greater of (i) the prime rate announced by Bankers Trust
Company or (ii) the Federal Funds rate plus .50%) plus .25% or the Eurodollar
rate plus 1.25%. Diamond Offshore is required to pay a commitment fee of .375%
on the unused available portion of the maximum credit commitment. Borrowings are
secured by security interests in certain of Diamond Offshore's assets. The
Diamond Offshore Bank Credit Facility also contains covenants that limit the
amount of total consolidated debt, require the maintenance of certain
consolidated financial ratios and limit dividends and similar payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" in the accompanying Prospectus. As of March 31, 1996,
Diamond Offshore was in compliance with each of these covenants.
It is anticipated that the Diamond Offshore Bank Credit Facility will be
used primarily to fund rig upgrades and similar capital expenditure
requirements. In management's opinion, Diamond Offshore's cash generated from
operations and borrowings available under the Diamond Offshore Bank Credit
Facility are sufficient to meet its anticipated short- and long-term liquidity
needs, including its capital expenditure requirements.
S-13
<PAGE> 14
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from Diamond Offshore's continuing rig
enhancement program, including top-drive drilling system installations and water
depth and drilling capability upgrades. Diamond Offshore expects to spend
approximately $198.1 million, including interest expense to be capitalized,
during 1996 for rig upgrades in connection with contract requirements. Included
in this amount is approximately $55.8 million for 1996 expenditures in
conjunction with the planned upgrade of the Ocean Clipper I to operate in deep
water with dynamic positioning capabilities. In addition, approximately $124.7
million is included for the upgrades relating to a letter of intent and a
contract for the Ocean Star and Ocean Quest, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in the accompanying Prospectus. Because these projects
are expected to be accompanied by term contracts at favorable dayrates, the
expenditures are, in Diamond Offshore's opinion, financially justified. During
the first quarter of 1996, $32.7 million was expended on these projects. Diamond
Offshore expects to evaluate other projects as opportunities arise. In addition,
Diamond Offshore has budgeted $40.4 million for 1996 capital expenditures
associated with its continuing rig enhancement program. During the first quarter
of 1996, $2.9 million was expended on this program. It is management's opinion
that significant improvements in operating cash flow resulting from current
conditions of improved dayrates and the increasing number of term contracts for
rigs in certain markets, in conjunction with borrowings under the Diamond
Offshore Bank Credit Facility, will be sufficient to meet these capital
requirements.
Diamond Offshore is analyzing financing alternatives that may be available
to it in the public or private capital markets. Proceeds of any such financing
transactions may be used for repayment of higher cost debt, to fund rig
upgrades, acquisitions or for other corporate purposes. Diamond Offshore's
ability to effect any such financings will be dependent on its historical
results of operations and its current financial condition and prospects at the
time it seeks access to the capital markets, and to other factors beyond Diamond
Offshore's control, including the prevailing interest rate environment and, with
respect to offerings of common or preferred stock or debt obligations
convertible into such common stock, other financial market conditions, and the
investment community's perception of Diamond Offshore and the offshore contract
drilling industry generally. Any such offering would be subject to the
restrictions imposed by the Shareholders Agreement, dated as of February 9,
1996, as amended (as so amended, the "Shareholders Agreement"), among Diamond
Offshore, Diamond Offshore (USA), Acquisition Sub, Alphee and Ratos, on public
sales or distributions of Diamond Offshore Common Stock, or securities
convertible into common stock, and until October 10, 1996, to obtaining the
prior written consent of CS First Boston Corporation ("CS First Boston") as
required by the underwriting agreement entered into in connection with the
Diamond Offshore Initial Public Offering. See "Underwriting" in this Prospectus
Supplement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity," "-- Capital Resources" and
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" in the accompanying Prospectus.
Also, from time to time Diamond Offshore reviews acquisition opportunities,
although Diamond Offshore has no current plans to purchase or otherwise acquire
additional rigs, other than with respect to the Acquisition. See "-- Other" in
this Prospectus Supplement.
OTHER
ACQUISITION OF ARETHUSA. Diamond Offshore consummated the Acquisition on
April 29, 1996. Under the Plan of Acquisition and the Amalgamation Agreement,
holders of Arethusa Common Stock will receive approximately 17.9 million shares
of Diamond Offshore Common Stock to be issued by Diamond Offshore based on a
ratio of .88 shares of Diamond Offshore Common Stock for each share of Arethusa
common stock (the "Amalgamation Ratio").
SALE OF ASSET. Subsequent to March 31, 1996, Diamond Offshore entered into
an agreement to sell its jack-up drilling rig, the Ocean Magallanes, to Cliffs
Drilling Company for $4.5 million. The rig is currently
S-14
<PAGE> 15
stacked in Punta Arenas, Chile. The sale, expected to close during the second
quarter of 1996, will generate an after-tax gain of approximately $2.0 million
for Diamond Offshore.
CURRENCY RISK. Certain of Diamond Offshore's subsidiaries use the local
currency in the country where they conduct operations as their functional
currency. Currency environments in which Diamond Offshore has material business
operations include the U.K., Australia and Brazil. Diamond Offshore generally
attempts to minimize its currency exchange risk by seeking international
contracts payable in local currency in amounts equal to Diamond Offshore's
estimated operating costs payable in local currency and in U.S. dollars for the
balance of the contract. Because of this strategy, Diamond Offshore has
minimized its unhedged net asset or liability positions denominated in local
currencies and has not experienced significant gains or losses associated with
changes in currency exchange rates. However, contracts presently covering three
of Diamond Offshore's four rigs operating in the U.K. sector of the North Sea
are payable in U.S. dollars. Diamond Offshore has not hedged its exposure to
changes in the exchange rate between U.S. dollars and pounds sterling for
operating costs payable in pounds sterling, although it may seek to do so in the
future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. However, when Diamond Offshore ceases its operations in a
currency environment, the accumulated adjustments are recognized currently in
results of operations. Translation gains and losses for Diamond Offshore's
operations in Brazil have been recognized currently due to the hyperinflationary
status of this environment. The effect on results of operations has not been
material and is not expected to have a significant effect in the future due to
the recent stabilization of currency rates in Brazil.
S-15
<PAGE> 16
ACTIVE MOBILE OFFSHORE DRILLING RIGS
Information as of April 24, 1996 concerning the Diamond Offshore fleet of
active mobile offshore drilling rigs is set forth in the table below.
<TABLE>
<CAPTION>
WATER DEPTH
CAPABILITY YEAR BUILT/LATEST CURRENT
TYPE AND NAME(A) (FT) ATTRIBUTES(B) ENHANCEMENT(C) LOCATION CUSTOMER(D)
- ------------------------ ----------- ----------------------------- ------------------ --------------- ----------------------
<S> <C> <C> <C> <C> <C>
FOURTH-GENERATION
SEMISUBMERSIBLES(3):
Ocean Alliance........ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea BP
Ocean America......... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico BP
Ocean Valiant......... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
OTHER
SEMISUBMERSIBLES(27):
Arethusa Worker....... 3,300 TDS 1982/1992 Gulf of Mexico Texaco
Ocean Voyager......... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Arethusa Yatzy(e)..... 3,000 TDS; DP 1989 Brazil Petrobras
Arethusa Lexington.... 2,500 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Arethusa Neptune...... 2,500 TDS; 3M 1977/1995 Gulf of Mexico Kerr-McGee
Arethusa Concord...... 2,200 TDS 1975/1995 Gulf of Mexico Shell
Arethusa Saratoga..... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Arethusa Yorktown..... 2,200 TDS 1976/1989 Brazil Petrobras
Ocean Endeavor........ 2,000 TDS; VC 1975/1994 Gulf of Mexico Oryx
Ocean Rover........... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...... 1,700 VC 1971/1981 Gulf of Mexico Newfield(f)
Arethusa
Whittington......... 1,500 TDS; 3M 1974/1995 Gulf of Mexico Mobil
Ocean Bounty.......... 1,500 TDS; VC; 3M 1977/1992 Australia/ BHPP
Indonesia
Ocean Guardian........ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......... 1,500 TDS 1974/1990 Gulf of Mexico Hardy Oil & Gas(g)
Ocean Princess........ 1,500 TDS; 15K 1977/1995 North Sea Marathon
Ocean Epoch........... 1,200 TDS 1977/1990 Australia BHPP
Ocean General......... 1,200 TDS 1976/1990 Vietnam Pedco
Ocean Nomad........... 1,200 TDS 1975/1995 North Sea Shell
Ocean Ambassador(h)... 1,100 TDS 1975/1995 Gulf of Mexico Committed
Ocean Baroness........ 1,100 TDS; VC 1973/1995 Brazil Petrobras
Ocean Star(i)(j)...... 850 VC 1974/1992 Gulf of Mexico Committed
Ocean Century......... 800 1973 Gulf of Mexico Stacked
Ocean Quest(k)........ 800 VC 1973 Gulf of Mexico Committed
Ocean Liberator....... 600 1974 Nigeria Ashland
Ocean Victory......... 600 VC 1972 North Sea Stacked
Ocean Zephyr.......... 600 1972 Brazil Petrobras
JACK-UPS(19):
Ocean Titan........... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico LL&E
Ocean Tower........... 350 IS; 3M 1972 Gulf of Mexico Sonat Exploration(l)
Bonito II(m).......... 300 TDS; IC 1983/1995 Gulf of Mexico Unocal
Miss Kitty(n)......... 300 IC 1982 Enroute ONGC
Ocean King............ 300 TDS; IC 1973/1989 Gulf of Mexico Conoco
Ocean Nugget.......... 300 TDS; IC 1976/1995 Gulf of Mexico Amoco
Ocean Summit.......... 300 SDS; IC 1972/1991 Gulf of Mexico Forcenergy
Ocean Warwick......... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Arethusa Heritage..... 250 TDS; IC 1981/1995 Egypt EDC
Arethusa Sovereign.... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Champion........ 250 MS 1975/1985 Gulf of Mexico Chevron
Ocean Columbia........ 250 TDS; IC 1978/1990 Gulf of Mexico Coastal Oil & Gas
Ocean Spartan......... 250 TDS; IC 1980/1994 Gulf of Mexico Meridian
Ocean Spur............ 250 TDS; IC 1981/1994 Gulf of Mexico Houston Exploration(o)
Ocean Conquest........ 200 MS 1978 Gulf of Mexico Stacked
Ocean Crusader........ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........... 200 TDS; MC 1983/1986 Gulf of Mexico Murphy
Arethusa Scotian...... 180 TDS; IC; 15K 1981/1988 North Sea Elf
(Dutch sector)
Ocean Magallanes(p)... 150 IC 1980 Chile Stacked
DRILLSHIP(1):
Ocean Clipper I....... 1,200 SP 1976 Enroute Committed(q)
</TABLE>
- ---------------
(a) Does not include one other semisubmersible rig held for disposition that is
also not included in the discussion of Diamond Offshore's fleet.
S-16
<PAGE> 17
(b) Attributes legend:
<TABLE>
<S> <C> <C>
DP -- Dynamically Positioned/Self-Propelled
MS -- Mat-Supported Slot Rig
TDS -- Top-Drive Drilling System
IC -- Independent-Leg Cantilevered Rig
SDS -- Side-Drive Drilling System
VC -- Victory-Class
IS -- Independent-Leg Slot Rig
SO -- Skid-Off Capability
3M -- Three Mud Pumps
MC -- Mat-Supported Cantilevered Rig
SP -- Self-Propelled
15K -- 15,000 psi Blowout Preventer
</TABLE>
(c) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(d) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(e) Arethusa acquired the Arethusa Yatzy on May 3, 1995. Prior to this date the
rig was operated by Arethusa under a management agreement.
(f) Turnkey operator is ADTI.
(g) Project manager is DOTS.
(h) Committed for two-well contract after completion of rig enhancements.
(i) Formerly named Ocean Countess.
(j) Committed under a letter of intent for a three-year term contract with
Texaco in the Gulf of Mexico.
(k) Committed under a three-year term contract with Chevron in the Gulf of
Mexico.
(l) Turnkey operator is Triton.
(m) Diamond Offshore charters the rig pursuant to a bareboat charter agreement
which expires in August 1996. The rig is under contract for sale, upon
closing of which such charter will terminate.
(n) Diamond Offshore operates the rig pursuant to a bareboat charter agreement
which expires in July 1997. Diamond Offshore has the option to extend the
charter agreement for one additional year. The rig is enroute to India
following completion of leg repairs.
(o) Turnkey operator is Brown/R&B.
(p) Under contract for sale.
(q) Committed under an agreement in principle for a four-year term contract in
the Gulf of Mexico following completion of rig enhancement.
S-17
<PAGE> 18
UNDERWRITING
Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement") among Diamond Offshore, the Selling
Stockholders and each of the underwriters named below (the "U.S. Underwriters"),
and concurrently with the sale of 1,505,000 shares of Diamond Offshore Common
Stock to the International Managers (as defined below), the Selling Stockholders
have agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters
severally has agreed to purchase from the Selling Stockholders, the number of
shares of Diamond Offshore Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................... 2,006,048
CS First Boston Corporation....................................... 2,006,046
Salomon Brothers Inc ............................................. 2,006,046
---------
Total................................................ 6,018,140
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS
First Boston and Salomon Brothers Inc are acting as representatives (the "U.S.
Representatives") of the U.S. Underwriters.
Diamond Offshore and the Selling Stockholders have also entered into the
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International, CS First Boston Limited and Salomon Brothers
International Limited are acting as representatives (the "International
Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 6,018,140
shares of Diamond Offshore Common Stock to the U.S. Underwriters pursuant to the
U.S. Purchase Agreement, the Selling Stockholders have agreed to sell to the
International Managers, and the International Managers severally have agreed to
purchase from the Selling Stockholders, an aggregate of 1,505,000 shares of
Diamond Offshore Common Stock. The public offering price per share of the
Diamond Offshore Common Stock and the total underwriting discount per share are
identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Diamond Offshore Common Stock being
sold pursuant to each such Purchase Agreement if any of such shares of Diamond
Offshore Common Stock being sold pursuant to each such Purchase Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting U.S.
Underwriters or International Managers (as the case may be) may be increased.
The closings with respect to the sale of shares of Diamond Offshore Common Stock
to be purchased by the International Managers and the U.S. Underwriters are
conditioned upon one another.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted to
sell shares of Diamond Offshore Common Stock to each other for purposes of
resale at the public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Diamond Offshore Common
Stock will not offer to sell or sell shares of Diamond Offshore Common Stock to
persons who are non-United States persons or non-Canadian persons or to persons
they believe intend to resell to persons who are non-United States persons or
non-Canadian persons, and the International Managers and any dealer to whom they
sell shares of Diamond Offshore Common Stock will not offer to sell or sell
shares of Diamond Offshore Common Stock to persons who are United States or
Canadian persons or to persons they believe intend to resell to United States or
Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
S-18
<PAGE> 19
The U.S. Representatives have advised Diamond Offshore and the Selling
Stockholders that the U.S. Underwriters propose to offer the shares of Diamond
Offshore Common Stock offered hereby to the public at the public offering price
set forth on the cover page of this Prospectus Supplement, and to certain
dealers at such price less a concession not in excess of $.90 per share of
Diamond Offshore Common Stock. The U.S. Underwriters may allow, and such dealers
may reallow, a discount not in excess of $.10 per share of Diamond Offshore
Common Stock on sales to certain other dealers. After the public offering, the
public offering price, concession and discount may be changed.
The Selling Stockholders have granted an option to the U.S. Underwriters,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to an aggregate of 601,814 additional shares of
Diamond Offshore Common Stock at the public offering price, less the
underwriting discount. The U.S. Underwriters may exercise this option only to
cover over-allotments, if any, made on the sale of Diamond Offshore Common Stock
offered hereby. To the extent that the U.S. Underwriters exercise this option,
each U.S. Underwriter shall be obligated, subject to certain conditions, to
purchase the number of additional shares of Diamond Offshore Common Stock
proportionate to such U.S. Underwriter's initial amount reflected in the
foregoing table. The Selling Stockholders also have granted an option to the
International Managers, exercisable during the 30-day period after the date of
this Prospectus Supplement, to purchase up to an aggregate of 150,501 additional
shares of Diamond Offshore Common Stock to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters.
The Selling Stockholders have agreed not to directly or indirectly sell,
offer to sell, grant any option for sale of, contract or otherwise transfer any
shares of Diamond Offshore Common Stock (except for the shares offered hereby)
or any securities convertible into or exchangeable or exercisable for Diamond
Offshore Common Stock for a period of 90 days after the date of this Prospectus
Supplement (the "Underwriters' Restricted Period") without the prior written
consent of Merrill Lynch. In addition, the Selling Stockholders have agreed
that, during the Underwriters' Restricted Period, without the prior written
consent of Merrill Lynch, the Selling Stockholders will not release Diamond
Offshore from Diamond Offshore's obligation under the Shareholders Agreement not
to effect, and to cause Loews to agree not to effect, any public sale or
distribution of any securities the same as or similar to the Diamond Offshore
Common Stock, or any securities convertible into or exchangeable into securities
the same as or similar to the Diamond Offshore Common Stock (except pursuant to
registrations on Form S-4 or any successor form, or Form S-8 or any successor
form relating solely to securities offered pursuant to any benefit plan). See
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" in the accompanying Prospectus.
Pursuant to the terms of an engagement letter dated September 1, 1995 (as
amended), Arethusa has agreed to pay Merrill Lynch $7.5 million for financial
advisory services in connection with the Acquisition. Arethusa has also agreed
to reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including
all reasonable fees and disbursements of counsel, and to indemnify Merrill Lynch
and certain related persons against certain liabilities relating to or arising
out of its engagement, including certain liabilities under the federal
securities laws. In addition, during the past two years Merrill Lynch has
performed investment banking services for Loews, an affiliate of Diamond
Offshore, from time to time and has been compensated therefor. Such services
have included, among other things, acting as manager of, or participating as a
syndicate member in, various securities transactions of Loews and its
subsidiaries and providing financial advisory services to Loews.
In consideration of financial advisory services rendered in connection with
the Acquisition, Diamond Offshore has agreed to pay CS First Boston a $500,000
fee. In addition, Diamond Offshore has agreed to reimburse CS First Boston for
all reasonable out-of-pocket expenses, including the fees and expenses of its
legal counsel and any other advisor retained by CS First Boston resulting from
or arising out of Diamond Offshore's engagement of CS First Boston with respect
to the Acquisition, and has agreed to indemnify CS First Boston (and its
directors, officers, employees, and persons controlling CS First Boston) against
certain liabilities and expenses in connection with the Acquisition, including
certain liabilities under federal securities laws. The Underwriters have agreed
to pay certain expenses of the Selling Stockholders incurred in connection with
the sale of the Offered Shares estimated at $100,000.
S-19
<PAGE> 20
The Underwriters do not intend to confirm sales of the shares of Diamond
Offshore Common Stock offered hereby to any accounts over which they exercise
discretionary authority.
Diamond Offshore, Loews and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Diamond Offshore Common Stock offered hereby
will be passed on for Diamond Offshore by Weil, Gotshal & Manges LLP, Houston,
Texas. Certain legal matters will be passed on for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom, New York, New York.
S-20
<PAGE> 21
INDEX TO PROSPECTUS SUPPLEMENT FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets -- March 31, 1996 and December 31, 1995............. SF-2
Consolidated Statements of Operations -- Three Months Ended March 31, 1996 and
1995........................................................................... SF-3
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1996 and
1995........................................................................... SF-4
Notes to Consolidated Financial Statements...................................... SF-5
</TABLE>
SF-1
<PAGE> 22
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 3,867 $ 10,306
Short-term investments........................................... 5,110 5,041
Accounts receivable.............................................. 87,624 74,496
Rig inventory and supplies....................................... 15,746 15,330
Prepaid expenses and other....................................... 8,209 10,601
--------- ---------
Total current assets..................................... 120,556 115,774
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION..................................................... 533,645 502,278
OTHER ASSETS....................................................... 3,984 --
--------- ---------
Total assets............................................. $ 658,185 $ 618,052
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 14,171 $ 18,322
Accrued liabilities.............................................. 35,905 33,929
--------- ---------
Total current liabilities................................ 50,076 52,251
LONG-TERM DEBT..................................................... 15,000 --
DEFERRED TAX LIABILITY............................................. 79,737 72,907
OTHER LIABILITIES.................................................. 1,740 --
--------- ---------
Total liabilities........................................ 146,553 125,158
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized,
none issued and outstanding).................................. -- --
Common stock (par value $.01, 200,000,000 shares authorized,
50,000,000 shares issued and outstanding)..................... 500 500
Additional paid-in capital....................................... 665,107 665,107
Accumulated deficit.............................................. (152,712) (171,444)
Cumulative translation adjustment................................ (1,263) (1,269)
--------- ---------
Total stockholders' equity............................... 511,632 492,894
--------- ---------
Total liabilities and stockholders' equity............... $ 658,185 $ 618,052
========= =========
</TABLE>
SF-2
<PAGE> 23
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES.............................................................. $106,868 $ 70,760
OPERATING EXPENSES:
Contract drilling................................................... 66,157 61,751
General and administrative.......................................... 3,103 3,140
Depreciation........................................................ 12,069 14,988
Gain on sale of assets.............................................. (157) (389)
-------- --------
Total operating expenses.................................... 81,172 79,490
-------- --------
OPERATING INCOME (LOSS)............................................... 25,696 (8,730)
OTHER INCOME (EXPENSE):
Interest expense.................................................... -- (8,486)
Currency transaction gains (losses)................................. 86 (34)
Other, net.......................................................... 348 389
-------- --------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT..................... 26,130 (16,861)
INCOME TAX (EXPENSE) BENEFIT.......................................... (7,398) 5,289
-------- --------
NET INCOME (LOSS)..................................................... $ 18,732 $(11,572)
======== ========
NET INCOME PER SHARE.................................................. $ 0.37
========
WEIGHTED AVERAGE SHARES OUTSTANDING................................... 50,000
========
</TABLE>
SF-3
<PAGE> 24
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................... $ 18,732 $(11,572)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation...................................................... 12,069 12,918
Gain on sale of assets............................................ (157) (389)
Write-down of asset............................................... -- 2,070
Accrued interest converted to notes payable to Loews.............. -- 8,484
Deferred tax provision (benefit).................................. 7,124 (5,489)
Changes in operating assets and liabilities:
Accounts receivable............................................... (13,128) 4,611
Rig inventory and supplies and other current assets............... 2,339 (9)
Other assets, non-current......................................... (2,583) --
Accounts payable and accrued liabilities.......................... (2,175) 48
Other liabilities, non-current.................................... 1,740 --
Other, net........................................................ (288) 20
-------- --------
Net cash provided by operating activities.................... 23,673 10,692
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................. (43,757) (6,981)
Proceeds from sales of assets........................................ 478 439
Change in short-term investments..................................... (69) --
-------- --------
Net cash used in investing activities........................ (43,348) (6,542)
-------- --------
FINANCING ACTIVITIES:
Borrowings on revolving line of credit............................... 37,000 --
Repayments on revolving line of credit............................... (22,000) --
Deferred financing costs............................................. (1,764) --
Net repayments to Loews.............................................. -- (6,000)
-------- --------
Net cash provided by (used in) financing activities.......... 13,236 (6,000)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................ (6,439) (1,850)
Cash and cash equivalents, beginning of period....................... 10,306 17,770
-------- --------
Cash and cash equivalents, end of period............................. $ 3,867 $ 15,920
======== ========
</TABLE>
SF-4
<PAGE> 25
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 1995 (File No. 1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared 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. Accordingly, they do not include all disclosures required by generally
accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated balance sheets,
statements of operations, and statements of cash flows at the dates and for the
periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.
Supplementary Cash Flow Information
Non-cash financing activities for the three months ended March 31, 1995
included $8.5 million of interest expense accrued and included in notes payable
to Loews Corporation ("Loews"). There were no non-cash financing activities for
the three months ended March 31, 1996. Cash payments made for interest on long-
term debt for the three months ended March 31, 1996 totaled $37,000.
Drilling and Other Property and Equipment
For financial reporting purposes, depreciation is provided on the
straight-line method over the remaining estimated useful lives from the date the
asset is placed into service. The Company believes that certain offshore
drilling rigs, due to their upgrade and design capabilities and maintenance
history, have an operating life in excess of their depreciable life as
originally assigned. For this reason, a change in accounting estimate, effective
January 1, 1996, increased the estimated useful lives for certain classes of
offshore drilling rigs. As compared to the original estimate of useful lives,
the effect of such change reduced depreciation expense and increased net income
for the three months ended March 31, 1996 by approximately $2.1 million and $1.5
million ($0.03 per share), respectively. The estimated useful lives of the
Company's offshore drilling rigs, after the change in estimate, range from 10 to
25 years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
SF-5
<PAGE> 26
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PENDING MERGER OF THE COMPANY AND ARETHUSA (OFF-SHORE) LIMITED
The Company and Arethusa (Off-Shore) Limited ("Arethusa"), a Bermuda
corporation, have entered into an agreement to merge the two companies. The
agreement provides that, upon consummation of the merger, holders of Arethusa
stock will receive 17.9 million shares of common stock to be issued by the
Company based on 20.3 million shares of Arethusa's common stock issued and
outstanding and on a ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The merger is subject to requisite
shareholder approval at the April 29, 1996 annual meeting of both companies. The
merger will be accounted for as a purchase for financial reporting purposes, and
accordingly, the costs of the merger will be allocated to assets acquired and
liabilities assumed based on their estimated fair market values.
Arethusa owns a fleet of 11 mobile offshore drilling rigs, operates two
additional mobile offshore drilling rigs, and provides drilling services
worldwide to international and government-controlled oil and gas companies. For
the year ended September 30, 1995, Arethusa reported revenues of $122.1 million,
net income of $21.6 million, and net income per share of $1.06.
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment.............................. $ 705,957 $ 689,438
Construction work in progress............................ 37,271 19,016
Land and buildings....................................... 11,845 3,655
Office equipment and other............................... 6,761 6,300
--------- ---------
761,834 718,409
Less accumulated depreciation............................ (228,189) (216,131)
--------- ---------
Total.......................................... $ 533,645 $ 502,278
========= =========
</TABLE>
For the three months ended March 31, 1996, the Company capitalized total
interest cost incurred of $.2 million in construction work in progress with
respect to qualifying construction projects.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits.................................... $16,517 $ 17,402
Other........................................................ 19,388 16,527
------- -------
Total.............................................. $35,905 $ 33,929
======= =======
</TABLE>
SF-6
<PAGE> 27
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
In the first quarter of 1996, the Company executed a definitive credit
agreement governing a $150.0 million credit facility with a group of banks (the
"Credit Facility"). Borrowings under the Credit Facility bear interest, at the
Company's option, at a per annum rate equal to a base rate (equal to the greater
of (i) the prime rate announced by Bankers Trust Company or (ii) the Federal
Funds rate plus .50%) plus .25% or the Eurodollar rate plus 1.25%. The Company
is required to pay a commitment fee of .375% on the unused available portion of
the maximum credit commitment. Debt financing costs are deferred and amortized
over the term of the debt. The weighted average interest rate on the Credit
Facility, including commitment and arrangement fees, was 14.5% at March 31,
1996. Borrowings are secured by security interests in certain of the Company's
assets. The Credit Facility also contains covenants that limit the amount of
total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments.
SF-7
<PAGE> 28
<TABLE>
<S> <C> <C>
8,375,455 SHARES
[DIAMOND OFFSHORE DIAMOND OFFSHORE DRILLING, INC.
LOGO] COMMON STOCK
($.01 PAR VALUE)
</TABLE>
---------------------
PROSPECTUS
---------------------
This Prospectus relates to 8,375,455 shares (the "Offered Shares") of
common stock, par value $0.01 per share ("Diamond Offshore Common Stock"), of
Diamond Offshore Drilling, Inc., a Delaware corporation ("Diamond Offshore"),
which Offered Shares may be offered from time to time by and for the account of
Alphee S.A., a Luxembourg corporation ("Alphee"), and/or Forvaltnings AB Ratos,
a Swedish corporation ("Ratos" and, together with Alphee, the "Selling
Stockholders"). Diamond Offshore will not receive any of the proceeds from the
sale of the Offered Shares. Diamond Offshore will bear certain costs relating to
the registration of the Offered Shares.
Pursuant to the Plan of Acquisition dated as of February 9, 1996, as
amended (as so amended, the "Plan of Acquisition"), among Diamond Offshore,
Diamond Offshore (USA) Inc., a Delaware corporation ("Diamond Offshore (USA)"),
AO Acquisition Limited, a Bermuda company ("Acquisition Sub"), and Arethusa
(Off-Shore) Limited, a Bermuda company ("Arethusa"), and the Amalgamation
Agreement dated as of February 9, 1996 (the "Amalgamation Agreement") between
Arethusa and Acquisition Sub, Diamond Offshore acquired Arethusa (the
"Acquisition"), on the terms set forth in the Plan of Acquisition and
Amalgamation Agreement. All of the information presented herein assumes
consummation of the Acquisition on April 29, 1996. Arethusa shareholders
received 17,893,344 shares of Diamond Offshore Common Stock, representing
approximately 26.4% of the total Diamond Offshore Common Stock currently
outstanding, of which the Selling Stockholders received an aggregate of
8,375,455 shares.
The Offered Shares may be offered for sale from time to time by the Selling
Stockholders to or through underwriters or directly to other purchasers or
through agents in one or more transactions on the New York Stock Exchange, Inc.
(the "NYSE"), in the over-the-counter market, in one or more private
transactions, or in a combination of such methods of sale, at prices and on
terms then prevailing, at prices related to such prices, or at negotiated
prices. The Selling Stockholders and any brokers and dealers through whom sales
of the Offered Shares are made may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, and the commissions or
discounts and other compensation paid to such persons may be regarded as
underwriters' compensation.
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE OFFERED SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE
6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THIS PROSPECTUS MAY NOT BE USED PRIOR TO CONSUMMATION OF THE ACQUISITION.
---------------------
The date of this Prospectus is April 12, 1996.
<PAGE> 29
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY DIAMOND OFFSHORE, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE OFFERED SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF DIAMOND OFFSHORE SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Diamond Offshore is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy and information
statements filed pursuant to Sections 14(a) and 14(c) of the Exchange Act and
other information filed with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, Diamond Offshore's
reports, proxy and information statements filed pursuant to Sections 14(a) and
14(c) of the Exchange Act and other information concerning Diamond Offshore can
be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005, on which exchange Diamond Offshore securities are listed.
Diamond Offshore has filed with the Commission a Registration Statement
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), on Forms S-4/S-1 with respect to the securities offered
hereby. This Prospectus also constitutes the prospectus of Diamond Offshore
filed as part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
(but are accurate statements of those matters considered by Diamond Offshore to
be material to a prospective investor in the Offered Shares); with respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying at the Commission's offices as described above.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF DIAMOND OFFSHORE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 30
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE DIAMOND OFFSHORE COMMON STOCK PURSUANT TO EXEMPTIONS
FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE EXCHANGE ACT.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements (including the Notes thereto) included elsewhere in this
Prospectus. Unless the context otherwise requires, references in this Prospectus
to "Diamond Offshore" shall mean Diamond Offshore Drilling, Inc. and its
consolidated subsidiaries including, from and after the consummation of the
Acquisition on April 29, 1996 (the "Effective Time"), Arethusa and its
consolidated subsidiaries. In this Prospectus, references to "dollars" and "$"
are to United States dollars.
DIAMOND OFFSHORE
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and consists of 30
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 19 jack-up rigs owned and/or operated by Diamond Offshore and
one drillship. Diamond Offshore also operates 10 land rigs deployed in South
Texas. Except for two jack-up rigs operated pursuant to bareboat charter
contracts, all of Diamond Offshore's offshore and land rigs are wholly owned.
Market Overview. The deep water and harsh environment markets for
semisubmersible rigs have experienced improved demand and higher dayrates during
the past year, due in part to the increasing impact of technological advances
(including 3-D seismic, horizontal drilling and subsea completion procedures)
that have broadened opportunities for offshore exploration and development. Both
the Gulf of Mexico and the North Sea semisubmersible markets have experienced
increased utilization and significantly higher dayrates in 1995 and 1996, and
customers increasingly are seeking to contract for rigs serving these markets
under term contracts (as opposed to contracts let on a single well or
well-to-well basis). As part of this trend, Diamond Offshore recently received a
commitment from a major oil company for a four-year term contract for its
drillship Ocean Clipper I, which will support an upgrade of the rig to operate
in deep water with dynamic positioning capabilities. In addition, Diamond
Offshore has entered into a contract and a letter of intent with two major oil
companies for two Victory-class semisubmersibles to conduct deep water drilling
operations in the Gulf of Mexico under three-year term contracts, in connection
with which Diamond Offshore will significantly enhance these rigs. The market
for jack-up rigs in the Gulf of Mexico, which weakened during 1994, appears to
have stabilized during 1995 and has shown some signs of strengthening in recent
months. Historically, however, the offshore contract drilling market has been
highly competitive and cyclical, and Diamond Offshore cannot predict the extent
to which current conditions will continue.
Business Strategy. Diamond Offshore seeks to maximize dayrates and rig
utilization by continuously adapting to changes in its markets, improving the
capabilities of its drilling rigs and increasing the quality of its service. The
key elements of its strategy are to:
- Market worldwide its large, diverse fleet, which is capable of satisfying
customer requirements in a variety of applications;
- Continue to enhance its fleet to meet customer demand for diverse
drilling capabilities, including those required for deep water and harsh
environment operations;
- Exploit the potential of Diamond Offshore's nine Victory-class
semisubmersible rigs by pursuing projects that take advantage of this rig
type's unique design to yield significantly enhanced rigs; and
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<PAGE> 31
- Maintain a program of continuous improvement of quality and safety
through Diamond Offshore's Global Excellence Management System and
further capitalize on customer recognition of Diamond Offshore's quality
and safety achievements.
The Acquisition. On April 29, 1996 Diamond Offshore completed the
Acquisition, thereby augmenting its fleet with Arethusa's 13 owned and/or
operated mobile offshore drilling rigs. Arethusa provided drilling services
worldwide to international and government-controlled oil and gas companies. The
eight semisubmersible rigs owned by Arethusa are located in the Gulf of Mexico
and offshore Brazil and the five jack-up rigs in its fleet are located offshore
India, Indonesia and Egypt, in the Gulf of Mexico and in the Dutch sector of the
North Sea.
Pursuant to the Acquisition, Diamond Offshore issued and sold to its wholly
owned subsidiary Diamond Offshore (USA) 17,893,344 shares of Diamond Offshore
Common Stock, representing approximately 26.4% of the total Diamond Offshore
Common Stock currently outstanding, which were contributed by Diamond Offshore
(USA) to the capital of Acquisition Sub and delivered by Acquisition Sub to
Arethusa shareholders in consideration of all of the issued and outstanding
shares of Arethusa common stock, par value $0.10 per share ("Arethusa Common
Stock"). The Acquisition was accomplished pursuant to an amalgamation (the
"Amalgamation") of Arethusa with Acquisition Sub, a wholly owned subsidiary of
Diamond Offshore (USA). The surviving company in the Amalgamation, Diamond
Offshore Exploration (Bermuda) Limited ("Diamond Offshore Exploration
(Bermuda)"), succeeded to the assets and liabilities of Arethusa and Acquisition
Sub and is continuing the business of Arethusa and Acquisition Sub as a wholly
owned subsidiary of Diamond Offshore (USA). See "Business -- The Acquisition."
Fleet Size and Diversity. Diamond Offshore's large, diverse fleet, which
includes some of the most technologically advanced rigs in the world, enables it
to offer a broad range of services worldwide in various markets, including the
deep water market, the harsh environment market (such as the North Sea), the
conventional semisubmersible market and the jack-up market. Diamond Offshore
believes that it is well positioned to compete in the most complex deep water
and harsh environment markets with its three fourth-generation semisubmersibles,
each of which is capable of drilling in water depths of up to 5,000 feet and
operating in harsh environments. Diamond Offshore's 27 remaining semisubmersible
rigs, including 16 that are capable of drilling in waters of 1,500 feet or more
and three that are currently marketed for drilling in the North Sea, give
Diamond Offshore a significant presence worldwide in the expanding
semisubmersible market. In addition, Diamond Offshore owns and/or operates 19
jack-up rigs with diverse capabilities that operate in water depths of up to 350
feet, including 14 capable of drilling in water depths of 250 feet or more.
Diamond Offshore believes that its presence in multiple markets provides a
competitive advantage. For example, Diamond Offshore believes that its
experience with safety and other regulatory matters in the United Kingdom has
been beneficial in Australia and in the Gulf of Mexico and that production
experience gained through Brazilian and North Sea operations has application
worldwide. Additionally, Diamond Offshore believes that its performance for a
customer in one market segment or area enables Diamond Offshore to better
understand that customer's needs and serve that customer in different market
segments or other geographic locations.
Fleet Enhancements. Diamond Offshore has continued to enhance its fleet
both to increase overall technical capabilities and to meet specific drilling
requirements. Diamond Offshore plans to continue its program of selectively
enhancing its rigs to meet customer demand for advanced features or
capabilities, including those required for operation in the deep water or harsh
environment markets. For example, Diamond Offshore upgraded the semisubmersible
Ocean Voyager to operate in maximum water depths of 3,200 feet and has modified
the semisubmersible Ocean Nomad to allow it to be certified for service in the
U.K. sector of the North Sea, where it is operating under a two-year contract at
improved dayrates. Diamond Offshore converted three of its 300-foot cantilever
jack-up rigs from slot rigs, which Diamond Offshore believes has resulted in
these rigs achieving higher dayrates and utilization. In addition, Diamond
Offshore has added top-drive drilling systems to many rigs, so that 36 rigs in
Diamond Offshore's fleet are now so equipped. From time to time Diamond Offshore
is able to negotiate lump-sum payments or increased dayrates from a customer to
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<PAGE> 32
offset a portion of the costs of specific upgrades undertaken to enhance a rig
to meet such customer's requirements for a particular drilling project.
Victory-Class Enhancements. The design of the Victory-class
semisubmersible rigs, including their cruciform hull configurations, long
fatigue-life and advantageous stress characteristics, makes this class of rig
particularly well-suited for significant upgrading projects. Currently, Diamond
Offshore's Victory-class rigs are outfitted for service in maximum water depths
of 600 to 3,200 feet. Five of Diamond Offshore's nine Victory-class rigs are
equipped with top-drive drilling systems, two are modified for increased
efficiency in the handling of subsea completion equipment and one has stability
enhancements that allow increased variable deck load. In management's opinion,
it is unlikely that new semisubmersibles will be built unless there is a
substantial and sustained improvement in the market; therefore, Diamond Offshore
believes that the relative ease and efficiency with which it can significantly
enhance its Victory-class rigs is a competitive advantage in a market requiring
increasing capability from offshore drilling rigs.
The Ocean Quest, one of Diamond Offshore's Victory-class rigs, is currently
undergoing an upgrade pursuant to contract with a major oil company for a
three-year commitment. The rig is being upgraded to conduct drilling operations
in the Gulf of Mexico in water depths of up to 3,500 feet. This project includes
enhancements to provide additional hull buoyancy, which will allow a variable
deck load exceeding 5,000 tons, the addition of a new self-contained chain/wire
mooring system, and drilling system upgrades, including the installation of a
top-drive drilling system, a 15,000 psi blowout prevention system, a third mud
pump and 2,900 barrel liquid mud capacity. The Ocean Quest is scheduled to be
placed in service in the fourth quarter of 1996. In addition, during the third
quarter of 1995 Diamond Offshore entered into a letter of intent with another
major oil company for a three-year commitment for a second Victory-class rig,
the Ocean Star (formerly named Ocean Countess), pursuant to which the rig is
being upgraded to conduct drilling operations in the Gulf of Mexico in water
depths of up to 4,500 feet. The upgrade project for the Ocean Star also includes
stability enhancements, the installation of a new mooring system and drilling
system upgrades similar to those planned for the Ocean Quest. The Ocean Star is
scheduled to be placed in service late in the fourth quarter of 1996. Following
the upgrades, Diamond Offshore believes that these rigs will be able to compete
effectively in the fourth-generation deep water market. Diamond Offshore is
currently pursuing other such upgrade opportunities for its seven remaining
Victory-class rigs. However, there can be no assurance that the upgrades for the
Ocean Quest and the Ocean Star will be completed as planned, or within Diamond
Offshore's budget for these projects, or that the definitive drilling contract
contemplated by the letter of intent relating to the Ocean Star will be
executed. In addition, there can be no assurance as to if, when or to what
extent upgrades will be made to other Victory-class rigs in Diamond Offshore's
fleet.
Additional Victory-class upgrade potential exists, including conceptual
plans Diamond Offshore is developing for the possible construction of an
ultra-large semisubmersible, the Ocean Legend. The Ocean Legend is intended to
take advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. Diamond Offshore has
completed its feasibility studies and has begun preliminary design engineering
in connection with the upgrade. See Note 1 to Diamond Offshore's Consolidated
Financial Statements included elsewhere herein. Although Diamond Offshore is
proposing the design to several major oil companies, there can be no assurance
that the Ocean Legend can be built in a cost-effective manner, that if a
Victory-class rig is so upgraded, there will be adequate demand for its
services, or that competitors will not achieve capability beyond that of
fourth-generation semisubmersibles through other means attractive to customers.
Quality. Diamond Offshore maintains a program to continuously improve
quality and safety through its Global Excellence Management System ("GEMS"),
which was instituted in 1993 to increase Diamond Offshore's commitment to
quality of service, safety and the environment. Diamond Offshore also seeks to
capitalize on customer recognition of Diamond Offshore's quality and safety
achievements. Diamond Offshore is the only drilling contractor to have won more
than once (in April 1994 and April 1995) the annually awarded U.S. Minerals
Management Service National Safety Award for Excellence.
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<PAGE> 33
RISK FACTORS
In addition to the other information contained in this Prospectus and
incorporated herein by reference, prospective investors should carefully
consider the matters set forth below before purchasing any of the Offered
Shares.
DEPENDENCE ON OIL AND NATURAL GAS INDUSTRY; INDUSTRY CONDITIONS
Diamond Offshore's business and operations depend principally upon the
condition of the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. Historically, the offshore
contract drilling industry has been highly competitive and cyclical, with
periods of high demand, short rig supply and high dayrates followed by periods
of low demand, excess rig supply and low dayrates. The offshore contract
drilling business is influenced by a number of factors, including the current
and anticipated prices of oil and natural gas, the expenditures by oil and gas
companies for exploration and production and the availability of drilling rigs.
For a number of years, depressed oil and natural gas prices and an oversupply of
rigs have adversely affected the offshore drilling market, particularly in the
Gulf of Mexico, where the prolonged weakness and uncertainty in the demand for
and price of natural gas resulted in a significant decline in exploration and
production activities. Demand for drilling services outside the United States,
excluding the North Sea, has been less volatile in recent years, but remains
dependent on a variety of political and economic factors beyond Diamond
Offshore's control, including worldwide demand for oil and natural gas, the
ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and
maintain production levels and pricing, the level of production of non-OPEC
countries and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.
COMPETITION
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the oversupply of rigs has created an
intensely competitive market in which price is the primary factor in determining
the selection of a drilling contractor. Diamond Offshore believes that
competition for drilling contracts will continue to be intense for the
foreseeable future because of the worldwide oversupply of drilling rigs and the
ability of contractors to move rigs from areas of low utilization and dayrates
to areas of greater activity and relatively higher dayrates. In addition, there
are inactive non-marketed rigs or rigs being operated in non-drilling activities
that could be reactivated to meet an increase in demand for drilling rigs in any
given market. Such movement or reactivation or a decrease in drilling activity
in any major market could depress dayrates and could adversely affect
utilization of Diamond Offshore's rigs. See "Business -- Offshore Contract
Drilling Services."
HISTORY OF OPERATING LOSSES
Diamond Offshore reported operating income of $11.7 million for the year
ended December 31, 1995, operating loss of $14.6 million for the year ended
December 31, 1994, operating income of $4.5 million for the year ended December
31, 1993, operating loss of $49.2 million for the year ended December 31, 1992
and operating loss of $15.4 million for the year ended December 31, 1991.
Additionally, Diamond Offshore reported net loss of $7.0 million, $34.8 million,
$16.6 million, $53.4 million and $26.6 million for the years ended December 31,
1995, 1994, 1993, 1992 and 1991, respectively. Diamond Offshore had total
stockholders' equity of $492.9 million as of December 31, 1995, net of an
accumulated deficit of $171.4 million. Diamond Offshore's financial results in
the future will depend primarily on the utilization and dayrates of the rigs
operated by Diamond Offshore and the cost of such operations. Although demand
for drilling services has improved recently, an oversupply of rigs has existed
since the early 1980's and has led to intense price competition among drilling
contractors. There can be no assurance that Diamond Offshore's operating results
will improve in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
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<PAGE> 34
AVERAGE AGE OF FLEET
The average age of the Diamond Offshore fleet of offshore drilling rigs
(calculated as of December 31, 1995 and measured from year built) is 17.7 years.
Many of Diamond Offshore's rigs have been upgraded during the last five years
with enhancements such as top-drive drilling systems, increases to water depth
capability, mud pump additions or increases in deck load capacity, and Diamond
Offshore believes that it will be feasible to continue to upgrade its fleet,
particularly its Victory-class semisubmersible rigs, notwithstanding the average
age of its fleet. However, there can be no assurance as to if, when or to what
extent upgrades will be made to rigs in Diamond Offshore's fleet. In addition,
to the extent Diamond Offshore is not able to enhance its fleet with upgrade
projects, Diamond Offshore will have fewer rigs available to meet customer
demand for harsh environment and deep water operations than if such projects had
been successfully implemented.
CONTROL BY MAJOR STOCKHOLDER AND POTENTIAL CONFLICTS OF INTEREST
Loews Corporation, a Delaware corporation ("Loews"), beneficially owns
approximately 51.6% of the outstanding shares of Diamond Offshore Common Stock
and is in a position to control actions that require the consent of
stockholders, including the election of directors, amendment of Diamond
Offshore's Restated Certificate of Incorporation and any mergers or any sale of
substantially all the assets of Diamond Offshore. In connection with the initial
public offering, in 1995, of Diamond Offshore Common Stock (the "Diamond
Offshore Initial Public Offering"), Loews and Diamond Offshore entered into
certain agreements providing for certain rights and obligations of each of them.
See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and Loews."
Diamond Offshore's Board of Directors includes, and is expected to continue
to include, persons who are also directors or officers of, or otherwise
represent, Loews. Diamond Offshore's Board of Directors presently consists of
five directors, one of whom (James S. Tisch) is also a director and the
President and Chief Operating Officer of Loews, and another of whom (Herbert C.
Hofmann) is a Senior Vice President of Loews. See "Management -- Security
Ownership of Management and Directors." Loews (other than through Diamond
Offshore) and Diamond Offshore are generally engaged in businesses sufficiently
different from each other as to make conflicts as to possible corporate
opportunities unlikely. It is possible, however, that Loews may in some
circumstances be in direct or indirect competition with Diamond Offshore,
including competition with respect to certain business strategies and
transactions that Diamond Offshore may propose to undertake. In addition,
potential conflicts of interest exist or could arise in the future for such
directors with respect to a number of areas relating to the past and ongoing
relationships of Loews and Diamond Offshore, including tax and insurance
matters, financial commitments, and sales of Diamond Offshore Common Stock
pursuant to registration rights or otherwise. Although the affected directors
may abstain from voting on matters in which the interests of Diamond Offshore
and Loews are in conflict so as to avoid potential violations of their
respective fiduciary duties to stockholders of the respective corporations, the
presence of potential or actual conflicts could affect the process or outcome of
Board deliberations, and no policies, procedures or practices have been adopted
by Diamond Offshore to reduce or avoid such conflicts. There can be no assurance
that such conflicts of interest will not materially adversely affect Diamond
Offshore. See "Management -- Certain Relationships and Related Transactions."
ENVIRONMENTAL MATTERS
Diamond Offshore's operations are subject to numerous federal, state and
local environmental laws and regulations that relate directly or indirectly to
its operations, including certain regulations controlling the discharge of
materials into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, Diamond Offshore may be liable for damages and costs incurred in
connection with oil spills for which it is held responsible. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may in certain circumstances impose "strict liability" and
render a company liable for environmental damage without regard to negligence or
fault on the part of such company. Such laws and regulations may expose Diamond
Offshore to liability for the conduct of or conditions caused by others, or for
acts of Diamond Offshore that were in
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<PAGE> 35
compliance with all applicable laws at the time such acts were performed. The
application of these requirements or the adoption of new requirements could have
a material adverse effect on Diamond Offshore. See "Business -- Governmental
Regulation."
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure across
all segments of the oil and gas industry. OPA '90, such similar legislation and
related regulations impose a variety of obligations on Diamond Offshore related
to the prevention of oil spills and liability for damages resulting from such
spills. OPA '90 imposes strict and with limited exceptions joint and several
liability upon each responsible party for oil removal costs and a variety of
public and private damages. OPA '90 also imposes ongoing financial
responsibility requirements on a responsible party. A failure to comply with
ongoing requirements or inadequate cooperation in a spill may subject a
responsible party, including in some cases Diamond Offshore, to civil or
criminal enforcement action. Also, the U.S. Minerals Management Service is
required to promulgate regulations to implement the financial responsibility
requirements for offshore facilities. If implemented as written, the financial
responsibility requirements of OPA '90 could have the effect of significantly
increasing the amount of financial responsibility that oil and gas operators
must demonstrate to comply with OPA '90. While industry groups and marine
insurance carriers are seeking modification of these requirements,
implementation of these requirements in their current form could adversely
affect the ability of some of Diamond Offshore's customers to operate in U.S.
waters, which could have a material adverse effect on Diamond Offshore. See
"Business -- Governmental Regulation."
OPERATIONAL HAZARDS
Diamond Offshore's operations are subject to hazards inherent in the
drilling of oil and gas wells such as blowouts, reservoir damage, loss of
production, loss of well control, cratering or fires, the occurrence of which
could result in the suspension of drilling operations, injury to or death of rig
and other personnel and damage to or destruction of Diamond Offshore's, Diamond
Offshore's customer's or a third party's property or equipment. Damage to the
environment could also result from Diamond Offshore's operations, particularly
through oil spillage or uncontrolled fires. In addition, offshore drilling
operations are subject to perils peculiar to marine operations, including
capsizing, grounding, collision and loss or damage from severe weather. Diamond
Offshore has insurance coverage and contractual indemnification for certain
risks but there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification. See "Business -- Indemnification and Insurance."
GOVERNMENTAL REGULATION AND TAX POLICY
Diamond Offshore's operations are subject to numerous governmental laws and
regulations. In addition, demand for services in the drilling industry is
dependent on the oil and gas exploration industry and accordingly is affected by
changes in tax and other laws relating to the energy business generally.
Significant capital expenditures may be required to comply with
governmental laws and regulations applicable to Diamond Offshore and such
compliance could materially adversely affect the results of operations or
competitive position of Diamond Offshore. It is possible that such regulations
may in the future add significantly to the cost of operating offshore drilling
equipment or may significantly limit drilling activity. See
"Business -- Governmental Regulation."
OPERATIONS OUTSIDE THE UNITED STATES
Operations outside the United States accounted for approximately 36.4%,
34.0% and 44.8% of Diamond Offshore's total consolidated revenues for fiscal
years 1995, 1994 and 1993, respectively. Operations outside the United States
accounted for approximately 47.5%, 52.3% and 63.9% of Arethusa's total
consolidated revenues for fiscal years 1995, 1994 and 1993, respectively.
Diamond Offshore's non-U.S. operations are subject to certain political,
economic and other uncertainties not encountered in U.S. operations, including
risks of war and civil disturbances (or other risks that may limit or disrupt
markets), expropriation and the
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<PAGE> 36
general hazards associated with the assertion of national sovereignty over
certain areas in which operations are conducted. Diamond Offshore's operations
outside the United States may face the additional risk of fluctuating currency
values, hard currency shortages, controls of currency exchange and repatriation
of income or capital. No prediction can be made as to what governmental
regulations may be enacted in the future that could adversely affect the
international drilling industry.
TURNKEY CONTRACTS
Diamond Offshore, through Diamond Offshore Turnkey Services, Inc. ("DOTS"),
a Delaware corporation and a direct, wholly owned subsidiary of Diamond
Offshore, selectively engages in drilling services pursuant to turnkey drilling
contracts under which DOTS agrees to drill a well to a specified depth for a
fixed price. Generally, DOTS is not entitled to payment unless the well is
drilled to the specified depth and profitability of the contract depends upon
its ability to keep expenses within the estimates used by DOTS in determining
the contract price. Drilling a well under a turnkey contract therefore typically
requires a cash commitment by Diamond Offshore in excess of those drilled under
conventional dayrate contracts and exposes DOTS to risks of potential financial
losses that generally are substantially greater than those that would ordinarily
exist when drilling under a conventional dayrate contract. The financial results
of a turnkey contract depend upon the performance of the drilling unit, drilling
conditions and other factors, some of which are beyond the control of DOTS. See
"Business -- Offshore Contract Drilling Services."
SHARES AVAILABLE FOR FUTURE SALE
Subject to the restrictions described in "Management -- Certain
Relationships and Related Transactions -- Controlling Stockholder" and
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" and applicable law, Loews is free to sell any
and all of the shares of Diamond Offshore Common Stock it owns. In addition, as
described in "Management -- Certain Relationships and Related
Transactions -- Registration Rights of Selling Stockholders," each of Alphee and
Ratos is free to sell, without restriction, at its election, all or part of the
shares of Diamond Offshore Common Stock received by such person in connection
with the Acquisition. No prediction can be made as to the effect, if any, that
future sales of Diamond Offshore Common Stock, or the availability of Diamond
Offshore Common Stock for future sale, may have on the market price of the
Diamond Offshore Common Stock prevailing from time to time. Sales of substantial
amounts of Diamond Offshore Common Stock or the perception that such sales might
occur could adversely affect prevailing market prices for the Diamond Offshore
Common Stock. In connection with the Diamond Offshore Initial Public Offering,
Diamond Offshore agreed that it will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to any additional
shares of Diamond Offshore Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Diamond Offshore Common Stock
until October 10, 1996 without the prior written consent of CS First Boston
Corporation ("CS First Boston"), except grants of employee stock options
pursuant to any subsequently adopted plan or issuances upon any exercise
thereof. Loews agreed to similar restrictions on behalf of itself and its
affiliates (other than Diamond Offshore) with respect to shares of the Diamond
Offshore Common Stock. Also in connection with the Diamond Offshore Initial
Public Offering, Diamond Offshore and Loews entered into an agreement that
provides Loews with certain rights to have the shares of Diamond Offshore Common
Stock owned by Loews registered by Diamond Offshore under the Securities Act in
order to permit the public sale of such shares. See "Management -- Certain
Relationships and Related Transactions -- Transactions Between Diamond Offshore
and Loews -- Registration Rights Agreement."
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<PAGE> 37
USE OF PROCEEDS
Diamond Offshore will not receive any proceeds from the sale of the Offered
Shares by the Selling Stockholders.
SELLING STOCKHOLDERS
All the Offered Shares being offered hereby are being offered by Alphee
and/or Ratos who hold 4,708,248 shares (or approximately 6.9%) and 3,667,207
shares (or approximately 5.4%) of the Diamond Offshore Common Stock,
respectively, and who, in the aggregate, hold all 8,375,455 Offered Shares,
representing approximately 12.3% of the outstanding shares of Diamond Offshore
Common Stock. All of the Offered Shares are being offered hereby.
Diamond Offshore, Diamond Offshore (USA), Acquisition Sub, Alphee and Ratos
entered into a Shareholders Agreement, dated as of February 9, 1996, as amended
(as so amended, the "Shareholders Agreement"), and therein agreed to certain
provisions concerning the Fee Agreement, dated as of February 9, 1996, as
amended, between Diamond Offshore and Arethusa (as so amended, the "Fee
Agreement"). See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and the Selling
Stockholders" and "-- Registration Rights of Selling Stockholders."
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DIVIDEND POLICY
There were no cash dividends declared by Diamond Offshore for 1995 or 1994,
except for a $2.1 million special dividend paid to Loews in connection with the
Diamond Offshore Initial Public Offering. See Note 2 to Diamond Offshore's
Consolidated Financial Statements included elsewhere herein. Diamond Offshore
does not anticipate that it will declare or pay any dividends on the Diamond
Offshore Common Stock in the foreseeable future. Diamond Offshore expects that
it will retain all earnings for the development and growth of its business. Any
future determination as to payment of dividends will be made at the discretion
of the Board of Directors of Diamond Offshore and will depend upon Diamond
Offshore's operating results, financial condition, capital requirements, general
business conditions and such other factors that the Board of Directors deems
relevant. In addition, the payment of cash dividends is limited by the terms of
Diamond Offshore's $150.0 million credit facility with a group of banks (the
"Diamond Offshore Bank Credit Facility"). Generally, the Diamond Offshore Bank
Credit Facility limits cash dividends to the then "Available Amount," as therein
defined, not to exceed in the aggregate $20.0 million plus at the date of
determination an amount equal to (i) 25% of cumulative consolidated net income
for fiscal quarters ending after January 1, 1996 and prior to such date minus
(ii) 100% of cumulative consolidated net loss for fiscal quarters ending after
January 1, 1996 and prior to such date. The "Available Amount," for any date of
determination, means $70.0 million plus (i) a percentage of cumulative
consolidated EBITDA (as defined in the Diamond Offshore Bank Credit Facility)
for fiscal quarters ending after January 1, 1996 and prior to such date, less
adjustments for interest expense, provisions for taxes and certain drilling
contract revenues, plus (ii) amounts attributable to certain asset sales and
issuances of equity, minus (iii) amounts attributable to certain capital
expenditures and investments made prior to such date, and to cash dividends
theretofore paid. At February 8, 1996 (the effective date of the Diamond
Offshore Bank Credit Facility), the "Available Amount" equalled $70.0 million,
and Diamond Offshore would have been permitted to pay cash dividends aggregating
$20.0 million at such date within the limits imposed by the Diamond Offshore
Bank Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity" and Note 12 to Diamond
Offshore's Consolidated Financial Statements included elsewhere herein.
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<PAGE> 39
CAPITALIZATION
The following table sets forth the capitalization of Diamond Offshore as of
December 31, 1995 and as adjusted as of such date after giving effect to the
Acquisition. This table should be read in conjunction with the Consolidated
Financial Statements (including the Notes thereto) and the Unaudited Pro Forma
Consolidated Condensed Financial Statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
(UNAUDITED)
-------------------------
HISTORICAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ -- $ 72,778
--------- ----------
Stockholders' equity:
Common stock, $.01 par value........................... 500 679
Additional paid-in capital............................. 665,107 1,215,605
Accumulated deficit.................................... (171,444) (171,444)
Cumulative translation adjustment...................... (1,269) (1,269)
--------- ----------
Total stockholders' equity........................... 492,894 1,043,571
--------- ----------
Total capitalization........................................ $ 492,894 $ 1,116,349
========= ==========
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical and pro
forma financial data for Diamond Offshore. The selected consolidated financial
data were derived from the Consolidated Financial Statements (including the
Notes thereto) of Diamond Offshore and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements (including the Notes
thereto) of Diamond Offshore included elsewhere herein. The pro forma financial
data reflect certain adjustments that give effect to the Acquisition, accounted
for under the purchase method of accounting, and assuming that the Diamond
Offshore Initial Public Offering had occurred at January 1, 1995. Such tables
should be read in conjunction with the "Unaudited Pro Forma Consolidated
Condensed Financial Statements" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995
PRO FORMA 1995 1994 1993 1992(1) 1991
--------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................... $ 456,750 $336,584 $307,918 $288,069 $214,885 $64,056
Operating expenses:
Contract drilling............... 346,092 259,560 256,919 228,211 199,201 61,928
General and administrative...... 22,890 13,857 11,993 11,785 15,401 3,416
Depreciation(2)................. 85,770 52,865 55,366 46,819 49,667 14,545
Gain on sale of assets.......... (1,349) (1,349) (1,736) (3,201) (231) (414)
Operating income (loss)........... 3,347 11,651 (14,624) 4,455 (49,153) (15,419)
Interest expense.................. (7,453) (27,052) (31,346) (25,906) (28,591) (7,296)
Other income (expense), net....... 5,646 1,598 (455) (219) (207) 106
Income tax benefit (expense)(3)... (2,503) 6,777 11,621 5,041 24,575 (4,000)
Net loss.......................... (963) (7,026) (34,804) (16,629) (53,376) (26,609)
Pro forma net income (loss) per
share........................... (0.01) 0.20(4) -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995
PRO FORMA 1995 1994 1993 1992(1) 1991
---------- -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)................. $ 85,335 $ 63,523 $ 57,521 $ 52,904 $ 35,391 $ 8,960
Drilling and other property and
equipment, net................... 1,052,118 502,278 488,664 498,740 478,454 94,574
Goodwill........................... 47,167 -- -- -- -- --
Total assets....................... 1,268,930 618,052 588,158 592,162 582,418 117,414
Long-term debt(6).................. 62,175 -- 394,777 353,483 233,216 88,254
Stockholders' equity(7)............ 1,043,571 492,894 124,066 158,361 275,300 5,550
</TABLE>
- ---------------
(1) Diamond Offshore acquired all of the common stock of Odeco Drilling Inc., a
Delaware corporation ("Odeco"), for approximately $376.6 million in cash
effective January 1, 1992.
(2) Effective January 1, 1993, Diamond Offshore revised the estimated useful
lives for certain classes of its offshore drilling rigs. The estimated
useful lives of Diamond Offshore's offshore drilling rigs, after the change
in estimate, range from 10 to 25 years. As compared to the original
estimate of useful lives, this change resulted in a reduction of
approximately $6.3 million in depreciation expense during 1993 and a
corresponding increase in operating income.
(3) Prior to the Diamond Offshore Initial Public Offering, Diamond Offshore was
included in the consolidated U.S. federal income tax return of Loews.
Effective January 1, 1992, Diamond Offshore adopted Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" which
utilizes the liability method of accounting for income taxes. For all
preceding periods,
13
<PAGE> 41
Accounting Principles Board Opinion No. 11, the deferral method, was
utilized. The cumulative effect of adoption of SFAS No. 109 on Diamond
Offshore's results of operations for the year ended December 31, 1992 was
not material. Prior to 1992, Diamond Offshore's profitable subsidiaries
were allocated a share of the Loews consolidated tax expense and no benefit
was given to any of Diamond Offshore's subsidiaries generating taxable
losses. Effective January 1, 1992, a tax sharing agreement with Loews was
adopted to allow for the recognition of expenses and benefits related to
taxable income and losses as if Diamond Offshore filed a separate
consolidated return. In conjunction with the Diamond Offshore Initial
Public Offering, the tax sharing agreement was terminated and all assets
and liabilities were settled by offsetting these amounts against notes
payable to Loews. For taxable periods subsequent to the Diamond Offshore
Initial Public Offering, Diamond Offshore will file a consolidated U.S.
federal income tax return on a stand-alone basis.
(4) Pro forma net income per share gives effect to the Diamond Offshore Initial
Public Offering and the after-tax effects of a reduction in interest
expense. Assuming the Diamond Offshore Initial Public Offering had occurred
at January 1, 1995, Diamond Offshore would have recognized net income of
$10.0 million, or $0.20 per share of Diamond Offshore Common Stock, after
adjusting for the after-tax effects of a reduction in interest expense. See
Note 1 to Diamond Offshore's Consolidated Financial Statements included
elsewhere herein.
(5) Pro forma working capital includes fair values of identifiable current
assets acquired and liabilities assumed, including liabilities for certain
costs directly associated with the Acquisition and current maturities of
long-term debt of Arethusa assumed by Diamond Offshore.
(6) Long-term debt consisted solely of notes payable to Loews for the historical
periods presented.
(7) In connection with the Diamond Offshore Initial Public Offering, Diamond
Offshore paid a special dividend of $2.1 million to Loews with a portion of
the proceeds. No other cash dividends were paid during the historical
periods presented.
14
<PAGE> 42
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet has been
prepared based on the historical financial statements of Diamond Offshore as of
and for the year ended December 31, 1995 and of Arethusa as of and for the year
ended September 30, 1995. The following unaudited pro forma consolidated
condensed income statement has been prepared based on the historical financial
statements of Diamond Offshore as of and for the year ended December 31, 1995
and based on pro forma income statement data for Arethusa that reflect
adjustments to Arethusa's historical consolidated income statement for the year
ended September 30, 1995 in connection with (i) the acquisition of the Arethusa
Yatzy, (iii) the sale of the Treasure Stawinner and (iii) the dividend and
capital distribution of $61.0 million ($3.00 per share of Arethusa Common Stock)
as if each had occurred at the beginning of fiscal year 1995. The pro forma
financial statements give effect to (i) the Acquisition, (ii) the Diamond
Offshore Initial Public Offering and, in connection therewith, the use of the
proceeds to repay all of Diamond Offshore's then outstanding indebtedness to
Loews and to fund the payment of a special dividend to Loews and (iii) interest
expense for working capital borrowings, and commitment and other fees, under the
Diamond Offshore Bank Credit Facility. The Acquisition was accounted for under
the purchase method of accounting using a purchase price of $560.7 million,
which was calculated based on a seven-day average of the closing price of
Diamond Offshore Common Stock at the time the Acquisition was announced. The pro
forma consolidated condensed balance sheet was prepared assuming such
transactions were consummated on December 31, 1995 and give effect to events
directly attributable to the transactions, including those that are
nonrecurring. The pro forma consolidated condensed income statement was prepared
assuming the transactions were consummated as of the beginning of the period
presented and give effect to events directly attributable to the transactions
which are expected to have a continuing impact on the combined entity. These pro
forma consolidated condensed financial statements should be read in conjunction
with the other financial information of Diamond Offshore and Arethusa presented
elsewhere in this Prospectus. The pro forma consolidated condensed financial
statements are presented for illustrative purposes only and are not necessarily
indicative of actual results that would have been achieved had the transactions
been consummated on such dates, and are not necessarily indicative of future
results. The allocation of the purchase price is preliminary, as valuation and
other studies have not been finalized. It is not expected that the final
allocation of the purchase price will produce materially different results from
those presented herein.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL(A)
--------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and other current assets............ $ 41,278 $ 46,878 $ (21,632)(b) $ 66,524
Accounts receivable...................... 74,496 28,625 -- 103,121
Drilling and other property and
equipment, net......................... 502,278 237,324 312,516(c) 1,052,118
Goodwill and other assets................ -- 2,505 44,662(d) 47,167
--------- -------- -------- ----------
Total assets................... $ 618,052 $ 315,332 $ 335,546 $1,268,930
========= ======== ======== ==========
Current liabilities...................... $ 52,251 $ 28,559 $ 3,500(e) $ 84,310
Long-term debt........................... -- 62,175 -- 62,175
Deferred credits and other liabilities... 72,907 2,019 3,948(f) 78,874
Common stock............................. 500 2,033 (1,854)(g) 679
Additional paid-in capital............... 665,107 218,800 331,698(g) 1,215,605
Accumulated earnings (deficit)........... (171,444) 132 (132) (171,444)
Unrealized gain on equity securities..... -- 1,614 (1,614) --
Cumulative translation adjustment........ (1,269) -- -- (1,269)
--------- -------- -------- ----------
Total liabilities and
stockholders' equity......... $ 618,052 $ 315,332 $ 335,546 $1,268,930
========= ======== ======== ==========
</TABLE>
15
<PAGE> 43
- ---------------
(a) There are no significant adjustments required to the historical financial
statements of Diamond Offshore or Arethusa to conform accounting policies
of the two companies.
(b) Adjustment for fair values of identifiable current assets acquired and for
certain events directly attributable to the transaction. Such items
include:
<TABLE>
<S> <C>
Severance, consulting, and salary continuation plans...................... $ (5,526)(1)
Arethusa dividend......................................................... (5,083)(2)
Financial advisory services............................................... (7,500)(3)
Legal, accounting, and other.............................................. (2,500)(4)
Office lease cancellation................................................. (1,023)(5)
--------
$(21,632)
========
</TABLE>
- ---------------
(1) Under the Plan of Acquisition, from and after the Effective Time,
Diamond Offshore and Arethusa and their respective subsidiaries will
honor in accordance with their terms certain Arethusa employment,
severance, consulting and salary continuation plans. See
"Business -- The Acquisition -- Continuing Arethusa Severance,
Consulting and Salary Continuation Plans."
(2) On March 15, 1996, in anticipation of the Acquisition, and as
expressly permitted by the Plan of Acquisition, Arethusa paid a
dividend of $0.25 per share of Arethusa Common Stock.
(3) Arethusa has agreed to pay Merrill Lynch a fee of $7.5 million for
financial advisory services in connection with the Acquisition upon
the closing of the Acquisition.
(4) Adjustment for legal, accounting, printing and other nonrecurring
charges expected to be incurred in connection with the Acquisition.
(5) Arethusa is committed under a lease agreement for office space that
continues until August 30, 2002. The lease may be canceled in
December 1996 for a lump-sum payment of approximately $1.0 million.
Such payment has no future economic benefit to the combined company
and is incremental to other costs incurred by either Arethusa or
Diamond Offshore in the conduct of activities prior to the Effective
Time.
(c) Adjustment for fair values, based on current appraisals, of the eight
semisubmersible drilling rigs, three jack-up drilling rigs, and other
property and equipment owned by Arethusa.
(d) Adjustment for fair values of identifiable assets and for the excess of the
cost of Arethusa over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed.
(e) Adjustment for the estimated unfunded termination liability related to the
Arethusa defined benefit plan.
(f) Adjustment for fair values of liabilities assumed and for the deferred tax
liability for estimated future tax effects of differences between the tax
bases and the fair value amounts assigned to identifiable assets and
liabilities of Arethusa, offset by net operating loss carryforwards of
Arethusa of approximately $30.0 million. As a result of the Acquisition,
Diamond Offshore will have available to it certain Arethusa net operating
loss carryforwards to reduce future U.S. federal income taxes payable. Due
to the change in ownership of Arethusa resulting from the Acquisition,
there will be annual limitations on the amount of Arethusa tax
carryforwards available to be utilized by Diamond Offshore.
16
<PAGE> 44
(g) The pro forma financial statements reflect the purchase of 100% of the
outstanding shares of Arethusa Common Stock for a total consideration of
$560.7 million which is comprised of the following:
<TABLE>
<S> <C>
Diamond Offshore Common Stock to be issued............................ $539,296(1)
Options assumed....................................................... 11,381(2)
--------
Total equity consideration............................................ 550,677
Transaction costs..................................................... 10,000(3)
--------
Total consideration................................................... $560,677
========
</TABLE>
- ---------------
(1) The value of the Diamond Offshore Common Stock to be issued in the
Acquisition is calculated based on a seven-day average of the closing
price of Diamond Offshore Common Stock at the time the Acquisition
was announced (December 7, 1995) of $30.14.
(2) Amount represents the fair value of the Arethusa Options to be
assumed by Diamond Offshore pursuant to the Amalgamation Agreement.
The fair value is based on a seven-day average of the closing price
of Diamond Offshore Common Stock at the time the Acquisition was
announced (December 7, 1995), the Amalgamation Ratio and the option
exercise price including the $3.00 reduction, which is subject to
shareholder approval at the Arethusa Annual Meeting. See "Other
Arethusa Annual Meeting Matters -- Decrease of Option Exercise
Price."
(3) Amounts represent transaction costs directly associated with the
Acquisition. See (b) above.
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
HISTORICAL
DIAMOND PRO FORMA
OFFSHORE ARETHUSA(A) ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................................... $336,584 $ 120,166 $ -- $ 456,750
Operating expenses:
Contract drilling.............................. 259,560 86,532 -- 346,092
General and administrative..................... 13,857 9,033 -- 22,890
Depreciation and amortization.................. 52,865 29,008 3,897(b) 85,770
Gain on sale of assets......................... (1,349) -- -- (1,349)
-------- -------- ------- --------
Total operating expenses................ 324,933 124,573 3,897 453,403
-------- -------- ------- --------
Operating income (loss).......................... 11,651 (4,407) (3,897) 3,347
Other income (expense):
Interest expense............................... (27,052) (6,697) 26,296(c) (7,453)
Other, net..................................... 1,598 4,048 -- 5,646
-------- -------- ------- --------
Income (loss) before income tax benefit
(expense)...................................... (13,803) (7,056) 22,399 1,540
Income tax benefit (expense)..................... 6,777 (1,440) (7,840)(d) (2,503)
-------- -------- ------- --------
Net income (loss)................................ $ (7,026) $ (8,496) $ 14,559 $ (963)
======== ======== ======= ========
Net income per common share...................... $ 0.20(f) $ (0.42) $ (0.01)
======== ======== ========
Weighted average common shares outstanding....... 50,000(f) 20,333 67,893(e)
======== ======== ========
</TABLE>
- ---------------
(a) Pro forma income statement data for Arethusa reflect (i) the acquisition of
the Arethusa Yatzy, which occurred on May 3, 1995, (ii) the sale of the
Treasure Stawinner, which occurred June 30, 1995, and (iii) the dividend
and capital distribution of $61.0 million ($3.00 per share of Arethusa
Common Stock) as if each had occurred at the beginning of fiscal year 1995.
Set forth below in this footnote (a) are the historical amounts, and the
adjustments thereto, upon which the pro forma Arethusa amounts are based.
17
<PAGE> 45
ARETHUSA PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
HISTORICAL DIVIDEND/
------------------- YATZY STAWINNER CAPITAL PRO
ARETHUSA YATZY(1) ACQUISITION SALE DISTRIBUTION FORMA
-------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Contract drilling revenue......... $122,147 $12,315 $ -- $(14,296)(6) $ -- $120,166
Operating expenses:
Direct costs.................... 87,953 8,060 (623)(5) (8,483)(6) -- 86,532
(375)(2)
General and administrative...... 8,658 -- 375(2) -- -- 9,033
Depreciation.................... 29,547 -- 1,352(3) (1,891)(6) -- 29,008
-------- -------- ------- -------- ------- --------
Total operating
expenses............... 126,158 8,060 729 (10,374) -- 124,573
-------- -------- ------- -------- ------- --------
Operating income (loss)........... (4,011) 4,255 (729) (3,922) -- (4,407)
Other income (expense):
Interest expense................ (6,311) -- (1,168)(4) 782(6) -- (6,697)
Interest income................. 5,692 -- -- (1,453)(7) 4,239
Gain (loss) on sale of assets... 27,820 -- -- (27,885)(6) -- (65)
Other, net...................... (126) -- -- -- -- (126)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes........................... 23,064 4,255 (1,897) (31,025) (1,453) (7,056)
Tax provision..................... (1,440) -- -- -- -- (1,440)
-------- -------- ------- -------- ------- --------
Net income (loss)................. $ 21,624 $ 4,255 $(1,897) $(31,025) $(1,453) $ (8,496)
======== ======== ======= ======== ======= ========
Net income (loss) per common
share........................... $ 1.06 $ (0.42)
======== ========
Weighted average common shares
outstanding..................... 20,333 20,333
======== ========
</TABLE>
- ---------------
(1) The historical financial information of the Yatzy operations for the
period from October 1, 1994, through May 2, 1995 is based upon Arethusa
records, as manager of the rig. The previous owner of the rig prepared
financial information only on a semi-annual, calendar year basis; and
was unable to provide the complete financial information for the twelve
months ended September 30, 1995. Financial statement captions for which
Yatzy historical information is not presented (historical depreciation
and interest expense) would have been adjusted to reflect Arethusa's
cost basis in the Arethusa Yatzy and Arethusa's financing of the rig.
Pro forma Yatzy acquisition adjustments (3) and (4) discussed below
provide fully for depreciation using Arethusa's cost basis in the
Arethusa Yatzy and interest based on Arethusa's financing of the rig.
Additionally, it is management's understanding that there are no other
significant transactions or activities related to the historical
operations of Yatzy which would have a material impact on the
as-adjusted pro forma income statement. Therefore, management believes
the resulting pro forma income statement is in compliance with Article
11 of Regulation S-X.
(2) To reclassify and eliminate the management fee paid to Arethusa from
direct costs to general and administrative expenses.
(3) To reflect depreciation expense calculated based upon Arethusa's cost
and estimated useful life of 25 years, which is consistent with
Arethusa's previously established depreciation policy.
(4) To adjust for additional interest expense associated with Arethusa's
$30.0 million note entered into in connection with the acquisition of
the Arethusa Yatzy.
(5) To adjust for a reduction in insurance expense resulting from
Arethusa's lower insured value for the Arethusa Yatzy.
(6) To reflect the elimination of historical operations, interest expense
and gain on sale of assets for the Treasure Stawinner.
(7) To reflect the reduction in interest income resulting from the dividend
and capital distribution made to shareholders in fiscal 1995.
18
<PAGE> 46
(b) To record the additional depreciation expense and amortization of goodwill
resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for
depreciation and a 20-year amortization period for goodwill.
(c) To adjust interest expense, assuming that the Diamond Offshore Initial
Public Offering and repayment of indebtedness occurred on January 1, 1995.
(d) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization and interest expense.
(e) Weighted average shares outstanding as if both the October 1995 issuance of
15.0 million shares by Diamond Offshore through the Diamond Offshore
Initial Public Offering and the 17.9 million shares to be issued by Diamond
Offshore in consideration of the Arethusa Common Stock had taken place on
January 1, 1995.
(f) After the Diamond Offshore Initial Public Offering, Diamond Offshore had
50.0 million shares of Diamond Offshore Common Stock outstanding. Assuming
the Diamond Offshore Initial Public Offering had occurred at January 1,
1995, Diamond Offshore would have recognized net income of $10.0 million,
or $0.20 per share of Diamond Offshore Common Stock, after adjusting for
the after-tax effects of a reduction in interest expense.
19
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Diamond
Offshore's Consolidated Financial Statements (including the notes thereto)
included elsewhere herein.
RESULTS OF OPERATIONS
GENERAL
REVENUES. Diamond Offshore's revenues vary based upon demand, which affects
the number of days the fleet is utilized and the dayrates received. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, Diamond Offshore may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues are generally adversely affected. As a response to changes in
demand, Diamond Offshore may withdraw a rig from the market by stacking it or
may reactivate a rig which was previously stacked, which may decrease or
increase revenues, respectively.
Revenues from dayrate drilling contracts are recognized currently. When
mobilization or enhancement is required for a contract, Diamond Offshore may
receive a lump-sum payment to offset a portion of the cost of such requirements.
Mobilization revenues less costs incurred to mobilize an offshore rig from one
market to another are usually recognized over the term of the related drilling
contract. In addition, payments received for rig enhancements are recognized as
revenues over the term of the related drilling contract. Revenues from offshore
turnkey contracts are recognized on the completed contract method, with revenues
accrued to the extent of turnkey costs until the specified turnkey depth and
other contract requirements are met.
OPERATING INCOME (LOSS). Operating income (loss) is primarily affected by
revenue factors, but is also a function of varying levels of operating expenses.
Operating expenses are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, Diamond Offshore realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. However, if the rig is to be idle for an
extended period of time, Diamond Offshore may reduce the size of a rig's crew
and take steps to "cold stack" the rig, which lowers expenses and partially
offsets the impact on operating income associated with loss of revenues. Diamond
Offshore recognizes as an operating expense maintenance activities such as
painting, inspections and routine overhauls that maintain rather than upgrade
its rigs. These expenses vary from period to period. Costs of rig enhancements
are capitalized and depreciated over the expected useful lives of the
enhancements. Depreciation expense decreases operating income in periods
subsequent to capital upgrades. From time to time, Diamond Offshore sells assets
in the ordinary course of its business and gains or losses associated with such
sales are included in operating income (loss).
20
<PAGE> 48
YEARS ENDED DECEMBER 31, 1995 AND 1994
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 67,393 $ 46,862 $ 20,531
Other Semisubmersibles..................................... 168,582 134,302 34,280
Jack-ups................................................... 68,829 89,883 (21,054)
Turnkey.................................................... 27,121 25,296 1,825
Land....................................................... 19,926 21,443 (1,517)
Other...................................................... 4 11 (7)
Eliminations............................................... (15,271) (9,879) (5,392)
-------- -------- -------
Total Revenues..................................... $336,584 $307,918 $ 28,666
======== ======== =======
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 34,717 $ 30,207 $ 4,510
Other Semisubmersibles..................................... 129,795 124,090 5,705
Jack-ups................................................... 60,798 66,723 (5,925)
Turnkey.................................................... 30,297 25,957 4,340
Land....................................................... 17,899 18,240 (341)
Other...................................................... 1,325 1,581 (256)
Eliminations............................................... (15,271) (9,879) (5,392)
-------- -------- -------
Total Contract Drilling Expense.................... $259,560 $256,919 $ 2,641
======== ======== =======
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 32,676 $ 16,655 $ 16,021
Other Semisubmersibles..................................... 38,787 10,212 28,575
Jack-ups................................................... 8,031 23,160 (15,129)
Turnkey.................................................... (3,176) (661) (2,515)
Land....................................................... 2,027 3,203 (1,176)
Other...................................................... (1,321) (1,570) 249
General and Administrative Expense......................... (13,857) (11,993) (1,864)
Depreciation Expense....................................... (52,865) (55,366) 2,501
Gain on Sale of Assets..................................... 1,349 1,736 (387)
-------- -------- -------
Total Operating Income (Loss)...................... $ 11,651 $(14,624) $ 26,275
======== ======== =======
</TABLE>
REVENUES. The $20.5 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from increases in dayrates in the North Sea
and the Gulf of Mexico. In addition, $3.9 million in revenue for rig
enhancements and mobilization fees in excess of mobilization costs was
recognized during 1995. These increases were partially offset by a reduction of
revenues resulting from the mobilization between markets of two
fourth-generation rigs during the first quarter of 1995. The $34.3 million
increase in revenues from other semisubmersibles is primarily attributable to
increases in dayrates and utilization in both the North Sea and the Gulf of
Mexico. In the North Sea, increases in utilization resulted in approximately
$13.5 million of additional revenues and increases in dayrates resulted in
approximately $4.2 million of additional revenues. In the Gulf of Mexico,
increases in utilization resulted in approximately $12.6 million of additional
revenues and increases in dayrates resulted in approximately $6.6 million of
additional revenues. In addition, the operations of two of three rigs acquired
during the second and third quarters of 1994 contributed a $6.0 million increase
in other semisubmersible revenue. Also, revenues for rig enhancements of $2.5
million were
21
<PAGE> 49
recognized during 1995. These increases were partially offset by a reduction of
revenues resulting from the mobilization between markets of three other
semisubmersibles: the Ocean Nomad from South America to the North Sea, the Ocean
Princess from Southeast Asia to the North Sea, and the Ocean Baroness from
Trinidad to Brazil. The $21.1 million decrease in revenues from jack-ups
resulted primarily from lower dayrates as compared to 1994 and a decline in
utilization. The decline in utilization in the Gulf of Mexico caused a $5.8
million reduction in revenues, primarily from cold stacking two rigs located in
the Gulf of Mexico in mid-1995, both of which were utilized during the prior
year. Partially offsetting these decreases was an increase in utilization for
two jack-ups which were moved from Venezuela to the Gulf of Mexico during the
first half of 1994. Decreases in dayrates in the Gulf of Mexico caused a $14.0
million reduction in revenues for jack-ups. The $1.8 million increase in turnkey
revenues resulted from an increase in the number of turnkey wells drilled.
Eleven turnkey wells were drilled during the year ended December 31, 1995 as
compared to nine wells drilled during the prior year. The $1.5 million decrease
in land revenues resulted primarily from a decline in utilization as compared to
1994.
CONTRACT DRILLING EXPENSE. The $4.5 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico and increased expenses
for the mobilization of two rigs during the first quarter of 1995 to relocate
the rigs between the Gulf of Mexico and the North Sea. The $5.7 million increase
in contract drilling expense for other semisubmersibles resulted primarily from
additional operating costs of $9.4 million associated with the three rigs
acquired in 1994, including mobilization costs of $4.0 million. In addition,
improved utilization for a rig operating in the North Sea resulted in a $2.3
million increase in operating costs. These increases were partially offset by
cost reductions of $5.7 million from the cold stacking of two rigs located in
the Gulf of Mexico. One of these semisubmersibles, the Ocean Prospector, was
cold stacked in the first quarter and reactivated during the fourth quarter of
1995. The other rig, the Ocean Quest, was cold stacked in the third quarter of
1994 and is currently undergoing significant rig enhancements in preparation for
a three-year term contract anticipated to begin in the fourth quarter of 1996.
The $5.9 million decrease in contract drilling expense for jack-ups resulted
primarily from cost reductions associated with the cold stacking of two rigs in
the Gulf of Mexico. The $4.3 million increase in turnkey expense resulted
primarily from the increase in the number of turnkey wells drilled and cost
overruns on one turnkey well in progress at December 31, 1995, for which an
estimated loss of $3.6 million has been recorded.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $1.9 million in 1995 due to increases in staff and other
administrative expenses and the commencement in 1995 of the Diamond Offshore
Management Bonus Program, an incentive plan for cash bonuses to selected
officers and key employees of Diamond Offshore.
DEPRECIATION EXPENSE. Depreciation expense of $52.9 million for 1995
included a $2.1 million write-down in the carrying value of a semisubmersible,
as compared to a $5.5 million write-down on another semisubmersible included in
depreciation expense for 1994. Partially offsetting this decrease was an
additional $1.2 million of depreciation expense associated with the three rigs
acquired during the second and third quarters of 1994.
GAIN ON SALE OF ASSETS. Gain on sale of assets for the year ended December
31, 1995 of $1.3 million resulted from the sale of a semisubmersible which was
held for disposition and from sales of miscellaneous assets. Gain on sale of
assets for the year ended December 31, 1994 of $1.7 million primarily resulted
from the sale of eight land drilling rigs.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995
decreased $4.2 million to $27.1 million as compared to $31.3 million for the
prior year. This decrease resulted from the payment of all of Diamond Offshore's
outstanding indebtedness to Loews in connection with the Diamond Offshore
Initial Public Offering.
FOREIGN CURRENCY TRANSACTION LOSSES. Foreign currency transaction losses of
$.2 million for 1995 decreased $1.1 million from $1.3 million for 1994. This
decrease is primarily due to a loss of $.7 million recognized in 1994 for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. See "-- Other."
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<PAGE> 50
OTHER INCOME (EXPENSE). Other income increased $.9 million to $1.8 million
as compared to $.9 million for 1994. This increase is primarily attributable to
additional interest income resulting from an increase in average cash balances
during 1995.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1995 decreased $4.8 million to $6.8 million, as compared to $11.6 million for
1994. This decrease resulted primarily from a decrease in Diamond Offshore's net
loss before taxes of $32.6 million, as compared to 1994. See Note 8 to Diamond
Offshore's Consolidated Financial Statements included elsewhere herein.
NET LOSS. Net loss for 1995 decreased $27.8 million to $7.0 million, as
compared to $34.8 million for 1994. The decrease resulted primarily from an
increase in operating income of $26.3 million.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------- INCREASE/
1994 1993 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 46,862 $ 36,791 $ 10,071
Other Semisubmersibles..................................... 134,302 125,979 8,323
Jack-ups................................................... 89,883 94,137 (4,254)
Turnkey.................................................... 25,296 18,038 7,258
Land....................................................... 21,443 17,770 3,673
Other...................................................... 11 934 (923)
Eliminations............................................... (9,879) (5,580) (4,299)
-------- -------- --------
Total Revenues..................................... $307,918 $288,069 $ 19,849
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 30,207 $ 25,090 $ 5,117
Other Semisubmersibles..................................... 124,090 114,434 9,656
Jack-ups................................................... 66,723 61,530 5,193
Turnkey.................................................... 25,957 16,416 9,541
Land....................................................... 18,240 15,503 2,737
Other...................................................... 1,581 818 763
Eliminations............................................... (9,879) (5,580) (4,299)
-------- -------- --------
Total Contract Drilling Expense.................... $256,919 $228,211 $ 28,708
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 16,655 $ 11,701 $ 4,954
Other Semisubmersibles..................................... 10,212 11,545 (1,333)
Jack-ups................................................... 23,160 32,607 (9,447)
Turnkey.................................................... (661) 1,622 (2,283)
Land....................................................... 3,203 2,267 936
Other...................................................... (1,570) 116 (1,686)
General and Administrative Expense......................... (11,993) (11,785) (208)
Depreciation Expense....................................... (55,366) (46,819) (8,547)
Gain on Sale of Assets..................................... 1,736 3,201 (1,465)
-------- -------- --------
Total Operating Income (Loss)...................... $(14,624) $ 4,455 $(19,079)
======== ======== ========
</TABLE>
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<PAGE> 51
REVENUES. The $10.1 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from a $17.8 million increase in revenues
from the two rigs located in the Gulf of Mexico during the year ended December
31, 1994, offset by a $7.7 million decrease in revenues from reduced utilization
of the rig in the North Sea. The $8.3 million increase in revenues from other
semisubmersibles resulted primarily from the operations of two of the three rigs
acquired during the second and third quarters of 1994. The $4.3 million decrease
in revenues from jack-ups resulted primarily from two rigs that were idle during
the first half of 1994. During this period, the rigs were mobilized from
Venezuela and refitted for operation in the Gulf of Mexico. The $7.3 million
increase in turnkey revenues resulted from an increase in the number of turnkey
wells drilled. Nine turnkey wells were drilled during the year ended December
31, 1994 as compared to four wells drilled during the prior year.
CONTRACT DRILLING EXPENSE. The $5.1 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico which was partially
offset by reduced utilization for the rig located in the North Sea. The $9.7
million increase in contract drilling expense for other semisubmersibles
resulted primarily from operating costs of $8.3 million associated with the
three rigs acquired during the second and third quarters of 1994 and from an
increase in mobilization costs of $2.2 million. These increases were partially
offset by cost reductions of $3.7 million from the cold stacking, upon
expiration of a term contract, of a rig in South America during the fourth
quarter of 1994. The $5.2 million increase in contract drilling expense for
jack-ups resulted primarily from increased costs incurred for the mobilization
and shipyard maintenance of two rigs moved from Venezuela to the Gulf of Mexico
during the first half of 1994. The $9.5 million increase in turnkey expense
resulted from the additional number of wells drilled. In addition, cost overruns
on one turnkey well resulted in additional expense, beyond that anticipated, of
$2.3 million during the year ended December 31, 1994. The $2.7 million increase
in contract drilling expense for land drilling operations resulted primarily
from an increase in the number of land turnkey wells drilled during the year
ended December 31, 1994 as compared to the prior year.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense of
$12.0 million for the year ended December 31, 1994 was relatively unchanged from
the $11.8 million incurred during the prior year.
DEPRECIATION EXPENSE. Depreciation expense increased $8.5 million over the
prior year, primarily as a result of Diamond Offshore's decision to decrease the
carrying value of one of its other semisubmersible rigs by $5.5 million. In
addition, depreciation expense increased $1.2 million associated with the
acquisition of three rigs in the second and third quarters of 1994 and $1.1
million from the full year recognition of depreciation expense in 1994
associated with the acquisition of the remaining interest in a fourth-generation
semisubmersible in March 1993.
GAIN ON SALE OF ASSETS. Gain on sale of assets for the year ended December
31, 1994 of $1.7 million primarily resulted from the sale of eight land drilling
rigs. Gain on sale of assets for the year ended December 31, 1993 of $3.2
million primarily resulted from the sale of Diamond Offshore's three platform
rigs.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1994
increased $5.4 million to $31.3 million as compared to $25.9 million for the
prior year. Interest expense consisted only of interest on notes payable to
Loews. During 1994, notes payable to Loews increased $41.3 million due to $25.0
million of additional borrowings to finance the acquisition of three
semisubmersibles purchased during the second and third quarters of 1994 and due
to $31.3 million for interest accrued on notes payable to Loews.
FOREIGN CURRENCY TRANSACTION LOSSES. Foreign currency transaction losses of
$1.3 million for the year ended December 31, 1994 were relatively unchanged from
$1.5 million for the prior year.
OTHER INCOME (EXPENSE). Other income of $.9 million for the year ended
December 31, 1994 was relatively unchanged from $1.3 million for the prior year.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1994 increased $6.6 million to $11.6 million, as compared to $5.0 million for
the prior year. This increase resulted primarily from the increase in Diamond
Offshore's net loss before taxes from $21.7 million for the year ended December
31, 1993 to $46.4 million for the year ended December 31, 1994.
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<PAGE> 52
NET LOSS. Net loss for the year ended December 31, 1994 increased $18.2
million to $34.8 million, as compared to $16.6 million for the prior year. The
increase resulted primarily from a decrease of $19.1 million in operating income
and an increase of $5.4 million in interest expense. The increase in net loss
was partially offset by an increase of $6.6 million in income tax benefit, as
compared to the prior year.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances, including 3-D seismic,
horizontal drilling, and subsea completion procedures. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates in 1995 and 1996, and customers increasingly
are seeking to contract rigs serving those markets under term contracts (as
opposed to contracts let on a single well or well-to-well basis). In the Gulf of
Mexico, the Ocean Valiant's contract has been extended through 1996 at an
increased dayrate. Contracts for Diamond Offshore's other semisubmersibles in
the Gulf of Mexico continue to be primarily on a well-to-well or multi-well
basis. However, one rig has received a contract extension on a long-term basis
through January 1998. Diamond Offshore's drillship, the Ocean Clipper I, is
scheduled to be upgraded during 1996 and 1997 to operate in the ultra-deep water
market of the Gulf of Mexico with dynamic positioning capabilities and other
features, in connection with a four-year term contract with a major oil company
that has been agreed to in principle. Also, as part of this trend, Diamond
Offshore entered into a contract and a letter of intent with two major oil
companies for the Ocean Quest and Ocean Star (formerly named Ocean Countess),
respectively, to conduct deep water drilling operations in the Gulf of Mexico
under three-year term contracts, in connection with which Diamond Offshore will
significantly enhance these rigs. See "-- Capital Resources."
In the North Sea, the Ocean Alliance is contracted for work through late
1996 and has received an increase in its dayrate. Diamond Offshore's three other
marketed semisubmersibles in the North Sea are all committed under long-term
contracts. The Ocean Nomad, which was relocated from South America, began its
two-year contract in late November 1995. The Ocean Princess has completed the
modifications necessary for its two-year contract which commenced in late March
1996. The Ocean Guardian is currently drilling pursuant to a one-year term
contract expiring during the third quarter of 1996. Of the remaining
semisubmersibles in Diamond Offshore's fleet, the Ocean Baroness has a
three-year term contract for drilling offshore Brazil through the first quarter
of 1999. In addition, the Arethusa Yatzy and Ocean Zephyr, also operating
offshore Brazil, are contracted to November 1998 and July 1997, respectively.
The market for jack-up rigs in the Gulf of Mexico, which weakened during
1994, appears to have stabilized and has shown some signs of strengthening in
recent months. Dayrates have improved from those earned in early 1995; however,
volatile natural gas prices and an oversupply of rigs prevented significant
improvements through the end of 1995. Two of Diamond Offshore's jack-up rigs are
committed through the first quarter of 1997, one drilling offshore Indonesia and
the other in the Dutch sector of the North Sea.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and Diamond Offshore cannot predict the extent to
which current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the year ended December 31,
1995 increased by $10.2 million to $52.8 million, as compared to $42.6 million
for the prior year. This increase was attributable to a $27.8 million decrease
in net loss from 1994, partially offset by an increase of $16.7 million in
accounts receivable in 1995, as compared to a decrease in accounts receivable of
$4.5 million for the prior year. Cash used in investing activities increased
$21.7 million primarily due to construction work in progress of $19.0 million
for rig upgrades in 1995. Cash provided by financing activities for 1995
decreased due to repayment of Diamond Offshore's notes payable to Loews in
conjunction with the Diamond Offshore Initial Public Offering.
Diamond Offshore's principal sources of funds have been cash flow from
operations and borrowings on notes payable to Loews. Upon completion of the
Diamond Offshore Initial Public Offering, Diamond Offshore
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<PAGE> 53
used a portion of the net proceeds to repay such notes in full. The remainder of
the proceeds was used to pay Loews a special dividend of $2.1 million. See Note
2 to Diamond Offshore's Consolidated Financial Statements included elsewhere
herein.
Diamond Offshore uses funds available under the Diamond Offshore Bank
Credit Facility, together with cash flow from operations, to fund its capital
expenditure and working capital requirements. The Diamond Offshore Bank Credit
Facility is a revolving line of credit for a five-year term providing a maximum
credit commitment of $150.0 million until the second anniversary, at which time
and at the end of each six-month period thereafter, the commitment will decrease
by $12.5 million to a final maximum credit commitment of $75.0 million during
the last six months. Borrowings will bear interest, at Diamond Offshore's
option, at a per annum rate equal to a base rate (equal to the greater of (i)
the prime rate announced by Bankers Trust Company or (ii) the Federal Funds rate
plus .50%) plus .25% or the Eurodollar rate plus 1.25%. Diamond Offshore is
required to pay a commitment fee of .375% on the unused available portion of the
maximum credit commitment. Borrowings are secured by a first priority security
interest in five semisubmersible drilling rigs, including Diamond Offshore's
three fourth-generation rigs, a pledge of 65% of the capital stock of Diamond
Offshore Limited, which owns the Ocean Alliance, and certain subsidiary
guarantees. Under the Diamond Offshore Bank Credit Facility, Diamond Offshore is
required to maintain a ratio of consolidated EBITDA (as defined) to consolidated
interest expense of at least 2.50:1.00 and a ratio of consolidated indebtedness
(including borrowings under such facility) to total capitalization (equal to the
sum of such indebtedness plus consolidated net worth) of no more than 0.40:1.00.
Diamond Offshore is also required to maintain a positive working capital
balance. In addition, the agreement has covenants that limit aggregate capital
expenditures, dividends and similar payments. See "Dividend Policy."
It is anticipated that the Diamond Offshore Bank Credit Facility will be
used primarily to fund rig upgrades and similar capital expenditure
requirements. In management's opinion, Diamond Offshore's cash generated from
operations and borrowings available under the Diamond Offshore Bank Credit
Facility are sufficient to meet its anticipated short and long-term liquidity
needs, including its capital expenditure and debt service requirements.
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from Diamond Offshore's continuing rig
enhancement program, including top-drive drilling system installations and water
depth and drilling capability upgrades. Diamond Offshore expects to spend
approximately $208.1 million, including interest expense to be capitalized,
during 1996 for significant rig upgrades in connection with contract
requirements. Included in this amount is approximately $55.8 million for 1996
expenditures in conjunction with the scheduled upgrade of the Ocean Clipper I to
operate in ultra-deep water with dynamic positioning capabilities and other
features. In addition, approximately $124.7 million is included for the upgrades
relating to the letter of intent and the contract for the Ocean Star (formerly
named Ocean Countess) and Ocean Quest, respectively. Also included in this
amount is approximately $10.0 million to upgrade the Arethusa Neptune to work in
3,000 feet of water. Because these projects are expected to be accompanied by
term contracts at favorable dayrates, the expenditures are, in Diamond
Offshore's opinion, financially justified. Diamond Offshore expects to evaluate
other projects as opportunities arise. In addition, Diamond Offshore has
budgeted $47.4 million for 1996 capital expenditures associated with its
continuing rig enhancement program. It is management's opinion that significant
improvements in operating cash flow resulting from current conditions of
improved dayrates and the increasing number of term contracts for rigs in
certain markets, in conjunction with borrowings under the Diamond Offshore Bank
Credit Facility, will be sufficient to meet these capital requirements.
In connection with the Acquisition, Diamond Offshore assumed Arethusa's
obligations with respect to approximately $69.2 million of secured indebtedness
at December 31, 1995, which was outstanding under two separate facilities. In
December 1994 Arethusa refinanced its then existing secured debt of $66.1
million with a new $80.0 million loan facility. See Note 6 to Arethusa's
Consolidated Financial Statements included elsewhere herein. This loan facility
was subsequently paid down by $38.9 million to $41.1 million at December 31,
1995. Currently, quarterly payments on this facility total $6.8 million per
annum with a
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<PAGE> 54
December 1999 balloon payment of $15.4 million. Additionally, in connection with
the acquisition of the Arethusa Yatzy (see Notes 4 and 6 to Arethusa's
Consolidated Financial Statements included elsewhere herein), Arethusa drew upon
a $30.0 million loan facility. Semi-annual payments totaling $3.8 million per
annum are due under this facility, which brings total current maturities under
these facilities to $10.6 million as of December 31, 1995. In management's view,
cash generated from operations and borrowings available under the Diamond
Offshore Bank Credit Facility will be sufficient to meet Diamond Offshore's debt
service obligations under these facilities.
Diamond Offshore is analyzing financing alternatives that may be available
to it in the public or private capital markets. Proceeds of any such financing
transactions may be used for repayment of higher cost debt, to fund rig upgrades
or acquisitions or for other corporate purposes. Diamond Offshore's ability to
effect any such financings will be dependent on its historical results of
operations and its current financial condition and prospects at the time it
seeks access to the capital markets, and to other factors beyond Diamond
Offshore's control, including the prevailing interest rate environment and, with
respect to offerings of common or preferred stock or debt obligations
convertible into such common stock, other financial market conditions, and the
investment community's perception of Diamond Offshore and the offshore contract
drilling industry generally. Any such offering would be subject to the
restrictions imposed by the Shareholders Agreement on public sales or
distributions of Diamond Offshore Common Stock, or securities convertible into
common stock, and until October 10, 1996, to obtaining the prior written consent
of CS First Boston as required by the underwriting agreement entered into in
connection with the Diamond Offshore Initial Public Offering.
Also, from time to time Diamond Offshore reviews acquisition opportunities
such as that presented by Arethusa, although Diamond Offshore has no current
plans to purchase or otherwise acquire additional rigs.
OTHER
Certain of Diamond Offshore's subsidiaries use the local currency in the
country where they conduct operations as their functional currency. Currency
environments in which Diamond Offshore has material business operations include
the United Kingdom, Australia and Brazil. Diamond Offshore generally attempts to
minimize its currency exchange risk by seeking international contracts payable
in local currency in amounts equal to Diamond Offshore's estimated operating
costs payable in local currency and in U.S. dollars for the balance of the
contract. Because of this strategy, Diamond Offshore in the past has minimized
its unhedged net asset or liability positions denominated in local currencies
and has not experienced significant gains or losses associated with changes in
currency exchange rates. However, at present contracts covering three of Diamond
Offshore's four rigs operating in the United Kingdom sector of the North Sea are
payable in U.S. dollars. Diamond Offshore has not hedged its exposure to changes
in the exchange rate between U.S. dollars and pounds sterling for operating
costs payable in pounds sterling, although it may seek to do so in the future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. However, when Diamond Offshore ceases its operations in a
currency environment, the accumulated adjustments are recognized currently in
results of operations. During 1994, Diamond Offshore recognized a loss of $.7
million for the accumulated translation adjustment upon discontinuance of
operations in Venezuela. Additionally, translation gains and losses for Diamond
Offshore's operations in Brazil have been recognized currently due to the
hyperinflationary status of this environment. The effect on results of
operations has not been material and is not expected to have a significant
effect in the future due to the recent stabilization of currency rates in
Brazil.
In February 1996, Diamond Offshore purchased for approximately $8.2 million
the eight-story building containing approximately 182,000 net rentable square
feet on approximately 6.2 acres in which it had leased office space for its
corporate headquarters. A portion of the building is currently occupied by other
tenants under leases which expire through 2005. This purchase will reduce
general and administrative expenses in the future by eliminating rent expense
and will provide rental income from the leases, offset by depreciation and
related interest expense. Diamond Offshore does not expect this purchase to have
a material effect on its results of operations.
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<PAGE> 55
BUSINESS
GENERAL
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and consists of 30
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 19 jack-up rigs and one drillship. Diamond Offshore also
operates 10 land rigs deployed in South Texas. All of Diamond Offshore's
offshore and land rigs are wholly owned except for two jack-up rigs operated
pursuant to bareboat charters.
Diamond Offshore is a Delaware corporation with its principal executive
offices located at 15415 Katy Freeway, Suite 400, Houston, Texas 77094, where
its telephone number is (713) 492-5300.
BUSINESS STRATEGY
Diamond Offshore seeks to maximize dayrates and rig utilization by
continuously adapting to changes in its markets, improving the capabilities of
its drilling rigs and increasing the quality of its service. The key elements of
its strategy are to:
- Market worldwide its large, diverse fleet, which is capable of satisfying
customer requirements in a variety of applications;
- Continue to enhance its fleet to meet customer demand for diverse
drilling capabilities, including those required for deep water and harsh
environment operations;
- Exploit the potential of Diamond Offshore's nine Victory-class
semisubmersible rigs by pursuing projects that take advantage of this rig
type's unique design to yield significantly enhanced rigs; and
- Maintain a program of continuous improvement of quality and safety
through Diamond Offshore's Global Excellence Management System and
further capitalize on customer recognition of Diamond Offshore's quality
and safety achievements.
INDUSTRY CONDITIONS
Diamond Offshore's business and operations depend principally upon the
condition of the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. Historically, the offshore
contract drilling industry has been highly competitive and cyclical, with
periods of high demand, short rig supply and high dayrates followed by periods
of low demand, excess rig supply and low dayrates. The offshore contract
drilling business is influenced by a number of factors, including the current
and anticipated prices of oil and natural gas, the expenditures by oil and gas
companies for exploration and production and the availability of drilling rigs.
For a number of years, depressed oil and natural gas prices and an oversupply of
rigs have adversely affected the offshore drilling market, particularly in the
Gulf of Mexico, where the prolonged weakness and uncertainty in the demand for
and price of natural gas resulted in a significant decline in exploration and
production activities. Demand for drilling services outside the United States,
excluding the North Sea, has been less volatile in recent years, but remains
dependent on a variety of political and economic factors beyond Diamond
Offshore's control, including worldwide demand for oil and natural gas, the
ability of OPEC to set and maintain production levels and pricing, the level of
production of non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and natural gas reserves.
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets experienced increased utilization and
significantly higher dayrates in 1995 and 1996, and customers increasingly are
seeking to contract for rigs serving these markets for a stated term (as opposed
to contracts for the drilling of a single well or a group of wells). The market
for
28
<PAGE> 56
jack-up rigs in the Gulf of Mexico, which weakened during 1994, appears to have
stabilized during 1995 and has shown some signs of strengthening in recent
months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Outlook."
COMPETITION
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the oversupply of rigs has created an
intensely competitive market in which price is the primary factor in determining
the selection of a drilling contractor. Diamond Offshore believes that
competition for drilling contracts will continue to be intense for the
foreseeable future because of the worldwide oversupply of drilling rigs and the
ability of contractors to move rigs from areas of low utilization and dayrates
to areas of greater activity and relatively higher dayrates. In addition, there
are inactive non-marketed rigs or rigs being operated in non-drilling activities
that could be reactivated to meet an increase in demand for drilling rigs in any
given market. Such movement or reactivation or a decrease in drilling activity
in any major market could depress dayrates and could adversely affect
utilization of Diamond Offshore's rigs. See "-- Offshore Contract Drilling
Services."
THE ACQUISITION
BACKGROUND. In September 1995 Arethusa publicly announced that it was
exploring strategic alternatives to maximize shareholder value, including a
possible sale of Arethusa. Following completion of the Diamond Offshore Initial
Public Offering, Diamond Offshore commenced an investigation of Arethusa and in
November 1995 submitted a formal indication of interest in acquiring Arethusa,
which was rejected. However, further discussions transpired that led to
execution of a letter of intent on December 7, 1995 pursuant to which Diamond
Offshore and Arethusa agreed to work together on an exclusive basis in an effort
to agree on the terms of the definitive documentation for the Acquisition.
Subsequent negotiations among representatives of Arethusa, Alphee, Ratos,
Diamond Offshore and Loews took place in numerous meetings, telephone
conversations and correspondence, following which the definitive documentation
for the Acquisition was executed on February 9, 1996.
Diamond Offshore elected to proceed with the Acquisition principally
because it viewed the Acquisition as a means of expanding its geographic areas
of operation and the size of its semisubmersible fleet, including the addition
of some units that may be suitable for upgrading. In addition, Diamond Offshore
expects that the increase in the number of publicly traded shares of Diamond
Offshore Common Stock resulting from the Acquisition, and the anticipated
consequential increase in Diamond Offshore's market capitalization, will
heighten trading volume and institutional interest in Diamond Offshore's
securities, which should ultimately benefit all Diamond Offshore stockholders.
THE AMALGAMATION. Pursuant to the Plan of Acquisition and the Amalgamation
Agreement, at the Effective Time, (1) Arethusa and Acquisition Sub have
amalgamated and will continue their businesses as one amalgamated company under
the name "Diamond Offshore Exploration (Bermuda) Limited," a wholly owned
subsidiary of Diamond Offshore (USA), (2) each issued and outstanding share of
Arethusa Common Stock (other than any such shares held by Diamond Offshore,
Diamond Offshore (USA) or Acquisition Sub) was canceled and ceased to exist and
each holder thereof became entitled to receive in consideration of each share so
canceled 0.88 shares of Diamond Offshore Common Stock (the "Amalgamation Ratio")
and (3) each share of Arethusa Common Stock held by Diamond Offshore, Diamond
Offshore (USA) or Acquisition Sub (other than any such shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) was
canceled, retired and ceased to exist, and no payment of Diamond Offshore Common
Stock was or will be made in respect thereof. Each certificate that immediately
prior to the Effective Time represented a share or shares of Arethusa Common
Stock now represents the right to receive, upon surrender of such certificate as
provided in the Amalgamation Agreement and subject to the provisions set forth
therein governing fractional shares, that number of shares of Diamond Offshore
Common Stock determined by multiplying the number of shares of Arethusa Common
Stock formerly represented by such certificate by the Amalgamation Ratio. From
and after the Effective Time, the holders of certificates previously
representing
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<PAGE> 57
shares of Arethusa Common Stock ceased to have any other rights except as
otherwise provided in the Amalgamation Agreement or by law.
MEMORANDUM OF ASSOCIATION; BYE-LAWS; DIRECTORS; OFFICERS. Under the
Amalgamation Agreement, (1) at the Effective Time, the Memorandum of Association
of Arethusa, as in effect immediately prior to the Effective Time, became the
Memorandum of Association of Diamond Offshore Exploration (Bermuda), (2) the
Bye-laws of Arethusa, as in effect immediately prior to the Effective Time,
became the Bye-laws of Diamond Offshore Exploration (Bermuda), (3) the directors
of Acquisition Sub immediately prior to the Effective Time became the directors
of Diamond Offshore Exploration (Bermuda), each to hold office in accordance
with the Memorandum of Association and Bye-laws of Diamond Offshore Exploration
(Bermuda) until their respective successors are duly elected or appointed and
qualified, and (4) the officers of Acquisition Sub immediately prior to the
Effective Time became the officers of Diamond Offshore Exploration (Bermuda),
each to hold office in accordance with the Bye-laws of Diamond Offshore
Exploration (Bermuda) until their respective successors are duly elected or
appointed and qualified.
CONTINUING ARETHUSA SEVERANCE, CONSULTING AND SALARY CONTINUATION
PLANS. Under the Plan of Acquisition, from and after the Effective Time, Diamond
Offshore will honor in accordance with their terms the following Arethusa
employment, severance, consulting and salary continuation plans: (1) the
Employment Agreement between Arethusa and Jan Rask, as amended (the "Rask
Employment Agreement"), (2) the Severance Agreement between Arethusa Off-Shore
Company, Arethusa's principal operating subsidiary ("AOC"), and O. Peter Blom,
(3) the Severance Agreement between AOC and Vincent G. Bounds, (4) the Severance
Agreement between AOC and Harris I. Knecht, (5) the Severance Agreement between
AOC and Danny R. Richardson, (6) the Severance Agreement between AOC and James
E. Traber, Jr., (7) the Severance Agreement between AOC and Charles R. Richter,
(8) the AOC Severance Policy for all AOC shore-based employees, (9) the Arethusa
1993 Employee Stock Option Plan and (10) the Arethusa 1994 Nonqualified Stock
Option Plan for Non-Employee Directors. To the extent permitted or required
under applicable law, each employee of Arethusa or its subsidiaries will be
given credit for all service with Arethusa or its subsidiaries (or service
credited by Arethusa or its subsidiaries) under all employee benefit plans
maintained by Arethusa, Diamond Offshore, Diamond Offshore (USA) or Acquisition
Sub in which they participate or in which they become participants for purposes
of eligibility and vesting.
In October 1994, Arethusa entered into the Rask Employment Agreement with
Jan Rask. The Rask Employment Agreement provides for a current annual salary of
$325,000. In addition, the Rask Employment Agreement provides that Arethusa will
pay Mr. Rask bonus compensation as may from time to time be awarded by the Board
of Directors of Arethusa and that Mr. Rask is entitled to participate in all
employee benefit plans and other compensatory arrangements sponsored by
Arethusa. The Rask Employment Agreement may be terminated by either party upon
180 days' prior written notice and by Arethusa at any time for "cause" (as
therein defined). The Rask Employment Agreement provides that until December 31,
1996, Mr. Rask will agree to assist in the pursuit of certain types of business
combinations and that Mr. Rask will receive a payment upon completion of any
such transaction. As a result of the consummation of the Acquisition, Mr. Rask
became entitled to a payment of $487,500 pursuant to the Rask Employment
Agreement, $81,250 of which was previously paid.
In October 1995, AOC entered into Executive Severance Agreements (the
"Arethusa Severance Agreements") with Messrs. Blom, Bounds, Knecht, Traber,
Richardson and Richter. The Arethusa Severance Agreements provide that these
executive officers will assist with activities arising in connection with
proposed business combinations and provide for certain benefits if any of these
executive officers are terminated or their employment is materially changed
within 2.5 years following a merger, sale or change of control, where the change
of control is to a competing drilling contractor, and the termination or change
is either (a) by the ongoing company for reasons other than for cause or as a
consequence of the executive's death, permanent disability or retirement, or (b)
by the executive if the executive is not offered continued employment in an
equivalent officer-level position in the Houston area, a compensation program at
least equal to such executive's compensation (excluding bonus) immediately prior
to such merger, sale or change of control and a comparable fringe benefit
program. In such event, such executive officers will receive a lump sum cash
payment equal to 30 times such executive's monthly base salary, outplacement
consulting assistance and
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earned and accrued vacation. The consummation of the Acquisition results in such
payments becoming due to each of such executive officers.
Under the Plan of Acquisition, following the Effective Time, except with
respect to any collective bargaining agreements, Diamond Offshore or its
subsidiaries will cause the employees of Arethusa and its subsidiaries to
receive compensation, benefits, fringe benefits, plans, programs and
arrangements that are no less favorable in the aggregate than the lesser of such
compensation, benefits, fringe benefits, plans, programs and arrangements to
which (1) such employees are entitled immediately prior the Effective Time or
(2) similarly situated employees of Diamond Offshore are entitled. With respect
to any welfare plan maintained by Arethusa or its subsidiaries or Diamond
Offshore in which employees or former employees of Arethusa or its subsidiaries
(or their dependents) participate after the Effective Time, Diamond Offshore
will waive or cause to be waived any preexisting condition provision (except for
preexisting conditions of any employee or former employee (or dependent) that
are currently excluded under existing Arethusa welfare plans in which such
employee or former employee (or dependent) currently participates) and each
employee or former employee and his dependents will be given credit for any
claims incurred prior to the Effective Time toward any applicable deductible
under any such welfare plan.
All members of Arethusa's Board of Directors resigned at the Effective
Time.
ARETHUSA STOCK OPTION PLANS. Pursuant to the Amalgamation Agreement, at the
Effective Time, each outstanding option to purchase shares of Arethusa Common
Stock under Arethusa's 1993 Employee Stock Option Plan (the "Arethusa Employee
Plan") and Arethusa's 1994 Nonqualified Stock Option Plan for Non-Employee
Directors (the "Arethusa Director Plan" and, together with the Arethusa Employee
Plan, the "Arethusa Stock Option Plans"), whether or not then vested or
exercisable (the "Arethusa Options") was assumed by Diamond Offshore. See
"Management -- Stock Option Plans."
INDEMNIFICATION. Diamond Offshore, Diamond Offshore (USA) and Acquisition
Sub agreed in the Plan of Acquisition that all rights to indemnification
existing in favor of the present or former directors, officers and employees (as
such) of Arethusa or any of its subsidiaries, as provided in Arethusa's
Memorandum of Association or Bye-laws or similar documents of any of such
subsidiaries, or any agreement to which Arethusa or any such subsidiary is a
party as in effect at February 9, 1996 with respect to matters occurring prior
to the Effective Time would survive the Amalgamation, and Diamond Offshore
agreed to cause Diamond Offshore Exploration (Bermuda) to comply fully with
Arethusa's obligations thereunder. In addition, from and after the Effective
Time, in the Plan of Acquisition Diamond Offshore agreed to, and agreed to cause
Diamond Offshore Exploration (Bermuda) to, indemnify, defend and hold harmless
the present directors and officers of Arethusa against any costs and expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages and liabilities, and amounts paid in settlement thereof with Diamond
Offshore's consent, in connection with any claim, action, suit, proceeding or
investigation relating to any of the transactions contemplated by the Plan of
Acquisition, the Amalgamation Agreement or the Fee Agreement.
RIGHTS OF DISSENTING SHAREHOLDERS. After the Effective Time, shares of
Arethusa Common Stock that were issued and outstanding immediately prior to the
Effective Time held by Arethusa shareholders who did not vote in favor of the
adoption and approval of the Amalgamation Agreement and who comply with Section
106(6), (6A), (6B) and (6C) of The Companies Act 1981 of Bermuda, as amended
("The Companies Act") will, at the election of Diamond Offshore (USA), either
(1) be canceled and shares of Diamond Offshore Common Stock delivered in
consideration thereof, subject to the rights of such shareholders under Section
106(6), (6A), (6B) and (6C) of The Companies Act, or (2) not be canceled and the
holders thereof not be entitled to receive shares of Diamond Offshore Common
Stock unless and until such holders have failed to perfect or have effectively
withdrawn or lost their rights to appraisal under The Companies Act, whereupon
such shares will be canceled and shares of Diamond Offshore Common Stock
delivered in consideration thereof. Diamond Offshore has not elected whether to
proceed with respect to any such shares under (1) or (2) as described in the
preceding sentence above.
ACCOUNTING TREATMENT. The Acquisition will be accounted for using the
purchase method of accounting pursuant to Opinion No. 16 of the Accounting
Principles Board. The purchase method accounts for a business combination as the
acquisition of one company by another. The acquiring corporation, Diamond
Offshore,
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<PAGE> 59
records assets less liabilities assumed. A difference between the cost of the
acquired corporation, Arethusa, and the sum of the fair values of tangible and
identifiable intangible assets less liabilities is recorded as goodwill. The
reported income of Diamond Offshore after the Effective Time will include the
operations of Arethusa after consummation of the Acquisition.
THE FLEET
Diamond Offshore's large, diverse fleet, which includes some of the most
technologically advanced rigs in the world, enables it to offer a broad range of
services worldwide in various markets, including the deep water market, the
harsh environment market (such as the North Sea), the conventional
semisubmersible market and the jack-up market.
SEMISUBMERSIBLES. Diamond Offshore owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semi-submerged" position, remaining afloat, off bottom, in a position in which
the lower hull is from about 55 to 90 feet below the water line and the upper
deck protrudes well above the surface. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position due in
part to its wave transparency characteristics at the water line.
Diamond Offshore owns and operates three of the world's 13
fourth-generation semisubmersibles. Fourth-generation semisubmersibles are
larger than other semisubmersibles, are capable of working in harsh environments
and have other advanced features. Diamond Offshore's existing fleet of three
fourth-generation semisubmersibles are all capable of operating in water depths
of up to 5,000 feet. Currently the Ocean Valiant and the Ocean America are
located in deep water areas of the Gulf of Mexico and the Ocean Alliance is
located in the harsh environment of the North Sea market west of the Shetland
Islands. At present, nine of the world's fourth-generation semisubmersibles are
contracted for service in the harsh environment North Sea market and four are
operating in the deep water Gulf of Mexico market.
In addition to its fourth-generation semisubmersibles, Diamond Offshore
owns and operates 27 other semisubmersibles (including nine Victory-class rigs),
18 of which operate in maximum water depths of between 1,000 to 2,500 feet, and
three of which are capable of drilling in 3,000 feet or more of water. The
diverse capabilities of most of these semisubmersibles enable them to work in
both shallow and deep water environments in the United States and most markets
outside the United States. Currently, 15 of these semisubmersibles are located
in the Gulf of Mexico; four are located in the North Sea; four are located
offshore Brazil; two are located offshore Australia; one is located offshore
Nigeria; and one is located offshore Vietnam. In addition to these 27
semisubmersibles, Diamond Offshore owns one other semisubmersible held for
disposition.
JACK-UPS. Diamond Offshore owns and/or operates a total of 19 jack-up rigs.
Jack-up rigs are mobile, self-elevating drilling platforms equipped with legs
that are lowered to the ocean floor until a foundation is established to support
the drilling platform. The rig hull includes the drilling rig, jacking system,
crew quarters, loading and unloading facilities, storage areas for bulk and
liquid materials, heliport and other related equipment. Jack-ups are used
extensively for drilling in water depths from 20 feet to 350 feet. The water
depth limit of a particular rig is principally determined by the length of the
rig's legs. A jack-up rig is towed by tugboats to the drillsite with its hull
riding in the sea as a vessel with its legs retracted. Once over a drillsite,
the legs are lowered until they rest on the seabed and jacking continues until
the hull is elevated above the surface of the water. After completion of
drilling operations, the hull is lowered until it rests in the water and then
the legs are retracted for relocation to another drillsite.
The principal market for Diamond Offshore's jack-up rigs is currently the
Gulf of Mexico, where 14 of Diamond Offshore's jack-up rigs are located. Of
Diamond Offshore's jack-up rigs in the Gulf of Mexico, seven are independent-leg
cantilevered rigs, two are mat-supported cantilevered rigs, two are
independent-leg slot rigs, two are mat-supported slot rigs and one is an
independent-leg slot rig that has been modified with skid-off capability. One of
Diamond Offshore's jack-up rigs in the Gulf of Mexico is operated pursuant to a
bareboat charter and the other 13 are wholly owned by Diamond Offshore. Diamond
Offshore also owns and operates one jack-up rig offshore each of Indonesia,
Egypt and The Netherlands, and Diamond Offshore operates one
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<PAGE> 60
jack-up rig offshore India pursuant to a bareboat charter. One of Diamond
Offshore's jack-ups is cold stacked in Chile. The jack-up located in the Gulf of
Mexico that Diamond Offshore bareboat charters is also under contract for sale,
upon closing of which such charter will terminate.
DRILLSHIP. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a computer
controlled thruster (dynamic positioning) system similar to those used on
certain semisubmersible rigs. Drillships normally require water depth of at
least 200 feet in order to conduct operations. Diamond Offshore's drillship, the
Ocean Clipper I, which uses a conventional anchoring system, is currently
located offshore Africa. The Ocean Clipper I currently has water depth
capability of 1,200 feet and variable deck load capacity in excess of 11,000
tons. However, the Ocean Clipper I is scheduled to be upgraded during the year
1996 through the first half of 1997 to operate in the ultra-deep water market of
the Gulf of Mexico with dynamic positioning capabilities, 15,000 psi blowout
preventers, three mud pumps and other refurbishments and upgrades. The drillship
is anticipated to commence operation in the Gulf of Mexico following completion
of the upgrade in the second quarter of 1997 pursuant to a four-year term
contract with a major oil company that has been agreed to in principle. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
FLEET ENHANCEMENTS. Diamond Offshore's strategy is to maximize dayrates and
utilization by adapting to trends in its markets, including enhancing its fleet
to meet customer demand for diverse drilling capabilities. Many of Diamond
Offshore's rigs have been upgraded during the last five years with enhancements
such as top-drive drilling systems, increases in water depth capability, mud
pump additions or increases in deck load capacity. For example, Diamond Offshore
upgraded the semisubmersible Ocean Voyager to operate in maximum water depths of
3,200 feet and has modified the semisubmersible Ocean Nomad to allow it to be
certified for service in the United Kingdom sector of the North Sea, where it is
operating under a two-year contract at improved dayrates. Diamond Offshore
converted three of its 300-foot cantilever jack-up rigs from slot rigs, which
Diamond Offshore believes has resulted in these rigs achieving higher dayrates
and utilization. Also, Diamond Offshore has added top-drive drilling systems to
many rigs, so that 36 rigs in Diamond Offshore's fleet are now so equipped.
Notwithstanding the average age of the Diamond Offshore fleet of 17.7 years
(calculated as of December 31, 1995 and measured from year built), Diamond
Offshore believes that it will be feasible to continue to upgrade its fleet,
particularly its Victory-class semisubmersible rigs. The design of the Victory-
class semisubmersible rigs, including their cruciform hull configurations, long
fatigue-life and advantageous stress characteristics, makes this class of rig
particularly well-suited for significant upgrading projects. Currently, Diamond
Offshore's Victory-class rigs are outfitted for service in maximum water depths
of 600 to 3,200 feet. Five of Diamond Offshore's nine Victory-class rigs are
equipped with top-drive drilling systems, two are modified for increased
efficiency in the handling of subsea completion equipment and one has stability
enhancements that allow increased variable deck load. In management's opinion,
it is unlikely that new semisubmersibles will be built unless there is a
substantial and sustained improvement in the market; therefore, Diamond Offshore
believes that the relative ease and efficiency with which it can significantly
enhance its Victory-class rigs is a competitive advantage in a market requiring
increasing capability from offshore drilling rigs.
The Ocean Quest, one of Diamond Offshore's Victory-class rigs, is currently
undergoing an upgrade pursuant to a contract with a major oil company for a
three-year commitment. The rig is being upgraded to conduct drilling operations
in the Gulf of Mexico in water depths of up to 3,500 feet. This project includes
enhancements to provide additional hull buoyancy, which will allow a variable
deck load exceeding 5,000 tons, the addition of a new self-contained chain/wire
mooring system, and drilling system upgrades, including the installation of a
top-drive drilling system, a 15,000 psi blowout prevention system, a third mud
pump and 2,900 barrel liquid mud capacity. The Ocean Quest is scheduled to be
placed in service in the fourth quarter of 1996. In addition, during the third
quarter of 1995 Diamond Offshore entered into a letter of intent with another
major oil company for a three-year commitment for a second Victory-class rig,
the Ocean Star (formerly named Ocean Countess), pursuant to which the rig is
being upgraded to conduct drilling operations in the Gulf of Mexico in water
depths of up to 4,500 feet. The upgrade project for the Ocean Star also includes
stability enhancements, the installation of a new mooring system and drilling
system upgrades similar to those planned
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for the Ocean Quest. The Ocean Star is scheduled to be placed in service late in
the fourth quarter of 1996. Following the upgrades, Diamond Offshore believes
that these rigs will be able to compete effectively in the fourth-generation
deep water market.
Additional Victory-class upgrade potential exists, including conceptual
plans Diamond Offshore is developing for the possible construction of an
ultra-large semisubmersible, the Ocean Legend. The Ocean Legend is intended to
take advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. Diamond Offshore has
completed its feasibility studies and has begun preliminary design engineering
in connection with the upgrade. See Note 1 to Diamond Offshore's Consolidated
Financial Statements included elsewhere herein. Although Diamond Offshore is
proposing the design to several major oil companies, there can be no assurance
that the Ocean Legend can be built in a cost-effective manner, that if a
Victory-class rig is so upgraded, there will be adequate demand for its
services, or that competitors will not achieve capability beyond that of
fourth-generation semisubmersibles through other means attractive to customers.
For the year ended December 31, 1995, Diamond Offshore spent approximately
$.6 million on conceptual design studies and related costs associated with the
Ocean Legend project. Diamond Offshore expects to evaluate other projects as
opportunities arise. Once a capital project is undertaken by Diamond Offshore,
Diamond Offshore may later determine that completion of such project is
infeasible based on its analysis of factors such as design criteria, anticipated
costs of construction, market demand and availability of financing, and Diamond
Offshore may be unable to recoup the expenditures made before such project is
abandoned. In addition, to the extent Diamond Offshore determines that its fleet
cannot be upgraded as it currently anticipates, Diamond Offshore will have fewer
rigs available to compete in the harsh environment and deep water markets than
if such upgrades had been successfully implemented.
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<PAGE> 62
More detailed information as of March 28, 1996 concerning the Diamond
Offshore fleet of active mobile offshore drilling rigs is set forth in the table
below.
<TABLE>
<CAPTION>
WATER DEPTH
CAPABILITY YEAR BUILT/LATEST CURRENT
TYPE AND NAME(A) (FT) ATTRIBUTES(B) ENHANCEMENT(C) LOCATION CUSTOMER(D)
- ------------------------ ----------- ----------------------------- ------------------ --------------- ----------------------
<S> <C> <C> <C> <C> <C>
FOURTH-GENERATION
SEMISUBMERSIBLES(3):
Ocean Alliance........ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea BP
Ocean America......... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico BP
Ocean Valiant......... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
OTHER
SEMISUBMERSIBLES(27):
Arethusa Worker....... 3,300 TDS 1982/1992 Gulf of Mexico Texaco
Ocean Voyager......... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Arethusa Yatzy(e)..... 3,000 TDS; DP 1989 Brazil Petrobras
Arethusa Lexington.... 2,500 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Arethusa Neptune...... 2,500 TDS; 3M 1977/1995 Gulf of Mexico Kerr-McGee
Arethusa Concord...... 2,200 TDS 1975/1995 Gulf of Mexico Shell
Arethusa Saratoga..... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Arethusa Yorktown..... 2,200 TDS 1976/1989 Brazil Petrobras
Ocean Endeavor........ 2,000 TDS; VC 1975/1994 Gulf of Mexico Oryx
Ocean Rover........... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...... 1,700 VC 1971/1981 Gulf of Mexico Newfield(f)
Arethusa
Whittington......... 1,500 TDS; 3M 1974/1995 Gulf of Mexico Mobil
Ocean Bounty.......... 1,500 TDS; VC; 3M 1977/1992 Australia/ Phillips
Indonesia
Ocean Guardian........ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......... 1,500 TDS 1974/1990 Gulf of Mexico Hardy Oil & Gas(g)
Ocean Princess(h)..... 1,500 TDS; 15K 1977/1995 North Sea Committed
Ocean Epoch........... 1,200 TDS 1977/1990 Australia/ Enterprise
Indonesia
Ocean General......... 1,200 TDS 1976/1990 Vietnam Fina
Ocean Nomad........... 1,200 TDS 1975/1995 North Sea Shell
Ocean Ambassador...... 1,100 TDS 1975/1995 Gulf of Mexico LL&E
Ocean Baroness........ 1,100 TDS; VC 1973/1995 Brazil Committed
Ocean Star(i)(j)...... 850 VC 1974/1992 Gulf of Mexico Committed
Ocean Century......... 800 1973 Gulf of Mexico Stacked
Ocean Quest(k)........ 800 VC 1973 Gulf of Mexico Committed
Ocean Liberator....... 600 1974 Nigeria Ashland
Ocean Victory......... 600 VC 1972 North Sea Stacked
Ocean Zephyr.......... 600 1972 Brazil Petrobras
JACK-UPS(19):
Ocean Titan........... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico LL&E
Ocean Tower........... 350 IS; 3M 1972 Gulf of Mexico Sonat Exploration(l)
Bonito II(m).......... 300 TDS; IC 1983/1995 Gulf of Mexico Unocal
Miss Kitty(n)......... 300 IC 1982 India ONGC
Ocean King............ 300 TDS; IC 1973/1989 Gulf of Mexico Conoco
Ocean Nugget.......... 300 TDS; IC 1976/1995 Gulf of Mexico Amoco
Ocean Summit.......... 300 SDS; IC 1972/1991 Gulf of Mexico Forcenergy
Ocean Warwick......... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Arethusa Heritage..... 250 TDS; IC 1981/1995 Egypt EDC
Arethusa Sovereign.... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Champion........ 250 MS 1975/1985 Gulf of Mexico Chevron
Ocean Columbia........ 250 TDS; IC 1978/1990 Gulf of Mexico Coastal Oil & Gas
Ocean Spartan......... 250 TDS; IC 1980/1994 Gulf of Mexico Meridian
Ocean Spur............ 250 TDS; IC 1981/1994 Gulf of Mexico Houston Exploration(o)
Ocean Conquest........ 200 MS 1978 Gulf of Mexico Stacked
Ocean Crusader........ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........... 200 TDS; MC 1983/1986 Gulf of Mexico Murphy
Arethusa Scotian...... 180 TDS; IC; 15K 1981/1988 North Sea Elf
(Dutch sector)
Ocean Magallanes...... 150 IC 1980 Chile Stacked
DRILLSHIP(1):
Ocean Clipper I....... 1,200 SP 1976 Africa Committed(p)
</TABLE>
- ---------------
(a) Does not include one other semisubmersible rig held for disposition that is
also not included in the discussion of Diamond Offshore's fleet.
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<PAGE> 63
(b) Attributes legend:
<TABLE>
<S> <C> <C> <C>
DP -- Dynamically Positioned/Self-Propelled
MS -- Mat-Supported Slot Rig
TDS -- Top-Drive Drilling System
IC -- Independent-Leg Cantilevered Rig
SDS -- Side-Drive Drilling System
VC -- Victory-Class
IS -- Independent-Leg Slot Rig
SO -- Skid-Off Capability
3M -- Three Mud Pumps
MC -- Mat-Supported Cantilevered Rig
SP -- Self-Propelled
15K -- 15,000 psi Blowout Preventer
</TABLE>
(c) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(d) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(e) Arethusa acquired the Arethusa Yatzy on May 3, 1995. Prior to this date the
rig was operated by Arethusa under a management agreement.
(f) Turnkey operator is ADTI.
(g) Turnkey operator is DOTS.
(h) Preparing for a two-year term contract that commenced late March 1996.
(i) Formerly named Ocean Countess.
(j) Committed under a letter of intent for a three-year term contract with
Texaco in the Gulf of Mexico.
(k) Committed under a three-year term contract with Chevron in the Gulf of
Mexico.
(l) Turnkey operator is Triton.
(m) Diamond Offshore charters the rig pursuant to a bareboat charter agreement
which expires in August 1996. The rig is under contract for sale, upon
closing of which such charter will terminate.
(n) Diamond Offshore operates the rig pursuant to a bareboat charter agreement
which expires in July 1997. Diamond Offshore has the option to extend the
charter agreement for one additional year.
(o) Turnkey operator is Brown/R&B.
(p) Committed under an agreement in principle for a four-year term contract in
the Gulf of Mexico following completion of rig enhancement.
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<PAGE> 64
OFFSHORE FLEET UTILIZATION
The following table sets forth certain information comparing the rig
utilization of the respective fleets of Diamond Offshore and Arethusa relative
to that of the offshore drilling industry as a whole during the year ended
December 31, 1995 and during the three months ended March 31, 1996. Industry
statistics and statistics for each of the companies were compiled by Offshore
Data Services. Diamond Offshore's one drillship had an average utilization of
59.4% and 95.6% for the year ended December 31, 1995 and the three months ended
March 31, 1996, respectively.
<TABLE>
<CAPTION>
AVERAGES FOR THREE MONTHS AVERAGES FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------------------- -----------------------------
1996 1995
----------------------------- -----------------------------
DIAMOND DIAMOND
OFFSHORE ARETHUSA INDUSTRY OFFSHORE ARETHUSA INDUSTRY
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FOURTH-GENERATION SEMISUBMERSIBLES:
Total Rigs....................... 3.0 -- 13.0 3.0 -- 13.0
Under Contract................... 3.0 -- 13.0 3.0 -- 13.0
Utilization Rate................. 100.0% -- 100.0% 100.0% -- 100.0%
OTHER SEMISUBMERSIBLES:
Total Rigs....................... 19.0 8.0 112.0 19.0 8.0 110.1
Under Contract................... 16.3 8.0 97.3 14.5 7.8 89.3
Utilization Rate................. 86.0% 100.0% 86.9% 76.3% 96.9% 81.2%
JACK-UPS:
Total Rigs....................... 14.0 5.0 302.3 14.0 5.0 306.8
Under Contract................... 11.0 5.0 254.3 10.6 4.8 249.1
Utilization Rate................. 78.6% 100.0% 84.1% 75.6% 95.0% 81.2%
</TABLE>
MARKETS
Diamond Offshore's principal markets for its offshore contract drilling
services are the Gulf of Mexico, Europe, including principally the United
Kingdom sector of the North Sea, South America and Australia/Southeast Asia.
Diamond Offshore actively markets its rigs worldwide. In the past, rigs in
Diamond Offshore's fleet have also operated in the Mediterranean Sea, the Black
Sea and other markets. See Note 11 to Diamond Offshore's Consolidated Financial
Statements included elsewhere herein.
Diamond Offshore believes that its presence in multiple markets provides a
competitive advantage. For example, Diamond Offshore believes that its
experience with safety and other regulatory matters in the United Kingdom has
been beneficial in Australia and in the Gulf of Mexico and that production
experience gained through Brazilian and North Sea operations has potential
application worldwide. Additionally, Diamond Offshore believes that its
performance for a customer in one market segment or area enables Diamond
Offshore to better understand that customer's needs and serve that customer in
different market segments or other geographic locations.
OFFSHORE CONTRACT DRILLING SERVICES
Diamond Offshore's contracts to provide offshore drilling services vary in
their terms and provisions. Diamond Offshore often obtains its contracts through
competitive bidding, although it is not unusual for Diamond Offshore to be
awarded drilling contracts without competitive bidding. Drilling contracts
generally provide for a basic drilling rate on a fixed dayrate basis regardless
of whether such drilling results in a successful well. Drilling contracts may
also provide for lower rates during periods when the rig is being moved or when
drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather or water conditions or other conditions beyond the control of
Diamond Offshore. Under dayrate contracts, Diamond Offshore generally pays the
operating expenses of the rig, including wages and the cost of incidental
supplies. Revenues from dayrate contracts have historically accounted for a
substantial portion of Diamond Offshore's revenues. In addition, Diamond
Offshore has worked some of its rigs under dayrate contracts pursuant to which
the customer also agrees to pay Diamond Offshore an incentive bonus based upon
performance.
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<PAGE> 65
A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of major equipment or in some cases due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in some
circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that give contractors the
flexibility to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain drilling prices at the lowest level possible.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while the customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, Diamond Offshore
seeks to have a reasonable balance of single well, well-to-well and term
contracts to minimize the downside impact of a decline in the market while still
participating in the benefit of increasing dayrates in a rising market. Although
many of Diamond Offshore's semisubmersible rigs are contracted on a term basis,
Diamond Offshore's jack-up fleet is primarily committed for short-term
single-well or well-to-well arrangements.
Diamond Offshore believes that more of its customers are seeking to
establish continuing relationships with a small number of preferred drilling
contractors rather than seeking bids for each drilling contract from a large
number of contractors. Diamond Offshore also believes that those contractors who
provide the highest quality and the greatest range of services will achieve
preferred contractor status. In response to this change in customer attitude, in
May 1993 DOTS began offering a portfolio of drilling and production services to
complement Diamond Offshore's offshore contract drilling business. These
services include overall project management and drilling and production
operations on a turnkey or modified-turnkey basis. Under a turnkey contract, the
drilling contractor agrees to perform a specified drilling service, such as
drilling a well to a specified depth for a fixed price. The ability of the
contractor to make a profit on this type of contract depends on the contractor's
ability to complete the specified project while keeping expenses within the
estimates used to determine the contract price. Under a turnkey contract, the
drilling contractor bears the financial risk of delays in completion of the
project. Since May 1993, DOTS has engaged in 22 turnkey drilling projects in the
Gulf of Mexico and, in conjunction with a tanker owner, has completed an
extended well test on a modified-turnkey basis for an operator in the North Sea.
Diamond Offshore also intends to seek alternative uses for the rigs in its fleet
that are no longer competitive in the drilling market and do not meet Diamond
Offshore's criteria for modification. Such alternative uses may include
employment of these rigs as mobile offshore production units or as a part of
floating production systems. These operations have not been a significant part
of Diamond Offshore's business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BAREBOAT CHARTER CONTRACTS
Diamond Offshore operates two of its rigs pursuant to bareboat charter
contracts. Under a bareboat charter, Diamond Offshore charters the use of a rig
for a specified period and operates the rig as if it were owned.
BONITO II CONTRACT. Diamond Offshore operates the Bonito II under a
bareboat charter agreement expiring in August 1996. Under the agreement, Diamond
Offshore makes periodic payments to the rig owner consisting of (i) monthly
basic charter hire payments and (ii) quarterly additional hire payments based on
certain revenue/cost criteria. Diamond Offshore recognizes all revenues and
costs, including the charter fee, in its financial statements. The rig is under
contract for sale, upon closing of which such charter will terminate.
MISS KITTY CONTRACT. Diamond Offshore operates the Miss Kitty under a
bareboat charter agreement initially expiring in July 1996, and recently
extended to July 1997. Under the agreement, Diamond Offshore
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<PAGE> 66
makes periodic payments to the rig owner consisting of (i) monthly basic charter
hire payments and (ii) quarterly additional hire payments based on certain
revenue/cost criteria. Diamond Offshore recognizes all revenues and costs,
including the charter fee, in its financial statements.
LAND DRILLING OPERATIONS
In addition to its offshore drilling fleet, Diamond Offshore owns and
operates 10 land rigs, all of which are currently located in South Texas, and a
fleet of heavy-duty trucks designed to transport these rigs to drilling
locations. Seven of Diamond Offshore's 10 land rigs are Cabot-design
trailer-mounted rigs that are highly mobile and relatively sophisticated, making
them more desirable to drilling contractors than non-trailer-mounted land rigs
of similar capability. Diamond Offshore believes that these trailer-mounted rigs
have achieved higher utilization rates than non-trailer-mounted rigs would have
achieved. Diamond Offshore's land rigs typically operate under dayrate, footage
or turnkey contracts (compensation under footage contracts is based on the
number of feet drilled and involves more risk for a contractor than dayrate
contracts and the potential for greater financial gains or losses), although
most of its contracts are dayrate contracts.
More detailed information concerning Diamond Offshore's land drilling rigs,
as of March 28, 1996, is set forth in the table below.
<TABLE>
<CAPTION>
DRILLING DEPTH
RIG CAPABILITY
NUMBER TYPE OF RIG (FT) CUSTOMER(1)
- -------------------- ---------------- -------------- ----------------------
<S> <C> <C> <C>
840............... Oilwell 840-E 18,000 UPRC
851............... National 80-B 15,000 Parker & Parsley
859............... Brewster N-75 15,000 Quisto Exploration
865............... Cabot 1200 14,000 Cox & Perkins
866............... Cabot 1200 14,000 Enron Oil & Gas
863............... Cabot 1000 13,000 Enron Oil & Gas
864............... Cabot 1000 13,000 Coastal Oil & Gas
861............... Cabot 900 11,000 Swift Energy
862............... Cabot 900 11,000 Conoco
860............... Cabot 750 9,500 Sanchez-O'Brien
</TABLE>
- ---------------
(1) For ease of presentation in this table, customer names have been shortened
or abbreviated.
CUSTOMERS
Diamond Offshore provides offshore drilling services to a customer base
that includes independent and major integrated oil companies and state-owned oil
companies. Occasionally, several customers have accounted for 10.0% or more of
Diamond Offshore's annual consolidated revenues, although the identity of such
customers may vary from year to year. During 1995, Diamond Offshore performed
services for approximately 90 different customers and British Petroleum Co., PLC
("BP"), accounted for 16.5% of Diamond Offshore's annual total consolidated
revenues. During 1994, Diamond Offshore performed services for approximately 90
different customers and no single customer accounted for more than 8.2% of
Diamond Offshore's annual total consolidated revenues. During 1993, Diamond
Offshore performed services for approximately 85 different customers and BP
accounted for 10.5% of Diamond Offshore's annual total consolidated revenues.
Management believes that at current levels of activity Diamond Offshore has
alternative customers for its services such that the loss of a single customer
would not have a material adverse effect on Diamond Offshore on a long-term
basis.
Diamond Offshore's services are marketed principally through its Houston
office, with support from its regional offices in New Orleans, Louisiana;
Aberdeen, Scotland; and Perth, Australia. Technical and administrative support
for Diamond Offshore's operations is provided by its Houston office.
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<PAGE> 67
QUALITY
Diamond Offshore maintains a program to continuously improve quality and
safety through GEMS, which was instituted in 1993 to increase Diamond Offshore's
commitment to quality of service, safety and the environment. GEMS is a quality
system that provides for formal procedures to assist in continuous improvement
in Diamond Offshore's efforts to exceed customer expectations in safety,
environmental concerns, equipment maintenance, rig enhancements, material
handling and personnel training and performance. The key to GEMS is Diamond
Offshore's end-of-well report, which is intended to ensure feedback for
improvement and communication of Diamond Offshore's concern for customer
satisfaction. Diamond Offshore also seeks to capitalize on customer recognition
of Diamond Offshore's quality and safety achievements. Diamond Offshore is the
only drilling contractor to have won more than once (in April 1994 and April
1995) the annually awarded U.S. Minerals Management Service National Safety
Award for Excellence.
GOVERNMENTAL REGULATION
Diamond Offshore's operations are subject to numerous federal, state and
local environmental laws and regulations that relate directly or indirectly to
its operations, including certain regulations controlling the discharge of
materials into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, Diamond Offshore may be liable for damages and costs incurred in
connection with oil spills for which it is held responsible. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may in certain circumstances impose "strict liability" and
render a company liable for environmental damage without regard to negligence or
fault on the part of such company. Such laws and regulations may expose Diamond
Offshore to liability for the conduct of or conditions caused by others, or for
acts of Diamond Offshore that were in compliance with all applicable laws at the
time such acts were performed. The application of these requirements or the
adoption of new requirements could have a material adverse effect on Diamond
Offshore.
OPA '90 and similar legislation enacted in Texas, Louisiana and other
coastal states address oil spill prevention and control and significantly expand
liability exposure across all segments of the oil and gas industry. OPA '90,
such similar legislation and related regulations impose a variety of obligations
on Diamond Offshore related to the prevention of oil spills and liability for
damages resulting from such spills. OPA '90 imposes strict and with limited
exceptions joint and several liability upon each responsible party for oil
removal costs and a variety of public and private damages. OPA '90 also imposes
ongoing financial responsibility requirements on a responsible party. A failure
to comply with such ongoing requirements or inadequate cooperation in a spill
may subject a responsible party, including in some cases Diamond Offshore, to
civil or criminal enforcement action. OPA '90 also requires the U.S. Minerals
Management Service to promulgate regulations to implement the financial
responsibility requirements for offshore facilities. If implemented as written,
the financial responsibility requirements of OPA '90 could have the effect of
significantly increasing the amount of financial responsibility that oil and gas
operators must demonstrate to comply with OPA '90. While industry groups and
marine insurance carriers are seeking modification of these requirements,
implementation of these requirements in their current form could adversely
affect the ability of some of Diamond Offshore's customers to operate in U.S.
waters, which could have a material adverse effect on Diamond Offshore.
The Federal Water Pollution Control Act of 1972, commonly referred to as
the Clean Water Act ("CWA"), prohibits the discharge of certain substances into
the navigable waters of the U.S. without a permit. The regulations implementing
the CWA require permits to be obtained by an operator before certain exploration
or drilling activities occur. Violations of monitoring, reporting and permitting
requirements can result in the imposition of civil and criminal penalties. The
provisions of the CWA can also be enforced by citizens' groups. Many states have
similar laws and regulations.
The Outer Continental Shelf Lands Act authorizes regulations relating to
safety and environmental protection applicable to lessees and permittees
operating on the Outer Continental Shelf. Specific design and operational
standards may apply to Outer Continental Shelf vessels, rigs, platforms,
vehicles and structures.
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<PAGE> 68
Violation of lease terms relating to environmental matters or regulations issued
pursuant to the Outer Continental Shelf Lands Act can result in substantial
civil and criminal penalties as well as potential court injunctions curtailing
operations and the cancellation of leases. Such enforcement liabilities can
result from either governmental or citizen prosecution.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"), currently exempts crude oil, and the Resource
Conservation and Recovery Act, as amended ("RCRA"), currently exempts certain
drilling materials, such as drilling fluids and production waters, from the
definitions of hazardous substances and hazardous wastes. However, Diamond
Offshore's operations may involve the use or handling of other materials, such
as fracturing fluids or acids, that may be classified as environmentally
hazardous substances or wastes. There can be no assurance that such exemption
will be preserved in future amendments of such acts, if any, or that more
stringent laws and regulations protecting the environment will not be adopted.
CERCLA assigns strict liability to each responsible party, as defined, for all
response and remediation costs, as well as natural resource damages. Few
defenses exist to the liability imposed by CERCLA.
Diamond Offshore's operations may involve the generation, use or handling
of materials, such as unused fracturing fluids or acids, that may be classified
as hazardous waste, and that are subject to RCRA and comparable state statutes.
The Environmental Protection Agency ("EPA") and various state agencies have
limited the disposal options for certain hazardous and nonhazardous wastes and
are considering the adoption of stricter handling and disposal standards for
nonhazardous wastes. RCRA currently exempts certain drilling materials, such as
drilling fluids and production waters, from the definitions of hazardous wastes.
There can be no assurance that such exemption will be preserved in future
amendments of such acts, if any, or that more stringent laws and regulations
protecting the environment will not be adopted.
The operations of Diamond Offshore are subject to the Clean Air Act, as
amended, and comparable state statutes. Traditional air quality programs
relating to the prevention of significant deterioration of air quality in areas
with unacceptable pollution levels ("nonattainment areas") restrict drilling in
affected areas. Amendments to the Clean Air Act were adopted in 1990 and contain
provisions that may result in the imposition over the next decade of certain
requirements with respect to air emissions, which requirements may require
capital expenditures by Diamond Offshore. The EPA is currently developing
regulations to implement these requirements. Pursuant to a mandate of the Clean
Air Act, the EPA together with other agencies of the federal government is
conducting a study of the effects of emissions from drilling activities in
nonattainment areas on the Outer Continental Shelf. Upon completion of the
study, these agencies will determine whether additional regulatory requirements
are necessary for these nonattainment areas. Any greater degree of regulation in
nonattainment areas would increase the cost associated with operation in those
areas.
LIMITATION ON OWNERSHIP BY NON-U.S. CITIZENS
Diamond Offshore, as the owner of United States flag vessels, is subject to
the Shipping Act, 1916, as amended ("Shipping Act"), which provides that a
controlling interest in Diamond Offshore may not be acquired by a non-U.S.
citizen without the consent of the U.S. Secretary of Transportation, acting
through the United States Maritime Administration ("MARAD"). Current MARAD
regulations authorize the transfer of a controlling interest in a company as
long as the United States is not at war, the transferee is not a national of a
country to which the transfer would be contrary to the foreign policy of the
United States and the company's U.S. flag vessels remain documented under the
U.S. flag after the transfer. In the absence of MARAD consent (either by the
current regulations or otherwise) the transfer of a controlling interest in
Diamond Offshore to non-U.S. citizens would enable MARAD to exercise various
remedies under the Shipping Act including seizure of vessels, civil penalties
and, in certain cases, criminal penalties.
INDEMNIFICATION AND INSURANCE
Diamond Offshore has generally been able to obtain contractual
indemnification pursuant to which Diamond Offshore's customers agree to protect
and indemnify Diamond Offshore to some degree from liability for reservoir,
pollution and environmental damages, but there can be no assurance that Diamond
41
<PAGE> 69
Offshore can obtain such indemnities in all of its contracts, that the level of
indemnification that can be obtained will be meaningful, that such
indemnification agreements will be enforceable or that the customer will be
financially able to comply with its indemnity obligations. In addition, Diamond
Offshore maintains insurance coverage against certain property damage, war risk
(in the case of certain operations outside the U.S.), general liability and
environmental liabilities, including pollution caused by sudden and accidental
oil spills, but there can be no assurance that such insurance will continue to
be available or carried by Diamond Offshore or if available and carried will be
adequate to cover Diamond Offshore's loss or liability in many circumstances.
Except with respect to its fourth-generation semisubmersibles, Diamond Offshore
does not maintain business interruption insurance and may elect to discontinue
this coverage for its fourth-generation semisubmersibles at any time.
EMPLOYEES
As of December 31, 1995, Diamond Offshore and Arethusa had approximately
2,500 and 1,101 employees, respectively (including international crews furnished
through labor contractors), approximately 260 of which Diamond Offshore
employees were union members. Diamond Offshore has experienced satisfactory
labor relations and provides comprehensive benefit plans for its hourly paid
employees. Diamond Offshore does not consider the possibility of a shortage of
qualified personnel to be a material factor in its business. If demand for oil
field services were to increase rapidly, retention of qualified people might
become more difficult without significant increases in compensation.
PROPERTIES
Diamond Offshore owns an 18,000 square foot building and 20 acres of land
in New Iberia, Louisiana used for its offshore drilling warehouse and storage
facility, a 13,000 square foot building and five acres of land in Aberdeen,
Scotland used in connection with its North Sea operations, a 15,000 square foot
building and 10 acres of land in Alice, Texas for its land drilling office,
warehouse and storage facility, six acres of land near Houston, Texas used as a
warehouse facility and an eight-story office building located at 15415 Katy
Freeway, Houston, Texas, where Diamond Offshore currently has its corporate
headquarters in approximately 60,000 square feet of such building. Diamond
Offshore leases approximately 29,000 square feet of office space in downtown
Houston and various office, warehouse and storage facilities and lots in
Louisiana, The Netherlands, the United Kingdom, Australia, India, Indonesia,
Singapore and Brazil to support its offshore drilling operations.
In February 1996, Diamond Offshore purchased for approximately $8.2 million
the eight-story building containing approximately 182,000 net rentable square
feet on approximately 6.2 acres in which it had leased office space for its
corporate headquarters. A portion of the building is currently occupied by other
tenants under leases which expire through 2005. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other."
LEGAL PROCEEDINGS
Various claims have been filed against Diamond Offshore in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that Diamond Offshore has established adequate reserves on its books
for any liabilities that may reasonably be expected to result from these claims.
In the opinion of management, no pending or threatened claims, actions or
proceedings against Diamond Offshore are expected to have a material adverse
effect on Diamond Offshore's financial position or results of operations.
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<PAGE> 70
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information with respect to each person
or entity known by Diamond Offshore to be the beneficial owner of more than 5%
of Diamond Offshore Common Stock as of the Effective Time (based upon beneficial
ownership of Diamond Offshore Common Stock, with respect to Loews, as of March
28, 1996 and Arethusa Common Stock, with respect to Alphee and Ratos, as of
April 2, 1996).
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------- ------------------------------ -------------------- ----------
<S> <C> <C> <C>
Common Stock Loews Corporation 35,050,000 51.6%
667 Madison Avenue
New York, N.Y. 10021-8087
Common Stock Alphee S.A. 4,708,248 6.9%
11, Avenue de la Gare
P.O. Box 2255
L-1022 Luxembourg
Common Stock Forvaltnings AB Ratos 3,667,207 5.4%
Drottninggatan 2
P.O. Box 1661, S-111 96
Stockholm, Sweden
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table shows the amount and nature of beneficial ownership of
Diamond Offshore Common Stock and Loews common stock beneficially owned by each
director of Diamond Offshore, each Named Executive Officer of Diamond Offshore
and all directors and officers of Diamond Offshore as a group, as of March 28,
1996. Directors and executive officers of Diamond Offshore individually and as a
group own less than 1% of equity securities of Diamond Offshore, Loews or any
subsidiary of Diamond Offshore. Except as otherwise noted, the named beneficial
owner has sole voting power and sole investment power with respect to the
number(s) of shares shown below.
<TABLE>
<CAPTION>
DIAMOND OFFSHORE LOEWS
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
------------------------------------------------------ ---------------- ------------
<S> <C> <C>
James S. Tisch........................................ 0 80,000(1)
Herbert C. Hofmann.................................... 1,000(2) 400(2)
David M. Ifshin....................................... 0 0
Robert E. Rose........................................ 2,100(3) 0
Raymond S. Troubh..................................... 2,500 5,000
Lawrence R. Dickerson................................. 500(3) 200
Ronald C. Johnson(4).................................. 0 0
Thomas P. Richards.................................... 6,000(5) 0
David W. Williams..................................... 100 0
Richard L. Lionberger................................. 0 0
All Directors and Executive Officers as a Group....... 12,300 85,950
</TABLE>
- ---------------
(1) In addition, 58,000 shares of Loews common stock are held by a charitable
foundation as to which Mr. Tisch has shared voting and investment power.
(2) In addition, 350 shares of Loews common stock and 300 shares of Diamond
Offshore Common Stock are owned by Mr. Hofmann's son, as to which shares
Mr. Hofmann disclaims any beneficial ownership.
(3) Voting power and investment power with respect to shares listed with Mr.
Rose and Mr. Dickerson are shared with each such individual's spouse.
(4) Mr. Johnson ceased to be an executive officer of Diamond Offshore in March
1996.
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<PAGE> 71
(5) The number of shares shown includes 4,000 shares owned by Richards Brothers
Company, a Texas corporation, of which all non-voting common stock is owned
by the children of Mr. Richards, and as to which Mr. Richards disclaims any
beneficial ownership.
DIRECTORS
Diamond Offshore's Board of Directors presently consists of five directors.
The directors are James S. Tisch, Herbert C. Hofmann, David M. Ifshin, Robert E.
Rose and Raymond S. Troubh. Two of such directors, Mr. Troubh and Mr. Ifshin,
are not directors, officers or employees of Loews or officers or employees of
Diamond Offshore. All directors are elected annually to serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. Each of the five directors is serving a term of one year to expire at
the 1997 annual meeting of stockholders and until his successor is elected and
qualifies or until his earlier death, resignation, disqualification or removal
from office. Information with respect to the current directors of Diamond
Offshore is set forth below.
<TABLE>
<CAPTION>
AGE AS OF
JANUARY
31, DIRECTOR
NAME POSITION 1996 SINCE
- ------------------------- ---------------------------------------- --------- --------
<S> <C> <C> <C>
James S. Tisch(1)........ Chairman of the Board 43 1989
Herbert C. Hofmann(1).... Director 53 1992
David M. Ifshin(2)....... Director 47 1995
Robert E. Rose(1)........ Director, President and Chief Executive
Officer 57 1989
Raymond S. Troubh(2)..... Director 69 1995
</TABLE>
- ---------------
(1) Member, Executive Committee of the Board of Directors.
(2) Member, Audit Committee of the Board of Directors.
James S. Tisch has served as the Chairman of the Board since 1995 and as a
director of Diamond Offshore since June 1989. Mr. Tisch has served as President
and Chief Operating Officer of Loews, a diversified holding company, since 1994
and prior thereto served as Executive Vice President of Loews for more than five
years. Mr. Tisch, a director of Loews since 1986, also serves as a director of
CNA Financial Corporation, an 84% owned subsidiary of Loews, and Gillett
Holdings, Inc.
Herbert C. Hofmann has served as a director of Diamond Offshore since
January 1992. Mr. Hofmann has served as Senior Vice President of Loews since
January 1992, and prior thereto served as Vice President -- Operations Planning
of Loews for more than five years. He has served as President and Chief
Executive Officer of Bulova Corporation, a 97% owned subsidiary of Loews since
August 1989, and as Chief Operating Officer of Bulova Corporation prior thereto.
Bulova Corporation distributes and sells watches and clocks.
David M. Ifshin has served as a director of Diamond Offshore since November
1995. Mr. Ifshin currently holds several professional positions. Since 1993, he
has served as a Senior Advisor of Galway Partners, Senior Vice President of
Cassidy Associates, and as partner in the law firm Ifshin & Friedman. Between
1983 and 1993, Mr. Ifshin served as a Managing Director of Prudential
Securities, Inc., Senior Vice President and Managing Director of Kemper
Securities (Prescott, Ball & Turben), Director, Washington, Capital Markets
Office of E.F. Hutton & Company, Inc. and a partner with the law firm of Manatt,
Phelps, Rothenberg & Phillips.
Robert E. Rose has served as President and Chief Executive Officer of
Diamond Offshore and as a director since June 1989.
Raymond S. Troubh has served as a director of Diamond Offshore since
November 1995. Mr. Troubh is a financial consultant in New York City and a
former Governor of the American Stock Exchange. For the past five years, Mr.
Troubh has been the principal of Raymond Troubh & Company. Mr. Troubh also
serves as a director of ADT Limited, America West Airlines, Inc., Applied Power
Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and Company, Benson Eyecare
Corporation, Foundation Health Corporation, General
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<PAGE> 72
American Investors Company, Manville Corporation, Olsten Corporation, Petrie
Stores Corporation, Riverwood International Corporation, Time Warner Inc.,
Triarc Companies, Inc., and WHX Corporation.
DIRECTOR COMPENSATION. Directors who are employees of Diamond Offshore are
not paid any fees or additional compensation for service as members of the Board
of Directors or any committee thereof. The annual retainer payable to directors
of Diamond Offshore who are not employees of Diamond Offshore or any of its
subsidiaries or affiliated companies, for services as directors, is $20,000 per
annum, payable quarterly. Each member of the Audit Committee of the Board of
Directors of Diamond Offshore receives a retainer of $2,500 per annum, payable
quarterly, and each director of Diamond Offshore who is not an employee of
Diamond Offshore or any of its subsidiaries or affiliated companies is paid a
fee of $1,000 for attendance at each meeting of the Board of Directors and of
the Audit Committee thereof in addition to the reasonable costs and expenses
incurred by such directors in relation to their services as such.
BOARD OF DIRECTORS AND COMMITTEES. Diamond Offshore's Board of Directors
has five members, and the Board has two standing committees. Further information
concerning the Board's standing committees appears below.
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
consists of three members, Mr. Tisch, Mr. Hofmann and Mr. Rose. The Executive
Committee has all the powers and exercises all the duties of the Board of
Directors in the management of the business of Diamond Offshore that may
lawfully be delegated to it by the Board of Directors. These powers and duties
include, among other things, declaring a dividend, authorizing the issuance of
stock, recommending to stockholders mergers or a sale of substantially all of
the assets of Diamond Offshore, providing advice and counsel to management of
Diamond Offshore, reviewing management's recommendations for significant changes
to the organizational structure of Diamond Offshore and recommending changes to
the Board of Directors.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors consists
of two members, Mr. Ifshin and Mr. Troubh. The Audit Committee reviews and
reports to the Board of Directors on the scope and results of audits by Diamond
Offshore's independent auditors. See "-- Certain Relationships and Related
Transactions -- Services Agreement." It recommends a firm of certified public
accountants to serve as auditors for Diamond Offshore, subject to nomination by
the Board of Directors and election by the stockholders, authorizes all audit
and other professional services rendered by the auditor and periodically reviews
the independence of the auditor. Membership on the Audit Committee is restricted
to directors independent of management and free from any relationship that, in
the opinion of the Board of Directors, would interfere with the exercise of
independent judgment as a committee member. Directors who are affiliates of
Diamond Offshore or officers or employees of Diamond Offshore or its
subsidiaries or its affiliates are not qualified for Audit Committee membership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During
Diamond Offshore's fiscal year ended December 31, 1995, Diamond Offshore had no
compensation committee or other committee of the Board of Directors performing
similar functions. Decisions concerning compensation of executive officers were
made during such fiscal year by persons who were members of Diamond Offshore's
Board of Directors, including Robert E. Rose, an executive officer of Diamond
Offshore.
NOMINATING COMMITTEE. During Diamond Offshore's fiscal year ended
December 31, 1995, Diamond Offshore had no nominating committee or other
committee of the Board of Directors performing similar functions.
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<PAGE> 73
EXECUTIVE OFFICER TENURE AND IDENTIFICATION
The executive officers of Diamond Offshore are elected annually by the
Board of Directors to serve until the next annual meeting of the Board of
Directors and until their successors are duly elected and qualified, or until
their earlier death, resignation, disqualification or removal from office.
Information with respect to the current executive officers of Diamond Offshore
is set forth below.
<TABLE>
<CAPTION>
AGE AS OF
JANUARY
31,
NAME 1996 POSITION
- ---------------------------- ---------- ----------------------------------------------
<S> <C> <C>
Robert E. Rose.............. 57 President, Chief Executive Officer and
Director
Lawrence R. Dickerson....... 43 Senior Vice President and Chief Financial
Officer
Thomas P. Richards.......... 52 Senior Vice President -- Worldwide Operations
David W. Williams........... 38 Senior Vice President -- Contracts and
Marketing
Richard L. Lionberger....... 45 Vice President, General Counsel and Secretary
Gary T. Krenek.............. 37 Controller
</TABLE>
Robert E. Rose has served as President and Chief Executive Officer of
Diamond Offshore and as a director since June 1989.
Lawrence R. Dickerson has served as Senior Vice President of Diamond
Offshore since April 1993 and has served as a Vice President and the Chief
Financial Officer of Diamond Offshore since June 1989.
Thomas P. Richards has served as Senior Vice President of Diamond Offshore
since September 1990. Since March 1996, Mr. Richards has been in charge of
worldwide operations, and prior thereto, since March 1993, Mr. Richards was in
charge of domestic operations. From 1990 to 1993 Mr. Richards was in charge of
land operations.
David W. Williams has served as Senior Vice President of Diamond Offshore
since December 1994 and was a Marketing Vice President between February 1992 and
May 1994. Mr. Williams was employed by Noble Drilling Corporation, an offshore
contract drilling company, from May 1994 through December 1994 as Vice President
of Marketing. Mr. Williams worked in marketing positions at Odeco, an offshore
contract drilling company, from 1990 to February 1992.
Richard L. Lionberger has served as Vice President, General Counsel and
Secretary of Diamond Offshore since February 1992. Mr. Lionberger was engaged in
the private practice of law from 1985 to 1992, principally as the owner of
Lionberger & Associates, and was counsel for Diamond Offshore during that
period.
Gary T. Krenek has served as Controller of Diamond Offshore since February
1992 and was Accounting Manager of Diamond Offshore since 1989.
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<PAGE> 74
EXECUTIVE COMPENSATION
The following table shows for the years ended December 31, 1995 and 1994
the cash compensation paid by Diamond Offshore, and a summary of certain other
compensation paid or accrued for such year, to its Chief Executive Officer and
each of Diamond Offshore's four other most highly compensated executive officers
(the "Named Executive Officers") for service in all capacities with Diamond
Offshore and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)(2)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3)
- --------------------------------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Robert E. Rose..................................... 1995 $390,000 $230,000 $ 6,075
President and Chief Executive Officer 1994 363,315 -- 6,075
Thomas P. Richards(4).............................. 1995 210,128 60,000 5,913
Senior Vice President -- Domestic Operations 1994 199,615 -- 5,913
Lawrence R. Dickerson.............................. 1995 190,000 107,000 5,727
Senior Vice President and Chief Financial Officer 1994 168,000 -- 5,727
Ronald C. Johnson(5)............................... 1995 178,928 -- 5,913
Senior Vice President -- International Operations 1994 182,902 -- 5,913
David W. Williams.................................. 1995 175,000 102,500 5,691
Senior Vice President -- Contracts and Marketing
Richard L. Lionberger.............................. 1994 134,842 -- 5,159
Vice President, General Counsel and Secretary
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser or $50,000 and 10% of the total
annual salary reported for each Named Executive Officer.
(2) Amounts include salary and bonus earned, as well as earned but deferred, by
the Named Executive Officers.
(3) The amounts shown include (i) Diamond Offshore's contributions under the
Retirement Plan referred to below for the years shown on behalf of the Named
Executive Officers, as follows: Mr. Rose, 1994 and 1995 -- $5,625; Mr.
Richards, 1994 and 1995 -- $5,625; Mr. Dickerson, 1994 and 1995 -- $5,625;
Mr. Johnson, 1994 and 1995 -- $5,625; Mr. Williams, 1995 -- $5,625; and Mr.
Lionberger, 1994 -- $5,057; and (ii) the term portion of the life insurance
premiums paid by Diamond Offshore for the years shown on behalf of the Named
Executive Officers, as follows: Mr. Rose, 1994 and 1995 -- $450; Mr.
Richards, 1994 and 1995 -- $288; Mr. Dickerson, 1994 and 1995 -- $102; Mr.
Johnson, 1994 and 1995 -- $288; Mr. Williams, 1995 -- $66; and Mr.
Lionberger, 1994 -- $102.
(4) Mr. Richards became Senior Vice President -- Worldwide Operations in March
1996.
(5) Mr. Johnson ceased to be an executive officer of Diamond Offshore in March
1996.
Diamond Offshore maintains a defined contribution plan (the "Retirement
Plan") designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"), pursuant to which Diamond Offshore contributes
3.75% of the participant's base and overtime salary subject to limitations of
eligible salary. Employees are vested in all contributions as made.
In addition Diamond Offshore expects to adopt an Executive Deferred
Compensation Plan pursuant to which Diamond Offshore will contribute any portion
of the 3.75% of the base salary contribution to the Retirement Plan that cannot
be contributed to the Retirement Plan because of the limitations of Sections
401(a)(17) and 415 of the Code. Additionally, the plan is expected to provide
that participants may defer a percentage of their salary and bonuses pursuant to
such plan. Participants in the plan will be highly compensated officers of
Diamond Offshore and will be fully vested in all amounts paid into the plan. The
plan
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<PAGE> 75
is anticipated to be effective in 1996 and there is proposed to be a make-up
Diamond Offshore contribution for any amounts that were not contributed to the
Retirement Plan for 1994 and 1995 because of the Code limitations described
above.
ANNUAL CASH BONUS INCENTIVES
Bonuses were awarded under the Diamond Offshore Management Bonus Program,
which is intended to provide a means whereby certain selected officers and key
employees of Diamond Offshore may develop a sense of proprietorship and personal
involvement in the development and financial success of Diamond Offshore, and
encourage the participants to remain with and devote their best efforts to the
business of Diamond Offshore, thereby advancing the interests of Diamond
Offshore and its stockholders. At the beginning of each year, the Executive
Committee of the Diamond Offshore Board of Directors establishes a bonus pool
(the "Annual Bonus Pool") equal to (i) a percentage (the "Applicable
Percentage") ranging from 10% to 35% (as determined by the Executive Committee
based on such committee's evaluation of Diamond Offshore during the prior year
(the "performance year") relative to peer companies, and the performance of
Diamond Offshore's share price and extraordinary events during the performance
year) of the total salaries of all participants for the performance year,
divided by (ii) the arithmetical average of (x) Diamond Offshore's cash flow
plus capital expenses for the year prior to the performance year and (y) cash
flow plus capital expenses as budgeted for the performance year, multiplied by
(iii) actual cash flow plus capital expenses for such performance year. The
Executive Committee establishes the bonus payout from the Annual Bonus Pool to
each participant (not to exceed 30% of such participant's eligible salary) based
upon corporate, group or individual performance, or a combination thereof, or
such other subjective criteria as the Executive Committee may determine to be
appropriate. The bonuses are payable in annual installments (50%, 25% and 25%)
over the three calendar year period following the performance year and, with
certain exceptions, are forfeited if not paid prior to termination of
employment. In addition, certain executive officers, including Mr. Rose,
received an additional bonus, to recognize the performance of certain executive
officers of Diamond Offshore in consummating the Diamond Offshore Initial Public
Offering. For performance year 1995, the Executive Committee elected to pay
bonuses under the Diamond Offshore Management Bonus Program aggregating
approximately $685,000 although the Annual Bonus Pool, if calculated based on
the formula set forth in the Diamond Offshore Management Bonus Program and
assuming the maximum permissible Applicable Percentage, would have been
approximately $1.2 million. This deviation was based on the Executive
Committee's subjective evaluation of the overall favorable performance of the
eligible officers in 1995, particularly in connection with the successful
completion of the Diamond Offshore Initial Public Offering.
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
Diamond Offshore and Robert E. Rose entered into and subsequently extended
an agreement, dated November 1, 1992 (the "Employment Agreement"), providing
for, among other things, the employment of Mr. Rose as the President and Chief
Executive Officer of Diamond Offshore until December 31, 1998. Mr. Rose
currently receives a salary at an annual rate of $500,000, subject to such
increases as the Board of Directors of Diamond Offshore may from time to time
determine. Pursuant to the Employment Agreement, Mr. Rose and Diamond Offshore
agree that during the term of Mr. Rose's employment under the Employment
Agreement and for a period of one year immediately following termination of such
employment by Diamond Offshore for cause, Mr. Rose will not engage in any other
business which is in competition with Diamond Offshore without written consent
from Diamond Offshore. The Employment Agreement provides that, for a 120-day
period after consummation of a Change of Control (as defined in the Employment
Agreement), Mr. Rose has the right to terminate his employment and Diamond
Offshore would be obligated to continue to compensate him for a three-year
period.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONTROLLING STOCKHOLDER. As of the date of this Prospectus, Loews
beneficially owns approximately 51.6% of the outstanding shares of Diamond
Offshore Common Stock. Diamond Offshore understands that Loews
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<PAGE> 76
has no current intention of disposing of any of the shares of Diamond Offshore
Common Stock owned by it. Loews entered into an agreement, dated October 10,
1995, with the underwriters of the Diamond Offshore Initial Public Offering
providing that Loews will not, and will not permit its affiliates (other than
Diamond Offshore) to offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of Diamond Offshore Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
Diamond Offshore Common Stock for a period of one year after the date of such
agreement, without the prior written consent of CS First Boston. After such date
such shares may be sold (i) in accordance with Rule 144 promulgated under the
Securities Act, (ii) in private offerings or (iii) upon registration under the
Securities Act without regard to the volume limitations of Rule 144.
In general, under Rule 144 as currently in effect, Loews will be entitled
to sell on the open market in broker's transactions within any three-month
period a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Diamond Offshore Common Stock (currently 678,933 shares)
or (ii) the average weekly trading volume in Diamond Offshore Common Stock on
the open market during the four calendar weeks preceding such sale.
Shares held by Loews may be freely sold if registered under the Securities
Act. Diamond Offshore has agreed to use its best efforts, upon request by Loews,
to register under the Securities Act any or all shares of Diamond Offshore
Common Stock held by Loews and, under certain conditions, when shares of Diamond
Offshore Common Stock are registered by Diamond Offshore. See "-- Transactions
Between Diamond Offshore and Loews -- Registration Rights Agreement."
Loews incorporated Diamond Offshore as a wholly owned subsidiary in 1989
and owned all of the outstanding shares of Diamond Offshore Common Stock since
that time until the consummation of the Diamond Offshore Initial Public
Offering. Proceeds from the Diamond Offshore Initial Public Offering were used
to repay all of Diamond Offshore's then outstanding indebtedness to Loews of
$336.2 million and the remainder of such proceeds was used to pay Loews a
special dividend of $2.1 million. By virtue of its ownership of a majority of
the outstanding shares of Diamond Offshore Common Stock, Loews is in a position
to control actions that require the consent of stockholders, including the
election of directors, payment of dividends, amendment of Diamond Offshore's
Restated Certificate of Incorporation and mergers or a sale of substantially all
the assets of Diamond Offshore. In addition, certain officers, directors or
employees of Loews serve on Diamond Offshore's Board of Directors. See
"-- Directors." Loews and Diamond Offshore have entered into various agreements
relating to the ongoing relationship between Loews and Diamond Offshore. See
"-- Transactions Between Diamond Offshore and Loews."
Loews is a diversified holding company, incorporated under the laws of
Delaware in 1969. Loews, through its subsidiaries, is engaged in a variety of
distinct businesses, including the production and sale of cigarettes; the
operation of hotels; through Diamond Offshore, the operation of oil and gas
drilling rigs; through its approximately 84% ownership of CNA Financial
Corporation, property, casualty and life insurance; and through its
approximately 97% ownership of Bulova Corporation, the distribution and sale of
watches and clocks. In 1995, the consolidated revenues of Loews were
approximately $18.7 billion. The address of Loews is 667 Madison Avenue, New
York, New York 10021-8087.
TRANSACTIONS BETWEEN DIAMOND OFFSHORE AND LOEWS. Diamond Offshore and Loews
have entered into intercompany transactions and agreements incident to their
respective businesses and may enter into material transactions and agreements
from time to time. In connection with the Diamond Offshore Initial Public
Offering, Diamond Offshore and Loews entered into agreements pursuant to which
certain management, administrative and other services are provided by Loews to
Diamond Offshore and certain other obligations were assumed by the parties.
These agreements were not the result of arm's length negotiations between the
parties.
The following description of certain terms of certain agreements,
arrangements and transactions between Diamond Offshore and Loews accurately
summarizes those terms thereof considered by Diamond Offshore to be material to
a prospective investor in the Offered Shares and is qualified in its entirety by
reference to the complete agreements filed as exhibits to the Registration
Statement or, in the case of the Tax Sharing Agreement, the registration
statement filed in connection with the Diamond Offshore Initial Public Offering.
49
<PAGE> 77
Services Agreement. Diamond Offshore and Loews entered into a Services
Agreement effective upon consummation of the Diamond Offshore Initial Public
Offering (the "Services Agreement") pursuant to which Loews agreed to continue
to perform certain administrative and technical services on behalf of Diamond
Offshore. Such services include personnel, telecommunications, purchasing,
internal auditing, accounting, data processing and cash management services, in
addition to advice and assistance with respect to preparation of tax returns and
obtaining insurance. Under the Services Agreement, Diamond Offshore is to
reimburse Loews for (i) allocated personnel costs (such as wages, salaries,
employee benefits and payroll taxes) of the Loews personnel actually providing
such services and (ii) all out-of-pocket expenses related to the provision of
such services. The Services Agreement may be terminated at Diamond Offshore's
option upon 30 days' notice to Loews and at the option of Loews upon six months'
notice to Diamond Offshore. In addition, Diamond Offshore has agreed to
indemnify and hold harmless Loews for all claims and damages arising from the
provision of services by Loews under the Services Agreement, unless due to the
gross negligence or willful misconduct of Loews.
Tax Sharing Agreement. Diamond Offshore has been and will be included in
the consolidated U.S. federal income tax returns filed by Loews with respect to
all periods in which it was a wholly owned subsidiary of Loews. Prior to 1992,
Diamond Offshore's profitable subsidiaries were allocated a share of the Loews
consolidated federal income tax expense and no benefit was given to any of
Diamond Offshore's subsidiaries generating taxable losses. Effective January 1,
1992, a Tax Sharing Agreement (the "Tax Sharing Agreement") with Loews was
adopted to allow for the recognition of expenses and benefits related to taxable
income or loss as if Diamond Offshore and its subsidiaries filed a separate
consolidated return. Upon completion of the Diamond Offshore Initial Public
Offering, Diamond Offshore was owned less than 80% by Loews and was therefore
removed from the consolidated federal income tax return of Loews, which
triggered the automatic termination of the Tax Sharing Agreement. Pursuant to a
termination and settlement agreement entered into effective upon consummation of
the Diamond Offshore Initial Public Offering, Diamond Offshore and Loews agreed
to offset the net amount owed by Loews to Diamond Offshore as a result of the
termination of the Tax Sharing Agreement against Diamond Offshore's notes
payable to Loews. Such offset constituted a full settlement and satisfaction of
Loews's payment obligations to Diamond Offshore arising upon termination of the
Tax Sharing Agreement.
Registration Rights Agreement. Under a Registration Rights Agreement
(the "Registration Rights Agreement") between Diamond Offshore and Loews,
Diamond Offshore will file, upon the request of Loews, one or more registration
statements under the Securities Act, subject to a maximum of three such
requests, in order to permit Loews to offer and sell any Diamond Offshore Common
Stock that Loews may hold. Subject to the restrictions described under
"-- Controlling Stockholder" and "-- Registration Rights of Selling
Stockholders," Loews may exercise these rights at any time, provided shares
comprising at least 5% of the outstanding Diamond Offshore Common Stock are to
be sold. Loews will bear the costs of any such registered offering, including
any underwriting commissions relating to shares it sells in any such offering,
any related transfer taxes and the costs of complying with non-U.S. securities
laws, and any fees and expenses of separate counsel and accountants retained by
Loews. The Registration Rights Agreement will terminate at such time as Loews's
percentage of ownership of the outstanding Diamond Offshore Common Stock falls
below 15%. Diamond Offshore has the right to require Loews to delay any exercise
by Loews of its rights to require registration and other actions for a period of
up to 90 days if, in the judgment of Diamond Offshore, any offering by Diamond
Offshore then being conducted or about to be conducted would be adversely
affected.
Subject to certain conditions, Diamond Offshore has also granted Loews the
right to include its Diamond Offshore Common Stock in any registration
statements covering offerings of Diamond Offshore Common Stock by Diamond
Offshore, and Diamond Offshore will pay all costs of such offerings other than
underwriting commissions and transfer taxes attributable to the shares sold on
behalf of Loews. There is no limitation on the number of times that Loews may
exercise this right with respect to registration statements relating to Diamond
Offshore Common Stock. Diamond Offshore will indemnify Loews, and Loews will
indemnify Diamond Offshore, against certain liabilities in respect of any
registration statement or offering covered by the Registration Rights Agreement.
The rights of Loews under the Registration Rights Agreement are transferable to
affiliates of Loews.
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<PAGE> 78
TRANSACTIONS BETWEEN DIAMOND OFFSHORE AND THE SELLING STOCKHOLDERS.
Pursuant to the Shareholders Agreement, each of Alphee and Ratos agreed to vote
all shares of Arethusa Common Stock it owned in favor of the approval and
adoption of the Amalgamation Agreement and in favor of the ratification of the
Plan of Acquisition and the Fee Agreement, and against any change in a majority
of the persons who constituted the Board of Directors of Arethusa. Under the
Shareholders Agreement, each of Alphee and Ratos irrevocably appointed
Acquisition Sub and its officers, agents and nominees, with full power of
substitution, as proxy to so vote its shares of Arethusa Common Stock. Also
pursuant to the Shareholders Agreement, each of Alphee and Ratos agreed to vote
all shares of Arethusa Common Stock with respect to which it held a proxy for
such purpose in favor of the ratification of the Fee Agreement and each of the
actions that were to be taken by Arethusa pursuant thereto. In addition, Diamond
Offshore granted the Selling Stockholders certain registration rights pursuant
to the Shareholders Agreement. See "-- Registration Rights of Selling
Stockholders."
REGISTRATION RIGHTS OF SELLING STOCKHOLDERS. Pursuant to the Plan of
Acquisition and the Shareholders Agreement, Diamond Offshore agreed for the
benefit of Alphee and Ratos to use its best efforts (i) to cause the
Registration Statement to be filed and declared effective at the earliest
practicable date and to remain effective until the Effective Time, to include
this Prospectus intended to permit each of Alphee and Ratos to sell after the
Effective Time without restriction, at its election, all or part of the shares
of Diamond Offshore Common Stock received by such person in connection with the
Acquisition and (ii) to maintain the continued effectiveness of the Registration
Statement with respect to such shares, including this Prospectus for use by such
persons, for a period of two years from the Effective Time, plus the aggregate
number of days in all Suspension Periods (as such term is defined in the
Shareholders Agreement) after the Effective Time (the "Required Period").
During the Required Period and assuming continued effectiveness of the
registration statement covering their shares of Diamond Offshore Common Stock,
Alphee and Ratos may sell such shares in or outside the United States through
underwriters or dealers, through agents, or directly to one or more purchasers.
The distribution of the shares of Diamond Offshore Common Stock offered by
Alphee or Ratos may be effected from time to time in one or more transactions
(which may involve crosses or block transactions) (i) on the NYSE (or on such
other national stock exchanges on which the Diamond Offshore Common Stock may be
listed from time to time) in transactions which may include special offerings,
exchange distributions and/or secondary distributions pursuant to and in
accordance with the rules of such exchanges, including sales to underwriters who
will acquire the Offered Shares for their own account and resell them in one or
more transactions or through brokers, acting as principal or agent, (ii) in the
over-the-counter market, including sales through brokers, acting as principal or
agent, (iii) in transactions other than on such exchanges or in the
over-the-counter market, or a combination of such transactions, including sales
through brokers, acting as principal or agent, (iv) through the issuance of
securities by issuers other than Diamond Offshore convertible into, exchangeable
for, or payable in such shares (whether such securities are listed on a national
securities exchange or otherwise) or (v) through the writing of options on the
shares (whether such options are listed on an options exchange or otherwise).
Any such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. Diamond Offshore has the right to require each of Alphee and
Ratos to suspend use of any resale prospectus for any period (not to exceed 20
days in any one instance and, when combined with any other such periods, 60 days
in any 12-month period) determined by Diamond Offshore if Diamond Offshore
would, in the opinion of Diamond Offshore's counsel, be required to disclose in
such prospectus information not otherwise then required by law to be publicly
disclosed and, in the judgment of the Board of Directors of Diamond Offshore,
such disclosure might adversely affect Diamond Offshore or any material business
transaction or negotiation in which Diamond Offshore is then engaged.
Each of Alphee and Ratos will have the right to elect during the 180-day
period beginning on the Effective Time (the "Initial Standstill Period") to
proceed with one, and only one, and thereafter such shareholders shall have the
right to proceed with one, and only one (for both such shareholders
collectively) underwritten offering of their shares of Diamond Offshore Common
Stock pursuant to the registration statement covering such shares, but if during
the Initial Standstill Period, only one underwritten offering of Diamond
Offshore Common Stock is effected pursuant to such registration statement, then
each of Alphee
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<PAGE> 79
and Ratos will have the right to proceed with one, and only one, underwritten
offering thereafter until the end of the Required Period. During the Initial
Standstill Period, and thereafter during the period commencing 14 days prior to
the commencement of, and continuing through the completion of the public
distribution of, shares of Diamond Offshore Common Stock in an underwritten
public offering by Alphee or Ratos, Diamond Offshore and Loews have agreed not
to effect any public sale or distribution of Diamond Offshore Common Stock, or
any securities convertible into such stock, subject to certain exceptions.
Diamond Offshore will pay the costs of all such underwritten offerings other
than (i) underwriting commissions attributable to the shares of Diamond Offshore
Common Stock sold on behalf of Alphee or Ratos, (ii) out-of-pocket costs
incurred in connection with "road shows" and other marketing support involving
members of Diamond Offshore's management, (iii) costs of any special audits,
(iv) fees and expenses of underwriter's counsel and (v) any out-of-pocket
expense (including fees and expenses of counsel) of Alphee or Ratos.
Subject to certain conditions, Diamond Offshore also granted each of Alphee
and Ratos the right to include their shares of Diamond Offshore Common Stock in
any registration statements covering offerings of Diamond Offshore Common Stock
filed during the Required Period by Diamond Offshore for its own account or for
holders of Diamond Offshore Common Stock other than Alphee or Ratos, and Diamond
Offshore will pay all costs of such offerings other than underwriting
commissions attributable to any shares sold on behalf of Alphee or Ratos. There
is no limitation on the number of times that Alphee and Ratos may exercise this
right during the Required Period with respect to registration statements
relating to Diamond Offshore Common Stock.
Diamond Offshore will indemnify Alphee and Ratos, and each of Alphee and
Ratos, severally, will indemnify Diamond Offshore, against certain liabilities
in respect of any registration statement or resale prospectus covering offerings
by Alphee or Ratos, as applicable, of shares of Diamond Offshore Common Stock.
The rights of Alphee and Ratos under the Shareholders Agreement with respect to
registration rights are transferable by each of Alphee and Ratos to their
respective affiliates, but are not otherwise transferable without the prior
written consent of Diamond Offshore.
STOCK OPTION PLANS
Pursuant to the Amalgamation Agreement, at the Effective Time, each
Arethusa Option was assumed by Diamond Offshore and now constitutes a fully
vested and currently exercisable option to acquire, on substantially the same
terms and conditions (modified as described below) as were applicable under the
Arethusa Stock Option Plans, the same number of shares of Diamond Offshore
Common Stock as the holder thereof would have been entitled to receive pursuant
to the Amalgamation had such holder exercised such Arethusa Option in full
immediately prior to the Effective Time, at a price per share equal to the per
share exercise price of the Arethusa Option being assumed divided by the
Amalgamation Ratio. No fractional shares of Diamond Offshore Common Stock will
be issued in connection with the exercise of any such Arethusa Option. Fractions
of Diamond Offshore Common Stock resulting from any such exercise will be paid
in cash based upon the market value of a share of Diamond Offshore Common Stock
on the date of exercise. Except as otherwise described above, the Arethusa Stock
Option Plans terminated as of the Effective Time. Diamond Offshore has filed
with the Commission a registration statement on Form S-8 with respect to the
shares of Diamond Offshore Common Stock subject to such Arethusa Options, as so
amended by Diamond Offshore.
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<PAGE> 80
PRICE RANGE OF DIAMOND OFFSHORE COMMON STOCK
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
The following table shows for the periods indicated the high and low closing
prices of Diamond Offshore Common Stock as reported by the NYSE. No information
is provided for Diamond Offshore Common Stock prior to the date of the Diamond
Offshore Initial Public Offering.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter Ended
March 31............................................ 43 3/8 33 3/8 -- --
June 30(1).......................................... 50 1/2 43 1/2 -- --
December 31......................................... -- -- 34 24
</TABLE>
- ---------------
(1) As of April 11, 1996.
On April 11, 1996, the closing price of the Diamond Offshore Common Stock,
as reported by the NYSE, was $50 1/2 per share. As of April 11, 1996, there were
approximately 73 record holders, and approximately 1,400 beneficial holders, of
Diamond Offshore Common Stock.
DESCRIPTION OF CAPITAL STOCK
The following description of certain terms of Diamond Offshore's capital
stock accurately summarizes those terms considered by Diamond Offshore to be
material to a prospective investor in the Offered Shares and is qualified in its
entirety by reference to Diamond Offshore's Restated Certificate of
Incorporation (the "Certificate"), a copy of which was included as an exhibit to
the Registration Statement.
COMMON STOCK
The authorized capital stock of Diamond Offshore consists of 225,000,000
shares of capital stock, 200,000,000 of such shares being Diamond Offshore
Common Stock, par value $0.01 per share. After giving effect to the issuance of
shares of Diamond Offshore Common Stock in connection with the Acquisition (the
exchange of each share of Arethusa Common Stock outstanding immediately prior to
the Acquisition in consideration of 0.88 shares of Diamond Offshore Common
Stock), there were 67,893,344 shares of Diamond Offshore Common Stock issued and
outstanding, of which 8,375,455 shares were held by the Selling Stockholders. In
addition, at the Effective Time, 1,000,000 shares of Diamond Offshore Common
Stock were reserved for issuance upon the exercise of Arethusa Options assumed
by Diamond Offshore.
Holders of Diamond Offshore Common Stock are entitled to one vote for each
share held and are not entitled to cumulative voting for the purpose of electing
directors and have no preemptive or similar right to subscribe for, or to
purchase, any shares of Diamond Offshore Common Stock or other securities to be
issued by Diamond Offshore in the future. Accordingly, the holders of more than
50% in voting power of the shares of Diamond Offshore Common Stock voting
generally for the election of directors will be able to elect all of Diamond
Offshore's directors. As described in "Management -- Certain Relationships and
Related Transactions -- Controlling Stockholder," Loews beneficially owns
approximately 51.6% of the outstanding shares of Diamond Offshore Common Stock
and is in a position to control actions that require the consent of
stockholders, including the election of directors, amendment of the Certificate
and any mergers or any sale of substantially all of the assets of Diamond
Offshore.
Holders of shares of Diamond Offshore Common Stock have no exchange,
conversion or preemptive rights and such shares are not subject to redemption.
All outstanding shares of Diamond Offshore Common Stock are duly authorized,
validly issued, fully paid and non-assessable. Subject to the prior rights, if
any, of holders of any outstanding class or series of capital stock having a
preference in relation to Diamond Offshore Common Stock as to distributions upon
the dissolution, liquidation and winding-up of Diamond Offshore and
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<PAGE> 81
as to dividends, holders of Diamond Offshore Common Stock are entitled to share
ratably in all assets of Diamond Offshore which remain after payment in full of
all debts and liabilities of Diamond Offshore, and to receive ratably such
dividends, if any, as may be declared by Diamond Offshore's Board of Directors
from time to time out of funds and other property legally available therefor.
See "Dividend Policy" and "Capitalization."
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
Diamond Offshore Common Stock, to issue up to 25,000,000 shares of preferred
stock, $.01 par value (the "Preferred Stock"), in one or more series, to
establish the number of shares to be included in each such series and to fix the
designations, preferences, relative, participating, optional and other special
rights of the shares of each such series and the qualifications, limitations and
restrictions thereof. Such matters may include, among others, voting rights,
conversion and exchange privileges, dividend rates, redemption rights, sinking
fund provisions and liquidation rights that could be superior and prior to
Diamond Offshore Common Stock.
The issuance of one or more series of the Preferred Stock could, under
certain circumstances, adversely affect the voting power of the holders of
Diamond Offshore Common Stock and could have the effect of discouraging or
making more difficult any attempt by a person or group to effect a change in
control of Diamond Offshore.
DELAWARE BUSINESS COMBINATION STATUTE
Diamond Offshore is a Delaware corporation and is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"). In
general, Section 203 will prevent an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) of
Diamond Offshore from engaging in a "business combination" (as therein defined)
with Diamond Offshore for three years following the date such person became an
interested stockholder, unless (i) before such person became an interested
stockholder, the Board of Directors of Diamond Offshore approved the business
combination in question, or the transaction which resulted in such person
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in the interested stockholder becoming such, the interested
stockholder owns at least 85% of the voting stock of Diamond Offshore
outstanding at the time such transaction commenced (excluding stock held by
directors who are also officers of Diamond Offshore and by employee stock plans
that do not provide employees with rights to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer),
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the Board of Directors of
Diamond Offshore and authorized at a meeting of stockholders by the affirmative
vote of the holders of not less than 66 2/3% of the outstanding voting stock of
Diamond Offshore not owned by the interested stockholder. Under Section 203, the
restrictions described above do not apply to certain business combinations
proposed by an interested stockholder following the announcement (or
notification) of one of certain extraordinary transactions involving Diamond
Offshore and a person who had not been an interested stockholder during the
preceding three years or who became an interested stockholder with the approval
of Diamond Offshore's directors, and which transactions are approved or not
opposed by a majority of the members of the Board of Directors then in office
who were directors prior to any person becoming an interested stockholder during
the previous three years or were recommended for election or elected to succeed
such directors by a majority of such directors.
Section 203 does not apply to Loews because it has been more than three
years since Loews became an interested stockholder.
POTENTIAL RESTRICTIONS ON SALES OF DIAMOND OFFSHORE COMMON STOCK TO NON-U.S.
CITIZENS
Pursuant to recent amendments to United States maritime laws relating to
sales of interests in and control of vessels owned by United States citizens to
non-citizens, the Secretary of Transportation, acting
54
<PAGE> 82
through the United States Maritime Administration, has prior consent authority
over certain transfers of Diamond Offshore's capital stock. See
"Business -- Limitation on Ownership by Non-U.S. Citizens."
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, L.L.C., whose principal offices are
located at 450 West 33rd Street, New York, New York 10001, acts as transfer
agent and registrar for Diamond Offshore Common Stock.
PLAN OF DISTRIBUTION
Any distribution of the Offered Shares by the Selling Stockholders may be
effected from time to time in one or more of the following transactions (which
may involve crosses or block transactions): (i) on the NYSE (or on such other
national stock exchanges on which the Diamond Offshore Common Stock may be
listed from time to time) in transactions which may include special offerings,
exchange distributions and/or secondary distributions pursuant to and in
accordance with the rules of such exchanges, including sales to underwriters who
will acquire the Offered Shares for their own account and resell them in one or
more transactions or through brokers, acting as principal or agent, (ii) in the
over-the-counter market, including sales through brokers, acting as principal or
agent, (iii) in transactions other than on such exchanges or in the
over-the-counter market, or a combination of such transactions, including sales
through brokers, acting as principal or agent, (iv) through the issuance of
securities by issuers other than Diamond Offshore convertible into, exchangeable
for, or payable in such shares (whether such securities are listed on a national
securities exchange or otherwise) or (v) through the writing of options on the
shares (whether such options are listed on an options exchange or otherwise).
Any such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices.
The Selling Stockholders and any such underwriters, brokers, dealers or
agents, upon effecting the sale of the Offered Shares may be deemed
"underwriters" as that term is defined by the Securities Act.
Underwriters participating in any offering made pursuant to this Prospectus
(as amended or supplemented from time to time) may receive underwriting
discounts and commissions, and discounts or concessions may be allowed or
reallowed or paid to dealers, and brokers or agents participating in such
transactions may receive brokerage or agent's commissions or fees.
In order to comply with the securities laws of certain states, if
applicable, the Offered Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Offered Shares may not be sold unless the Offered Shares have been registered or
qualified for sale in such state or any exemption from registration or
qualification is available and complied with.
Pursuant to the Shareholders Agreement, Diamond Offshore agreed to cause
the Registration Statement to include a resale prospectus that would permit the
Selling Stockholders to sell the Offered Shares without restriction and to keep
the Registration Statement continuously effective for the Required Period.
Diamond Offshore has agreed to pay certain expenses in connection with such
registration, including (1) all registration and filing fees, (2) fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications of
the securities registered), (3) printing expenses, (4) internal expenses of
Diamond Offshore (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (5)
reasonable fees and disbursements of counsel for Diamond Offshore and customary
fees and expenses for independent certified public accountants retained by
Diamond Offshore (including the expenses of any comfort letters or costs
associated with the delivery by independent certified public accountants of a
comfort letter or comfort letters but excluding costs associated with special
audits), (6) the reasonable fees and expenses of any special experts retained by
Diamond Offshore in connection with such registration, (7) fees and expenses in
connection with any review of underwriting arrangements by the National
Association of Securities Dealers, Inc. including fees and expenses of any
"qualified independent underwriter" in connection with an underwritten offering
and (8) fees and disbursements of underwriters customarily paid by issuers or
sellers of securities in connection
55
<PAGE> 83
with an underwritten offering. Diamond Offshore will not be responsible for any
underwriting fees, discounts or commissions in connection with an underwritten
offering or any out-of-pocket expenses (including counsel fees and expenses) of
the Selling Stockholders or any fees and expenses of underwriters' counsel in
connection with an underwritten offering. In addition, the Selling Stockholders
have agreed to pay all costs of any special audits in connection with an
underwritten offering and have agreed to pay, or in the case of an underwritten
offering to cause the underwriters to pay, all out-of-pocket expenses of Diamond
Offshore in connection with any domestic "road show" presentations. Diamond
Offshore and the Selling Stockholders have agreed to indemnify each other and
certain other persons against certain liabilities in connection with the
offering of the Offered Shares including liabilities arising under the
Securities Act. In connection with an underwritten offering, Diamond Offshore
has agreed to indemnify any underwriter thereof and certain other persons to the
same extent as provided with respect to the indemnification of the Selling
Stockholder(s) if such underwriter agrees to indemnify Diamond Offshore to the
same extent as provided with respect to the indemnification of Diamond Offshore
by such Selling Stockholder(s). See "Management -- Certain Relationships and
Related Transactions -- Registration Rights of Selling Stockholders."
LEGAL MATTERS
The validity of the shares of Diamond Offshore Common Stock offered hereby
will be passed on for Diamond Offshore by Weil, Gotshal & Manges LLP, Houston,
Texas.
EXPERTS
The consolidated financial statements of Diamond Offshore as of December
31, 1995 and 1994, and for each of the three years in the period ended December
31, 1995 included herein have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Arethusa as of September 30, 1995
and 1994, and for each of the three years in the period ended September 30, 1995
included in this Prospectus, have been audited by Arthur Andersen & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
56
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets -- December 31, 1995 and 1994........................... F-3
Consolidated Statements of Operations -- Years Ended December 31, 1995, 1994 and
1993............................................................................. F-4
Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1995,
1994 and 1993.................................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and
1993............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets -- December 31 and September 30, 1995......... F-18
Consolidated Condensed Statements of Income -- Three Months Ended December 31, 1995
and 1994......................................................................... F-19
Consolidated Condensed Statements of Cash Flows -- Three Months Ended December 31,
1995 and 1994.................................................................... F-20
Notes to Consolidated Condensed Financial Statements................................ F-21
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................................ F-23
Consolidated Balance Sheets -- September 30, 1995 and 1994.......................... F-24
Consolidated Statements of Income -- Years Ended September 30, 1995, 1994 and
1993............................................................................. F-25
Consolidated Statements of Shareholders' Investment -- Years Ended September 30,
1995, 1994 and 1993.............................................................. F-26
Consolidated Statements of Cash Flows -- Years Ended September 30, 1995, 1994 and
1993............................................................................. F-27
Notes to Consolidated Financial Statements.......................................... F-28
</TABLE>
F-1
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Houston, Texas
January 29, 1996
(February 13, 1996 as to Note 12)
F-2
<PAGE> 86
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 10,306 $ 17,770
Short-term investments.......................................... 5,041 4,926
Accounts receivable............................................. 74,496 57,804
Rig inventory and supplies...................................... 15,330 15,024
Prepaid expenses and other...................................... 10,601 3,970
--------- ---------
Total current assets....................................... 115,774 99,494
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION.................................................... 502,278 488,664
--------- ---------
Total assets............................................... $ 618,052 $ 588,158
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 18,322 $ 13,596
Accrued liabilities............................................. 33,929 28,377
--------- ---------
Total current liabilities.................................. 52,251 41,973
NOTES PAYABLE TO LOEWS............................................. -- 394,777
DEFERRED TAX LIABILITY............................................. 72,907 27,342
--------- ---------
Total liabilities.......................................... 125,158 464,092
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized,
none issued and outstanding at December 31, 1995).............. -- --
Common stock (par value $.01, 200,000,000 shares authorized,
50,000,000 shares issued and outstanding and par value $1.00,
1,000 shares authorized, 100 shares issued and outstanding at
December 31, 1995 and 1994, respectively)..................... 500 1
Additional paid-in capital...................................... 665,107 289,685
Accumulated deficit............................................. (171,444) (164,418)
Cumulative translation adjustment............................... (1,269) (1,202)
--------- ---------
Total stockholders' equity................................. 492,894 124,066
--------- ---------
Total liabilities and stockholders' equity................. $ 618,052 $ 588,158
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 87
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES..................................................... $336,584 $307,918 $288,069
OPERATING EXPENSES:
Contract drilling....................................... 259,560 256,919 228,211
General administrative.................................. 13,857 11,993 11,785
Depreciation............................................ 52,865 55,366 46,819
Gain on sale of assets.................................. (1,349) (1,736) (3,201)
-------- -------- --------
Total operating expenses........................... 324,933 322,542 283,614
-------- -------- --------
OPERATING INCOME (LOSS)...................................... 11,651 (14,624) 4,455
Other income (expense):
Interest expense........................................ (27,052) (31,346) (25,906)
Currency transaction losses............................. (191) (1,316) (1,474)
Other, net.............................................. 1,789 861 1,255
-------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT............................... (13,803) (46,425) (21,670)
INCOME TAX BENEFIT........................................... 6,777 11,621 5,041
-------- -------- --------
NET LOSS..................................................... $ (7,026) $(34,804) $(16,629)
======== ======== ========
PRO FORMA NET INCOME PER SHARE (NOTE 1)...................... $ 0.20
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 88
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1992..................... 100 $ 1 $ 389,685 $(112,985) $(1,401) $ 275,300
Net loss............................ -- -- -- (16,629) -- (16,629)
Exchange rate changes, net.......... -- -- -- -- (310) (310)
Dividend to Loews................... -- -- (100,000) -- -- (100,000)
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1993..................... 100 1 289,685 (129,614) (1,711) 158,361
Net loss............................ -- -- -- (34,804) -- (34,804)
Exchange rate changes, net.......... -- -- -- -- 509 509
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1994..................... 100 1 289,685 (164,418) (1,202) 124,066
Net loss............................ -- -- -- (7,026) -- (7,026)
Exchange rate changes, net.......... -- -- -- -- (67) (67)
Capital contribution................ -- -- 39,676 -- -- 39,676
350,500-for-one stock split......... 35,049,900 350 (350) -- -- --
Issuance of common stock from
initial public offering.......... 14,950,000 149 338,214 -- -- 338,363
Dividend to Loews................... -- -- (2,118) -- -- (2,118)
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1995..................... 50,000,000 $500 $ 665,107 $(171,444) $(1,269) $ 492,894
========== ==== ========== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 89
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (7,026) $(34,804) $(16,629)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 50,794 49,908 46,819
Write-down of asset.................................... 2,071 5,458 --
Gain on sale of assets and other....................... (1,349) (1,736) (3,201)
Accrued interest converted to notes payable to Loews... 27,044 31,294 25,894
Deferred tax benefit................................... (7,472) (13,534) (8,053)
Changes in operating assets and liabilities:
Accounts receivable.................................... (16,692) 4,458 (16,376)
Rig inventory and supplies and other current assets.... (4,896) (698) (1,393)
Accounts payable and accrued liabilities............... 10,278 1,455 6,184
Other, net............................................. 29 761 (341)
--------- -------- --------
Net cash provided by operating activities.............. 52,781 42,562 32,904
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of St. Vincent Drilling Ltd...................... -- -- (10,600)
Acquisition of drilling rigs and related equipment........ -- (25,000) --
Capital expenditures...................................... (66,646) (21,146) (14,345)
Proceeds from sale of assets.............................. 1,516 2,486 4,194
Change in short-term investments.......................... (115) 95 20
--------- -------- --------
Net cash used in investing activities.................. (65,245) (43,565) (20,731)
--------- -------- --------
FINANCING ACTIVITIES:
Net (repayments) borrowings (to) from Loews............... (331,245) 10,000 (5,627)
Proceeds from issuance of common stock.................... 338,363 -- --
Dividend to Loews......................................... (2,118) -- --
--------- -------- --------
Net cash provided by (used in) financing activities.... 5,000 10,000 (5,627)
--------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (7,464) 8,997 6,546
Cash and cash equivalents, beginning of year.............. 17,770 8,773 2,227
--------- -------- --------
Cash and cash equivalents, end of year.................... $ 10,306 $ 17,770 $ 8,773
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 90
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 70.1% of the
outstanding common stock of the Company (see Note 2).
The Company engages principally in the contract drilling of offshore oil
and gas wells primarily for independent and major integrated oil companies and
state-owned oil companies. The Company's fleet of mobile offshore drilling rigs
is one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Southeast Asia and consists of 22
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 14 jack-up rigs and one drillship. The Company also operates
10 land rigs deployed in South Texas. All of the Company's offshore and land
rigs are wholly owned.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.
Supplementary Cash Flow Information
Non-cash financing activities for the year ended December 31, 1995 included
a capital contribution by Loews in September 1995 of $39.7 million which reduced
the outstanding debt to Loews. In addition, $27.0 million of interest expense
was accrued and included in "Notes payable to Loews" prior to such notes being
repaid with a portion of the proceeds from the Common Stock Offering (see Note
2). In connection with the Common Stock Offering, the tax sharing agreement with
Loews was terminated and all liabilities were settled by offsetting $50.9
million owed by Loews to the Company under the agreement against notes payable
to Loews.
Non-cash financing activities for the years ended December 31, 1994 and
1993 included $31.3 million and $25.9 million, respectively, of interest expense
accrued and included in "Notes payable to Loews." Non-cash financing activities
for 1993 also included a $100.0 million dividend declared to Loews in the form
of additional debt (see Note 7).
Rig Inventory and Supplies
Inventories primarily consist of replacement parts and supplies held for
use in the operations of the Company. Inventories are stated at the lower of
cost or estimated value.
Drilling and Other Property and Equipment
Drilling and other property and equipment is carried at cost. Maintenance
and repairs are charged to income currently while replacements and betterments
are capitalized. Costs incurred for major rig upgrades are accumulated in
construction work in progress, with no depreciation recorded on the additions,
until the month the upgrade is completed and the rig is placed into service.
Upon retirement or other disposal of fixed
F-7
<PAGE> 91
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets, the cost and related accumulated depreciation are removed from the
respective accounts and any gains or losses are included in the results of
operations.
For financial reporting purposes, depreciation is provided on the
straight-line method over the remaining estimated useful lives from the date the
asset is placed into service. The estimated useful lives of the Company's
offshore drilling rigs range from 10 to 25 years. Other property and equipment
is estimated to have useful lives ranging from 3 to 10 years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
Income Taxes
Taxable income (loss) of the Company and its domestic subsidiaries was
included in the consolidated U.S. federal income tax return of Loews and other
members of the Loews affiliated group for all taxable periods ending prior to
the Common Stock Offering. Thereafter, the taxable income (loss) of the Company
and its domestic subsidiaries is included in the consolidated U.S. federal
income tax return of the Company and its affiliated group.
Deferred income taxes are recognized for the effect of temporary
differences between financial and tax reporting. Except for selective dividends,
the Company intends to reinvest the unremitted earnings of its non-U.S.
subsidiaries and postpone their remittance indefinitely. Thus, no additional
U.S. taxes have been provided on earnings of these non-U.S. subsidiaries. The
Company's non-U.S. income tax liabilities are based upon the results of
operations of the various subsidiaries in those jurisdictions in which they are
subject to taxation.
Revenue Recognition
Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. The net of mobilization fees
received and costs incurred to mobilize an offshore rig from one market to
another is recognized over the term of the related drilling contract. Absent a
contract, mobilization costs are recognized currently. Revenues received from
customers for asset enhancements relating to specific contracts are deferred and
amortized to income over the term of the drilling contract.
Income from offshore turnkey contracts is recognized on the completed
contract method, with revenues accrued to the extent of costs until the
specified turnkey depth and other contract requirements are met. Provisions for
future losses on turnkey contracts are recognized when it becomes apparent that
contract drilling expenses to be incurred on a specific contract will exceed the
revenue from the contract.
F-8
<PAGE> 92
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at year-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the stockholders' equity section titled "Cumulative translation
adjustment." Currency transaction gains and losses are included in current
operating results. Additionally, translation gains and losses of subsidiaries
operating in hyperinflationary economies are included in operating results
currently.
Research and Development Expenses
Research and development expenses are expensed when incurred and are
reflected in the Consolidated Statements of Operations in "Contract drilling
expenses." For the year ended December 31, 1995, research and development
expenses of approximately $.6 million were incurred in connection with
preliminary feasibility studies for the development of an ultra-large
semisubmersible, the Ocean Legend. There were no research and development
expenses for the years ended December 31, 1994 and 1993.
Pro Forma Net Income Per Share Data
As described in Note 2, after its initial public offering, the Company had
50,000,000 shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the period, the Company would have
recognized net income of $10.0 million, or $0.20 per share, after adjusting for
the after-tax effects of a reduction in interest expense.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
2. COMMON STOCK OFFERING
Pursuant to the Common Stock Offering, the Company sold 14,950,000 shares
of common stock, including 1,950,000 shares from an over-allotment option.
Subsequent to the Common Stock Offering, the exercise of the over-allotment
option and a 350,500-for-one stock split, which was effective immediately prior
to consummation of the Common Stock Offering, the Company had 50,000,000 shares
of common stock outstanding.
Proceeds from the Common Stock Offering were used to repay all of the
Company's then outstanding debt to Loews of $336.2 million and the remainder of
such proceeds was used to pay Loews a special dividend of $2.1 million. In
addition, pursuant to a termination and settlement agreement, all assets and
liabilities under the tax sharing agreement with Loews were settled by
offsetting amounts owed by Loews to the Company thereunder against notes payable
to Loews (see Note 8).
F-9
<PAGE> 93
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SHORT-TERM INVESTMENTS
The Company has entered into a pledge agreement with a bank whereby the
bank has or will extend various financial accommodations to or for the account
of the Company, including issuing letters of credit, entering into foreign
exchange contracts or permitting intra-day overdrafts. In consideration of and
as a condition precedent to the making of such financial accommodations by the
bank, the Company is required to maintain a pledged collateral account in which
the bank has a continuing security interest. As of December 31, 1995 and 1994,
the Company had $5.0 million and $4.9 million, respectively, in U.S. Treasury
Bills deposited in such pledged collateral account.
4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment................................... $ 689,438 $ 645,922
Construction work in progress................................. 19,016 --
Land and buildings............................................ 3,655 3,599
Office equipment and other.................................... 6,300 5,391
--------- ---------
718,409 654,912
Less accumulated depreciation................................. (216,131) (166,248)
--------- ---------
Total............................................... $ 502,278 $ 488,664
========= =========
</TABLE>
Construction Work in Progress
The Company entered into letters of intent with two major oil companies for
three-year commitments on both the Ocean Quest and Ocean Star (formerly named
Ocean Countess) pursuant to which the rigs are being upgraded to conduct
drilling operations in the Gulf of Mexico deep water market. The upgrade
projects include stability enhancements to provide additional hull buoyancy, the
addition of a new mooring system, and drilling system upgrades. In connection
with these upgrades, the Company mobilized the Ocean Star, which had been
previously idle in the North Sea, to the Gulf of Mexico during the fourth
quarter of 1995. Both rigs entered the shipyard to begin their upgrades in
December 1995 and are scheduled to be placed into service in the fourth quarter
of 1996. As of December 31, 1995, $6.6 million and $3.2 million of construction
work in progress was related to the Ocean Quest and Ocean Star, respectively.
The remaining $9.2 million of construction work in progress was related to
upgrades to prepare the Ocean Baroness and Ocean Princess for contracts in
Brazil and the North Sea, respectively.
Impairment of Assets
During 1995 and 1994, the Company recorded impairment losses of $2.1
million and $5.5 million, respectively, to decrease the carrying value of two
semisubmersible drilling rigs (one located in the Gulf of Mexico and the other
located in South America). The rig in the Gulf of Mexico was sold in the fourth
quarter of 1995 and management plans to sell the rig in South America during
1996. The impairment losses represent the amount by which the carrying value of
the rigs exceeded the fair value of such rigs, based on expected future cash
flows to be generated by such rigs. The impairment losses, reflected in
"Depreciation" in the Consolidated Statements of Operations, reduce the carrying
value of both rigs to zero. Operating losses provided by the rig located in the
Gulf of Mexico during the years ended December 31, 1995, 1994 and 1993 were
approximately $2,000, $324,000 and $333,000, respectively. Operating income
(loss) contributed by the rig located in South America during the years ended
December 31, 1995, 1994 and 1993 was approximately $(.6) million, $(2.1) million
and $2.4 million, respectively.
F-10
<PAGE> 94
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits........................................ $17,402 $15,480
Other............................................................ 16,527 12,897
------- -------
Total.................................................. $33,929 $28,377
======= =======
</TABLE>
6. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable. The Company maintains cash and cash equivalents and certain other
financial instruments with various financial institutions. An accounting loss
would occur if one or more of these institutions fails to perform according to
the terms of its agreements. However, these financial institutions are located
throughout the world, and the Company's strategy is designed to limit exposure
to any one institution. The Company's periodic evaluations of the relative
credit standing of these financial institutions are considered in the Company's
investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. Since the market for the Company's services is the oil and gas industry,
this customer base consists primarily of major oil companies and independent oil
and gas producers. The Company provides allowances for potential credit losses
when necessary. No such allowances were deemed necessary for the years
presented. As of December 31, 1995 and 1994, the Company had no significant
concentrations of credit risk.
Fair Values
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments, both
assets and liabilities, for which it is practicable to estimate fair value. The
Company's financial instruments include short-term investments, accounts
receivable and notes payable to Loews. The carrying amounts of the Company's
financial instruments approximate fair value due to the nature of such
instruments. The estimated fair value amounts have been determined by the
Company using appropriate valuation methodologies and information available to
management as of December 31, 1995 and 1994. Considerable judgment is required
in developing these estimates, and accordingly, no assurance can be given that
the estimated values are indicative of the amounts that would be realized in a
free market exchange.
The carrying amount of the Company's investment in U.S. Treasury Bills is
at fair value based upon the closing market prices obtained from public sources.
The Company believes it has the ability to hold its fixed income investment
until maturity. However, the Company may sell its securities and reinvest the
proceeds to take advantage of opportunities generated by changing interest
rates. Therefore, the Company considers its securities as available for sale.
7. NOTES PAYABLE TO AND TRANSACTIONS WITH LOEWS
As described in Note 2, a portion of the proceeds from the Common Stock
Offering was used to repay all of the Company's then outstanding debt to Loews
of $336.2 million. Prior to the Common Stock Offering, the Company received from
Loews loans for acquisitions, capital expenditures and working capital depending
on its cash requirements and cash position. These loans, net of amounts repaid,
were $41.3 million and
F-11
<PAGE> 95
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$20.3 million, including interest at 10 percent per annum of $26.3 million and
$24.7 million, during the years ended December 31, 1994 and 1993, respectively.
Loews had represented to the Company that no repayment of the debt outstanding
was required within twelve months and the debt was, therefore, classified as
noncurrent at December 31, 1994.
On October 7, 1993, the Company declared a $100.0 million dividend to Loews
in the form of additional debt, with interest accruing at 5 percent per annum.
Interest accrued at December 31, 1994 and 1993 was $5.0 million and $1.2
million, respectively.
The Company and Loews have entered into a services agreement which was
effective upon consummation of the Common Stock Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is required to reimburse
Loews for (i) allocated personnel costs (such as wages, salaries, employee
benefits and payroll taxes) of the Loews personnel actually providing such
services and (ii) all out-of-pocket expenses related to the provision of such
services. The Services Agreement may be terminated at the Company's option upon
30 days' notice to Loews and at the option of Loews upon six months' notice to
the Company. In addition, the Company has agreed to indemnify Loews for all
claims and damages arising from the provision of services by Loews under the
Services Agreement, unless due to the gross negligence or willful misconduct of
Loews. Prior to the Common Stock Offering, Loews provided such services at an
allocated rate. The Company has been charged $.7 million, $.9 million and $.6
million by Loews for these support functions during the years ended December 31,
1995, 1994 and 1993, respectively.
Subsequent to the Common Stock Offering, Loews provided the Company with a
$150.0 million revolving line of credit available through October 31, 1996 or
until alternative financing is arranged. Borrowings under the line of credit
bear interest, at the Company's option, at a per annum rate equal to a base rate
(equal to the greater of (i) the prime rate announced by Bankers Trust Company
or (ii) the Federal Funds rate plus .50%) plus .25% or the Eurodollar rate plus
1.25%. The line of credit is unsecured, has no financial or restrictive
covenants, and the Company is not required to pay a commitment fee to Loews. As
of December 31, 1995, there were no amounts outstanding under this line of
credit.
8. INCOME TAXES
The Company and its subsidiaries were party to a tax sharing agreement with
Loews and the Company has provided a tax provision calculated as if on a
stand-alone basis for U.S. federal income tax purposes prior to the Common Stock
Offering. In conjunction with the Common Stock Offering, the tax sharing
agreement was terminated and all assets and liabilities were settled by
offsetting amounts owed by Loews to the Company under the agreement against
notes payable to Loews (see Note 2).
An analysis of the Company's income (taxes) benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. -- current.......................................... $ -- $ -- $ --
U.S. -- deferred......................................... 7,472 13,559 8,558
Non-U.S. -- current...................................... (489) (1,541) (2,519)
Non-U.S. -- deferred..................................... -- (25) (505)
State and other.......................................... (206) (372) (493)
------ ------- -------
Total.......................................... $6,777 $11,621 $ 5,041
====== ======= =======
</TABLE>
F-12
<PAGE> 96
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards........................... $ 15,641 $ 69,241
Investment tax credit carryforwards........................ 7,638 8,838
U.S. taxes on foreign income............................... 8,136 7,180
Workers compensation accruals(1)........................... 2,971 930
Foreign tax credits........................................ 5,160 3,060
Other...................................................... 432 1,432
-------- --------
Total deferred tax assets.......................... $ 39,978 $ 90,681
-------- --------
DEFERRED TAX LIABILITIES:
Drilling and other property and equipment.................. (98,401) (106,288)
Non-U.S. deferred taxes.................................... (10,146) (10,060)
Other...................................................... (1,367) (745)
-------- --------
Total deferred liabilities......................... (109,914) (117,093)
-------- --------
Net deferred tax liability......................... $ (69,936) $ (26,412)
======== ========
</TABLE>
- ---------------
(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.
In connection with the purchase of Odeco Drilling Inc. in 1992, the Company
acquired net operating loss ("NOL") and investment tax credit ("ITC")
carryforwards available to offset future taxable income. The amount of these
acquired NOL and ITC carryforwards, which are expected to be utilized on future
income tax returns, is $49.9 million and $8.8 million, respectively. At December
31, 1995, the Company has recorded a deferred tax asset for the NOL and ITC
carryforwards available, including those generated subsequent to the Common
Stock Offering, which expire as follows:
<TABLE>
<CAPTION>
TAX BENEFIT OF
NET OPERATING INVESTMENT TAX
YEAR LOSSES CREDITS
- ---- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
2001........................................................ $ 8,134 $ --
2002........................................................ -- --
2003........................................................ 2,627 7,638
2004........................................................ 216 --
2005........................................................ 66 --
2006........................................................ 272 --
2008........................................................ 2,321 --
2010........................................................ 2,005 --
------- ------
Total............................................. $ 15,641 $7,638
======= ======
</TABLE>
No valuation allowance has been provided on the Company's deferred tax
assets because management believes that future reversals of existing taxable
temporary differences will generate taxable income sufficient to utilize these
benefits. However, if the Company is unable to generate sufficient taxable
income in the future through operating results, a valuation allowance will be
required through a charge to expense.
F-13
<PAGE> 97
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the expected income tax benefit resulting from the use
of statutory tax rates to the effective income tax benefit follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income tax benefit:
U.S................................................ $(19,591) $(29,667) $(26,290)
Non-U.S............................................ 5,788 (16,758) 4,620
-------- -------- --------
Worldwide.......................................... $(13,803) $(46,425) $(21,670)
======== ======== ========
Expected tax benefit at statutory rate............... $ 4,831 $ 16,249 $ 7,585
Increase in U.S. statutory rate...................... -- -- (1,530)
Non-U.S. income (loss):
Impact of taxation at different rates.............. 1,270 1,716 198
Impact of non-U.S. losses for which a current tax
benefit is not available........................ (1,004) (6,094) (2,490)
State taxes and other................................ 1,680 (250) 1,278
-------- -------- --------
Income tax benefit.............................. $ 6,777 $ 11,621 $ 5,041
======== ======== ========
</TABLE>
As a result of legislation enacted in August 1993, the federal tax rate for
corporations was increased from 34 to 35 percent, effective January 1, 1993. An
adjustment of $1.5 million to increase the net federal deferred tax liability
was recorded in the third quarter of 1993 for the effect of such legislation.
Undistributed earnings of non-U.S. subsidiaries for which no deferred
income tax provision has been made for possible future remittances totaled
approximately $46.1 million at December 31, 1995. Substantially all of this
amount represents earnings reinvested as part of the Company's ongoing business.
It is not practicable to estimate the amount of taxes that might be payable on
the eventual remittance of such earnings. On remittance, certain countries
impose withholding taxes that, subject to certain limitations, are then
available for use as tax credits against a U.S. tax liability, if any. The
Company also has certain income tax loss carryforwards in non-U.S. tax
jurisdictions to which it has assigned no value because of the uncertainty of
utilization of these carryforwards.
9. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution retirement plans for its U.S.
and U.K. employees. The plan for U.S. employees is designed to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan
for U.S. employees, each participant may elect to defer taxation on a portion of
his or her eligible earnings, as defined by the plan, by directing the Company
to withhold a percentage of such earnings. A participating employee may also
elect to make after-tax contributions to the plan. The Company contributes 3.75
percent of a participant's defined compensation. For the years ended December
31, 1995, 1994 and 1993, the Company's provision for contributions was $2.4
million, $2.3 million and $2.0 million, respectively.
The plan for U.K. employees provides that the Company contribute amounts
equivalent to the employee's contributions generally up to a maximum of 3
percent of the employee's defined compensation per year. For the years ended
December 31, 1995, 1994 and 1993, the Company's provision for contributions was
$.2 million, $.2 million and $.3 million, respectively.
F-14
<PAGE> 98
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire
through the year 2000. Total rent expense amounted to $1.5 million, $1.5 million
and $.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Minimum future rental payments under leases are approximately
$327,000, $85,000, $15,000, $15,000 and $10,000 for the years 1996 to 2000,
respectively (see Note 12).
Various claims have been filed against the Company in the ordinary course
of business, particularly claims alleging personal injuries. Management believes
that the Company has established adequate reserves on its books for any
liabilities that may reasonably be expected to result from these claims. In the
opinion of management, no pending or threatened claims, actions or proceedings
against the Company are expected to have a material adverse effect on the
Company's financial position or results of operations.
As security for certain bids and performance on certain contracts, the
Company is contingently liable as of December 31, 1995 and 1994 in the amount of
$.8 million and $1.1 million, respectively, under performance/bid bonds. On the
Company's behalf, banks have issued letters of credit securing these bonds.
11. GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS
The following table summarizes, by geographic area, operating revenues and
operating income (loss) for the years ended December 31, 1995, 1994 and 1993,
and identifiable assets at the end of those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES:
United States...................................... $213,998 $203,198 $158,916
Europe/Africa...................................... 47,645 19,159 47,765
Australia/Southeast Asia........................... 53,113 57,129 30,284
South America...................................... 21,828 26,133 32,489
Other areas........................................ -- 2,299 18,615
-------- -------- --------
Total...................................... $336,584 $307,918 $288,069
======== ======== ========
OPERATING INCOME (LOSS):
United States...................................... $ 19,002 $ 4,125 $ 12,255
Europe/Africa...................................... 5,753 (10,365) (8,432)
Australia/Southeast Asia........................... (7,675) 2,783 (5,960)
South America...................................... (5,429) (11,546) 3,943
Other areas........................................ -- 379 2,649
-------- -------- --------
Total...................................... $ 11,651 $(14,624) $ 4,455
======== ======== ========
IDENTIFIABLE ASSETS:
United States...................................... $386,282 $366,575 $327,370
Europe/Africa...................................... 165,277 125,773 153,619
Australia/Southeast Asia........................... 36,705 48,059 47,386
South America...................................... 29,788 47,751 48,014
Other areas........................................ -- -- 15,773
-------- -------- --------
Total...................................... $618,052 $588,158 $592,162
======== ======== ========
</TABLE>
A substantial portion of the Company's assets are mobile, therefore, asset
locations at the end of the period are not necessarily indicative of the
geographic distribution of the earnings generated by such assets during the
periods.
F-15
<PAGE> 99
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets located outside the U.S. include cash and cash equivalents of
$1.3 million, $2.5 million and $3.3 million at December 31, 1995, 1994 and 1993,
respectively.
The Company has performed drilling activities for certain major customers.
For the year ended December 31, 1995, one customer contributed 16.5 percent of
total revenues. For the year ended December 31, 1994, no single customer
contributed 10.0 percent or more of total revenues. For the year ended December
31, 1993, one customer contributed 10.5 percent of total revenues.
12. SUBSEQUENT EVENTS
Arethusa (Off-Shore) Limited Acquisition
The Company and Arethusa (Off-Shore) Limited, a Bermuda company
("Arethusa"), have entered into an agreement to merge the two companies. The
agreement provides that, upon consummation of the merger, holders of Arethusa
stock will receive 17.9 million shares of common stock to be issued by the
Company based on 20.3 million shares of Arethusa's common stock issued and
outstanding and on a ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The merger is subject to requisite
shareholder approval. It is anticipated that the consummation of the merger will
occur no later than July 31, 1996. The merger will be accounted for as a
purchase for financial reporting purposes, and accordingly, the costs of the
merger will be allocated to assets acquired and liabilities assumed based on
their estimated fair market values.
Arethusa owns a fleet of 11 mobile offshore drilling rigs, operates two
additional mobile offshore drilling rigs, and provides drilling services
worldwide to domestic, international and state-owned oil and gas companies. For
the year ended September 30, 1995, Arethusa reported revenues of $122.1 million,
net income of $21.6 million, and net income per share of $1.06. The following
pro forma information presents the consolidated results of operations, assuming
consummation of the merger had occurred at the beginning of the period. The
historical operating results for the Company included in the pro forma financial
data have been adjusted to give effect to the Common Stock Offering and interest
expense for working capital borrowings.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1995
------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Revenues.................................................................. $456,750
Operating income.......................................................... 3,347
Net loss.................................................................. (963)
Net loss per share........................................................ (0.01)
</TABLE>
Building Purchase
In February 1996, the Company purchased for approximately $8.2 million the
land and the eight-story building containing approximately 182,000 net rentable
square feet on approximately 6.2 acres in which it had leased office space for
its corporate headquarters. A portion of the building is currently occupied by
other tenants under leases which expire through the year 2005. This purchase
will reduce general and administrative expenses in the future by eliminating
rent expense and will provide rental income from the leases, offset by
depreciation and related interest expense. The Company, therefore, does not
expect the result of this purchase to have a material effect on its results of
operations.
F-16
<PAGE> 100
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility
In February 1996, the Company executed a definitive credit agreement
governing a $150.0 million credit facility with a group of banks (the "Diamond
Offshore Bank Credit Facility"). This line of credit bears interest at the same
per annum rate as the revolving line of credit with Loews. Borrowings are
secured by security interests in certain of the Company's assets. The Diamond
Offshore Bank Credit Facility also contains covenants that limit the amount of
total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments. The Company is
required to pay a commitment fee on the unused available portion of the maximum
credit commitment. Upon execution of the definitive agreement for the Diamond
Offshore Bank Credit Facility, the revolving line of credit with Loews was
terminated.
13. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years 1995 and 1994
is shown below. Per share information has not been provided for periods prior to
the Common Stock Offering.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Revenues................................ $ 70,760 $ 76,106 $ 91,716 $ 98,002
Operating income (loss)................. (8,730) 56 11,572 8,753
Income (loss) before income tax
benefit.............................. (16,861) (8,299) 3,003 8,354
Net income (loss)....................... (11,572) (2,770) 1,422 5,894
Pro forma net income per share(1)....... -- -- -- 0.13
1994:
Revenues................................ $ 73,759 $ 75,074 $ 78,872 $ 80,213
Operating income (loss)................. 107 (3,248) (4,535) (6,948)
Loss before income tax benefit.......... (7,355) (12,021) (12,152) (14,897)
Net loss................................ (8,555) (8,505) (7,929) (9,815)
</TABLE>
- ---------------
(1) As described in Note 2, after its initial public offering, the Company had
50,000,000 shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the fourth quarter, the Company
would have recognized net income of $6.4 million, or $0.13 per share, after
adjusting for the after-tax effects of a reduction in interest expense.
F-17
<PAGE> 101
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash investments........................................ $ 27,215 $ 20,251
Restricted cash.................................................. 2,345 2,469
Marketable equity securities..................................... -- 6,000
Accounts receivable.............................................. 29,426 28,625
Supplies and spare parts, at cost................................ 16,564 16,952
Prepayments and other current assets............................. 1,305 1,206
--------- ---------
Total current assets..................................... 76,855 75,503
--------- ---------
MOBILE DRILLING RIGS AND EQUIPMENT, at cost........................ 350,780 348,426
Accumulated depreciation......................................... (119,244) (111,102)
--------- ---------
Net mobile drilling rigs and equipment........................... 231,536 237,324
--------- ---------
OTHER ASSETS....................................................... 2,020 2,505
--------- ---------
Total assets............................................. $ 310,411 $ 315,332
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 10,603 $ 10,603
Accounts payable................................................. 5,085 12,942
Accrued liabilities.............................................. 3,625 4,050
Interest payable................................................. 641 662
Income taxes payable............................................. 328 302
--------- ---------
Total current liabilities................................ 20,282 28,559
--------- ---------
LONG-TERM DEBT..................................................... 58,587 62,175
--------- ---------
DEFERRED CREDITS................................................... 700 1,000
--------- ---------
OTHER LONG-TERM LIABILITIES........................................ 1,021 1,019
--------- ---------
SHAREHOLDERS' INVESTMENT:
Common stock, $.10 par value per share, 50,000 shares authorized,
20,333 shares issued and outstanding.......................... 2,033 2,033
Additional paid-in capital....................................... 218,800 218,800
Accumulated earnings............................................. 8,988 132
Unrealized gain on equity securities............................. -- 1,614
--------- ---------
Total shareholders' investment........................... 229,821 222,579
--------- ---------
Total liabilities and shareholders' investment........... $ 310,411 $ 315,332
========= =========
</TABLE>
See accompanying notes.
F-18
<PAGE> 102
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
CONTRACT DRILLING REVENUE................................................ $40,364 $28,279
------- -------
OPERATING EXPENSES:
Direct costs........................................................... 20,367 20,821
General and administrative............................................. 2,664 2,045
Depreciation........................................................... 8,193 7,067
------- -------
OPERATING INCOME (LOSS).................................................. 9,140 (1,654)
OPERATING INCOME (EXPENSE):
Interest expense....................................................... (1,485) (1,421)
Interest income........................................................ 371 1,716
Gain on sales of equity securities..................................... 1,602 --
Loss on sales of assets................................................ (17) 7
Other, net............................................................. (371) (23)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................................ 9,240 (1,375)
TAX PROVISION............................................................ (384) (315)
------- -------
NET INCOME (LOSS)........................................................ $ 8,856 $(1,690)
======= =======
EARNINGS (LOSS) PER COMMON SHARE......................................... $ .44 $ (.08)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................... 20,333 20,333
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 103
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities............................. $12,324 $ 2,883
------- --------
INVESTING ACTIVITIES:
Capital expenditures for mobile drilling rigs and equipment........... (7,936) (2,051)
Proceeds from dispositions of equipment............................... 12 18
Proceeds from sales-type lease of mobile drilling rig, net............ -- 1,414
Sales of marketable securities........................................ 5,988 --
Changes in other assets............................................... 164 105
------- --------
Net cash used in investing activities......................... (1,772) (514)
------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.............................. -- 80,000
Principal payments on long-term debt.................................. (3,588) (71,809)
Payments for debt financing arrangements.............................. -- (371)
------- --------
Net cash provided by (used in) financing activities........... (3,588) 7,820
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 6,964 10,189
CASH AND CASH EQUIVALENTS, beginning of period.......................... 20,251 26,410
------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $27,215 $ 36,599
======= ========
</TABLE>
See accompanying notes.
F-20
<PAGE> 104
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements for the interim periods
shown in this report have not been audited by independent public accountants
but, in the opinion of management, all adjustments necessary for the fair
presentation of these financial statements have been made. All such adjustments
are of a normal recurring nature. Results of operations for interim periods are
not necessarily indicative of results to be expected for the full fiscal year.
The condensed consolidated financial statements should be read in
connection with the consolidated financial statements of Arethusa (Off-Shore)
Limited ("Arethusa") as of September 30, 1995 and 1994, and for each of the
three years in the period ended September 30, 1995 and the related notes
thereto, included elsewhere herein.
2. PENDING MERGER OF ARETHUSA AND DIAMOND OFFSHORE DRILLING, INC.
On February 9, 1996, Arethusa and Diamond Offshore Drilling, Inc. ("Diamond
Offshore") executed and delivered definitive agreements in connection with the
previously announced proposed merger of the two companies. Merrill Lynch and CS
First Boston, financial advisers to Arethusa and Diamond Offshore, respectively,
have each rendered a fairness opinion in respect of the transaction and each
company's Board of Directors has resolved to recommend the transaction to its
shareholders.
Under the proposed merger each Arethusa share would be exchanged for .88
share of Diamond Offshore on a taxable basis to Arethusa's United States
shareholders. The transaction is subject to approval by the shareholders of each
company at meetings presently expected to be held in April. Commitments to vote
in favor of the merger have been made by shareholders representing approximately
47% of Arethusa's shares and by Loews Corporation, representing approximately
70% of Diamond Offshore shares. If the Plan of Acquisition is terminated under
certain circumstances, Arethusa must pay to Diamond Offshore a fee of up to $18
million.
Upon successful consummation of the merger, options awarded to officers,
directors and employees of Arethusa will become fully vested and exercisable.
Also, Arethusa Off-Shore Company ("AOC"), a wholly owned subsidiary of Arethusa,
has entered into executive severance agreements with certain executive officers
and has amended its severance policy for most shore based employees which will
provide payment of certain additional benefits to the employees if they are
terminated following the merger.
Additionally, on February 9, 1996 Arethusa declared a cash dividend of $.25
per common share payable on March 15 to shareholders of record as of March 1,
1996.
Additionally, subject to approval by Arethusa shareholders and to a
successful merger, the exercise price of options granted under the 1993 Employee
Stock Option Plan (approximately 462,000 shares granted) would be reduced by $3
per share. In the event the option exercise price is reduced to $7 per share,
Arethusa would be required to record compensation expense in its financial
statements for the difference between the revised exercise price of $7 per share
and the market value on the date approval is received from shareholders. To the
extent the market value of Arethusa shares continues to increase above the
exercise price there will be an increased charge to compensation expense.
3. ACQUISITION OF THE ARETHUSA YATZY
In May 1995, Arethusa acquired the Arethusa Yatzy (see footnote 4 to
Arethusa's September 30, 1995 Annual Report on Form 10-K). The following
unaudited pro forma income statement data for the three months ended December
31, 1994 present the consolidated results of operations as if the acquisition
had occurred on September 30, 1994. The unaudited pro forma income statement
data also reflect two additional significant fiscal 1995 transactions, the sale
of the Treasure Stawinner and the June 30, 1995 dividend and capital
distribution (both discussed in footnote 5 to Arethusa's September 30, 1995
Annual Report on Form 10-K), as if each had occurred on September 30, 1994. Such
unaudited pro forma financial data may
F-21
<PAGE> 105
not be indicative of the results of operations of Arethusa had the transactions
been completed on such earlier date, nor is it necessarily indicative of future
financial results.
PRO FORMA INCOME STATEMENT DATA
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Contract Drilling Revenue.................................................. $28,393
-------
Net Loss................................................................... $(2,095)
-------
Net Loss Per Common Share.................................................. $ (.10)
-------
</TABLE>
The historical operating results for the Arethusa Yatzy included in the
unaudited pro forma financial data have been adjusted for (i) duplicate
administrative expenses, (ii) depreciation expense calculated based upon
Arethusa's cost and estimated useful life, (iii) a reduction in insurance
expense based upon Arethusa's lower insured value, and (iv) interest calculated
based upon Arethusa's $30.0 million note.
4. COMMITMENTS AND CONTINGENCIES:
Operating Lease -- Arethusa is committed under a lease agreement for office
space which continues until August 30, 2002. The lease may be canceled in
December 1996 for a lump-sum payment of approximately $1,023,000.
Litigation -- Arethusa is engaged in various claims and litigation arising
from operations. In the opinion of management, uninsured losses, if any,
resulting from these matters will not have a material adverse effect on
Arethusa's results of operations or financial position.
Revenue Agent Reviews -- Revenue agent reviews are currently in progress
with respect to certain of Arethusa's subsidiaries and operations in Indonesia
and the United States. While Arethusa cannot predict with certainty the outcome
of such reviews, management does not believe the ultimate outcome of these
reviews will have a material adverse impact on Arethusa's consolidated financial
position or results of operations.
F-22
<PAGE> 106
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Arethusa (Off-Shore) Limited:
We have audited the accompanying consolidated balance sheets of Arethusa
(Off-Shore) Limited (a Bermuda company) and subsidiaries as of September 30,
1995 and 1994, and the related consolidated statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1995, which, as described in Note 1, have been prepared on the
basis of accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. United States standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arethusa (Off-Shore) Limited
and subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
November 14, 1995
F-23
<PAGE> 107
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $ 20,251 $ 26,410
Restricted cash.................................................... 2,469 2,161
Equity securities.................................................. 6,000 --
Accounts receivable................................................ 28,625 23,076
Lease receivable................................................... -- 57,321
Supplies and spare parts, at cost.................................. 16,952 12,591
Prepayments and other current assets............................... 1,206 1,316
--------- ---------
Total current assets....................................... 75,503 122,875
--------- ---------
Mobile drilling rigs and equipment, at cost
Drilling rigs --
Semisubmersibles................................................ 267,417 227,768
Jack-ups........................................................ 73,823 72,446
Drill pipe and other drilling equipment............................ 5,767 5,450
Furniture, fixtures, automobiles and other......................... 1,419 1,310
--------- ---------
348,426 306,974
Accumulated depreciation........................................... (111,102) (85,818)
--------- ---------
Net mobile drilling rigs and equipment............................. 237,324 221,156
--------- ---------
Other assets......................................................... 2,505 3,791
--------- ---------
Total assets............................................... $ 315,332 $ 347,822
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities
Current maturities of long-term debt............................... $ 10,603 $ 30,899
Accounts payable................................................... 12,942 8,317
Accrued liabilities................................................ 4,050 3,154
Interest payable................................................... 662 763
Income taxes payable............................................... 302 306
--------- ---------
Total current liabilities.................................. 28,559 43,439
--------- ---------
Long-term debt....................................................... 62,175 40,910
--------- ---------
Deferred credits..................................................... 1,000 2,201
--------- ---------
Other long-term liabilities.......................................... 1,019 931
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' Investment:
Common stock, $.10 par value per share, 50,000 shares authorized,
20,333 shares issued and outstanding............................ 2,033 2,033
Additional paid-in capital......................................... 218,800 274,386
Accumulated earnings............................................... 132 (16,078)
Unrealized gain on equity securities............................... 1,614 --
--------- ---------
Total shareholders' investment..................................... 222,579 260,341
--------- ---------
Total liabilities and shareholders' investment............. $ 315,332 $ 347,822
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 108
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Contract drilling revenue...................................... $122,147 $120,212 $ 94,161
-------- -------- --------
Operating expenses
Direct costs................................................. 87,953 79,857 63,882
General and administrative................................... 8,658 7,609 6,300
Depreciation................................................. 29,547 27,446 23,784
-------- -------- --------
Total operating expenses............................. 126,158 114,912 93,966
-------- -------- --------
Operating income (loss)........................................ (4,011) 5,300 195
-------- -------- --------
Other income (expense)
Interest expense............................................. (6,311) (6,090) (10,194)
Interest income.............................................. 5,692 5,842 6,196
Gains on sales of assets..................................... 27,820 330 1,015
Gain on sale of equity securities............................ 67 -- --
Other, net................................................... (193) (253) (154)
-------- -------- --------
Total other income (expense)......................... 27,075 (171) (3,137)
-------- -------- --------
Income (loss) before income taxes.............................. 23,064 5,129 (2,942)
Tax provision.................................................. (1,440) (1,542) (2,061)
-------- -------- --------
Net income (loss).............................................. $ 21,624 $ 3,587 $ (5,003)
-------- -------- --------
Net income (loss) per common share............................. $ 1.06 $ .18 $ (.31)
-------- -------- --------
Weighted average common shares outstanding..................... 20,333 20,333 16,073
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 109
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
---------------- ADDITIONAL GAIN ON
PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL EARNINGS SECURITIES
------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992.............. 15,333 $1,533 $ 228,467 $ (14,662) $ --
Net loss for fiscal year 1993............ -- -- -- (5,003) --
Issuance of Common Stock:
-- Through Initial Public Offering.... 4,000 400 36,019 -- --
-- In connection with rig
acquisitions........................ 1,000 100 9,900 -- --
------ ------ -------- -------- ------
Balance at September 30, 1993.............. 20,333 2,033 274,386 (19,665) --
Net income for fiscal year 1994.......... -- -- -- 3,587 --
------ ------ -------- -------- ------
Balance at September 30, 1994.............. 20,333 2,033 274,386 (16,078) --
Net income for fiscal year 1995.......... -- -- -- 21,624 --
Dividend and capital distribution -- $3
per share............................. -- -- (55,586) (5,414) --
Unrealized gain on equity securities -- -- -- -- 1,614
------ ------ -------- -------- ------
Balance at September 30, 1995.............. 20,333 $2,033 $ 218,800 $ 132 $1,614
====== ====== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 110
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income (loss).......................................... $ 21,624 $ 3,587 $ (5,003)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization........................... 29,547 27,187 23,794
Gains on sales of assets................................ (27,820) (330) (1,015)
Gain on sale of equity securities....................... (67) -- --
Changes in operating assets and liabilities --
(Increase) decrease in restricted cash................ (308) 993 2,473
Increase in accounts receivable....................... (5,189) (1,967) (4,949)
Increase in supplies and spare parts.................. (554) (931) (729)
(Increase) decrease in prepayments and other current
assets............................................. 110 (477) 193
Increase (decrease) in accounts payable............... 530 338 (695)
Increase in accrued liabilities....................... 896 692 1,117
Decrease in interest payable.......................... (101) (710) (439)
Increase (decrease) in income taxes payable........... (4) (137) 220
--------- -------- --------
Total adjustments.................................. (2,960) 24,658 19,970
--------- -------- --------
Net cash provided by operating activities........ 18,664 28,245 14,967
--------- -------- --------
Investing activities
Acquisitions of mobile drilling rigs and equipment......... (69,498) (5,989) (61,814)
Proceeds from dispositions of mobile drilling rigs
and equipment, net...................................... 53,191 674 21,997
Proceeds from sales-type lease of mobile drilling rig,
net..................................................... 56,069 5,362 4,898
Changes in other assets, including deferral and
reimbursement of mobilization expenditures.............. 631 (3,027) --
Investment in equity securities............................ (4,538) -- --
Proceeds from sale of equity securities.................... 218 -- --
Other...................................................... (66) (8) (56)
--------- -------- --------
Net cash provided by (used in) investing
activities.................................... 36,007 (2,988) (34,975)
--------- -------- --------
Financing activities
Proceeds from issuance of long-term debt................... 110,000 -- 25,000
Principal payments on long-term debt....................... (109,032) (23,490) (35,191)
Payments for debt financing arrangements................... (798) (84) (589)
Dividend and capital distribution.......................... (61,000) -- --
Proceeds from issuance of common stock, net of issuance
costs................................................... -- -- 36,419
--------- -------- --------
Net cash provided by (used in) financing
activities.................................... (60,830) (23,574) 25,639
--------- -------- --------
Net increase (decrease) in cash and cash equivalents......... (6,159) 1,683 5,631
Cash and cash equivalents, beginning of period............... 26,410 24,727 19,096
--------- -------- --------
Cash and cash equivalents, end of period..................... $ 20,251 $ 26,410 $ 24,727
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
General Organization
Arethusa (Off-Shore) Limited (herein referred to as Arethusa or the
Company) is a Bermuda corporation, incorporated on August 31, 1990. Arethusa was
formed for the purpose of acquiring offshore drilling rigs and certain other
property and equipment owned by Zapata Off-Shore Company and its subsidiaries
(Zapata or ZOS), and on October 31, 1990, these assets were purchased for $298
million.
In June 1993, the Company effected a two-for-three reverse stock split and
reduced the par value of its stock from $10 to $.10 per share. In connection
with the reverse stock split, the shareholders authorized additional shares of
common stock, resulting in a total of 50,000,000 shares authorized. In August
1993, Arethusa completed an Initial Public Offering (IPO) of 4,896,000 shares of
common stock at an initial price to the public of $10 per share, of which
4,000,000 shares were sold by the Company and 896,000 shares were sold by a
shareholder. These shares are publicly traded on the NASDAQ National Market
System.
Consolidation
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, expressed in
United States dollars and include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Equity Securities
As of September 30, 1995, the Company had investments in equity securities.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", such equity
securities are reflected in the accompanying balance sheet as available-for-sale
securities at the quoted market value as of September 30, 1995. Unrealized gains
on the investment are reported as a separate component of shareholders'
investment, until realized. The quoted market value of the shares held by the
Company may not be the value that would be realized should the Company dispose
of all of the shares in a short period of time.
Supplies and Spare Parts
Supplies and spare parts are stated at average cost which does not exceed
market value.
Mobile Drilling Rigs and Equipment
Mobile drilling rigs and equipment are recorded at cost. Depreciation is
provided on the straight-line method without salvage value, using an estimated
useful life, as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C>
Mobile drilling rigs..................................................... 25 years
Drill pipe and other drilling equipment.................................. 4-6 years
Furniture, fixtures, automobiles and other............................... 3-25 years
</TABLE>
For mobile drilling rigs acquired, the estimated useful life is based upon
when the asset was placed in service by its original owner but will not be less
than five years.
Routine repairs and maintenance are charged to expense as incurred. Repair
and maintenance expense totaled approximately $16,400,000, $14,500,000 and
$10,100,000 for fiscal years 1995, 1994 and 1993, respectively. Major renewals
and improvements are capitalized and are generally depreciated over five years.
F-28
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Upon disposal of assets subject to depreciation, the accounts are relieved of
related costs and accumulated depreciation.
Mobilization Costs
When significant costs are incurred in connection with mobilizing a
drilling rig for a new contract, such costs, net of any mobilization fees
received, are deferred and amortized over the new contract term. When a rig is
mobilized before obtaining a new contract, the market in the new locale is
analyzed and the projected return on the mobilization investment is determined,
and mobilization costs are deferred and amortized over a period not to exceed 24
months. Mobilization costs incurred in connection with rig purchases are
capitalized as part of the purchase price and are depreciated over the life of
the rig.
Interest Rate Swap Agreements
From time to time, the Company has entered into interest rate swap
agreements whereby the Company has exchanged the floating interest rate under
certain debt agreements for a fixed interest rate. The differential paid or
received is accrued as interest rates change and recognized over the life of the
agreements. No such financial instruments have been in effect since October
1993.
Revenue Recognition
Contract drilling revenues are recognized as earned, based on contractual
drilling rates. Losses are recognized in the period in which the loss is
identified.
Foreign Currency Translation
Arethusa accounts for foreign currency translation in accordance with SFAS
No. 52, "Foreign Currency Translation." In connection therewith, the United
States dollar was determined to be the functional currency as revenues are
received and operating costs are paid primarily in United States dollars.
Earnings (Loss) per Share Data
Earnings (loss) per share data is based on the weighted average number of
common shares and common equivalent shares outstanding during each year, if
dilutive.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." The Company
believes that the fair value of its financial instruments approximates their
book value. This determination was made as follows:
Long-Term Debt. The fair value of the Company's long-term debt, all of
which is floating rate, is estimated based on rates currently available to
the Company for debt with similar maturities.
Currency Exchange Contracts. Currency exchange contracts in place on
September 30, 1993, expired between October 1993 and December 1993. As
market value gains and losses on currency exchange contracts are recognized
as an offset to currency exchange losses in the statements of income
(discussed in Note 8) in the period in which they occur, the carrying value
is therefore equal to the fair value. At September 30, 1995 and 1994, no
currency exchange contracts were outstanding.
Recent Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" which defines a fair value based
method of accounting for an employee stock
F-29
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
option or similar equity instrument and is effective for fiscal years beginning
after December 15, 1995. As allowed by SFAS No. 123, the Company plans to
continue to measure compensation cost for their compensation plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" with pro forma
disclosure in the future of the difference, if any, between compensation cost
included in net income and the related cost measured under the fair value
method.
2. RELATED-PARTY TRANSACTIONS:
Sale of 50-Percent Interest in Arethusa Heritage
On December 31, 1991, a subsidiary of Ymer Offshore AB (Ymer), a former
shareholder of Arethusa, purchased a 50-percent interest in the Arethusa
Heritage, for an aggregate purchase price of $10 million. The purchase price was
paid $2 million in cash and the remaining $8 million in the form of a secured
note.
As a part of this sale, Ymer and Arethusa also entered into option
agreements in which Ymer had the right to sell back to Arethusa, and Arethusa
had the right to repurchase, the Ymer interest in the rig at specified prices.
Effective January 31, 1994, the Company repurchased this 50 percent interest in
the Arethusa Heritage for $8.4 million. As payment for the repurchase, the
Company paid $400,000 in cash and accepted cancellation of the $8.0 million
promissory note which was due on January 31, 1994. The Company now owns 100% of
the Arethusa Heritage.
As a result of these option agreements, Arethusa did not recognize this
transaction as a sale. The Company recorded a deferred credit for the amount of
the gain which was amortized based upon the approximate period of time the
options were expected to be outstanding. For the years ended September 30, 1994
and 1993, respectively, Arethusa recognized $49,100 and $884,300 of gain, and
$142,700 and $435,900 of interest income related to this transaction.
During fiscal years 1994 and 1993 Arethusa operated the Arethusa Heritage
under a bareboat charter agreement. The charter fee totaled $357,300 and
$1,076,100, respectively, during the years ended September 30, 1994 and 1993.
This bareboat charter agreement terminated on January 31, 1994, in connection
with Arethusa's repurchase of the 50-percent interest in the rig.
Yatzy Management and Operating Services Agreement
Prior to Arethusa's acquisition of the Yatzy in May 1995 (see Note 4), the
rig was managed by Arethusa under a management and operating services agreement
with Exmar, N.V. (a Belgium corporation which is related to Alphee S.A., a
principal shareholder of the Company). Under the terms of the agreement,
Arethusa was paid a management fee, and all operating expenses were paid by
Exmar, N.V. This management fee totaled $374,500, $638,700 and $638,700 for
fiscal 1995, 1994 and 1993 respectively, and the Company has recorded such fees
as a reduction of Arethusa's administrative expenses.
Other Related-Party Transactions
The Company previously provided $710,000 in financing for the homes of the
president and a vice president of Arethusa Off-Shore Company (AOC), a wholly
owned subsidiary of Arethusa, who were recruited from outside the United States.
These notes, which originally bore interest at 9 percent per annum, matured
during fiscal 1994 and were renewed for additional three year terms. During
fiscal year 1995, AOC agreed to take possession of the home of the vice
president in full payment of his note. The remaining note receivable from the
president is now payable in full in 1997, with interest due quarterly in arrears
based upon the stated rate of 8.12 percent per annum. This note receivable is
secured by a real estate lien note and the deed of trust for the home.
F-30
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Ymer and International Maritime Investors S.A. (IMI), the majority
shareholder of Alphee S.A., each guaranteed $4.5 million of the rig secured debt
due August 20, 1996. The Company agreed to compensate Ymer and IMI at the rate
of 1 1/2 percent per annum of the guaranteed amount. Such guarantees expired
with the debt repayment in December 1994.
3. CASH FLOW INFORMATION:
For purposes of the statements of cash flows, all investments with an
original maturity of three months or less are considered to be cash equivalents.
Net cash used in operating activities reflects cash interest payments of
approximately $7,109,000, $6,139,000 and $11,209,000; and income and withholding
tax payments of approximately $1,389,000, $1,744,000 and $1,852,000 for fiscal
years 1995, 1994 and 1993, respectively.
Restricted cash is comprised of balances maintained to guarantee the
Company's performance under drilling contracts in Indonesia and India, and rig
availability for certain drilling contract bids.
4. ASSET ACQUISITIONS:
Acquisition of the Arethusa Yatzy
On May 3, 1995, the Company acquired the Arethusa Yatzy (formerly the
Yatzy), a dynamically-positioned semisubmersible drilling rig built in 1989. The
rig has been managed by Arethusa since 1991 and in May 1995 began a drilling
contract with Petroleos Brasileiros, S.A. (Petrobras), which is expected to keep
the unit working offshore Brazil through November 1998. The purchase price was
$50.2 million, $20.2 million of which was paid from existing cash balances and
$30.0 million of which was funded through a new eight-year, rig-secured loan.
The following unaudited pro forma income statement data for the years ended
September 30, 1995 and 1994, present the consolidated results of operations as
if the acquisition had occurred at the beginning of the fiscal year 1994. The
unaudited pro forma income statement data also reflect two additional
significant fiscal 1995 transactions, the sale of the Treasure Stawinner
discussed in Note 5 and the June 30, 1995, dividend and capital distribution of
$61.0 million ($3.00 per share), as if each had occurred at the beginning of
fiscal 1994. Since the gain on the sale of the Treasure Stawinner is a
nonrecurring credit, this gain has not been included in this pro forma income
statement data. If calculated as if the sale occured at the beginning of fiscal
1994, this gain amount would approximate $24.4 million. Such unaudited pro forma
financial data may not be indicative of the results of operations of the Company
had the transactions been completed on such earlier date, nor is it necessarily
indicative of future financial results.
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Contract Drilling Revenue...................................... $120,166 $122,675
======== ========
Net Income (Loss).............................................. $ (8,496) $ 883
======== ========
Net Income (Loss) Per Common Share............................. $ (.42) $ .04
======== ========
</TABLE>
The historical operating results for the Arethusa Yatzy included in the
unaudited pro forma financial data, have been adjusted for (i) duplicate
administrative expenses, (ii) depreciation expense calculated based upon
Arethusa's cost and estimated useful life, (iii) a reduction in insurance
expense based upon Arethusa's lower insured value, and (iv) interest expense
calculated based upon Arethusa's $30.0 million note.
F-31
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Acquisition of Arethusa Worker and Treasure Stawinner.
On August 20, 1993, Arethusa acquired two deepwater semisubmersible
drilling rigs, the Arethusa Worker and the Treasure Stawinner, for $59.0 million
in cash and 1,000,000 shares of common stock of the Company. Arethusa funded the
cash portion of this acquisition with $34.0 million of cash proceeds from the
IPO and $25.0 million of bank debt.
5. ASSET DISPOSITIONS:
Sale of the Treasure Stawinner
On June 30, 1995, Arethusa completed the Sale of the Treasure Stawinner for
conversion to a floating production unit for Petrobras. Arethusa received $55.0
million in cash and has retained ownership of certain drilling equipment, which
was removed from the rig and will be used by the Company for other purposes.
Upon closing of the transaction, the Company recognized a gain of approximately
$27.9 million, repaid $12.6 million of secured debt, and declared a $3 per share
dividend and capital distribution to shareholders. The dividend/distribution
totaled $61.0 million, and was paid on July 28, 1995 to shareholders of record
as of July 14, 1995.
Sale of Miss Kitty
In July 1993, Arethusa sold the jackup Miss Kitty for $22.0 million in
cash. Arethusa continues to operate the Miss Kitty pursuant to a bareboat
charter agreement with the new owners which has recently been extended for an
additional year through July 30, 1997. The Company realized a gain of $3.6
million which is being amortized ratably over the initial three-year charter
term. The charter provides for a fixed charter fee of $9,765 per day for the
first eighteen months, and thereafter a basic charter rate of $6,750 per day
plus a revenue sharing component. The Company used $18.2 million of the proceeds
to reduce outstanding debt.
Sale of Zapata Arctic
Effective March 30, 1992, Arethusa sold the Petrobras XXV (formerly the
Zapata Arctic) to an affiliate of Petrobras, effected through a sales-type lease
with a term of 10 years, for a gain of approximately $27.3 million. The lease
stipulated a down payment of $2,642,500 and 40 quarterly installments, for total
principal payments of $75,500,000 plus interest. The interest component of the
installment was adjusted quarterly to the three-month London Interbank Market
Rate plus 4 percent. At September 30, 1994 and 1993, this rate was 9.31 and 7.19
percent per annum, respectively.
The lessee had two options to purchase the rig for the then unpaid
principal balance of the lease, in March 1995 or December 1997. On March 31,
1995 Petrobras exercised their purchase option under the lease of the Petrobras
XXV. The Company transferred title of this rig to the Petrobras affiliate and
received lease proceeds of $54.4 million in cash, which were used to pay $17.9
million of secured debt and $1.2 million in commissions.
Sale of Bonito II
Arethusa sold the Bonito II on December 31, 1991, for a gain of
approximately $5.1 million. The buyer paid $25.3 million in cash for the rig and
services provided by Arethusa in connection with the sale. Arethusa continues to
operate the Bonito II pursuant to a bareboat charter agreement which currently
extends to August 1996. The charter rate is currently $7,550 per day plus a
revenue sharing component. The Company has the option to extend the charter for
two additional one-year periods from August 1996.
During March 1994, the Bonito II ended its contract in India and was
mobilized to the Gulf of Mexico where it commenced operations under a drilling
contract in July 1994. In connection with this mobilization,
F-32
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
the Company and the owner agreed to share equally the mobilization costs. The
net costs to be borne by the Company, which is approximately $1.7 million, is
being deferred and amortized over a period of twenty-four months.
6. DEBT:
Long-term debt at September 30, 1995 and 1994, consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Rig-secured debt due May 3, 2003............................... $ 30,000 $ --
Rig-secured debt due December 22, 1999......................... 42,778 --
Rig-secured debt due October 30, 1996.......................... -- 52,809
Rig-secured debt due August 20, 1996........................... -- 19,000
-------- --------
72,778 71,809
Less -- Current maturities..................................... (10,603) (30,899)
-------- --------
$ 62,175 $ 40,910
======== ========
</TABLE>
Rig-Secured Debt Due May 3, 2003
In connection with the acquisition of the Arethusa Yatzy on May 3, 1995,
the Company entered into a credit agreement to borrow $30.0 million from its
lending banks. Under the terms of the agreement, principal is payable in sixteen
semi-annual installments of $1.9 million. Interest rates are based upon an
average of the Reuters FRBD reference rates plus 1 1/2 percent per annum, and
payable in arrears. The effective interest rate for fiscal year 1995 was 7.54
percent.
The loan is secured by a first mortgage on the Arethusa Yatzy. Loan
covenants included, among other financial provisions, (a) maintenance of minimum
collateral values, (b) restrictions on the sale of collateralized assets, (c)
restrictions on declarations of dividends and (d) limitations on further
indebtedness.
Rig-Secured Debt Due December 22, 1999
On December 20, 1994, the Company entered into a new credit agreement with
its lending banks. Under this agreement, certain wholly-owned subsidiaries of
the Company borrowed $80 million to refinance then existing rig-secured debt.
During fiscal 1995 this loan was paid down by $37.2 million, which included
three scheduled quarterly installments totalling $6.7 million, and two
additional payments totalling $30.5 million made in connection with the
monetization of the Petrobras XXV lease and the Sale of the Treasure Stawinner
(see Note 5). Currently, quarterly payments on this loan total $1.7 million with
a final payment of $15.4 million due in December 1999. Interest is payable
quarterly in arrears and is based upon the London Interbank Market Rate plus
1 1/2 percent per annum. The effective interest rate for fiscal year 1995 was
7.97 percent.
The loan is secured by the first priority fleet mortgage on all rigs owned
by the Company other than the Arethusa Yatzy. Other loan covenants are similar
to those in the rig-secured debt due May 3, 2003.
F-33
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Annual Maturities
The annual maturities of long-term debt (including the current portion),
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending September 30 --
1996.......................................................... $10,603
1997.......................................................... 10,603
1998.......................................................... 10,603
1999.......................................................... 10,603
2000.......................................................... 19,118
Thereafter.................................................... 11,248
-------
$72,778
=======
</TABLE>
7. TAXES:
Arethusa's United States subsidiaries and Bermuda subsidiaries with
operations in United States territorial waters provide taxes at the United
States federal statutory rate. As of September 30, 1995, these subsidiaries
collectively had United States net operating loss carryforwards of approximately
$85.6 million for United States tax reporting purposes. These losses are
available to benefit future United States tax expense and expire in fiscal years
2006 through 2010.
Arethusa's subsidiaries operating in the territorial waters of countries
outside of the United States provide taxes at the rates applicable in those
countries. The tax provision includes income and withholding taxes applicable to
operations in India, Indonesia, Brazil and the Netherlands.
At the present time, no income, profit, capital or capital gain taxes are
levied in Bermuda and, accordingly, no provision for such taxes has been
recorded by the Company. In the event that such taxes are levied, the Company
has received an undertaking from Bermuda Government exempting it from all such
taxes until March 28, 2016.
Revenue agent reviews are currently in progress with respect to certain of
the Company's subsidiaries and operations in Indonesia and the United States.
While the Company cannot predict with certainty the outcome of such reviews,
management does not believe the ultimate outcome of these reviews will have a
material adverse impact on the Company's consolidated financial position or
results of operations.
F-34
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
The Company's income (loss) before income taxes and income tax provision
were (in thousands):
<TABLE>
<CAPTION>
INCOME
(LOSS) BEFORE TAX
INCOME TAXES PROVISION
------------- ---------
<S> <C> <C>
For the year Ended September 30, 1995:
Bermuda...................................................... $ (179) $ --
Non-Bermuda.................................................. 23,245 (1,440)
------- -------
$23,064 $(1,440)
======= =======
For the year Ended September 30, 1994:
Bermuda...................................................... $ 247 $ --
Non-Bermuda.................................................. 4,882 (1,542)
------- -------
$ 5,129 $(1,542)
======= =======
For the year Ended September 30, 1993:
Bermuda...................................................... $ (399) $ --
Non-Bermuda.................................................. (2,543) (2,061)
------- -------
$(2,942) $(2,061)
======= =======
</TABLE>
Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have not been
recognized in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on differences between
the financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Prior-year financial statements were not restated for
SFAS No. 109. The adoption of SFAS No. 109 had no material effect on the
Company's consolidated financial position or results of operations.
No deferred taxes were required to be provided during fiscal 1995, 1994, or
1993.
The components of the net deferred tax asset (liability) as of September
30, 1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets --
Net U.S. operating loss carryforwards......................... $ 29,964 $ 24,481
Accruals and reserves......................................... 514 409
Valuation allowance........................................... (23,543) (19,761)
-------- --------
6,935 5,129
======== ========
Deferred tax liabilities --
Excess of tax over book depreciation.......................... (6,935) (5,129)
-------- --------
Net deferred tax asset (liability).............................. $ -- $ --
======== ========
</TABLE>
8. CURRENCY EXCHANGE:
In an effort to minimize the effects of exchange rate fluctuations, the
Company generally hedges its exposure through obtaining payment for drilling
contracts in United States Dollars. During fiscal years 1994 and 1993, the
Company also entered into currency exchange contracts to address specific risks.
The Company does not engage in currency speculation. At September 30, 1993, the
Company had contracts maturing between October and December 1993 requiring it to
purchase $3.6 million in foreign currency (the equivalent
F-35
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
of 119.0 million Indian rupees). During fiscal year 1994, the Company committed
to an additional $1.0 million of currency exchange contracts which matured
between December 1993 and June 1994. There were no currency exchange contracts
in place at September 30, 1995 or 1994. Market value gains and losses on the
currency exchange contracts have been recognized as an offset to currency
exchange losses in the statements of income. Total currency exchange losses
recorded in the statements of income were approximately $1.2 million, $1.2
million and $1.8 million for fiscal years 1995, 1994 and 1993, respectively.
These losses primarily resulted from operations in Brazil and India.
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS:
Arethusa's customer base includes major and independent oil and gas
companies and government owned oil companies. During fiscal 1995, 1994 and 1993,
the Company earned 52.1 percent, 54.3 percent, and 49.1 percent, respectively,
of its revenues from major customers. A summary of the major customers for these
years were as follows: year ended September 30, 1995 -- Petrobras and Shell Oil
Company, 27.8 percent and 24.3 percent, respectively; year ended September 30,
1994 -- Petrobras, Marathon Oil Company, and Maxus Southeast Sumatra, Inc., 26.3
percent, 15.0 percent and 13.0 percent, respectively; year ended September 30,
1993 -- Indian Oil & Natural Gas Commission, Maxus Southeast Sumatra, Inc. and
Petrobras, 17.4 percent, 15.8 percent and 15.9 percent, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Operating Lease
Arethusa is committed under a lease agreement for office space which
continues until August 30, 2002. The lease may be canceled in December 1996 for
a lump-sum payment of approximately $1,023,000. Under the terms of the lease,
the Company only made cash payments to reimburse the landlord for operating
expenses through December 31, 1993. The Company began making additional payments
for base, rental installments on January 1, 1994. Rental charges are expensed on
a straight-line basis over the term of the lease. The Company recognized rental
expense of approximately $566,000, $552,000 and $524,000 of which approximately
$203,000, $211,000 and $183,000 were paid as operating expenses in fiscal years
1995, 1994 and 1993, respectively. Estimated future minimum lease payments,
excluding reimbursable operating expenses, under this operating lease are as
follows (in thousands):
<TABLE>
<S> <C>
Fiscal year --
1996........................................................... $ 373
1997........................................................... 392
1998........................................................... 463
1999........................................................... 487
2000........................................................... 509
Thereafter..................................................... 989
------
$3,213
======
</TABLE>
Litigation
Arethusa is engaged in various claims and litigation arising from
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse effect on Arethusa's results
of operations or financial position.
F-36
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
11. BENEFIT PLANS:
Pension Plan
AOC established a defined benefit pension plan effective October 1, 1992,
which covers substantially all U. S. citizens and U. S. permanent residents who
are employed by AOC. Employees are automatically enrolled in the plan following
the completion of one year of service and are 100 percent vested after five
years of service. Benefits are calculated and paid based on employees' years of
credited service and average final compensation using an excess benefit formula
integrated with social security covered compensation.
Pension costs are determined actuarially and funded to the extent allowable
under the Internal Revenue Code. The plan's assets are invested in cash and cash
equivalents, equity securities, government and corporate debt securities.
The significant actuarial assumptions as of the plan's year-end are set
forth in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1995 1994
---- ----
<S> <C> <C>
Discount rate........................................................ 7.5% 8.1%
Expected long-term rate.............................................. 9.0% 9.0%
Compensation projection rate......................................... 5.0% 5.0%
</TABLE>
The funded status as of September 30, 1995 and September 30, 1994, is set
forth in the following table (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Benefit obligation -- Vested............................................ $ (7,159) $(5,394)
-- Non-vested........................................ (663) (254)
-------- -------
Accumulated benefit obligation.......................................... (7,822) (5,648)
Effect of compensation projection....................................... (3,061) (2,916)
-------- -------
Projected benefit obligation............................................ (10,883) (8,564)
Plan assets at fair value............................................... 8,421 6,725
-------- -------
Projected benefit obligation in excess of plan assets................... (2,462) (1,839)
Unrecognized loss....................................................... 2,329 1,339
Unrecognized prior service cost......................................... (299) --
Contributions........................................................... 123 --
-------- -------
Accrued pension cost.......................................... $ (309) $ (500)
======== =======
</TABLE>
Net periodic pension cost for the fiscal year ended September 30, 1995 and
1994 includes the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -----
<S> <C> <C>
Service cost of benefits earned........................................... $ 566 $ 575
Interest cost on projected benefit obligations............................ 692 619
Actual return on plan assets.............................................. (1,014) 227
Deferred gain (loss)...................................................... 401 (855)
Amortization of loss...................................................... 43 53
Amortization of prior service cost........................................ (21) --
------- -----
Net period pension cost......................................... $ 667 $ 619
======= =====
</TABLE>
F-37
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Profit-Sharing Plan
AOC established a defined contribution profit-sharing plan effective
October 1, 1992 which covers substantially all U.S. citizens, U.S. permanent
residents and third country national expatriates who are employed by AOC. The
plan and trust agreement are intended to meet the requirements of Section 401(a)
and all related sections of the Internal Revenue Code.
Employees may enroll in the plan following the completion of one year of
service. Participants may elect to make contributions from 1 percent up to 16
percent of gross monthly salary to the plan: a maximum of 10 percent on a 401(k)
basis; a maximum of 16 percent on a 401(m) basis. All amounts contributed to the
plan are deposited in a trust with a national bank and administered by
independent trustees.
At the end of the plan year on September 30, the Company will match a
minimum of 10 percent up to a maximum of 100 percent of eligible basic
contributions made by participants during the plan year. The basic rate of
contribution used to determine the Company matching amount is 6 percent, on a
401(k) or 401(m) basis. The actual matching percentage is determined by the
Company's Board of Directors at the end of the plan year. AOC made
profit-sharing provisions of approximately $276,000, $134,000 and $120,000 for
1995, 1994 and 1993, respectively.
Employee Stock Option Plan
In August 1993, the Company adopted the Arethusa (Off-Shore) Limited 1993
Employee Stock Option Plan (the Employee Plan) pursuant to which a maximum
aggregate of 666,667 shares of Common Stock are available for grant to eligible
employees. Options granted pursuant to the Employee Plan vest in equal
installments over three years and remain exercisable for a period of seven
years, so long as the option holder remains an employee of the Company as of the
date of exercise. The exercise price of options granted under the Employee Plan
equal the market price of the Common Stock on the date of grant. The Employee
Plan provides for the adjustment of the number of shares awarded thereunder, and
the exercise price thereof, on any stock dividend, any subdivision or
combination of the outstanding shares of Common Stock and any merger,
consolidation, recapitalization of the Company or similar event which affects
the issued and outstanding shares of Common Stock.
In August 1993, the Company granted 466,666 options at an option price of
$10 per share, the market price in the IPO. Accordingly, no compensation expense
has been recorded with respect to these options.
As of September 30, 1995 there were 308,000 exercisable options, and 4,667
options had been canceled and surrendered. No options have been exercised.
In September 1995 the board of directors approved a $3 per share reduction
in the option price to $7 per share, subject to shareholder approval at the next
annual general meeting. This action was proposed as a result of the $3 per share
dividend and capital distribution paid by the Company in July 1995.
Non-employee Director Stock Option Plan
In February 1995, the Company's shareholders approved the Arethusa
(Off-Shore) Limited 1994 Nonqualified Stock Option Plan for Non-Employee
Directors ("Directors' Plan"), pursuant to which a maximum aggregate of 250,000
shares of common stock were authorized. Under the Directors' Plan eligible
directors were granted an option to purchase 20,000 shares of the Company's
common stock, at an exercise price equal to the fair market value of the common
stock on the date of grant. Options granted under this plan vest in equal annual
installments over a three-year period, and expire seven years from date of
grant.
As of September 30, 1995, 160,000 options had been granted under the
Directors' Plan; 100,000 of these options carry an option price of $11.25 based
upon a May 1994 date of grant, and the remaining 60,000 options
F-38
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
have an option price of $12.625 based on a February 1995 date of grant. In May
1995, approximately 33,000 options became exercisable. No options have been
exercised or cancelled.
12. GEOGRAPHIC INFORMATION (UNAUDITED):
The nature of the Company's operations and assets requires movement among
geographic areas in response to market conditions and contract requirements.
Therefore, the operations and assets reported within a particular geographic
area may not be indicative of a long-term operating commitment in that area.
Assets are included in the geographic information shown below according to
operating location (in thousands):
<TABLE>
<CAPTION>
BERMUDA
UNITED NORTH SOUTHEAST SOUTH AND
STATES SEA ASIA AMERICA INDIA OTHER ELIMINATIONS TOTAL
-------- ------- --------- -------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 1995 --
Revenues.......................... $ 72,008 $ 8,769 $ 6,902 $ 33,979 $ 7,289 $32,788 $(39,588) $122,147
Operating income (loss)........... (8,667) (2,172) (1,117) 7,022 1,488 (565) -- (4,011)
Identifiable assets............... 170,159 29,736 16,937 82,331 2,797 13,372 -- 315,332
Year Ended September 30, 1994 --
Revenues.......................... $ 64,273 $ 6,116 $15,593 $ 31,648 $10,255 $22,123 $(29,796) $120,212
Operating income (loss)........... (3,346) (2,513) 3,910 7,662 281 (694) -- 5,300
Identifiable assets............... 163,610 31,501 33,165 116,982 2,408 156 -- 347,822
Year Ended September 30, 1993 --
Revenues.......................... $ 40,994 $12,582 $14,887 $ 19,911 $16,307 $ -- $(10,520) $ 94,161
Operating income (loss)........... (9,383) 550 2,726 4,813 1,967 (478) -- 195
Identifiable assets............... 168,494 34,210 33,454 126,509 6,346 -- -- 369,013
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for fiscal 1995 and 1994 is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995 --
Contract drilling revenue................. $28,279 $27,167 $32,232 $34,469 $122,147
Operating income (loss)................... (1,654) (3,246) (525) 1,414 (4,011)
Income (loss) before income taxes......... (1,375) (2,957) 26,687 709 23,064
Net income (loss)......................... (1,690) (3,232) 26,414 132 21,624
Net income (loss) per common share........ $ (.08) $ (.16) $ 1.30 $ .01 $ 1.06
1994 --
Contract drilling revenue................. $30,147 $30,967 $29,219 $29,879 $120,212
Operating income.......................... 1,786 2,042 971 501 5,300
Income before income taxes................ 1,518 2,094 948 569 5,129
Net income................................ 1,059 1,632 546 350 3,587
Net income per common share............... $ .05 $ .08 $ .03 $ .02 $ .18
</TABLE>
14. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS:
On December 7, 1995, Arethusa entered into a letter of intent with Diamond
Offshore Drilling, Inc. ("Diamond Offshore") for the merger of the two
companies. The terms of the proposed transaction provide that, upon satisfaction
of certain conditions precedent, including execution of definitive agreements
(which execution occurred February 9, 1996) and obtaining approval from Arethusa
and Diamond Offshore shareholders and certain regulatory agencies, each of the
issued and outstanding shares of Arethusa common stock would be converted into
the right to receive .88 shares of Diamond Offshore common stock. On
F-39
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
February 9, 1996, Arethusa declared a cash dividend of $.25 per share to the
holders of its common stock. Management anticipates the merger will be
consummated no later than July 31, 1996.
Upon successful consummation of the merger, options awarded to certain
officers, directors and employees of Arethusa will become fully vested and
exercisable. Additionally, AOC has entered into executive severance agreements
with certain executive officers and has amended its severance policy for most
shore based employees which will provide payment of certain additional benefits
to the employees if they are terminated following the merger.
Additionally, subject to approval by Arethusa shareholders and to a
successful merger, the exercise price of options granted under the 1993 Employee
Stock Option Plan (approximately 462,000 shares granted) would be reduced by $3
per share. In the event the option exercise price is reduced to $7 per share,
Arethusa would be required to record compensation expense in its financial
statements for the difference between the revised exercise price of $7 per share
and the market value on the date approval is received from shareholders. To the
extent the market value of Arethusa shares continues to increase above the
exercise price there will be an increased charge to compensation expense.
F-40
<PAGE> 124
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DIAMOND
OFFSHORE OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF DIAMOND OFFSHORE SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Diamond Offshore Drilling, Inc........... S-2
Use of Proceeds.......................... S-3
Selling Stockholders..................... S-3
Capitalization........................... S-4
Selected Consolidated Financial Data..... S-5
Unaudited Pro Forma Consolidated
Condensed Financial Statements......... S-6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-11
Active Mobile Offshore Drilling Rigs..... S-16
Underwriting............................. S-18
Legal Matters............................ S-20
Index to Prospectus Supplement Financial
Statements............................. SF-1
PROSPECTUS
Available Information.................... 2
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 10
Selling Stockholders..................... 10
Dividend Policy.......................... 11
Capitalization........................... 12
Selected Consolidated Financial Data..... 13
Unaudited Pro Forma Consolidated
Condensed Financial Statements......... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 20
Business................................. 28
Management............................... 43
Description of Capital Stock............. 53
Plan of Distribution..................... 55
Legal Matters............................ 56
Experts.................................. 56
Index to Financial Statements............ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
7,523,140 SHARES
[DIAMOND OFFSHORE LOGO]
COMMON STOCK
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH & CO.
CS FIRST BOSTON
SALOMON BROTHERS INC
May 20, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 125
Rule 424(b)(5)
Reg. No. 333-2680
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 12, 1996)
<TABLE>
<S> <C> <C>
7,523,140 SHARES
[DIAMOND OFFSHORE LOGO] DIAMOND OFFSHORE DRILLING, INC.
COMMON STOCK
</TABLE>
---------------------
All of the shares of common stock, par value $0.01 per share ("Diamond
Offshore Common Stock"), of Diamond Offshore Drilling, Inc., a Delaware
corporation ("Diamond Offshore"), offered hereby (the "Offered Shares") will be
sold by Alphee S.A., a Luxembourg corporation ("Alphee"), and Forvaltnings AB
Ratos, a Swedish corporation ("Ratos" and, together with Alphee, the "Selling
Stockholders"). See "Selling Stockholders." Diamond Offshore will not receive
any of the proceeds from the sale of the Offered Shares.
Of the 7,523,140 Offered Shares, 1,505,000 Offered Shares are being offered
initially outside the United States and Canada (the "International Offering") by
the International Managers (as defined herein) and 6,018,140 Offered Shares are
being offered in the United States and Canada (the "U.S. Offering" and, together
with the International Offering, the "Offerings") by the U.S. Underwriters (as
defined herein). The public offering price and the aggregate underwriting
discount per share will be identical for both Offerings. See "Underwriting."
Pursuant to the Plan of Acquisition dated as of February 9, 1996, as amended
(as so amended, the "Plan of Acquisition"), among Diamond Offshore, Diamond
Offshore (USA) Inc., a Delaware corporation ("Diamond Offshore (USA)"), AO
Acquisition Limited, a Bermuda company ("Acquisition Sub"), and Arethusa
(Off-Shore) Limited, a Bermuda company ("Arethusa"), and the Amalgamation
Agreement dated as of February 9, 1996 (the "Amalgamation Agreement") between
Arethusa and Acquisition Sub, Diamond Offshore acquired Arethusa (the
"Acquisition") on the terms set forth in the Plan of Acquisition and
Amalgamation Agreement. The Acquisition was consummated on April 29, 1996 (the
"Effective Time"). Arethusa shareholders received 17,893,344 shares of Diamond
Offshore Common Stock, representing approximately 26.4% of the total Diamond
Offshore Common Stock currently outstanding, of which the Selling Stockholders
received an aggregate of 8,375,455 shares.
Diamond Offshore Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "DO." On May 20, 1996, the closing price of the Diamond
Offshore Common Stock on the NYSE was $49 3/8 per share.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE OFFERED SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 6
OF THE ACCOMPANYING PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE UNDERWRITING SELLING
TO PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $49.25 $1.48 $47.77
- ----------------------------------------------------------------------------------------------------------------
Total(3)...................................... $370,514,645 $11,134,247 $359,380,398
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Diamond Offshore and the Selling Stockholders have agreed to indemnify the
several Underwriters (as defined herein) against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Diamond Offshore has agreed to pay certain expenses of the Offerings
estimated at $500,000. The Selling Stockholders have agreed to pay certain
other expenses of the Offerings estimated at $167,500. The Underwriters have
agreed to pay certain expenses of the Selling Stockholders estimated at
$100,000.
(3) The Selling Stockholders have granted the U.S. Underwriters and the
International Managers options, exercisable within 30 days after the date of
this Prospectus Supplement, to purchase up to 601,814 and 150,501 additional
shares of Diamond Offshore Common Stock, respectively, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Selling Stockholders
will be $407,566,159, $12,247,674 and $395,318,485, respectively. See
"Underwriting."
---------------------
The Offered Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Offered Shares will be made in New York, New York on or about
May 24, 1996.
---------------------
MERRILL LYNCH INTERNATIONAL
CS FIRST BOSTON
SALOMON BROTHERS INTERNATIONAL LIMITED
---------------------
The date of this Prospectus Supplement is May 20, 1996.
<PAGE> 126
IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF DIAMOND
OFFSHORE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THESE OFFERINGS, CERTAIN PERSONS AFFILIATED WITH PERSONS
PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN
ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE DIAMOND OFFSHORE COMMON STOCK
PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and, including those rigs
acquired as a result of the Acquisition, consists of 30 semisubmersible rigs
(including three of the world's 13 fourth-generation semisubmersibles), 19
jack-up rigs owned and/or operated by Diamond Offshore and one drillship.
Diamond Offshore also operates 10 land rigs deployed in South Texas. Except for
two jack-up rigs operated pursuant to bareboat charter contracts, all of Diamond
Offshore's offshore and land rigs are wholly owned.
On April 29, 1996, Diamond Offshore consummated the Acquisition, thereby
adding to its fleet Arethusa's 13 owned and/or operated mobile offshore drilling
rigs. Arethusa provided drilling services worldwide to international and
government-controlled oil and gas companies. Arethusa's eight semisubmersible
rigs now owned by Diamond Offshore are located in the Gulf of Mexico and
offshore Brazil and Arethusa's five jack-up rigs now owned by Diamond Offshore
are located offshore India, Indonesia and Egypt, in the Gulf of Mexico and in
the Dutch sector of the North Sea.
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
For the period from April 12 through May 20, 1996, the high and low closing
prices of Diamond Offshore Common Stock as reported by the NYSE were $52 5/8 and
$44 1/4 per share, respectively. For the high and low closing prices for earlier
periods, see "Management -- Price Range of Diamond Offshore Common Stock" in the
accompanying Prospectus.
S-2
<PAGE> 127
USE OF PROCEEDS
Diamond Offshore will not receive any of the proceeds from the sale of the
Offered Shares by the Selling Stockholders.
SELLING STOCKHOLDERS
All of the Offered Shares being offered hereby are being offered by Alphee
and Ratos. The following table sets forth information, as of the date of this
Prospectus Supplement, relating to beneficial ownership (as defined in Rule
13d-3 of the Securities Exchange Act of 1934, as amended) of Diamond Offshore
Common Stock by each Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP NUMBER OF SHARES OF OWNERSHIP OF
OF DIAMOND OFFSHORE DIAMOND OFFSHORE DIAMOND OFFSHORE
COMMON STOCK PRIOR TO COMMON COMMON STOCK AFTER
THE OFFERINGS STOCK TO BE SOLD(1) THE OFFERINGS(1)
NAME OF --------------------- ------------------- -------------------
SELLING STOCKHOLDER NUMBER PERCENT NUMBER NUMBER PERCENT
- ----------------------------------- --------- ------- ------------------- ------- -------
<S> <C> <C> <C> <C> <C>
Alphee S.A......................... 4,708,248 6.9% 4,234,771 473,477 0.7%
11, Avenue de la Gare
1611 Luxembourg
Forvaltnings AB Ratos.............. 3,667,207 5.4% 3,288,369 378,838 0.6%
Drottninggatan 2
Stockholm, Sweden
</TABLE>
- ---------------
(1) In addition to the shares of Diamond Offshore Common Stock indicated, the
Selling Stockholders have granted the U.S. Underwriters and the
International Managers options, exercisable within 30 days after the date
of this Prospectus Supplement, to purchase up to 601,814 and 150,501
additional shares of Diamond Offshore Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, (a)
the number of shares of Diamond Offshore Common Stock to be sold by Alphee
and Ratos will be 4,658,248 and 3,617,207, respectively, and (b) beneficial
ownership of Diamond Offshore Common Stock after the Offerings by Alphee
and Ratos will be 50,000 (.07%) and 50,000 (.07%), respectively.
See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and the Selling
Stockholders," "-- Registration Rights of Selling Stockholders" and "Plan of
Distribution" in the accompanying Prospectus for additional information with
respect to the Selling Stockholders.
S-3
<PAGE> 128
CAPITALIZATION
The following table sets forth the capitalization of Diamond Offshore as of
March 31, 1996 and as adjusted as of such date after giving effect to the
Acquisition. This table should be read in conjunction with the Consolidated
Financial Statements (including the Notes thereto) and the Unaudited Pro Forma
Consolidated Condensed Financial Statements included elsewhere in this
Prospectus Supplement.
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
-------------------------
HISTORICAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ 15,000 $ 82,477
--------- ----------
Stockholders' equity:
Common stock, $.01 par value........................... 500 679
Additional paid-in capital............................. 665,107 1,215,605
Accumulated deficit.................................... (152,712) (152,712)
Cumulative translation adjustment...................... (1,263) (1,263)
--------- ----------
Total stockholders' equity........................... 511,632 1,062,309
--------- ----------
Total capitalization........................................ $ 526,632 $ 1,144,786
========= ==========
</TABLE>
S-4
<PAGE> 129
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical and pro
forma financial data for Diamond Offshore. The selected consolidated financial
data were derived from the Consolidated Financial Statements (including the
Notes thereto) of Diamond Offshore included in this Prospectus Supplement and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements (including the Notes thereto) of Diamond Offshore included in this
Prospectus Supplement. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of results to be anticipated for
the entire year.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
THREE MONTHS MARCH 31,
ENDED ---------------------
MARCH 31, 1996 1996 1995
-------------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues.......................................... $147,662 $106,868 $ 70,760
Operating expenses:
Contract drilling..................................... 86,454 66,157 61,751
General and administrative............................ 5,552 3,103 3,140
Depreciation(1)....................................... 20,018 12,069 14,988
Gain on sale of assets................................ (157) (157) (389)
Operating income (loss)................................. 35,795 25,696 (8,730)
Interest expense........................................ (1,291) -- (8,486)
Other income (expense), net............................. 484 434 355
Income tax benefit (expense)............................ (7,861) (7,398) 5,289
Net income (loss)....................................... 27,127 18,732 (11,572)
Net income per share.................................... .40 0.37 --
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA MARCH 31,
MARCH 31, 1996 1996
-------------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 109,185 $ 70,480
Drilling and other property and equipment, net....................... 1,083,485 533,645
Goodwill and other assets............................................ 28,956 3,984
Total assets......................................................... 1,295,738 658,185
Long-term debt....................................................... 71,874 15,000
Stockholders' equity................................................. 1,062,309 511,632
</TABLE>
- ---------------
(1) Effective January 1, 1996, Diamond Offshore revised the estimated useful
lives for certain classes of its offshore drilling rigs. The estimated
useful lives of Diamond Offshore's offshore drilling rigs, after the change
in estimate, range from 10 to 25 years. The effect of such change reduced
depreciation expense and increased net income for the three months ended
March 31, 1996 by approximately $2.1 million and $1.5 million ($0.03 per
share), respectively.
S-5
<PAGE> 130
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma consolidated condensed financial statements as of
and for the three months ended March 31, 1996 have been prepared based on the
historical financial statements of Diamond Offshore and Arethusa as of and for
the three months ended March 31, 1996. Such historical financial statements are
unaudited but, in the opinion of management, include all adjustments necessary,
consisting only of normal recurring accruals. The unaudited pro forma
consolidated condensed income statement for the year ended December 31, 1995 has
been prepared based on the historical financial statements of Diamond Offshore
as of and for the year ended December 31, 1995 and based on pro forma income
statement data for Arethusa that reflect adjustments to Arethusa's historical
consolidated income statement for the year ended September 30, 1995 in
connection with (i) the acquisition of the Arethusa Yatzy, (ii) the sale of the
Treasure Stawinner and (iii) the dividend and capital distribution of $61.0
million ($3.00 per share of common stock, par value $0.10 per share, of Arethusa
("Arethusa Common Stock")) as if each had occurred at the beginning of fiscal
year 1995. The pro forma income statement for the three months ended March 31,
1996 gives effect to the Acquisition. The pro forma income statement for the
year ended December 31, 1995 gives effect to (i) the Acquisition, (ii) the
initial public offering of Diamond Offshore Common Stock in October 1995 (the
"Diamond Offshore Initial Public Offering") and, in connection therewith, the
use of the proceeds to repay all of Diamond Offshore's then outstanding
indebtedness to Loews Corporation, a Delaware corporation ("Loews"), and to fund
the payment of a special dividend to Loews and (iii) interest expense for
working capital borrowings, and commitment and other fees, under Diamond
Offshore's $150.0 million credit facility with a group of banks (the "Diamond
Offshore Bank Credit Facility"). The Acquisition was accounted for under the
purchase method of accounting using a purchase price of $560.7 million, which
was calculated based on a seven-day average of the closing price of Diamond
Offshore Common Stock at the time the Acquisition was announced. The pro forma
consolidated condensed balance sheet was prepared assuming such transactions
were consummated on March 31, 1996 and give effect to events directly
attributable to the transactions, including those that are nonrecurring. The pro
forma consolidated condensed income statement was prepared assuming the
transactions were consummated as of the beginning of the period presented and
give effect to events directly attributable to the transactions which are
expected to have a continuing impact on the combined entity. These pro forma
consolidated condensed financial statements should be read in conjunction with
the other financial information of Diamond Offshore and Arethusa presented
elsewhere in this Prospectus Supplement and the accompanying Prospectus. The pro
forma consolidated condensed financial statements are presented for illustrative
purposes only and are not necessarily indicative of actual results that would
have been achieved had the transactions been consummated on such dates, and are
not necessarily indicative of future results. The allocation of the purchase
price is preliminary, as valuation and other studies have not been finalized. It
is not expected that the final allocation of the purchase price will produce
materially different results from those presented herein.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL(A)
--------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and other current assets............ $ 32,932 $ 49,722 $ (16,549)(b) $ 66,105
Accounts receivable...................... 87,624 29,568 -- 117,192
Drilling and other property and
equipment, net......................... 533,645 230,853 318,987(c) 1,083,485
Goodwill and other assets................ 3,984 2,071 22,901(d) 28,956
--------- -------- -------- ----------
Total assets................... $ 658,185 $ 312,214 $ 325,339 $1,295,738
========= ======== ======== ==========
Current liabilities...................... $ 50,076 $ 20,536 $ 3,500(e) $ 74,112
Long-term debt........................... 15,000 56,874 -- 71,874
Deferred credits and other liabilities... 81,477 1,884 4,082(f) 87,443
Common stock............................. 500 2,033 (1,854)(g) 679
Additional paid-in capital............... 665,107 218,800 331,698(g) 1,215,605
Accumulated earnings (deficit)........... (152,712) 12,087 (12,087) (152,712)
Cumulative translation adjustment........ (1,263) -- -- (1,263)
--------- -------- -------- ----------
Total liabilities and
stockholders' equity......... $ 658,185 $ 312,214 $ 325,339 $1,295,738
========= ======== ======== ==========
</TABLE>
S-6
<PAGE> 131
- ---------------
(a) There are no significant adjustments required to the historical financial
statements of Diamond Offshore or Arethusa to conform accounting policies
of the two companies.
(b) Adjustment for fair values of identifiable current assets acquired and for
certain events directly attributable to the transaction. Such items
include:
<TABLE>
<S> <C>
Severance, consulting, and salary continuation plans...................... $ (5,526)(1)
Financial advisory services............................................... (7,500)(2)
Legal, accounting, and other.............................................. (2,500)(3)
Office lease cancellation................................................. (1,023)(4)
--------
$(16,549)
========
</TABLE>
- ---------------
(1) Under the Plan of Acquisition, from and after the Effective Time,
Diamond Offshore and Arethusa and their respective subsidiaries will
honor in accordance with their terms certain Arethusa employment,
severance, consulting and salary continuation plans.
(2) Arethusa has agreed to pay Merrill Lynch, Pierce, Fenner & Smith
Incorporated a fee of $7.5 million for financial advisory services in
connection with the Acquisition upon the closing of the Acquisition.
(3) Adjustment for legal, accounting, printing and other nonrecurring
charges expected to be incurred in connection with the Acquisition.
(4) Arethusa is committed under a lease agreement for office space that
continues until August 30, 2002. The lease may be canceled in December
1996 for a lump-sum payment of approximately $1.0 million. Such payment
has no future economic benefit to the combined company and is
incremental to other costs incurred by either Arethusa or Diamond
Offshore in the conduct of activities prior to the Effective Time.
(c) Adjustment for fair values, based on current appraisals, of the eight
semisubmersible drilling rigs, three jack-up drilling rigs, and other
property and equipment owned by Arethusa.
(d) Adjustment for fair values of identifiable assets and for the excess of the
cost of Arethusa over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed.
(e) Adjustment for the estimated unfunded termination liability related to the
Arethusa defined benefit plan.
(f) Adjustment for fair values of liabilities assumed and for the deferred tax
liability for estimated future tax effects of differences between the tax
bases and the fair value amounts assigned to identifiable assets and
liabilities of Arethusa, offset by net operating loss carryforwards of
Arethusa of approximately $30.0 million. As a result of the Acquisition,
Diamond Offshore will have available to it certain Arethusa net operating
loss carryforwards to reduce future U.S. federal income taxes payable. Due
to the change in ownership of Arethusa resulting from the Acquisition,
there will be annual limitations on the amount of Arethusa tax
carryforwards available to be utilized by Diamond Offshore.
(g) The pro forma financial statements reflect the purchase of 100% of the
outstanding shares of Arethusa Common Stock for a total consideration of
$560.7 million which is comprised of the following:
<TABLE>
<S> <C>
Diamond Offshore Common Stock to be issued............................ $539,296(1)
Options assumed....................................................... 11,381(2)
--------
Total equity consideration............................................ 550,677
Transaction costs..................................................... 10,000(3)
--------
Total consideration................................................... $560,677
========
</TABLE>
S-7
<PAGE> 132
- ---------------
(1) The value of the Diamond Offshore Common Stock to be issued in the
Acquisition is calculated based on a seven-day average of the closing
price of Diamond Offshore Common Stock at the time the Acquisition
was announced (December 7, 1995) of $30.14.
(2) Amount represents the fair value of the Arethusa Options assumed by
Diamond Offshore pursuant to the Amalgamation Agreement. The fair
value is based on a seven-day average of the closing price of Diamond
Offshore Common Stock at the time the Acquisition was announced
(December 7, 1995), the Amalgamation Ratio (as defined herein) and
the option exercise price including the $3.00 reduction, which was
approved by Arethusa shareholders at Arethusa's annual general
meeting of shareholders on April 29, 1996.
(3) Amounts represent transaction costs directly associated with the
Acquisition. See (b) above.
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues......................................... $106,868 $ 40,794 $ -- $ 147,662
Operating expenses:
Contract drilling.............................. 66,157 20,297 -- 86,454
General and administrative..................... 3,103 2,449 -- 5,552
Depreciation and amortization.................. 12,069 8,277 (328) (a) 20,018
Gain on sale of assets......................... (157) -- -- (157)
-------- -------- ------- --------
Total operating expenses................ 81,172 31,023 (328) 111,867
-------- -------- ------- --------
Operating income (loss).......................... 25,696 9,771 328 35,795
Other income (expense):
Interest expense............................... -- (1,291) -- (1,291)
Other, net..................................... 434 50 -- 484
-------- -------- ------- --------
Income (loss) before income tax (expense)
benefit........................................ 26,130 8,530 328 34,988
Income tax (expense) benefit..................... (7,398) (348) (115) (b) (7,861)
-------- -------- ------- --------
Net income....................................... $ 18,732 $ 8,182 $ 213 $ 27,127
======== ======== ======= ========
Net income per common share...................... $ 0.37 $ 0.40 $ 0.40
======== ======== ========
Weighted average common shares outstanding....... 50,000 20,333 67,893(c)
======== ======== ========
</TABLE>
- ---------------
(a) To record the adjustment to depreciation expense and amortization of
goodwill resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for depreciation
and a 20-year amortization period for goodwill.
(b) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization.
(c) Weighted average shares outstanding as if the issuance of 17.9 million
shares to be issued by Diamond Offshore in consideration of the Arethusa
Common Stock had taken place on January 1, 1996.
S-8
<PAGE> 133
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
DIAMOND PRO FORMA
OFFSHORE ARETHUSA(A) ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues......................................... $336,584 $ 120,166 $ -- $ 456,750
Operating expenses:
Contract drilling.............................. 259,560 86,532 -- 346,092
General and administrative..................... 13,857 9,033 -- 22,890
Depreciation and amortization.................. 52,865 29,008 3,897(b) 85,770
Gain on sale of assets......................... (1,349) -- -- (1,349)
-------- -------- ------- --------
Total operating expenses................ 324,933 124,573 3,897 453,403
-------- -------- ------- --------
Operating income (loss).......................... 11,651 (4,407) (3,897) 3,347
Other income (expense):
Interest expense............................... (27,052) (6,697) 26,296(c) (7,453)
Other, net..................................... 1,598 4,048 -- 5,646
-------- -------- ------- --------
Income (loss) before income tax benefit
(expense)...................................... (13,803) (7,056) 22,399 1,540
Income tax benefit (expense)..................... 6,777 (1,440) (7,840)(d) (2,503)
-------- -------- ------- --------
Net income (loss)................................ $ (7,026) $ (8,496) $ 14,559 $ (963)
======== ======== ======= ========
Net income per common share...................... $ 0.20(f) $ (0.42) $ (0.01)
======== ======== ========
Weighted average common shares outstanding....... 50,000(f) 20,333 67,893(e)
======== ======== ========
</TABLE>
- ---------------
(a) Pro forma income statement data for Arethusa reflect (i) the acquisition of
the Arethusa Yatzy, which occurred on May 3, 1995, (ii) the sale of the
Treasure Stawinner, which occurred June 30, 1995, and (iii) the dividend
and capital distribution of $61.0 million ($3.00 per share of Arethusa
Common Stock) as if each had occurred at the beginning of fiscal year 1995.
Set forth below in this footnote (a) are the historical amounts, and the
adjustments thereto, upon which the pro forma Arethusa amounts are based.
ARETHUSA PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
HISTORICAL DIVIDEND/
------------------- YATZY STAWINNER CAPITAL PRO
ARETHUSA YATZY(1) ACQUISITION SALE DISTRIBUTION FORMA
-------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Contract drilling revenue............. $122,147 $12,315 $ -- $(14,296)(6) $ -- $120,166
Operating expenses:
Direct costs........................ 87,953 8,060 (623)(5) (8,483)(6) -- 86,532
(375)(2)
General and administrative.......... 8,658 -- 375(2) -- -- 9,033
Depreciation........................ 29,547 -- 1,352(3) (1,891)(6) -- 29,008
-------- ------- ------- -------- ------- --------
Total operating expenses..... 126,158 8,060 729 (10,374) -- 124,573
-------- ------- ------- -------- ------- --------
Operating income (loss)............... (4,011) 4,255 (729) (3,922) -- (4,407)
Other income (expense):
Interest expense.................... (6,311) -- (1,168)(4) 782(6) -- (6,697)
Interest income..................... 5,692 -- -- (1,453)(7) 4,239
Gain (loss) on sale of assets....... 27,820 -- -- (27,885)(6) -- (65)
Other, net.......................... (126) -- -- -- -- (126)
-------- ------- ------- -------- ------- --------
Income (loss) before income taxes..... 23,064 4,255 (1,897) (31,025) (1,453) (7,056)
Tax provision......................... (1,440) -- -- -- -- (1,440)
-------- ------- ------- -------- ------- --------
Net income (loss)..................... $ 21,624 $ 4,255 $(1,897) $(31,025) $(1,453) $ (8,496)
======== ======= ======= ======== ======= ========
Net income (loss) per common share.... $ 1.06 $ (0.42)
======== ========
Weighted average common shares
outstanding......................... 20,333 20,333
======== ========
</TABLE>
S-9
<PAGE> 134
- ---------------
(1) The historical financial information of the Yatzy operations for the
period from October 1, 1994, through May 2, 1995 is based upon Arethusa
records, as manager of the rig. The previous owner of the rig prepared
financial information only on a semi-annual, calendar year basis; and
was unable to provide the complete financial information for the twelve
months ended September 30, 1995. Financial statement captions for which
Yatzy historical information is not presented (historical depreciation
and interest expense) would have been adjusted to reflect Arethusa's
cost basis in the Arethusa Yatzy and Arethusa's financing of the rig.
Pro forma Yatzy acquisition adjustments (3) and (4) discussed below
provide fully for depreciation using Arethusa's cost basis in the
Arethusa Yatzy and interest based on Arethusa's financing of the rig.
Additionally, it is management's understanding that there are no other
significant transactions or activities related to the historical
operations of Yatzy which would have a material impact on the
as-adjusted pro forma income statement. Therefore, management believes
the resulting pro forma income statement is in compliance with Article
11 of Regulation S-X.
(2) To reclassify and eliminate the management fee paid to Arethusa from
direct costs to general and administrative expenses.
(3) To reflect depreciation expense calculated based upon Arethusa's cost
and estimated useful life of 25 years, which is consistent with
Arethusa's previously established depreciation policy.
(4) To adjust for additional interest expense associated with Arethusa's
$30.0 million note entered into in connection with the acquisition of
the Arethusa Yatzy.
(5) To adjust for a reduction in insurance expense resulting from
Arethusa's lower insured value for the Arethusa Yatzy.
(6) To reflect the elimination of historical operations, interest expense
and gain on sale of assets for the Treasure Stawinner.
(7) To reflect the reduction in interest income resulting from the dividend
and capital distribution made to shareholders in fiscal 1995.
(b) To record the additional depreciation expense and amortization of goodwill
resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for
depreciation and a 20-year amortization period for goodwill.
(c) To adjust interest expense, assuming that the Diamond Offshore Initial
Public Offering and repayment of indebtedness occurred on January 1, 1995.
(d) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization and interest expense.
(e) Weighted average shares outstanding as if both the October 1995 issuance of
15.0 million shares by Diamond Offshore through the Diamond Offshore
Initial Public Offering and the 17.9 million shares to be issued by Diamond
Offshore in consideration of the Arethusa Common Stock had taken place on
January 1, 1995.
(f) After the Diamond Offshore Initial Public Offering, Diamond Offshore had
50.0 million shares of Diamond Offshore Common Stock outstanding. Assuming
the Diamond Offshore Initial Public Offering had occurred at January 1,
1995, Diamond Offshore would have recognized net income of $10.0 million,
or $0.20 per share of Diamond Offshore Common Stock, after adjusting for
the after-tax effects of a reduction in interest expense.
S-10
<PAGE> 135
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with Diamond
Offshore's Consolidated Financial Statements (including the Notes thereto)
included elsewhere in this Prospectus Supplement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 21,465 $ 11,703 $ 9,762
Other Semisubmersibles..................................... 52,995 35,511 17,484
Jack-ups................................................... 20,136 16,926 3,210
Turnkey.................................................... 13,626 3,143 10,483
Land....................................................... 5,102 5,475 (373)
Other...................................................... -- -- --
Eliminations............................................... (6,456) (1,998) (4,458)
-------- -------- -------
Total Revenues..................................... $106,868 $ 70,760 $ 36,108
======== ======== =======
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 7,898 $ 8,294 $ (396)
Other Semisubmersibles..................................... 31,490 30,774 716
Jack-ups................................................... 14,927 15,506 (579)
Turnkey.................................................... 14,128 4,598 9,530
Land....................................................... 4,772 4,709 63
Other...................................................... (602) (132) (470)
Eliminations............................................... (6,456) (1,998) (4,458)
-------- -------- -------
Total Contract Drilling Expense.................... $ 66,157 $ 61,751 $ 4,406
======== ======== =======
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 13,567 $ 3,409 $ 10,158
Other Semisubmersibles..................................... 21,505 4,737 16,768
Jack-ups................................................... 5,209 1,420 3,789
Turnkey.................................................... (502) (1,455) 953
Land....................................................... 330 766 (436)
Other...................................................... 602 132 470
General and Administrative Expense......................... (3,103) (3,140) 37
Depreciation Expense....................................... (12,069) (14,988) 2,919
Gain on Sale of Assets..................................... 157 389 (232)
-------- -------- -------
Total Operating Income (Loss)...................... $ 25,696 $ (8,730) $ 34,426
======== ======== =======
</TABLE>
REVENUES. The $9.8 million increase in revenues from fourth-generation
semisubmersibles resulted from improvements in dayrates ($6.3 million) and
increases in utilization ($3.5 million). The improvement in utilization for 1996
was partially attributable to the relocation between markets of two
fourth-generation rigs during the comparable period of the prior year, reducing
the days worked for these rigs during that period. The $17.5 million increase in
revenues from other semisubmersibles was primarily attributable to increases in
dayrates in both the North Sea and the Gulf of Mexico. These increases were
partially offset by a reduction in revenues of approximately $4.8 million due to
the Ocean Princess and the Ocean Baroness being out of service while
modifications were being performed prior to these rigs beginning term contracts
in the North Sea and South America, respectively. The $3.2 million increase in
revenues from jack-ups resulted from increased
S-11
<PAGE> 136
utilization and dayrates in the Gulf of Mexico. The $10.5 million increase in
turnkey revenues resulted from projects of greater magnitude completed during
the first quarter of 1996 as compared to those completed during the same period
of the prior year. In addition, Diamond Offshore performed overall project
management services for two customers during the current year, generating
approximately $2.7 million which is included in turnkey revenue for the first
quarter of 1996.
CONTRACT DRILLING EXPENSE. Contract drilling expense for fourth-generation
semisubmersibles, other semisubmersibles, and jack-ups was relatively unchanged
from the first quarter of the prior year. The $9.5 million increase in turnkey
expense resulted from more extensive turnkey wells drilled, project management
services provided and cost overruns on one turnkey well during the current year.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense of
$3.1 million for the quarter ended March 31, 1996 was unchanged from the
comparable period of the prior year.
DEPRECIATION EXPENSE. Depreciation expense of $12.1 million for the quarter
ended March 31, 1996 included a change in accounting estimate to increase the
estimated useful lives for certain classes of rigs which reduced depreciation
expense by approximately $2.1 million, as compared to the quarter ended March
31, 1995. Partially offsetting this decrease were increases in depreciation for
three rig upgrades performed in 1995 and capital expenditures associated with
Diamond Offshore's continuing rig enhancement program. In addition, depreciation
expense for the comparable period of the prior year included a $2.1 million
write-down in the carrying value of a semisubmersible.
INTEREST EXPENSE. Diamond Offshore incurred $0.2 million of interest
expense for the quarter ended March 31, 1996 as compared to $8.5 million for the
same period of the prior year. This decrease was attributable to a reduction in
the outstanding indebtedness resulting from the repayment of Diamond Offshore's
loan from Loews in connection with the Diamond Offshore Initial Public Offering
in October 1995. The $0.2 million of interest expense for 1996 has been
capitalized to the cost of construction on the Ocean Quest and Ocean Star. See
Notes 3 and 5 to Diamond Offshore's Consolidated Financial Statements included
in this Prospectus Supplement.
INCOME TAX (EXPENSE) BENEFIT. The income tax (expense) benefit for the
quarter ended March 31, 1996 was $(7.4) million as compared to $5.3 million for
the comparable period of the prior year. This change resulted primarily from the
increase of $43.0 million in Diamond Offshore's income before income tax
(expense) benefit.
NET INCOME (LOSS). Net income for the quarter ended March 31, 1996
increased $30.3 million to $18.7 million, as compared to a net loss of $(11.6)
million for the comparable period of the prior year. The increase resulted
primarily from an increase in operating income of $34.4 million and a decrease
in interest expense of $8.5 million, partially offset by an increase in income
tax expense of $12.7 million.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances, including 3-D seismic,
horizontal drilling, and subsea completion procedures. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates through the first quarter of 1996. Customers
are continuing to contract rigs serving those markets under term contracts (as
opposed to contracts let on a single well or well-to-well basis). In the Gulf of
Mexico, the Ocean Valiant's contract has been extended through 1996 at an
increased dayrate. Contracts for Diamond Offshore's other semisubmersibles in
the Gulf of Mexico continue to be primarily on a well-to-well or multi-well
basis. However, term contract opportunities are becoming more prevalent. Diamond
Offshore's drillship, the Ocean Clipper I, is scheduled to be upgraded during
1996 and 1997 to operate in the ultra-deep water market of the Gulf of Mexico
with dynamic positioning capabilities, in connection with a four-year term
contract with a major oil company that has been agreed to in principle. The oil
company has an option to terminate the contract prior to its scheduled
termination date upon payment to Diamond Offshore of a termination fee. See
" -- Capital Resources" in this Prospectus Supplement.
S-12
<PAGE> 137
In the North Sea, the Ocean Alliance is contracted for work through late
1996 and has received an increase in its dayrate. Diamond Offshore's three other
marketed semisubmersibles in the North Sea are all committed under term
contracts. The Ocean Nomad, which was relocated from South America, began its
two-year contract in late November 1995. The Ocean Princess has completed the
modifications necessary for its two-year contract which commenced in late March
1996. The Ocean Guardian is currently drilling pursuant to a one-year term
contract expiring during the third quarter of 1996. Of the remaining
semisubmersibles in Diamond Offshore's fleet, the Ocean Baroness completed
modifications and began, in early April 1996, a three-year term contract for
drilling offshore Brazil. In addition, the Ocean Zephyr, also operating offshore
Brazil, is contracted to July 1997.
The market for jack-up rigs in the Gulf of Mexico appears to have
stabilized and has shown some signs of strengthening in recent months. Dayrates
have improved from those earned in early 1995; however, volatile natural gas
prices and an oversupply of rigs prevented significant improvements through
early 1996.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and Diamond Offshore cannot predict the extent to
which current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the three months ended March
31, 1996 increased by $13.0 million to $23.7 million, as compared to $10.7
million for the comparable period of the prior year. This increase was
attributable to a $30.3 million increase in net income for the first quarter of
1996, partially offset by an increase of $13.1 million in accounts receivable,
as compared to a decrease in accounts receivable of $4.6 million for the same
period of the prior year. Cash used in investing activities increased $36.8
million primarily due to capital expenditures for major upgrades of $32.7
million and $8.2 million for the purchase during the first quarter of 1996 of
the land and eight-story building in which Diamond Offshore has its corporate
headquarters. Cash provided by financing activities for the three months ended
March 31, 1996 increased $19.2 million primarily due to net borrowings of $15.0
million on the Diamond Offshore Bank Credit Facility as compared to $6.0 million
net repayments on Diamond Offshore's indebtedness during the same period of the
prior year.
Diamond Offshore uses funds available under the Diamond Offshore Bank
Credit Facility, together with cash flow from operations, to fund its capital
expenditure and working capital requirements. The Diamond Offshore Bank Credit
Facility is a revolving line of credit for a five-year term providing a maximum
credit commitment of $150.0 million until the second anniversary, at which time
and at the end of each six-month period thereafter, the commitment will decrease
by $12.5 million to a final maximum credit commitment of $75.0 million during
the last six months. Borrowings under the Diamond Offshore Bank Credit Facility
bear interest, at Diamond Offshore's option, at a per annum rate equal to a base
rate (equal to the greater of (i) the prime rate announced by Bankers Trust
Company or (ii) the Federal Funds rate plus .50%) plus .25% or the Eurodollar
rate plus 1.25%. Diamond Offshore is required to pay a commitment fee of .375%
on the unused available portion of the maximum credit commitment. Borrowings are
secured by security interests in certain of Diamond Offshore's assets. The
Diamond Offshore Bank Credit Facility also contains covenants that limit the
amount of total consolidated debt, require the maintenance of certain
consolidated financial ratios and limit dividends and similar payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" in the accompanying Prospectus. As of March 31, 1996,
Diamond Offshore was in compliance with each of these covenants.
It is anticipated that the Diamond Offshore Bank Credit Facility will be
used primarily to fund rig upgrades and similar capital expenditure
requirements. In management's opinion, Diamond Offshore's cash generated from
operations and borrowings available under the Diamond Offshore Bank Credit
Facility are sufficient to meet its anticipated short- and long-term liquidity
needs, including its capital expenditure requirements.
S-13
<PAGE> 138
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from Diamond Offshore's continuing rig
enhancement program, including top-drive drilling system installations and water
depth and drilling capability upgrades. Diamond Offshore expects to spend
approximately $198.1 million, including interest expense to be capitalized,
during 1996 for rig upgrades in connection with contract requirements. Included
in this amount is approximately $55.8 million for 1996 expenditures in
conjunction with the planned upgrade of the Ocean Clipper I to operate in deep
water with dynamic positioning capabilities. In addition, approximately $124.7
million is included for the upgrades relating to a letter of intent and a
contract for the Ocean Star and Ocean Quest, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in the accompanying Prospectus. Because these projects
are expected to be accompanied by term contracts at favorable dayrates, the
expenditures are, in Diamond Offshore's opinion, financially justified. During
the first quarter of 1996, $32.7 million was expended on these projects. Diamond
Offshore expects to evaluate other projects as opportunities arise. In addition,
Diamond Offshore has budgeted $40.4 million for 1996 capital expenditures
associated with its continuing rig enhancement program. During the first quarter
of 1996, $2.9 million was expended on this program. It is management's opinion
that significant improvements in operating cash flow resulting from current
conditions of improved dayrates and the increasing number of term contracts for
rigs in certain markets, in conjunction with borrowings under the Diamond
Offshore Bank Credit Facility, will be sufficient to meet these capital
requirements.
Diamond Offshore is analyzing financing alternatives that may be available
to it in the public or private capital markets. Proceeds of any such financing
transactions may be used for repayment of higher cost debt, to fund rig
upgrades, acquisitions or for other corporate purposes. Diamond Offshore's
ability to effect any such financings will be dependent on its historical
results of operations and its current financial condition and prospects at the
time it seeks access to the capital markets, and to other factors beyond Diamond
Offshore's control, including the prevailing interest rate environment and, with
respect to offerings of common or preferred stock or debt obligations
convertible into such common stock, other financial market conditions, and the
investment community's perception of Diamond Offshore and the offshore contract
drilling industry generally. Any such offering would be subject to the
restrictions imposed by the Shareholders Agreement, dated as of February 9,
1996, as amended (as so amended, the "Shareholders Agreement"), among Diamond
Offshore, Diamond Offshore (USA), Acquisition Sub, Alphee and Ratos, on public
sales or distributions of Diamond Offshore Common Stock, or securities
convertible into common stock, and until October 10, 1996, to obtaining the
prior written consent of CS First Boston Corporation ("CS First Boston") as
required by the underwriting agreement entered into in connection with the
Diamond Offshore Initial Public Offering. See "Underwriting" in this Prospectus
Supplement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity," "-- Capital Resources" and
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" in the accompanying Prospectus.
Also, from time to time Diamond Offshore reviews acquisition opportunities,
although Diamond Offshore has no current plans to purchase or otherwise acquire
additional rigs, other than with respect to the Acquisition. See "-- Other" in
this Prospectus Supplement.
OTHER
ACQUISITION OF ARETHUSA. Diamond Offshore consummated the Acquisition on
April 29, 1996. Under the Plan of Acquisition and the Amalgamation Agreement,
holders of Arethusa Common Stock will receive approximately 17.9 million shares
of Diamond Offshore Common Stock to be issued by Diamond Offshore based on a
ratio of .88 shares of Diamond Offshore Common Stock for each share of Arethusa
common stock (the "Amalgamation Ratio").
SALE OF ASSET. Subsequent to March 31, 1996, Diamond Offshore entered into
an agreement to sell its jack-up drilling rig, the Ocean Magallanes, to Cliffs
Drilling Company for $4.5 million. The rig is currently
S-14
<PAGE> 139
stacked in Punta Arenas, Chile. The sale, expected to close during the second
quarter of 1996, will generate an after-tax gain of approximately $2.0 million
for Diamond Offshore.
CURRENCY RISK. Certain of Diamond Offshore's subsidiaries use the local
currency in the country where they conduct operations as their functional
currency. Currency environments in which Diamond Offshore has material business
operations include the U.K., Australia and Brazil. Diamond Offshore generally
attempts to minimize its currency exchange risk by seeking international
contracts payable in local currency in amounts equal to Diamond Offshore's
estimated operating costs payable in local currency and in U.S. dollars for the
balance of the contract. Because of this strategy, Diamond Offshore has
minimized its unhedged net asset or liability positions denominated in local
currencies and has not experienced significant gains or losses associated with
changes in currency exchange rates. However, contracts presently covering three
of Diamond Offshore's four rigs operating in the U.K. sector of the North Sea
are payable in U.S. dollars. Diamond Offshore has not hedged its exposure to
changes in the exchange rate between U.S. dollars and pounds sterling for
operating costs payable in pounds sterling, although it may seek to do so in the
future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. However, when Diamond Offshore ceases its operations in a
currency environment, the accumulated adjustments are recognized currently in
results of operations. Translation gains and losses for Diamond Offshore's
operations in Brazil have been recognized currently due to the hyperinflationary
status of this environment. The effect on results of operations has not been
material and is not expected to have a significant effect in the future due to
the recent stabilization of currency rates in Brazil.
S-15
<PAGE> 140
ACTIVE MOBILE OFFSHORE DRILLING RIGS
Information as of April 24, 1996 concerning the Diamond Offshore fleet of
active mobile offshore drilling rigs is set forth in the table below.
<TABLE>
<CAPTION>
WATER DEPTH
CAPABILITY YEAR BUILT/LATEST CURRENT
TYPE AND NAME(A) (FT) ATTRIBUTES(B) ENHANCEMENT(C) LOCATION CUSTOMER(D)
- ------------------------ ----------- ----------------------------- ------------------ --------------- ----------------------
<S> <C> <C> <C> <C> <C>
FOURTH-GENERATION
SEMISUBMERSIBLES(3):
Ocean Alliance........ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea BP
Ocean America......... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico BP
Ocean Valiant......... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
OTHER
SEMISUBMERSIBLES(27):
Arethusa Worker....... 3,300 TDS 1982/1992 Gulf of Mexico Texaco
Ocean Voyager......... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Arethusa Yatzy(e)..... 3,000 TDS; DP 1989 Brazil Petrobras
Arethusa Lexington.... 2,500 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Arethusa Neptune...... 2,500 TDS; 3M 1977/1995 Gulf of Mexico Kerr-McGee
Arethusa Concord...... 2,200 TDS 1975/1995 Gulf of Mexico Shell
Arethusa Saratoga..... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Arethusa Yorktown..... 2,200 TDS 1976/1989 Brazil Petrobras
Ocean Endeavor........ 2,000 TDS; VC 1975/1994 Gulf of Mexico Oryx
Ocean Rover........... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...... 1,700 VC 1971/1981 Gulf of Mexico Newfield(f)
Arethusa
Whittington......... 1,500 TDS; 3M 1974/1995 Gulf of Mexico Mobil
Ocean Bounty.......... 1,500 TDS; VC; 3M 1977/1992 Australia/ BHPP
Indonesia
Ocean Guardian........ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......... 1,500 TDS 1974/1990 Gulf of Mexico Hardy Oil & Gas(g)
Ocean Princess........ 1,500 TDS; 15K 1977/1995 North Sea Marathon
Ocean Epoch........... 1,200 TDS 1977/1990 Australia BHPP
Ocean General......... 1,200 TDS 1976/1990 Vietnam Pedco
Ocean Nomad........... 1,200 TDS 1975/1995 North Sea Shell
Ocean Ambassador(h)... 1,100 TDS 1975/1995 Gulf of Mexico Committed
Ocean Baroness........ 1,100 TDS; VC 1973/1995 Brazil Petrobras
Ocean Star(i)(j)...... 850 VC 1974/1992 Gulf of Mexico Committed
Ocean Century......... 800 1973 Gulf of Mexico Stacked
Ocean Quest(k)........ 800 VC 1973 Gulf of Mexico Committed
Ocean Liberator....... 600 1974 Nigeria Ashland
Ocean Victory......... 600 VC 1972 North Sea Stacked
Ocean Zephyr.......... 600 1972 Brazil Petrobras
JACK-UPS(19):
Ocean Titan........... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico LL&E
Ocean Tower........... 350 IS; 3M 1972 Gulf of Mexico Sonat Exploration(l)
Bonito II(m).......... 300 TDS; IC 1983/1995 Gulf of Mexico Unocal
Miss Kitty(n)......... 300 IC 1982 Enroute ONGC
Ocean King............ 300 TDS; IC 1973/1989 Gulf of Mexico Conoco
Ocean Nugget.......... 300 TDS; IC 1976/1995 Gulf of Mexico Amoco
Ocean Summit.......... 300 SDS; IC 1972/1991 Gulf of Mexico Forcenergy
Ocean Warwick......... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Arethusa Heritage..... 250 TDS; IC 1981/1995 Egypt EDC
Arethusa Sovereign.... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Champion........ 250 MS 1975/1985 Gulf of Mexico Chevron
Ocean Columbia........ 250 TDS; IC 1978/1990 Gulf of Mexico Coastal Oil & Gas
Ocean Spartan......... 250 TDS; IC 1980/1994 Gulf of Mexico Meridian
Ocean Spur............ 250 TDS; IC 1981/1994 Gulf of Mexico Houston Exploration(o)
Ocean Conquest........ 200 MS 1978 Gulf of Mexico Stacked
Ocean Crusader........ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........... 200 TDS; MC 1983/1986 Gulf of Mexico Murphy
Arethusa Scotian...... 180 TDS; IC; 15K 1981/1988 North Sea Elf
(Dutch sector)
Ocean Magallanes(p)... 150 IC 1980 Chile Stacked
DRILLSHIP(1):
Ocean Clipper I....... 1,200 SP 1976 Enroute Committed(q)
</TABLE>
- ---------------
(a) Does not include one other semisubmersible rig held for disposition that is
also not included in the discussion of Diamond Offshore's fleet.
S-16
<PAGE> 141
(b) Attributes legend:
<TABLE>
<S> <C> <C>
DP -- Dynamically Positioned/Self-Propelled
MS -- Mat-Supported Slot Rig
TDS -- Top-Drive Drilling System
IC -- Independent-Leg Cantilevered Rig
SDS -- Side-Drive Drilling System
VC -- Victory-Class
IS -- Independent-Leg Slot Rig
SO -- Skid-Off Capability
3M -- Three Mud Pumps
MC -- Mat-Supported Cantilevered Rig
SP -- Self-Propelled
15K -- 15,000 psi Blowout Preventer
</TABLE>
(c) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(d) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(e) Arethusa acquired the Arethusa Yatzy on May 3, 1995. Prior to this date the
rig was operated by Arethusa under a management agreement.
(f) Turnkey operator is ADTI.
(g) Project manager is DOTS.
(h) Committed for two-well contract after completion of rig enhancements.
(i) Formerly named Ocean Countess.
(j) Committed under a letter of intent for a three-year term contract with
Texaco in the Gulf of Mexico.
(k) Committed under a three-year term contract with Chevron in the Gulf of
Mexico.
(l) Turnkey operator is Triton.
(m) Diamond Offshore charters the rig pursuant to a bareboat charter agreement
which expires in August 1996. The rig is under contract for sale, upon
closing of which such charter will terminate.
(n) Diamond Offshore operates the rig pursuant to a bareboat charter agreement
which expires in July 1997. Diamond Offshore has the option to extend the
charter agreement for one additional year. The rig is enroute to India
following completion of leg repairs.
(o) Turnkey operator is Brown/R&B.
(p) Under contract for sale.
(q) Committed under an agreement in principle for a four-year term contract in
the Gulf of Mexico following completion of rig enhancement.
S-17
<PAGE> 142
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement") among Diamond Offshore, the
Selling Stockholders and each of the underwriters named below (the
"International Managers"), and concurrently with the sale of 6,018,140 shares of
Diamond Offshore Common Stock to the U.S. Underwriters (as defined below), the
Selling Stockholders have agreed to sell to the International Managers, and each
of the International Managers severally has agreed to purchase from the Selling
Stockholders, the number of shares of Diamond Offshore Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Merrill Lynch International....................................... 505,000
CS First Boston Limited........................................... 500,000
Salomon Brothers International Limited............................ 500,000
---------
Total................................................ 1,505,000
=========
</TABLE>
Merrill Lynch International, CS First Boston Limited and Salomon Brothers
International Limited are acting as representatives (the "International
Representatives") of the International Managers.
Diamond Offshore and the Selling Stockholders have also entered into the
U.S. purchase agreement (the "U.S. Purchase Agreement") with certain other
underwriters in the United States and Canada (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters") for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS First Boston
and Salomon Brothers Inc are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 1,505,000 shares of
Diamond Offshore Common Stock to the International Managers pursuant to the
International Purchase Agreement, the Selling Stockholders have agreed to sell
to the U.S. Underwriters, and the U.S. Underwriters severally have agreed to
purchase from the Selling Stockholders, an aggregate of 6,018,140 shares of
Diamond Offshore Common Stock. The public offering price per share of the
Diamond Offshore Common Stock and the total underwriting discount per share are
identical under the International Purchase Agreement and the U.S. Purchase
Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Diamond Offshore Common Stock being
sold pursuant to each such Purchase Agreement if any of such shares of Diamond
Offshore Common Stock being sold pursuant to each such Purchase Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting
International Managers or U.S. Underwriters (as the case may be) may be
increased. The closings with respect to the sale of shares of Diamond Offshore
Common Stock to be purchased by the International Managers and the U.S.
Underwriters are conditioned upon one another.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted to
sell shares of Diamond Offshore Common Stock to each other for purposes of
resale at the public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the International
Managers and any dealer to whom they sell shares of Diamond Offshore Common
Stock will not offer to sell or sell shares of Diamond Offshore Common Stock to
persons who are United States and Canadian persons or to persons they believe
intend to resell to persons who are United States and Canadian persons, and the
U.S. Underwriters and any dealer to whom they sell shares of Diamond Offshore
Common Stock will not offer to sell or sell shares of Diamond Offshore Common
Stock to persons who are non-United States persons or non-Canadian persons or to
persons they believe intend to resell to persons who are non-
S-18
<PAGE> 143
The International Representatives have advised Diamond Offshore and the
Selling Stockholders that the International Managers propose to offer the shares
of Diamond Offshore Common Stock offered hereby to the public at the public
offering price set forth on the cover page of this Prospectus Supplement, and to
certain dealers at such price less a concession not in excess of $.90 per share
of Diamond Offshore Common Stock. The International Managers may allow, and such
dealers may reallow, a discount not in excess of $.10 per share of Diamond
Offshore Common Stock on sales to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.
The Selling Stockholders have granted an option to the International
Managers, exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to an aggregate of 150,501 additional shares of
Diamond Offshore Common Stock at the public offering price, less the
underwriting discount. The International Managers may exercise this option only
to cover over-allotments, if any, made on the sale of Diamond Offshore Common
Stock offered hereby. To the extent that the International Managers exercise
this option, each International Manager shall be obligated, subject to certain
conditions, to purchase the number of additional shares of Diamond Offshore
Common Stock proportionate to such International Manager's initial amount
reflected in the foregoing table. The Selling Stockholders also have granted an
option to the U.S. Underwriters, exercisable during the 30-day period after the
date of this Prospectus Supplement, to purchase up to an aggregate of 601,814
additional shares of Diamond Offshore Common Stock to cover over-allotments, if
any, on terms similar to those granted to the International Managers.
The Selling Stockholders have agreed not to directly or indirectly sell,
offer to sell, grant any option for sale of, contract or otherwise transfer any
shares of Diamond Offshore Common Stock (except for the shares offered hereby)
or any securities convertible into or exchangeable or exercisable for Diamond
Offshore Common Stock for a period of 90 days after the date of this Prospectus
Supplement (the "Underwriters' Restricted Period") without the prior written
consent of Merrill Lynch. In addition, the Selling Stockholders have agreed
that, during the Underwriters' Restricted Period, without the prior written
consent of Merrill Lynch, the Selling Stockholders will not release Diamond
Offshore from Diamond Offshore's obligation under the Shareholders Agreement not
to effect, and to cause Loews to agree not to effect, any public sale or
distribution of any securities the same as or similar to the Diamond Offshore
Common Stock, or any securities convertible into or exchangeable into securities
the same as or similar to the Diamond Offshore Common Stock (except pursuant to
registrations on Form S-4 or any successor form, or Form S-8 or any successor
form relating solely to securities offered pursuant to any benefit plan). See
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" in the accompanying Prospectus.
Each International Manager represents and agrees that (a) it has not
offered or sold and prior to the expiry of six months from the closing date of
the Offerings, will not offer or sell any shares of Diamond Offshore Common
Stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (b) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Diamond Offshore Common Stock in, from or
otherwise involving the United Kingdom, and (c) it has only issued or passed on
and will only issue or pass on to any person in the United Kingdom any document
received by it in connection with the issue or sale of the Diamond Offshore
Common Stock if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Diamond
Offshore Common Stock or the possession, circulation or distribution of this
Prospectus Supplement or the accompanying Prospectus or any other material
relating to Diamond Offshore, the Selling Stockholders or shares of Diamond
Offshore Common Stock in any jurisdiction where action for that purpose is
required. Accordingly, the shares of Diamond Offshore Common Stock may not be
offered or sold, directly or indirectly, and neither this Prospectus Supplement
or the accompanying Prospectus nor any other offering material or advertisements
in connection with the shares of Diamond Offshore Common
S-19
<PAGE> 144
Stock may be distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations of such country
or jurisdiction.
Purchasers of the shares of Diamond Offshore Common Stock offered hereby
may be required to pay stamp taxes and other charges in accordance with the laws
and practices of the country of purchase, in addition to the offering price set
forth on the cover page of this Prospectus Supplement.
Pursuant to the terms of an engagement letter dated September 1, 1995 (as
amended), Arethusa has agreed to pay Merrill Lynch $7.5 million for financial
advisory services in connection with the Acquisition. Arethusa has also agreed
to reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including
all reasonable fees and disbursements of counsel, and to indemnify Merrill Lynch
and certain related persons against certain liabilities relating to or arising
out of its engagement, including certain liabilities under the federal
securities laws. In addition, during the past two years Merrill Lynch has
performed investment banking services for Loews, an affiliate of Diamond
Offshore, from time to time and has been compensated therefor. Such services
have included, among other things, acting as manager of, or participating as a
syndicate member in, various securities transactions of Loews and its
subsidiaries and providing financial advisory services to Loews.
In consideration of financial advisory services rendered in connection with
the Acquisition, Diamond Offshore has agreed to pay CS First Boston a $500,000
fee. In addition, Diamond Offshore has agreed to reimburse CS First Boston for
all reasonable out-of-pocket expenses, including the fees and expenses of its
legal counsel and any other advisor retained by CS First Boston resulting from
or arising out of Diamond Offshore's engagement of CS First Boston with respect
to the Acquisition, and has agreed to indemnify CS First Boston (and its
directors, officers, employees, and persons controlling CS First Boston) against
certain liabilities and expenses in connection with the Acquisition, including
certain liabilities under federal securities laws.
The Underwriters do not intend to confirm sales of the shares of Diamond
Offshore Common Stock offered hereby to any accounts over which they exercise
discretionary authority.
Diamond Offshore, Loews and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the Underwriters may be required to make in respect thereof. The
Underwriters have agreed to pay certain expenses of the Selling Stockholders
incurred in connection with the sale of the Offered Shares estimated at
$100,000.
LEGAL MATTERS
The validity of the shares of Diamond Offshore Common Stock offered hereby
will be passed on for Diamond Offshore by Weil, Gotshal & Manges LLP, Houston,
Texas. Certain legal matters will be passed on for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom, New York, New York.
S-20
<PAGE> 145
INDEX TO PROSPECTUS SUPPLEMENT FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets -- March 31, 1996 and December 31, 1995............. SF-2
Consolidated Statements of Operations -- Three Months Ended March 31, 1996 and
1995........................................................................... SF-3
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1996 and
1995........................................................................... SF-4
Notes to Consolidated Financial Statements...................................... SF-5
</TABLE>
SF-1
<PAGE> 146
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 3,867 $ 10,306
Short-term investments........................................... 5,110 5,041
Accounts receivable.............................................. 87,624 74,496
Rig inventory and supplies....................................... 15,746 15,330
Prepaid expenses and other....................................... 8,209 10,601
--------- ---------
Total current assets..................................... 120,556 115,774
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION..................................................... 533,645 502,278
OTHER ASSETS....................................................... 3,984 --
--------- ---------
Total assets............................................. $ 658,185 $ 618,052
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 14,171 $ 18,322
Accrued liabilities.............................................. 35,905 33,929
--------- ---------
Total current liabilities................................ 50,076 52,251
LONG-TERM DEBT..................................................... 15,000 --
DEFERRED TAX LIABILITY............................................. 79,737 72,907
OTHER LIABILITIES.................................................. 1,740 --
--------- ---------
Total liabilities........................................ 146,553 125,158
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized,
none issued and outstanding).................................. -- --
Common stock (par value $.01, 200,000,000 shares authorized,
50,000,000 shares issued and outstanding)..................... 500 500
Additional paid-in capital....................................... 665,107 665,107
Accumulated deficit.............................................. (152,712) (171,444)
Cumulative translation adjustment................................ (1,263) (1,269)
--------- ---------
Total stockholders' equity............................... 511,632 492,894
--------- ---------
Total liabilities and stockholders' equity............... $ 658,185 $ 618,052
========= =========
</TABLE>
SF-2
<PAGE> 147
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES.............................................................. $106,868 $ 70,760
OPERATING EXPENSES:
Contract drilling................................................... 66,157 61,751
General and administrative.......................................... 3,103 3,140
Depreciation........................................................ 12,069 14,988
Gain on sale of assets.............................................. (157) (389)
-------- --------
Total operating expenses.................................... 81,172 79,490
-------- --------
OPERATING INCOME (LOSS)............................................... 25,696 (8,730)
OTHER INCOME (EXPENSE):
Interest expense.................................................... -- (8,486)
Currency transaction gains (losses)................................. 86 (34)
Other, net.......................................................... 348 389
-------- --------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT..................... 26,130 (16,861)
INCOME TAX (EXPENSE) BENEFIT.......................................... (7,398) 5,289
-------- --------
NET INCOME (LOSS)..................................................... $ 18,732 $(11,572)
======== ========
NET INCOME PER SHARE.................................................. $ 0.37
========
WEIGHTED AVERAGE SHARES OUTSTANDING................................... 50,000
========
</TABLE>
SF-3
<PAGE> 148
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................... $ 18,732 $(11,572)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation...................................................... 12,069 12,918
Gain on sale of assets............................................ (157) (389)
Write-down of asset............................................... -- 2,070
Accrued interest converted to notes payable to Loews.............. -- 8,484
Deferred tax provision (benefit).................................. 7,124 (5,489)
Changes in operating assets and liabilities:
Accounts receivable............................................... (13,128) 4,611
Rig inventory and supplies and other current assets............... 2,339 (9)
Other assets, non-current......................................... (2,583) --
Accounts payable and accrued liabilities.......................... (2,175) 48
Other liabilities, non-current.................................... 1,740 --
Other, net........................................................ (288) 20
-------- --------
Net cash provided by operating activities.................... 23,673 10,692
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................. (43,757) (6,981)
Proceeds from sales of assets........................................ 478 439
Change in short-term investments..................................... (69) --
-------- --------
Net cash used in investing activities........................ (43,348) (6,542)
-------- --------
FINANCING ACTIVITIES:
Borrowings on revolving line of credit............................... 37,000 --
Repayments on revolving line of credit............................... (22,000) --
Deferred financing costs............................................. (1,764) --
Net repayments to Loews.............................................. -- (6,000)
-------- --------
Net cash provided by (used in) financing activities.......... 13,236 (6,000)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................ (6,439) (1,850)
Cash and cash equivalents, beginning of period....................... 10,306 17,770
-------- --------
Cash and cash equivalents, end of period............................. $ 3,867 $ 15,920
======== ========
</TABLE>
SF-4
<PAGE> 149
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 1995 (File No. 1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared 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. Accordingly, they do not include all disclosures required by generally
accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated balance sheets,
statements of operations, and statements of cash flows at the dates and for the
periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.
Supplementary Cash Flow Information
Non-cash financing activities for the three months ended March 31, 1995
included $8.5 million of interest expense accrued and included in notes payable
to Loews Corporation ("Loews"). There were no non-cash financing activities for
the three months ended March 31, 1996. Cash payments made for interest on long-
term debt for the three months ended March 31, 1996 totaled $37,000.
Drilling and Other Property and Equipment
For financial reporting purposes, depreciation is provided on the
straight-line method over the remaining estimated useful lives from the date the
asset is placed into service. The Company believes that certain offshore
drilling rigs, due to their upgrade and design capabilities and maintenance
history, have an operating life in excess of their depreciable life as
originally assigned. For this reason, a change in accounting estimate, effective
January 1, 1996, increased the estimated useful lives for certain classes of
offshore drilling rigs. As compared to the original estimate of useful lives,
the effect of such change reduced depreciation expense and increased net income
for the three months ended March 31, 1996 by approximately $2.1 million and $1.5
million ($0.03 per share), respectively. The estimated useful lives of the
Company's offshore drilling rigs, after the change in estimate, range from 10 to
25 years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
SF-5
<PAGE> 150
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PENDING MERGER OF THE COMPANY AND ARETHUSA (OFF-SHORE) LIMITED
The Company and Arethusa (Off-Shore) Limited ("Arethusa"), a Bermuda
corporation, have entered into an agreement to merge the two companies. The
agreement provides that, upon consummation of the merger, holders of Arethusa
stock will receive 17.9 million shares of common stock to be issued by the
Company based on 20.3 million shares of Arethusa's common stock issued and
outstanding and on a ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The merger is subject to requisite
shareholder approval at the April 29, 1996 annual meeting of both companies. The
merger will be accounted for as a purchase for financial reporting purposes, and
accordingly, the costs of the merger will be allocated to assets acquired and
liabilities assumed based on their estimated fair market values.
Arethusa owns a fleet of 11 mobile offshore drilling rigs, operates two
additional mobile offshore drilling rigs, and provides drilling services
worldwide to international and government-controlled oil and gas companies. For
the year ended September 30, 1995, Arethusa reported revenues of $122.1 million,
net income of $21.6 million, and net income per share of $1.06.
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment.............................. $ 705,957 $ 689,438
Construction work in progress............................ 37,271 19,016
Land and buildings....................................... 11,845 3,655
Office equipment and other............................... 6,761 6,300
--------- ---------
761,834 718,409
Less accumulated depreciation............................ (228,189) (216,131)
--------- ---------
Total.......................................... $ 533,645 $ 502,278
========= =========
</TABLE>
For the three months ended March 31, 1996, the Company capitalized total
interest cost incurred of $.2 million in construction work in progress with
respect to qualifying construction projects.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits.................................... $16,517 $ 17,402
Other........................................................ 19,388 16,527
------- -------
Total.............................................. $35,905 $ 33,929
======= =======
</TABLE>
SF-6
<PAGE> 151
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
In the first quarter of 1996, the Company executed a definitive credit
agreement governing a $150.0 million credit facility with a group of banks (the
"Credit Facility"). Borrowings under the Credit Facility bear interest, at the
Company's option, at a per annum rate equal to a base rate (equal to the greater
of (i) the prime rate announced by Bankers Trust Company or (ii) the Federal
Funds rate plus .50%) plus .25% or the Eurodollar rate plus 1.25%. The Company
is required to pay a commitment fee of .375% on the unused available portion of
the maximum credit commitment. Debt financing costs are deferred and amortized
over the term of the debt. The weighted average interest rate on the Credit
Facility, including commitment and arrangement fees, was 14.5% at March 31,
1996. Borrowings are secured by security interests in certain of the Company's
assets. The Credit Facility also contains covenants that limit the amount of
total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments.
SF-7
<PAGE> 152
<TABLE>
<S> <C> <C>
8,375,455 SHARES
[DIAMOND OFFSHORE DIAMOND OFFSHORE DRILLING, INC.
LOGO] COMMON STOCK
($.01 PAR VALUE)
</TABLE>
---------------------
PROSPECTUS
---------------------
This Prospectus relates to 8,375,455 shares (the "Offered Shares") of
common stock, par value $0.01 per share ("Diamond Offshore Common Stock"), of
Diamond Offshore Drilling, Inc., a Delaware corporation ("Diamond Offshore"),
which Offered Shares may be offered from time to time by and for the account of
Alphee S.A., a Luxembourg corporation ("Alphee"), and/or Forvaltnings AB Ratos,
a Swedish corporation ("Ratos" and, together with Alphee, the "Selling
Stockholders"). Diamond Offshore will not receive any of the proceeds from the
sale of the Offered Shares. Diamond Offshore will bear certain costs relating to
the registration of the Offered Shares.
Pursuant to the Plan of Acquisition dated as of February 9, 1996, as
amended (as so amended, the "Plan of Acquisition"), among Diamond Offshore,
Diamond Offshore (USA) Inc., a Delaware corporation ("Diamond Offshore (USA)"),
AO Acquisition Limited, a Bermuda company ("Acquisition Sub"), and Arethusa
(Off-Shore) Limited, a Bermuda company ("Arethusa"), and the Amalgamation
Agreement dated as of February 9, 1996 (the "Amalgamation Agreement") between
Arethusa and Acquisition Sub, Diamond Offshore acquired Arethusa (the
"Acquisition"), on the terms set forth in the Plan of Acquisition and
Amalgamation Agreement. All of the information presented herein assumes
consummation of the Acquisition on April 29, 1996. Arethusa shareholders
received 17,893,344 shares of Diamond Offshore Common Stock, representing
approximately 26.4% of the total Diamond Offshore Common Stock currently
outstanding, of which the Selling Stockholders received an aggregate of
8,375,455 shares.
The Offered Shares may be offered for sale from time to time by the Selling
Stockholders to or through underwriters or directly to other purchasers or
through agents in one or more transactions on the New York Stock Exchange, Inc.
(the "NYSE"), in the over-the-counter market, in one or more private
transactions, or in a combination of such methods of sale, at prices and on
terms then prevailing, at prices related to such prices, or at negotiated
prices. The Selling Stockholders and any brokers and dealers through whom sales
of the Offered Shares are made may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, and the commissions or
discounts and other compensation paid to such persons may be regarded as
underwriters' compensation.
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
---------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE OFFERED SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE
6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THIS PROSPECTUS MAY NOT BE USED PRIOR TO CONSUMMATION OF THE ACQUISITION.
---------------------
The date of this Prospectus is April 12, 1996.
<PAGE> 153
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY DIAMOND OFFSHORE, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE OFFERED SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF DIAMOND OFFSHORE SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Diamond Offshore is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy and information
statements filed pursuant to Sections 14(a) and 14(c) of the Exchange Act and
other information filed with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, Diamond Offshore's
reports, proxy and information statements filed pursuant to Sections 14(a) and
14(c) of the Exchange Act and other information concerning Diamond Offshore can
be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005, on which exchange Diamond Offshore securities are listed.
Diamond Offshore has filed with the Commission a Registration Statement
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), on Forms S-4/S-1 with respect to the securities offered
hereby. This Prospectus also constitutes the prospectus of Diamond Offshore
filed as part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
(but are accurate statements of those matters considered by Diamond Offshore to
be material to a prospective investor in the Offered Shares); with respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying at the Commission's offices as described above.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF DIAMOND OFFSHORE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE DIAMOND OFFSHORE COMMON STOCK PURSUANT TO EXEMPTIONS
FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE EXCHANGE ACT.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements (including the Notes thereto) included elsewhere in this
Prospectus. Unless the context otherwise requires, references in this Prospectus
to "Diamond Offshore" shall mean Diamond Offshore Drilling, Inc. and its
consolidated subsidiaries including, from and after the consummation of the
Acquisition on April 29, 1996 (the "Effective Time"), Arethusa and its
consolidated subsidiaries. In this Prospectus, references to "dollars" and "$"
are to United States dollars.
DIAMOND OFFSHORE
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and consists of 30
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 19 jack-up rigs owned and/or operated by Diamond Offshore and
one drillship. Diamond Offshore also operates 10 land rigs deployed in South
Texas. Except for two jack-up rigs operated pursuant to bareboat charter
contracts, all of Diamond Offshore's offshore and land rigs are wholly owned.
Market Overview. The deep water and harsh environment markets for
semisubmersible rigs have experienced improved demand and higher dayrates during
the past year, due in part to the increasing impact of technological advances
(including 3-D seismic, horizontal drilling and subsea completion procedures)
that have broadened opportunities for offshore exploration and development. Both
the Gulf of Mexico and the North Sea semisubmersible markets have experienced
increased utilization and significantly higher dayrates in 1995 and 1996, and
customers increasingly are seeking to contract for rigs serving these markets
under term contracts (as opposed to contracts let on a single well or
well-to-well basis). As part of this trend, Diamond Offshore recently received a
commitment from a major oil company for a four-year term contract for its
drillship Ocean Clipper I, which will support an upgrade of the rig to operate
in deep water with dynamic positioning capabilities. In addition, Diamond
Offshore has entered into a contract and a letter of intent with two major oil
companies for two Victory-class semisubmersibles to conduct deep water drilling
operations in the Gulf of Mexico under three-year term contracts, in connection
with which Diamond Offshore will significantly enhance these rigs. The market
for jack-up rigs in the Gulf of Mexico, which weakened during 1994, appears to
have stabilized during 1995 and has shown some signs of strengthening in recent
months. Historically, however, the offshore contract drilling market has been
highly competitive and cyclical, and Diamond Offshore cannot predict the extent
to which current conditions will continue.
Business Strategy. Diamond Offshore seeks to maximize dayrates and rig
utilization by continuously adapting to changes in its markets, improving the
capabilities of its drilling rigs and increasing the quality of its service. The
key elements of its strategy are to:
- Market worldwide its large, diverse fleet, which is capable of satisfying
customer requirements in a variety of applications;
- Continue to enhance its fleet to meet customer demand for diverse
drilling capabilities, including those required for deep water and harsh
environment operations;
- Exploit the potential of Diamond Offshore's nine Victory-class
semisubmersible rigs by pursuing projects that take advantage of this rig
type's unique design to yield significantly enhanced rigs; and
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- Maintain a program of continuous improvement of quality and safety
through Diamond Offshore's Global Excellence Management System and
further capitalize on customer recognition of Diamond Offshore's quality
and safety achievements.
The Acquisition. On April 29, 1996 Diamond Offshore completed the
Acquisition, thereby augmenting its fleet with Arethusa's 13 owned and/or
operated mobile offshore drilling rigs. Arethusa provided drilling services
worldwide to international and government-controlled oil and gas companies. The
eight semisubmersible rigs owned by Arethusa are located in the Gulf of Mexico
and offshore Brazil and the five jack-up rigs in its fleet are located offshore
India, Indonesia and Egypt, in the Gulf of Mexico and in the Dutch sector of the
North Sea.
Pursuant to the Acquisition, Diamond Offshore issued and sold to its wholly
owned subsidiary Diamond Offshore (USA) 17,893,344 shares of Diamond Offshore
Common Stock, representing approximately 26.4% of the total Diamond Offshore
Common Stock currently outstanding, which were contributed by Diamond Offshore
(USA) to the capital of Acquisition Sub and delivered by Acquisition Sub to
Arethusa shareholders in consideration of all of the issued and outstanding
shares of Arethusa common stock, par value $0.10 per share ("Arethusa Common
Stock"). The Acquisition was accomplished pursuant to an amalgamation (the
"Amalgamation") of Arethusa with Acquisition Sub, a wholly owned subsidiary of
Diamond Offshore (USA). The surviving company in the Amalgamation, Diamond
Offshore Exploration (Bermuda) Limited ("Diamond Offshore Exploration
(Bermuda)"), succeeded to the assets and liabilities of Arethusa and Acquisition
Sub and is continuing the business of Arethusa and Acquisition Sub as a wholly
owned subsidiary of Diamond Offshore (USA). See "Business -- The Acquisition."
Fleet Size and Diversity. Diamond Offshore's large, diverse fleet, which
includes some of the most technologically advanced rigs in the world, enables it
to offer a broad range of services worldwide in various markets, including the
deep water market, the harsh environment market (such as the North Sea), the
conventional semisubmersible market and the jack-up market. Diamond Offshore
believes that it is well positioned to compete in the most complex deep water
and harsh environment markets with its three fourth-generation semisubmersibles,
each of which is capable of drilling in water depths of up to 5,000 feet and
operating in harsh environments. Diamond Offshore's 27 remaining semisubmersible
rigs, including 16 that are capable of drilling in waters of 1,500 feet or more
and three that are currently marketed for drilling in the North Sea, give
Diamond Offshore a significant presence worldwide in the expanding
semisubmersible market. In addition, Diamond Offshore owns and/or operates 19
jack-up rigs with diverse capabilities that operate in water depths of up to 350
feet, including 14 capable of drilling in water depths of 250 feet or more.
Diamond Offshore believes that its presence in multiple markets provides a
competitive advantage. For example, Diamond Offshore believes that its
experience with safety and other regulatory matters in the United Kingdom has
been beneficial in Australia and in the Gulf of Mexico and that production
experience gained through Brazilian and North Sea operations has application
worldwide. Additionally, Diamond Offshore believes that its performance for a
customer in one market segment or area enables Diamond Offshore to better
understand that customer's needs and serve that customer in different market
segments or other geographic locations.
Fleet Enhancements. Diamond Offshore has continued to enhance its fleet
both to increase overall technical capabilities and to meet specific drilling
requirements. Diamond Offshore plans to continue its program of selectively
enhancing its rigs to meet customer demand for advanced features or
capabilities, including those required for operation in the deep water or harsh
environment markets. For example, Diamond Offshore upgraded the semisubmersible
Ocean Voyager to operate in maximum water depths of 3,200 feet and has modified
the semisubmersible Ocean Nomad to allow it to be certified for service in the
U.K. sector of the North Sea, where it is operating under a two-year contract at
improved dayrates. Diamond Offshore converted three of its 300-foot cantilever
jack-up rigs from slot rigs, which Diamond Offshore believes has resulted in
these rigs achieving higher dayrates and utilization. In addition, Diamond
Offshore has added top-drive drilling systems to many rigs, so that 36 rigs in
Diamond Offshore's fleet are now so equipped. From time to time Diamond Offshore
is able to negotiate lump-sum payments or increased dayrates from a customer to
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offset a portion of the costs of specific upgrades undertaken to enhance a rig
to meet such customer's requirements for a particular drilling project.
Victory-Class Enhancements. The design of the Victory-class
semisubmersible rigs, including their cruciform hull configurations, long
fatigue-life and advantageous stress characteristics, makes this class of rig
particularly well-suited for significant upgrading projects. Currently, Diamond
Offshore's Victory-class rigs are outfitted for service in maximum water depths
of 600 to 3,200 feet. Five of Diamond Offshore's nine Victory-class rigs are
equipped with top-drive drilling systems, two are modified for increased
efficiency in the handling of subsea completion equipment and one has stability
enhancements that allow increased variable deck load. In management's opinion,
it is unlikely that new semisubmersibles will be built unless there is a
substantial and sustained improvement in the market; therefore, Diamond Offshore
believes that the relative ease and efficiency with which it can significantly
enhance its Victory-class rigs is a competitive advantage in a market requiring
increasing capability from offshore drilling rigs.
The Ocean Quest, one of Diamond Offshore's Victory-class rigs, is currently
undergoing an upgrade pursuant to contract with a major oil company for a
three-year commitment. The rig is being upgraded to conduct drilling operations
in the Gulf of Mexico in water depths of up to 3,500 feet. This project includes
enhancements to provide additional hull buoyancy, which will allow a variable
deck load exceeding 5,000 tons, the addition of a new self-contained chain/wire
mooring system, and drilling system upgrades, including the installation of a
top-drive drilling system, a 15,000 psi blowout prevention system, a third mud
pump and 2,900 barrel liquid mud capacity. The Ocean Quest is scheduled to be
placed in service in the fourth quarter of 1996. In addition, during the third
quarter of 1995 Diamond Offshore entered into a letter of intent with another
major oil company for a three-year commitment for a second Victory-class rig,
the Ocean Star (formerly named Ocean Countess), pursuant to which the rig is
being upgraded to conduct drilling operations in the Gulf of Mexico in water
depths of up to 4,500 feet. The upgrade project for the Ocean Star also includes
stability enhancements, the installation of a new mooring system and drilling
system upgrades similar to those planned for the Ocean Quest. The Ocean Star is
scheduled to be placed in service late in the fourth quarter of 1996. Following
the upgrades, Diamond Offshore believes that these rigs will be able to compete
effectively in the fourth-generation deep water market. Diamond Offshore is
currently pursuing other such upgrade opportunities for its seven remaining
Victory-class rigs. However, there can be no assurance that the upgrades for the
Ocean Quest and the Ocean Star will be completed as planned, or within Diamond
Offshore's budget for these projects, or that the definitive drilling contract
contemplated by the letter of intent relating to the Ocean Star will be
executed. In addition, there can be no assurance as to if, when or to what
extent upgrades will be made to other Victory-class rigs in Diamond Offshore's
fleet.
Additional Victory-class upgrade potential exists, including conceptual
plans Diamond Offshore is developing for the possible construction of an
ultra-large semisubmersible, the Ocean Legend. The Ocean Legend is intended to
take advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. Diamond Offshore has
completed its feasibility studies and has begun preliminary design engineering
in connection with the upgrade. See Note 1 to Diamond Offshore's Consolidated
Financial Statements included elsewhere herein. Although Diamond Offshore is
proposing the design to several major oil companies, there can be no assurance
that the Ocean Legend can be built in a cost-effective manner, that if a
Victory-class rig is so upgraded, there will be adequate demand for its
services, or that competitors will not achieve capability beyond that of
fourth-generation semisubmersibles through other means attractive to customers.
Quality. Diamond Offshore maintains a program to continuously improve
quality and safety through its Global Excellence Management System ("GEMS"),
which was instituted in 1993 to increase Diamond Offshore's commitment to
quality of service, safety and the environment. Diamond Offshore also seeks to
capitalize on customer recognition of Diamond Offshore's quality and safety
achievements. Diamond Offshore is the only drilling contractor to have won more
than once (in April 1994 and April 1995) the annually awarded U.S. Minerals
Management Service National Safety Award for Excellence.
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RISK FACTORS
In addition to the other information contained in this Prospectus and
incorporated herein by reference, prospective investors should carefully
consider the matters set forth below before purchasing any of the Offered
Shares.
DEPENDENCE ON OIL AND NATURAL GAS INDUSTRY; INDUSTRY CONDITIONS
Diamond Offshore's business and operations depend principally upon the
condition of the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. Historically, the offshore
contract drilling industry has been highly competitive and cyclical, with
periods of high demand, short rig supply and high dayrates followed by periods
of low demand, excess rig supply and low dayrates. The offshore contract
drilling business is influenced by a number of factors, including the current
and anticipated prices of oil and natural gas, the expenditures by oil and gas
companies for exploration and production and the availability of drilling rigs.
For a number of years, depressed oil and natural gas prices and an oversupply of
rigs have adversely affected the offshore drilling market, particularly in the
Gulf of Mexico, where the prolonged weakness and uncertainty in the demand for
and price of natural gas resulted in a significant decline in exploration and
production activities. Demand for drilling services outside the United States,
excluding the North Sea, has been less volatile in recent years, but remains
dependent on a variety of political and economic factors beyond Diamond
Offshore's control, including worldwide demand for oil and natural gas, the
ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and
maintain production levels and pricing, the level of production of non-OPEC
countries and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.
COMPETITION
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the oversupply of rigs has created an
intensely competitive market in which price is the primary factor in determining
the selection of a drilling contractor. Diamond Offshore believes that
competition for drilling contracts will continue to be intense for the
foreseeable future because of the worldwide oversupply of drilling rigs and the
ability of contractors to move rigs from areas of low utilization and dayrates
to areas of greater activity and relatively higher dayrates. In addition, there
are inactive non-marketed rigs or rigs being operated in non-drilling activities
that could be reactivated to meet an increase in demand for drilling rigs in any
given market. Such movement or reactivation or a decrease in drilling activity
in any major market could depress dayrates and could adversely affect
utilization of Diamond Offshore's rigs. See "Business -- Offshore Contract
Drilling Services."
HISTORY OF OPERATING LOSSES
Diamond Offshore reported operating income of $11.7 million for the year
ended December 31, 1995, operating loss of $14.6 million for the year ended
December 31, 1994, operating income of $4.5 million for the year ended December
31, 1993, operating loss of $49.2 million for the year ended December 31, 1992
and operating loss of $15.4 million for the year ended December 31, 1991.
Additionally, Diamond Offshore reported net loss of $7.0 million, $34.8 million,
$16.6 million, $53.4 million and $26.6 million for the years ended December 31,
1995, 1994, 1993, 1992 and 1991, respectively. Diamond Offshore had total
stockholders' equity of $492.9 million as of December 31, 1995, net of an
accumulated deficit of $171.4 million. Diamond Offshore's financial results in
the future will depend primarily on the utilization and dayrates of the rigs
operated by Diamond Offshore and the cost of such operations. Although demand
for drilling services has improved recently, an oversupply of rigs has existed
since the early 1980's and has led to intense price competition among drilling
contractors. There can be no assurance that Diamond Offshore's operating results
will improve in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
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AVERAGE AGE OF FLEET
The average age of the Diamond Offshore fleet of offshore drilling rigs
(calculated as of December 31, 1995 and measured from year built) is 17.7 years.
Many of Diamond Offshore's rigs have been upgraded during the last five years
with enhancements such as top-drive drilling systems, increases to water depth
capability, mud pump additions or increases in deck load capacity, and Diamond
Offshore believes that it will be feasible to continue to upgrade its fleet,
particularly its Victory-class semisubmersible rigs, notwithstanding the average
age of its fleet. However, there can be no assurance as to if, when or to what
extent upgrades will be made to rigs in Diamond Offshore's fleet. In addition,
to the extent Diamond Offshore is not able to enhance its fleet with upgrade
projects, Diamond Offshore will have fewer rigs available to meet customer
demand for harsh environment and deep water operations than if such projects had
been successfully implemented.
CONTROL BY MAJOR STOCKHOLDER AND POTENTIAL CONFLICTS OF INTEREST
Loews Corporation, a Delaware corporation ("Loews"), beneficially owns
approximately 51.6% of the outstanding shares of Diamond Offshore Common Stock
and is in a position to control actions that require the consent of
stockholders, including the election of directors, amendment of Diamond
Offshore's Restated Certificate of Incorporation and any mergers or any sale of
substantially all the assets of Diamond Offshore. In connection with the initial
public offering, in 1995, of Diamond Offshore Common Stock (the "Diamond
Offshore Initial Public Offering"), Loews and Diamond Offshore entered into
certain agreements providing for certain rights and obligations of each of them.
See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and Loews."
Diamond Offshore's Board of Directors includes, and is expected to continue
to include, persons who are also directors or officers of, or otherwise
represent, Loews. Diamond Offshore's Board of Directors presently consists of
five directors, one of whom (James S. Tisch) is also a director and the
President and Chief Operating Officer of Loews, and another of whom (Herbert C.
Hofmann) is a Senior Vice President of Loews. See "Management -- Security
Ownership of Management and Directors." Loews (other than through Diamond
Offshore) and Diamond Offshore are generally engaged in businesses sufficiently
different from each other as to make conflicts as to possible corporate
opportunities unlikely. It is possible, however, that Loews may in some
circumstances be in direct or indirect competition with Diamond Offshore,
including competition with respect to certain business strategies and
transactions that Diamond Offshore may propose to undertake. In addition,
potential conflicts of interest exist or could arise in the future for such
directors with respect to a number of areas relating to the past and ongoing
relationships of Loews and Diamond Offshore, including tax and insurance
matters, financial commitments, and sales of Diamond Offshore Common Stock
pursuant to registration rights or otherwise. Although the affected directors
may abstain from voting on matters in which the interests of Diamond Offshore
and Loews are in conflict so as to avoid potential violations of their
respective fiduciary duties to stockholders of the respective corporations, the
presence of potential or actual conflicts could affect the process or outcome of
Board deliberations, and no policies, procedures or practices have been adopted
by Diamond Offshore to reduce or avoid such conflicts. There can be no assurance
that such conflicts of interest will not materially adversely affect Diamond
Offshore. See "Management -- Certain Relationships and Related Transactions."
ENVIRONMENTAL MATTERS
Diamond Offshore's operations are subject to numerous federal, state and
local environmental laws and regulations that relate directly or indirectly to
its operations, including certain regulations controlling the discharge of
materials into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, Diamond Offshore may be liable for damages and costs incurred in
connection with oil spills for which it is held responsible. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may in certain circumstances impose "strict liability" and
render a company liable for environmental damage without regard to negligence or
fault on the part of such company. Such laws and regulations may expose Diamond
Offshore to liability for the conduct of or conditions caused by others, or for
acts of Diamond Offshore that were in
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compliance with all applicable laws at the time such acts were performed. The
application of these requirements or the adoption of new requirements could have
a material adverse effect on Diamond Offshore. See "Business -- Governmental
Regulation."
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure across
all segments of the oil and gas industry. OPA '90, such similar legislation and
related regulations impose a variety of obligations on Diamond Offshore related
to the prevention of oil spills and liability for damages resulting from such
spills. OPA '90 imposes strict and with limited exceptions joint and several
liability upon each responsible party for oil removal costs and a variety of
public and private damages. OPA '90 also imposes ongoing financial
responsibility requirements on a responsible party. A failure to comply with
ongoing requirements or inadequate cooperation in a spill may subject a
responsible party, including in some cases Diamond Offshore, to civil or
criminal enforcement action. Also, the U.S. Minerals Management Service is
required to promulgate regulations to implement the financial responsibility
requirements for offshore facilities. If implemented as written, the financial
responsibility requirements of OPA '90 could have the effect of significantly
increasing the amount of financial responsibility that oil and gas operators
must demonstrate to comply with OPA '90. While industry groups and marine
insurance carriers are seeking modification of these requirements,
implementation of these requirements in their current form could adversely
affect the ability of some of Diamond Offshore's customers to operate in U.S.
waters, which could have a material adverse effect on Diamond Offshore. See
"Business -- Governmental Regulation."
OPERATIONAL HAZARDS
Diamond Offshore's operations are subject to hazards inherent in the
drilling of oil and gas wells such as blowouts, reservoir damage, loss of
production, loss of well control, cratering or fires, the occurrence of which
could result in the suspension of drilling operations, injury to or death of rig
and other personnel and damage to or destruction of Diamond Offshore's, Diamond
Offshore's customer's or a third party's property or equipment. Damage to the
environment could also result from Diamond Offshore's operations, particularly
through oil spillage or uncontrolled fires. In addition, offshore drilling
operations are subject to perils peculiar to marine operations, including
capsizing, grounding, collision and loss or damage from severe weather. Diamond
Offshore has insurance coverage and contractual indemnification for certain
risks but there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification. See "Business -- Indemnification and Insurance."
GOVERNMENTAL REGULATION AND TAX POLICY
Diamond Offshore's operations are subject to numerous governmental laws and
regulations. In addition, demand for services in the drilling industry is
dependent on the oil and gas exploration industry and accordingly is affected by
changes in tax and other laws relating to the energy business generally.
Significant capital expenditures may be required to comply with
governmental laws and regulations applicable to Diamond Offshore and such
compliance could materially adversely affect the results of operations or
competitive position of Diamond Offshore. It is possible that such regulations
may in the future add significantly to the cost of operating offshore drilling
equipment or may significantly limit drilling activity. See
"Business -- Governmental Regulation."
OPERATIONS OUTSIDE THE UNITED STATES
Operations outside the United States accounted for approximately 36.4%,
34.0% and 44.8% of Diamond Offshore's total consolidated revenues for fiscal
years 1995, 1994 and 1993, respectively. Operations outside the United States
accounted for approximately 47.5%, 52.3% and 63.9% of Arethusa's total
consolidated revenues for fiscal years 1995, 1994 and 1993, respectively.
Diamond Offshore's non-U.S. operations are subject to certain political,
economic and other uncertainties not encountered in U.S. operations, including
risks of war and civil disturbances (or other risks that may limit or disrupt
markets), expropriation and the
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general hazards associated with the assertion of national sovereignty over
certain areas in which operations are conducted. Diamond Offshore's operations
outside the United States may face the additional risk of fluctuating currency
values, hard currency shortages, controls of currency exchange and repatriation
of income or capital. No prediction can be made as to what governmental
regulations may be enacted in the future that could adversely affect the
international drilling industry.
TURNKEY CONTRACTS
Diamond Offshore, through Diamond Offshore Turnkey Services, Inc. ("DOTS"),
a Delaware corporation and a direct, wholly owned subsidiary of Diamond
Offshore, selectively engages in drilling services pursuant to turnkey drilling
contracts under which DOTS agrees to drill a well to a specified depth for a
fixed price. Generally, DOTS is not entitled to payment unless the well is
drilled to the specified depth and profitability of the contract depends upon
its ability to keep expenses within the estimates used by DOTS in determining
the contract price. Drilling a well under a turnkey contract therefore typically
requires a cash commitment by Diamond Offshore in excess of those drilled under
conventional dayrate contracts and exposes DOTS to risks of potential financial
losses that generally are substantially greater than those that would ordinarily
exist when drilling under a conventional dayrate contract. The financial results
of a turnkey contract depend upon the performance of the drilling unit, drilling
conditions and other factors, some of which are beyond the control of DOTS. See
"Business -- Offshore Contract Drilling Services."
SHARES AVAILABLE FOR FUTURE SALE
Subject to the restrictions described in "Management -- Certain
Relationships and Related Transactions -- Controlling Stockholder" and
"Management -- Certain Relationships and Related Transactions -- Registration
Rights of Selling Stockholders" and applicable law, Loews is free to sell any
and all of the shares of Diamond Offshore Common Stock it owns. In addition, as
described in "Management -- Certain Relationships and Related
Transactions -- Registration Rights of Selling Stockholders," each of Alphee and
Ratos is free to sell, without restriction, at its election, all or part of the
shares of Diamond Offshore Common Stock received by such person in connection
with the Acquisition. No prediction can be made as to the effect, if any, that
future sales of Diamond Offshore Common Stock, or the availability of Diamond
Offshore Common Stock for future sale, may have on the market price of the
Diamond Offshore Common Stock prevailing from time to time. Sales of substantial
amounts of Diamond Offshore Common Stock or the perception that such sales might
occur could adversely affect prevailing market prices for the Diamond Offshore
Common Stock. In connection with the Diamond Offshore Initial Public Offering,
Diamond Offshore agreed that it will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to any additional
shares of Diamond Offshore Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Diamond Offshore Common Stock
until October 10, 1996 without the prior written consent of CS First Boston
Corporation ("CS First Boston"), except grants of employee stock options
pursuant to any subsequently adopted plan or issuances upon any exercise
thereof. Loews agreed to similar restrictions on behalf of itself and its
affiliates (other than Diamond Offshore) with respect to shares of the Diamond
Offshore Common Stock. Also in connection with the Diamond Offshore Initial
Public Offering, Diamond Offshore and Loews entered into an agreement that
provides Loews with certain rights to have the shares of Diamond Offshore Common
Stock owned by Loews registered by Diamond Offshore under the Securities Act in
order to permit the public sale of such shares. See "Management -- Certain
Relationships and Related Transactions -- Transactions Between Diamond Offshore
and Loews -- Registration Rights Agreement."
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USE OF PROCEEDS
Diamond Offshore will not receive any proceeds from the sale of the Offered
Shares by the Selling Stockholders.
SELLING STOCKHOLDERS
All the Offered Shares being offered hereby are being offered by Alphee
and/or Ratos who hold 4,708,248 shares (or approximately 6.9%) and 3,667,207
shares (or approximately 5.4%) of the Diamond Offshore Common Stock,
respectively, and who, in the aggregate, hold all 8,375,455 Offered Shares,
representing approximately 12.3% of the outstanding shares of Diamond Offshore
Common Stock. All of the Offered Shares are being offered hereby.
Diamond Offshore, Diamond Offshore (USA), Acquisition Sub, Alphee and Ratos
entered into a Shareholders Agreement, dated as of February 9, 1996, as amended
(as so amended, the "Shareholders Agreement"), and therein agreed to certain
provisions concerning the Fee Agreement, dated as of February 9, 1996, as
amended, between Diamond Offshore and Arethusa (as so amended, the "Fee
Agreement"). See "Management -- Certain Relationships and Related
Transactions -- Transactions Between Diamond Offshore and the Selling
Stockholders" and "-- Registration Rights of Selling Stockholders."
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DIVIDEND POLICY
There were no cash dividends declared by Diamond Offshore for 1995 or 1994,
except for a $2.1 million special dividend paid to Loews in connection with the
Diamond Offshore Initial Public Offering. See Note 2 to Diamond Offshore's
Consolidated Financial Statements included elsewhere herein. Diamond Offshore
does not anticipate that it will declare or pay any dividends on the Diamond
Offshore Common Stock in the foreseeable future. Diamond Offshore expects that
it will retain all earnings for the development and growth of its business. Any
future determination as to payment of dividends will be made at the discretion
of the Board of Directors of Diamond Offshore and will depend upon Diamond
Offshore's operating results, financial condition, capital requirements, general
business conditions and such other factors that the Board of Directors deems
relevant. In addition, the payment of cash dividends is limited by the terms of
Diamond Offshore's $150.0 million credit facility with a group of banks (the
"Diamond Offshore Bank Credit Facility"). Generally, the Diamond Offshore Bank
Credit Facility limits cash dividends to the then "Available Amount," as therein
defined, not to exceed in the aggregate $20.0 million plus at the date of
determination an amount equal to (i) 25% of cumulative consolidated net income
for fiscal quarters ending after January 1, 1996 and prior to such date minus
(ii) 100% of cumulative consolidated net loss for fiscal quarters ending after
January 1, 1996 and prior to such date. The "Available Amount," for any date of
determination, means $70.0 million plus (i) a percentage of cumulative
consolidated EBITDA (as defined in the Diamond Offshore Bank Credit Facility)
for fiscal quarters ending after January 1, 1996 and prior to such date, less
adjustments for interest expense, provisions for taxes and certain drilling
contract revenues, plus (ii) amounts attributable to certain asset sales and
issuances of equity, minus (iii) amounts attributable to certain capital
expenditures and investments made prior to such date, and to cash dividends
theretofore paid. At February 8, 1996 (the effective date of the Diamond
Offshore Bank Credit Facility), the "Available Amount" equalled $70.0 million,
and Diamond Offshore would have been permitted to pay cash dividends aggregating
$20.0 million at such date within the limits imposed by the Diamond Offshore
Bank Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity" and Note 12 to Diamond
Offshore's Consolidated Financial Statements included elsewhere herein.
11
<PAGE> 163
CAPITALIZATION
The following table sets forth the capitalization of Diamond Offshore as of
December 31, 1995 and as adjusted as of such date after giving effect to the
Acquisition. This table should be read in conjunction with the Consolidated
Financial Statements (including the Notes thereto) and the Unaudited Pro Forma
Consolidated Condensed Financial Statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
(UNAUDITED)
-------------------------
HISTORICAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt.................................................. $ -- $ 72,778
--------- ----------
Stockholders' equity:
Common stock, $.01 par value........................... 500 679
Additional paid-in capital............................. 665,107 1,215,605
Accumulated deficit.................................... (171,444) (171,444)
Cumulative translation adjustment...................... (1,269) (1,269)
--------- ----------
Total stockholders' equity........................... 492,894 1,043,571
--------- ----------
Total capitalization........................................ $ 492,894 $ 1,116,349
========= ==========
</TABLE>
12
<PAGE> 164
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical and pro
forma financial data for Diamond Offshore. The selected consolidated financial
data were derived from the Consolidated Financial Statements (including the
Notes thereto) of Diamond Offshore and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements (including the Notes
thereto) of Diamond Offshore included elsewhere herein. The pro forma financial
data reflect certain adjustments that give effect to the Acquisition, accounted
for under the purchase method of accounting, and assuming that the Diamond
Offshore Initial Public Offering had occurred at January 1, 1995. Such tables
should be read in conjunction with the "Unaudited Pro Forma Consolidated
Condensed Financial Statements" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995
PRO FORMA 1995 1994 1993 1992(1) 1991
--------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues.................... $ 456,750 $336,584 $307,918 $288,069 $214,885 $64,056
Operating expenses:
Contract drilling............... 346,092 259,560 256,919 228,211 199,201 61,928
General and administrative...... 22,890 13,857 11,993 11,785 15,401 3,416
Depreciation(2)................. 85,770 52,865 55,366 46,819 49,667 14,545
Gain on sale of assets.......... (1,349) (1,349) (1,736) (3,201) (231) (414)
Operating income (loss)........... 3,347 11,651 (14,624) 4,455 (49,153) (15,419)
Interest expense.................. (7,453) (27,052) (31,346) (25,906) (28,591) (7,296)
Other income (expense), net....... 5,646 1,598 (455) (219) (207) 106
Income tax benefit (expense)(3)... (2,503) 6,777 11,621 5,041 24,575 (4,000)
Net loss.......................... (963) (7,026) (34,804) (16,629) (53,376) (26,609)
Pro forma net income (loss) per
share........................... (0.01) 0.20(4) -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995
PRO FORMA 1995 1994 1993 1992(1) 1991
---------- -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)................. $ 85,335 $ 63,523 $ 57,521 $ 52,904 $ 35,391 $ 8,960
Drilling and other property and
equipment, net................... 1,052,118 502,278 488,664 498,740 478,454 94,574
Goodwill........................... 47,167 -- -- -- -- --
Total assets....................... 1,268,930 618,052 588,158 592,162 582,418 117,414
Long-term debt(6).................. 62,175 -- 394,777 353,483 233,216 88,254
Stockholders' equity(7)............ 1,043,571 492,894 124,066 158,361 275,300 5,550
</TABLE>
- ---------------
(1) Diamond Offshore acquired all of the common stock of Odeco Drilling Inc., a
Delaware corporation ("Odeco"), for approximately $376.6 million in cash
effective January 1, 1992.
(2) Effective January 1, 1993, Diamond Offshore revised the estimated useful
lives for certain classes of its offshore drilling rigs. The estimated
useful lives of Diamond Offshore's offshore drilling rigs, after the change
in estimate, range from 10 to 25 years. As compared to the original
estimate of useful lives, this change resulted in a reduction of
approximately $6.3 million in depreciation expense during 1993 and a
corresponding increase in operating income.
(3) Prior to the Diamond Offshore Initial Public Offering, Diamond Offshore was
included in the consolidated U.S. federal income tax return of Loews.
Effective January 1, 1992, Diamond Offshore adopted Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" which
utilizes the liability method of accounting for income taxes. For all
preceding periods,
13
<PAGE> 165
Accounting Principles Board Opinion No. 11, the deferral method, was
utilized. The cumulative effect of adoption of SFAS No. 109 on Diamond
Offshore's results of operations for the year ended December 31, 1992 was
not material. Prior to 1992, Diamond Offshore's profitable subsidiaries
were allocated a share of the Loews consolidated tax expense and no benefit
was given to any of Diamond Offshore's subsidiaries generating taxable
losses. Effective January 1, 1992, a tax sharing agreement with Loews was
adopted to allow for the recognition of expenses and benefits related to
taxable income and losses as if Diamond Offshore filed a separate
consolidated return. In conjunction with the Diamond Offshore Initial
Public Offering, the tax sharing agreement was terminated and all assets
and liabilities were settled by offsetting these amounts against notes
payable to Loews. For taxable periods subsequent to the Diamond Offshore
Initial Public Offering, Diamond Offshore will file a consolidated U.S.
federal income tax return on a stand-alone basis.
(4) Pro forma net income per share gives effect to the Diamond Offshore Initial
Public Offering and the after-tax effects of a reduction in interest
expense. Assuming the Diamond Offshore Initial Public Offering had occurred
at January 1, 1995, Diamond Offshore would have recognized net income of
$10.0 million, or $0.20 per share of Diamond Offshore Common Stock, after
adjusting for the after-tax effects of a reduction in interest expense. See
Note 1 to Diamond Offshore's Consolidated Financial Statements included
elsewhere herein.
(5) Pro forma working capital includes fair values of identifiable current
assets acquired and liabilities assumed, including liabilities for certain
costs directly associated with the Acquisition and current maturities of
long-term debt of Arethusa assumed by Diamond Offshore.
(6) Long-term debt consisted solely of notes payable to Loews for the historical
periods presented.
(7) In connection with the Diamond Offshore Initial Public Offering, Diamond
Offshore paid a special dividend of $2.1 million to Loews with a portion of
the proceeds. No other cash dividends were paid during the historical
periods presented.
14
<PAGE> 166
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet has been
prepared based on the historical financial statements of Diamond Offshore as of
and for the year ended December 31, 1995 and of Arethusa as of and for the year
ended September 30, 1995. The following unaudited pro forma consolidated
condensed income statement has been prepared based on the historical financial
statements of Diamond Offshore as of and for the year ended December 31, 1995
and based on pro forma income statement data for Arethusa that reflect
adjustments to Arethusa's historical consolidated income statement for the year
ended September 30, 1995 in connection with (i) the acquisition of the Arethusa
Yatzy, (iii) the sale of the Treasure Stawinner and (iii) the dividend and
capital distribution of $61.0 million ($3.00 per share of Arethusa Common Stock)
as if each had occurred at the beginning of fiscal year 1995. The pro forma
financial statements give effect to (i) the Acquisition, (ii) the Diamond
Offshore Initial Public Offering and, in connection therewith, the use of the
proceeds to repay all of Diamond Offshore's then outstanding indebtedness to
Loews and to fund the payment of a special dividend to Loews and (iii) interest
expense for working capital borrowings, and commitment and other fees, under the
Diamond Offshore Bank Credit Facility. The Acquisition was accounted for under
the purchase method of accounting using a purchase price of $560.7 million,
which was calculated based on a seven-day average of the closing price of
Diamond Offshore Common Stock at the time the Acquisition was announced. The pro
forma consolidated condensed balance sheet was prepared assuming such
transactions were consummated on December 31, 1995 and give effect to events
directly attributable to the transactions, including those that are
nonrecurring. The pro forma consolidated condensed income statement was prepared
assuming the transactions were consummated as of the beginning of the period
presented and give effect to events directly attributable to the transactions
which are expected to have a continuing impact on the combined entity. These pro
forma consolidated condensed financial statements should be read in conjunction
with the other financial information of Diamond Offshore and Arethusa presented
elsewhere in this Prospectus. The pro forma consolidated condensed financial
statements are presented for illustrative purposes only and are not necessarily
indicative of actual results that would have been achieved had the transactions
been consummated on such dates, and are not necessarily indicative of future
results. The allocation of the purchase price is preliminary, as valuation and
other studies have not been finalized. It is not expected that the final
allocation of the purchase price will produce materially different results from
those presented herein.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL(A)
--------------------------
DIAMOND
OFFSHORE ARETHUSA ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and other current assets............ $ 41,278 $ 46,878 $ (21,632)(b) $ 66,524
Accounts receivable...................... 74,496 28,625 -- 103,121
Drilling and other property and
equipment, net......................... 502,278 237,324 312,516(c) 1,052,118
Goodwill and other assets................ -- 2,505 44,662(d) 47,167
--------- -------- -------- ----------
Total assets................... $ 618,052 $ 315,332 $ 335,546 $1,268,930
========= ======== ======== ==========
Current liabilities...................... $ 52,251 $ 28,559 $ 3,500(e) $ 84,310
Long-term debt........................... -- 62,175 -- 62,175
Deferred credits and other liabilities... 72,907 2,019 3,948(f) 78,874
Common stock............................. 500 2,033 (1,854)(g) 679
Additional paid-in capital............... 665,107 218,800 331,698(g) 1,215,605
Accumulated earnings (deficit)........... (171,444) 132 (132) (171,444)
Unrealized gain on equity securities..... -- 1,614 (1,614) --
Cumulative translation adjustment........ (1,269) -- -- (1,269)
--------- -------- -------- ----------
Total liabilities and
stockholders' equity......... $ 618,052 $ 315,332 $ 335,546 $1,268,930
========= ======== ======== ==========
</TABLE>
15
<PAGE> 167
- ---------------
(a) There are no significant adjustments required to the historical financial
statements of Diamond Offshore or Arethusa to conform accounting policies
of the two companies.
(b) Adjustment for fair values of identifiable current assets acquired and for
certain events directly attributable to the transaction. Such items
include:
<TABLE>
<S> <C>
Severance, consulting, and salary continuation plans...................... $ (5,526)(1)
Arethusa dividend......................................................... (5,083)(2)
Financial advisory services............................................... (7,500)(3)
Legal, accounting, and other.............................................. (2,500)(4)
Office lease cancellation................................................. (1,023)(5)
--------
$(21,632)
========
</TABLE>
- ---------------
(1) Under the Plan of Acquisition, from and after the Effective Time,
Diamond Offshore and Arethusa and their respective subsidiaries will
honor in accordance with their terms certain Arethusa employment,
severance, consulting and salary continuation plans. See
"Business -- The Acquisition -- Continuing Arethusa Severance,
Consulting and Salary Continuation Plans."
(2) On March 15, 1996, in anticipation of the Acquisition, and as
expressly permitted by the Plan of Acquisition, Arethusa paid a
dividend of $0.25 per share of Arethusa Common Stock.
(3) Arethusa has agreed to pay Merrill Lynch a fee of $7.5 million for
financial advisory services in connection with the Acquisition upon
the closing of the Acquisition.
(4) Adjustment for legal, accounting, printing and other nonrecurring
charges expected to be incurred in connection with the Acquisition.
(5) Arethusa is committed under a lease agreement for office space that
continues until August 30, 2002. The lease may be canceled in
December 1996 for a lump-sum payment of approximately $1.0 million.
Such payment has no future economic benefit to the combined company
and is incremental to other costs incurred by either Arethusa or
Diamond Offshore in the conduct of activities prior to the Effective
Time.
(c) Adjustment for fair values, based on current appraisals, of the eight
semisubmersible drilling rigs, three jack-up drilling rigs, and other
property and equipment owned by Arethusa.
(d) Adjustment for fair values of identifiable assets and for the excess of the
cost of Arethusa over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed.
(e) Adjustment for the estimated unfunded termination liability related to the
Arethusa defined benefit plan.
(f) Adjustment for fair values of liabilities assumed and for the deferred tax
liability for estimated future tax effects of differences between the tax
bases and the fair value amounts assigned to identifiable assets and
liabilities of Arethusa, offset by net operating loss carryforwards of
Arethusa of approximately $30.0 million. As a result of the Acquisition,
Diamond Offshore will have available to it certain Arethusa net operating
loss carryforwards to reduce future U.S. federal income taxes payable. Due
to the change in ownership of Arethusa resulting from the Acquisition,
there will be annual limitations on the amount of Arethusa tax
carryforwards available to be utilized by Diamond Offshore.
16
<PAGE> 168
(g) The pro forma financial statements reflect the purchase of 100% of the
outstanding shares of Arethusa Common Stock for a total consideration of
$560.7 million which is comprised of the following:
<TABLE>
<S> <C>
Diamond Offshore Common Stock to be issued............................ $539,296(1)
Options assumed....................................................... 11,381(2)
--------
Total equity consideration............................................ 550,677
Transaction costs..................................................... 10,000(3)
--------
Total consideration................................................... $560,677
========
</TABLE>
- ---------------
(1) The value of the Diamond Offshore Common Stock to be issued in the
Acquisition is calculated based on a seven-day average of the closing
price of Diamond Offshore Common Stock at the time the Acquisition
was announced (December 7, 1995) of $30.14.
(2) Amount represents the fair value of the Arethusa Options to be
assumed by Diamond Offshore pursuant to the Amalgamation Agreement.
The fair value is based on a seven-day average of the closing price
of Diamond Offshore Common Stock at the time the Acquisition was
announced (December 7, 1995), the Amalgamation Ratio and the option
exercise price including the $3.00 reduction, which is subject to
shareholder approval at the Arethusa Annual Meeting. See "Other
Arethusa Annual Meeting Matters -- Decrease of Option Exercise
Price."
(3) Amounts represent transaction costs directly associated with the
Acquisition. See (b) above.
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
HISTORICAL
DIAMOND PRO FORMA
OFFSHORE ARETHUSA(A) ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................................... $336,584 $ 120,166 $ -- $ 456,750
Operating expenses:
Contract drilling.............................. 259,560 86,532 -- 346,092
General and administrative..................... 13,857 9,033 -- 22,890
Depreciation and amortization.................. 52,865 29,008 3,897(b) 85,770
Gain on sale of assets......................... (1,349) -- -- (1,349)
-------- -------- ------- --------
Total operating expenses................ 324,933 124,573 3,897 453,403
-------- -------- ------- --------
Operating income (loss).......................... 11,651 (4,407) (3,897) 3,347
Other income (expense):
Interest expense............................... (27,052) (6,697) 26,296(c) (7,453)
Other, net..................................... 1,598 4,048 -- 5,646
-------- -------- ------- --------
Income (loss) before income tax benefit
(expense)...................................... (13,803) (7,056) 22,399 1,540
Income tax benefit (expense)..................... 6,777 (1,440) (7,840)(d) (2,503)
-------- -------- ------- --------
Net income (loss)................................ $ (7,026) $ (8,496) $ 14,559 $ (963)
======== ======== ======= ========
Net income per common share...................... $ 0.20(f) $ (0.42) $ (0.01)
======== ======== ========
Weighted average common shares outstanding....... 50,000(f) 20,333 67,893(e)
======== ======== ========
</TABLE>
- ---------------
(a) Pro forma income statement data for Arethusa reflect (i) the acquisition of
the Arethusa Yatzy, which occurred on May 3, 1995, (ii) the sale of the
Treasure Stawinner, which occurred June 30, 1995, and (iii) the dividend
and capital distribution of $61.0 million ($3.00 per share of Arethusa
Common Stock) as if each had occurred at the beginning of fiscal year 1995.
Set forth below in this footnote (a) are the historical amounts, and the
adjustments thereto, upon which the pro forma Arethusa amounts are based.
17
<PAGE> 169
ARETHUSA PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------
HISTORICAL DIVIDEND/
------------------- YATZY STAWINNER CAPITAL PRO
ARETHUSA YATZY(1) ACQUISITION SALE DISTRIBUTION FORMA
-------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Contract drilling revenue......... $122,147 $12,315 $ -- $(14,296)(6) $ -- $120,166
Operating expenses:
Direct costs.................... 87,953 8,060 (623)(5) (8,483)(6) -- 86,532
(375)(2)
General and administrative...... 8,658 -- 375(2) -- -- 9,033
Depreciation.................... 29,547 -- 1,352(3) (1,891)(6) -- 29,008
-------- -------- ------- -------- ------- --------
Total operating
expenses............... 126,158 8,060 729 (10,374) -- 124,573
-------- -------- ------- -------- ------- --------
Operating income (loss)........... (4,011) 4,255 (729) (3,922) -- (4,407)
Other income (expense):
Interest expense................ (6,311) -- (1,168)(4) 782(6) -- (6,697)
Interest income................. 5,692 -- -- (1,453)(7) 4,239
Gain (loss) on sale of assets... 27,820 -- -- (27,885)(6) -- (65)
Other, net...................... (126) -- -- -- -- (126)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes........................... 23,064 4,255 (1,897) (31,025) (1,453) (7,056)
Tax provision..................... (1,440) -- -- -- -- (1,440)
-------- -------- ------- -------- ------- --------
Net income (loss)................. $ 21,624 $ 4,255 $(1,897) $(31,025) $(1,453) $ (8,496)
======== ======== ======= ======== ======= ========
Net income (loss) per common
share........................... $ 1.06 $ (0.42)
======== ========
Weighted average common shares
outstanding..................... 20,333 20,333
======== ========
</TABLE>
- ---------------
(1) The historical financial information of the Yatzy operations for the
period from October 1, 1994, through May 2, 1995 is based upon Arethusa
records, as manager of the rig. The previous owner of the rig prepared
financial information only on a semi-annual, calendar year basis; and
was unable to provide the complete financial information for the twelve
months ended September 30, 1995. Financial statement captions for which
Yatzy historical information is not presented (historical depreciation
and interest expense) would have been adjusted to reflect Arethusa's
cost basis in the Arethusa Yatzy and Arethusa's financing of the rig.
Pro forma Yatzy acquisition adjustments (3) and (4) discussed below
provide fully for depreciation using Arethusa's cost basis in the
Arethusa Yatzy and interest based on Arethusa's financing of the rig.
Additionally, it is management's understanding that there are no other
significant transactions or activities related to the historical
operations of Yatzy which would have a material impact on the
as-adjusted pro forma income statement. Therefore, management believes
the resulting pro forma income statement is in compliance with Article
11 of Regulation S-X.
(2) To reclassify and eliminate the management fee paid to Arethusa from
direct costs to general and administrative expenses.
(3) To reflect depreciation expense calculated based upon Arethusa's cost
and estimated useful life of 25 years, which is consistent with
Arethusa's previously established depreciation policy.
(4) To adjust for additional interest expense associated with Arethusa's
$30.0 million note entered into in connection with the acquisition of
the Arethusa Yatzy.
(5) To adjust for a reduction in insurance expense resulting from
Arethusa's lower insured value for the Arethusa Yatzy.
(6) To reflect the elimination of historical operations, interest expense
and gain on sale of assets for the Treasure Stawinner.
(7) To reflect the reduction in interest income resulting from the dividend
and capital distribution made to shareholders in fiscal 1995.
18
<PAGE> 170
(b) To record the additional depreciation expense and amortization of goodwill
resulting from the allocation of the purchase price. The pro forma
adjustment assumes an 18-year average estimated useful life for
depreciation and a 20-year amortization period for goodwill.
(c) To adjust interest expense, assuming that the Diamond Offshore Initial
Public Offering and repayment of indebtedness occurred on January 1, 1995.
(d) To record income tax expense on the effect of the pro forma adjustments to
depreciation and amortization and interest expense.
(e) Weighted average shares outstanding as if both the October 1995 issuance of
15.0 million shares by Diamond Offshore through the Diamond Offshore
Initial Public Offering and the 17.9 million shares to be issued by Diamond
Offshore in consideration of the Arethusa Common Stock had taken place on
January 1, 1995.
(f) After the Diamond Offshore Initial Public Offering, Diamond Offshore had
50.0 million shares of Diamond Offshore Common Stock outstanding. Assuming
the Diamond Offshore Initial Public Offering had occurred at January 1,
1995, Diamond Offshore would have recognized net income of $10.0 million,
or $0.20 per share of Diamond Offshore Common Stock, after adjusting for
the after-tax effects of a reduction in interest expense.
19
<PAGE> 171
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Diamond
Offshore's Consolidated Financial Statements (including the notes thereto)
included elsewhere herein.
RESULTS OF OPERATIONS
GENERAL
REVENUES. Diamond Offshore's revenues vary based upon demand, which affects
the number of days the fleet is utilized and the dayrates received. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, Diamond Offshore may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues are generally adversely affected. As a response to changes in
demand, Diamond Offshore may withdraw a rig from the market by stacking it or
may reactivate a rig which was previously stacked, which may decrease or
increase revenues, respectively.
Revenues from dayrate drilling contracts are recognized currently. When
mobilization or enhancement is required for a contract, Diamond Offshore may
receive a lump-sum payment to offset a portion of the cost of such requirements.
Mobilization revenues less costs incurred to mobilize an offshore rig from one
market to another are usually recognized over the term of the related drilling
contract. In addition, payments received for rig enhancements are recognized as
revenues over the term of the related drilling contract. Revenues from offshore
turnkey contracts are recognized on the completed contract method, with revenues
accrued to the extent of turnkey costs until the specified turnkey depth and
other contract requirements are met.
OPERATING INCOME (LOSS). Operating income (loss) is primarily affected by
revenue factors, but is also a function of varying levels of operating expenses.
Operating expenses are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, Diamond Offshore realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. However, if the rig is to be idle for an
extended period of time, Diamond Offshore may reduce the size of a rig's crew
and take steps to "cold stack" the rig, which lowers expenses and partially
offsets the impact on operating income associated with loss of revenues. Diamond
Offshore recognizes as an operating expense maintenance activities such as
painting, inspections and routine overhauls that maintain rather than upgrade
its rigs. These expenses vary from period to period. Costs of rig enhancements
are capitalized and depreciated over the expected useful lives of the
enhancements. Depreciation expense decreases operating income in periods
subsequent to capital upgrades. From time to time, Diamond Offshore sells assets
in the ordinary course of its business and gains or losses associated with such
sales are included in operating income (loss).
20
<PAGE> 172
YEARS ENDED DECEMBER 31, 1995 AND 1994
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 67,393 $ 46,862 $ 20,531
Other Semisubmersibles..................................... 168,582 134,302 34,280
Jack-ups................................................... 68,829 89,883 (21,054)
Turnkey.................................................... 27,121 25,296 1,825
Land....................................................... 19,926 21,443 (1,517)
Other...................................................... 4 11 (7)
Eliminations............................................... (15,271) (9,879) (5,392)
-------- -------- -------
Total Revenues..................................... $336,584 $307,918 $ 28,666
======== ======== =======
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 34,717 $ 30,207 $ 4,510
Other Semisubmersibles..................................... 129,795 124,090 5,705
Jack-ups................................................... 60,798 66,723 (5,925)
Turnkey.................................................... 30,297 25,957 4,340
Land....................................................... 17,899 18,240 (341)
Other...................................................... 1,325 1,581 (256)
Eliminations............................................... (15,271) (9,879) (5,392)
-------- -------- -------
Total Contract Drilling Expense.................... $259,560 $256,919 $ 2,641
======== ======== =======
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 32,676 $ 16,655 $ 16,021
Other Semisubmersibles..................................... 38,787 10,212 28,575
Jack-ups................................................... 8,031 23,160 (15,129)
Turnkey.................................................... (3,176) (661) (2,515)
Land....................................................... 2,027 3,203 (1,176)
Other...................................................... (1,321) (1,570) 249
General and Administrative Expense......................... (13,857) (11,993) (1,864)
Depreciation Expense....................................... (52,865) (55,366) 2,501
Gain on Sale of Assets..................................... 1,349 1,736 (387)
-------- -------- -------
Total Operating Income (Loss)...................... $ 11,651 $(14,624) $ 26,275
======== ======== =======
</TABLE>
REVENUES. The $20.5 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from increases in dayrates in the North Sea
and the Gulf of Mexico. In addition, $3.9 million in revenue for rig
enhancements and mobilization fees in excess of mobilization costs was
recognized during 1995. These increases were partially offset by a reduction of
revenues resulting from the mobilization between markets of two
fourth-generation rigs during the first quarter of 1995. The $34.3 million
increase in revenues from other semisubmersibles is primarily attributable to
increases in dayrates and utilization in both the North Sea and the Gulf of
Mexico. In the North Sea, increases in utilization resulted in approximately
$13.5 million of additional revenues and increases in dayrates resulted in
approximately $4.2 million of additional revenues. In the Gulf of Mexico,
increases in utilization resulted in approximately $12.6 million of additional
revenues and increases in dayrates resulted in approximately $6.6 million of
additional revenues. In addition, the operations of two of three rigs acquired
during the second and third quarters of 1994 contributed a $6.0 million increase
in other semisubmersible revenue. Also, revenues for rig enhancements of $2.5
million were
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recognized during 1995. These increases were partially offset by a reduction of
revenues resulting from the mobilization between markets of three other
semisubmersibles: the Ocean Nomad from South America to the North Sea, the Ocean
Princess from Southeast Asia to the North Sea, and the Ocean Baroness from
Trinidad to Brazil. The $21.1 million decrease in revenues from jack-ups
resulted primarily from lower dayrates as compared to 1994 and a decline in
utilization. The decline in utilization in the Gulf of Mexico caused a $5.8
million reduction in revenues, primarily from cold stacking two rigs located in
the Gulf of Mexico in mid-1995, both of which were utilized during the prior
year. Partially offsetting these decreases was an increase in utilization for
two jack-ups which were moved from Venezuela to the Gulf of Mexico during the
first half of 1994. Decreases in dayrates in the Gulf of Mexico caused a $14.0
million reduction in revenues for jack-ups. The $1.8 million increase in turnkey
revenues resulted from an increase in the number of turnkey wells drilled.
Eleven turnkey wells were drilled during the year ended December 31, 1995 as
compared to nine wells drilled during the prior year. The $1.5 million decrease
in land revenues resulted primarily from a decline in utilization as compared to
1994.
CONTRACT DRILLING EXPENSE. The $4.5 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico and increased expenses
for the mobilization of two rigs during the first quarter of 1995 to relocate
the rigs between the Gulf of Mexico and the North Sea. The $5.7 million increase
in contract drilling expense for other semisubmersibles resulted primarily from
additional operating costs of $9.4 million associated with the three rigs
acquired in 1994, including mobilization costs of $4.0 million. In addition,
improved utilization for a rig operating in the North Sea resulted in a $2.3
million increase in operating costs. These increases were partially offset by
cost reductions of $5.7 million from the cold stacking of two rigs located in
the Gulf of Mexico. One of these semisubmersibles, the Ocean Prospector, was
cold stacked in the first quarter and reactivated during the fourth quarter of
1995. The other rig, the Ocean Quest, was cold stacked in the third quarter of
1994 and is currently undergoing significant rig enhancements in preparation for
a three-year term contract anticipated to begin in the fourth quarter of 1996.
The $5.9 million decrease in contract drilling expense for jack-ups resulted
primarily from cost reductions associated with the cold stacking of two rigs in
the Gulf of Mexico. The $4.3 million increase in turnkey expense resulted
primarily from the increase in the number of turnkey wells drilled and cost
overruns on one turnkey well in progress at December 31, 1995, for which an
estimated loss of $3.6 million has been recorded.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $1.9 million in 1995 due to increases in staff and other
administrative expenses and the commencement in 1995 of the Diamond Offshore
Management Bonus Program, an incentive plan for cash bonuses to selected
officers and key employees of Diamond Offshore.
DEPRECIATION EXPENSE. Depreciation expense of $52.9 million for 1995
included a $2.1 million write-down in the carrying value of a semisubmersible,
as compared to a $5.5 million write-down on another semisubmersible included in
depreciation expense for 1994. Partially offsetting this decrease was an
additional $1.2 million of depreciation expense associated with the three rigs
acquired during the second and third quarters of 1994.
GAIN ON SALE OF ASSETS. Gain on sale of assets for the year ended December
31, 1995 of $1.3 million resulted from the sale of a semisubmersible which was
held for disposition and from sales of miscellaneous assets. Gain on sale of
assets for the year ended December 31, 1994 of $1.7 million primarily resulted
from the sale of eight land drilling rigs.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995
decreased $4.2 million to $27.1 million as compared to $31.3 million for the
prior year. This decrease resulted from the payment of all of Diamond Offshore's
outstanding indebtedness to Loews in connection with the Diamond Offshore
Initial Public Offering.
FOREIGN CURRENCY TRANSACTION LOSSES. Foreign currency transaction losses of
$.2 million for 1995 decreased $1.1 million from $1.3 million for 1994. This
decrease is primarily due to a loss of $.7 million recognized in 1994 for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. See "-- Other."
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<PAGE> 174
OTHER INCOME (EXPENSE). Other income increased $.9 million to $1.8 million
as compared to $.9 million for 1994. This increase is primarily attributable to
additional interest income resulting from an increase in average cash balances
during 1995.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1995 decreased $4.8 million to $6.8 million, as compared to $11.6 million for
1994. This decrease resulted primarily from a decrease in Diamond Offshore's net
loss before taxes of $32.6 million, as compared to 1994. See Note 8 to Diamond
Offshore's Consolidated Financial Statements included elsewhere herein.
NET LOSS. Net loss for 1995 decreased $27.8 million to $7.0 million, as
compared to $34.8 million for 1994. The decrease resulted primarily from an
increase in operating income of $26.3 million.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Comparative data relating to Diamond Offshore's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when Diamond Offshore's rigs are utilized in its turnkey
operations). Diamond Offshore's drillship, Ocean Clipper I, is included in Other
Semisubmersibles for discussion purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------- INCREASE/
1994 1993 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles......................... $ 46,862 $ 36,791 $ 10,071
Other Semisubmersibles..................................... 134,302 125,979 8,323
Jack-ups................................................... 89,883 94,137 (4,254)
Turnkey.................................................... 25,296 18,038 7,258
Land....................................................... 21,443 17,770 3,673
Other...................................................... 11 934 (923)
Eliminations............................................... (9,879) (5,580) (4,299)
-------- -------- --------
Total Revenues..................................... $307,918 $288,069 $ 19,849
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles......................... $ 30,207 $ 25,090 $ 5,117
Other Semisubmersibles..................................... 124,090 114,434 9,656
Jack-ups................................................... 66,723 61,530 5,193
Turnkey.................................................... 25,957 16,416 9,541
Land....................................................... 18,240 15,503 2,737
Other...................................................... 1,581 818 763
Eliminations............................................... (9,879) (5,580) (4,299)
-------- -------- --------
Total Contract Drilling Expense.................... $256,919 $228,211 $ 28,708
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles......................... $ 16,655 $ 11,701 $ 4,954
Other Semisubmersibles..................................... 10,212 11,545 (1,333)
Jack-ups................................................... 23,160 32,607 (9,447)
Turnkey.................................................... (661) 1,622 (2,283)
Land....................................................... 3,203 2,267 936
Other...................................................... (1,570) 116 (1,686)
General and Administrative Expense......................... (11,993) (11,785) (208)
Depreciation Expense....................................... (55,366) (46,819) (8,547)
Gain on Sale of Assets..................................... 1,736 3,201 (1,465)
-------- -------- --------
Total Operating Income (Loss)...................... $(14,624) $ 4,455 $(19,079)
======== ======== ========
</TABLE>
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REVENUES. The $10.1 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from a $17.8 million increase in revenues
from the two rigs located in the Gulf of Mexico during the year ended December
31, 1994, offset by a $7.7 million decrease in revenues from reduced utilization
of the rig in the North Sea. The $8.3 million increase in revenues from other
semisubmersibles resulted primarily from the operations of two of the three rigs
acquired during the second and third quarters of 1994. The $4.3 million decrease
in revenues from jack-ups resulted primarily from two rigs that were idle during
the first half of 1994. During this period, the rigs were mobilized from
Venezuela and refitted for operation in the Gulf of Mexico. The $7.3 million
increase in turnkey revenues resulted from an increase in the number of turnkey
wells drilled. Nine turnkey wells were drilled during the year ended December
31, 1994 as compared to four wells drilled during the prior year.
CONTRACT DRILLING EXPENSE. The $5.1 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico which was partially
offset by reduced utilization for the rig located in the North Sea. The $9.7
million increase in contract drilling expense for other semisubmersibles
resulted primarily from operating costs of $8.3 million associated with the
three rigs acquired during the second and third quarters of 1994 and from an
increase in mobilization costs of $2.2 million. These increases were partially
offset by cost reductions of $3.7 million from the cold stacking, upon
expiration of a term contract, of a rig in South America during the fourth
quarter of 1994. The $5.2 million increase in contract drilling expense for
jack-ups resulted primarily from increased costs incurred for the mobilization
and shipyard maintenance of two rigs moved from Venezuela to the Gulf of Mexico
during the first half of 1994. The $9.5 million increase in turnkey expense
resulted from the additional number of wells drilled. In addition, cost overruns
on one turnkey well resulted in additional expense, beyond that anticipated, of
$2.3 million during the year ended December 31, 1994. The $2.7 million increase
in contract drilling expense for land drilling operations resulted primarily
from an increase in the number of land turnkey wells drilled during the year
ended December 31, 1994 as compared to the prior year.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense of
$12.0 million for the year ended December 31, 1994 was relatively unchanged from
the $11.8 million incurred during the prior year.
DEPRECIATION EXPENSE. Depreciation expense increased $8.5 million over the
prior year, primarily as a result of Diamond Offshore's decision to decrease the
carrying value of one of its other semisubmersible rigs by $5.5 million. In
addition, depreciation expense increased $1.2 million associated with the
acquisition of three rigs in the second and third quarters of 1994 and $1.1
million from the full year recognition of depreciation expense in 1994
associated with the acquisition of the remaining interest in a fourth-generation
semisubmersible in March 1993.
GAIN ON SALE OF ASSETS. Gain on sale of assets for the year ended December
31, 1994 of $1.7 million primarily resulted from the sale of eight land drilling
rigs. Gain on sale of assets for the year ended December 31, 1993 of $3.2
million primarily resulted from the sale of Diamond Offshore's three platform
rigs.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1994
increased $5.4 million to $31.3 million as compared to $25.9 million for the
prior year. Interest expense consisted only of interest on notes payable to
Loews. During 1994, notes payable to Loews increased $41.3 million due to $25.0
million of additional borrowings to finance the acquisition of three
semisubmersibles purchased during the second and third quarters of 1994 and due
to $31.3 million for interest accrued on notes payable to Loews.
FOREIGN CURRENCY TRANSACTION LOSSES. Foreign currency transaction losses of
$1.3 million for the year ended December 31, 1994 were relatively unchanged from
$1.5 million for the prior year.
OTHER INCOME (EXPENSE). Other income of $.9 million for the year ended
December 31, 1994 was relatively unchanged from $1.3 million for the prior year.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1994 increased $6.6 million to $11.6 million, as compared to $5.0 million for
the prior year. This increase resulted primarily from the increase in Diamond
Offshore's net loss before taxes from $21.7 million for the year ended December
31, 1993 to $46.4 million for the year ended December 31, 1994.
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<PAGE> 176
NET LOSS. Net loss for the year ended December 31, 1994 increased $18.2
million to $34.8 million, as compared to $16.6 million for the prior year. The
increase resulted primarily from a decrease of $19.1 million in operating income
and an increase of $5.4 million in interest expense. The increase in net loss
was partially offset by an increase of $6.6 million in income tax benefit, as
compared to the prior year.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances, including 3-D seismic,
horizontal drilling, and subsea completion procedures. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates in 1995 and 1996, and customers increasingly
are seeking to contract rigs serving those markets under term contracts (as
opposed to contracts let on a single well or well-to-well basis). In the Gulf of
Mexico, the Ocean Valiant's contract has been extended through 1996 at an
increased dayrate. Contracts for Diamond Offshore's other semisubmersibles in
the Gulf of Mexico continue to be primarily on a well-to-well or multi-well
basis. However, one rig has received a contract extension on a long-term basis
through January 1998. Diamond Offshore's drillship, the Ocean Clipper I, is
scheduled to be upgraded during 1996 and 1997 to operate in the ultra-deep water
market of the Gulf of Mexico with dynamic positioning capabilities and other
features, in connection with a four-year term contract with a major oil company
that has been agreed to in principle. Also, as part of this trend, Diamond
Offshore entered into a contract and a letter of intent with two major oil
companies for the Ocean Quest and Ocean Star (formerly named Ocean Countess),
respectively, to conduct deep water drilling operations in the Gulf of Mexico
under three-year term contracts, in connection with which Diamond Offshore will
significantly enhance these rigs. See "-- Capital Resources."
In the North Sea, the Ocean Alliance is contracted for work through late
1996 and has received an increase in its dayrate. Diamond Offshore's three other
marketed semisubmersibles in the North Sea are all committed under long-term
contracts. The Ocean Nomad, which was relocated from South America, began its
two-year contract in late November 1995. The Ocean Princess has completed the
modifications necessary for its two-year contract which commenced in late March
1996. The Ocean Guardian is currently drilling pursuant to a one-year term
contract expiring during the third quarter of 1996. Of the remaining
semisubmersibles in Diamond Offshore's fleet, the Ocean Baroness has a
three-year term contract for drilling offshore Brazil through the first quarter
of 1999. In addition, the Arethusa Yatzy and Ocean Zephyr, also operating
offshore Brazil, are contracted to November 1998 and July 1997, respectively.
The market for jack-up rigs in the Gulf of Mexico, which weakened during
1994, appears to have stabilized and has shown some signs of strengthening in
recent months. Dayrates have improved from those earned in early 1995; however,
volatile natural gas prices and an oversupply of rigs prevented significant
improvements through the end of 1995. Two of Diamond Offshore's jack-up rigs are
committed through the first quarter of 1997, one drilling offshore Indonesia and
the other in the Dutch sector of the North Sea.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and Diamond Offshore cannot predict the extent to
which current conditions will continue.
LIQUIDITY
Net cash provided by operating activities for the year ended December 31,
1995 increased by $10.2 million to $52.8 million, as compared to $42.6 million
for the prior year. This increase was attributable to a $27.8 million decrease
in net loss from 1994, partially offset by an increase of $16.7 million in
accounts receivable in 1995, as compared to a decrease in accounts receivable of
$4.5 million for the prior year. Cash used in investing activities increased
$21.7 million primarily due to construction work in progress of $19.0 million
for rig upgrades in 1995. Cash provided by financing activities for 1995
decreased due to repayment of Diamond Offshore's notes payable to Loews in
conjunction with the Diamond Offshore Initial Public Offering.
Diamond Offshore's principal sources of funds have been cash flow from
operations and borrowings on notes payable to Loews. Upon completion of the
Diamond Offshore Initial Public Offering, Diamond Offshore
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<PAGE> 177
used a portion of the net proceeds to repay such notes in full. The remainder of
the proceeds was used to pay Loews a special dividend of $2.1 million. See Note
2 to Diamond Offshore's Consolidated Financial Statements included elsewhere
herein.
Diamond Offshore uses funds available under the Diamond Offshore Bank
Credit Facility, together with cash flow from operations, to fund its capital
expenditure and working capital requirements. The Diamond Offshore Bank Credit
Facility is a revolving line of credit for a five-year term providing a maximum
credit commitment of $150.0 million until the second anniversary, at which time
and at the end of each six-month period thereafter, the commitment will decrease
by $12.5 million to a final maximum credit commitment of $75.0 million during
the last six months. Borrowings will bear interest, at Diamond Offshore's
option, at a per annum rate equal to a base rate (equal to the greater of (i)
the prime rate announced by Bankers Trust Company or (ii) the Federal Funds rate
plus .50%) plus .25% or the Eurodollar rate plus 1.25%. Diamond Offshore is
required to pay a commitment fee of .375% on the unused available portion of the
maximum credit commitment. Borrowings are secured by a first priority security
interest in five semisubmersible drilling rigs, including Diamond Offshore's
three fourth-generation rigs, a pledge of 65% of the capital stock of Diamond
Offshore Limited, which owns the Ocean Alliance, and certain subsidiary
guarantees. Under the Diamond Offshore Bank Credit Facility, Diamond Offshore is
required to maintain a ratio of consolidated EBITDA (as defined) to consolidated
interest expense of at least 2.50:1.00 and a ratio of consolidated indebtedness
(including borrowings under such facility) to total capitalization (equal to the
sum of such indebtedness plus consolidated net worth) of no more than 0.40:1.00.
Diamond Offshore is also required to maintain a positive working capital
balance. In addition, the agreement has covenants that limit aggregate capital
expenditures, dividends and similar payments. See "Dividend Policy."
It is anticipated that the Diamond Offshore Bank Credit Facility will be
used primarily to fund rig upgrades and similar capital expenditure
requirements. In management's opinion, Diamond Offshore's cash generated from
operations and borrowings available under the Diamond Offshore Bank Credit
Facility are sufficient to meet its anticipated short and long-term liquidity
needs, including its capital expenditure and debt service requirements.
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from Diamond Offshore's continuing rig
enhancement program, including top-drive drilling system installations and water
depth and drilling capability upgrades. Diamond Offshore expects to spend
approximately $208.1 million, including interest expense to be capitalized,
during 1996 for significant rig upgrades in connection with contract
requirements. Included in this amount is approximately $55.8 million for 1996
expenditures in conjunction with the scheduled upgrade of the Ocean Clipper I to
operate in ultra-deep water with dynamic positioning capabilities and other
features. In addition, approximately $124.7 million is included for the upgrades
relating to the letter of intent and the contract for the Ocean Star (formerly
named Ocean Countess) and Ocean Quest, respectively. Also included in this
amount is approximately $10.0 million to upgrade the Arethusa Neptune to work in
3,000 feet of water. Because these projects are expected to be accompanied by
term contracts at favorable dayrates, the expenditures are, in Diamond
Offshore's opinion, financially justified. Diamond Offshore expects to evaluate
other projects as opportunities arise. In addition, Diamond Offshore has
budgeted $47.4 million for 1996 capital expenditures associated with its
continuing rig enhancement program. It is management's opinion that significant
improvements in operating cash flow resulting from current conditions of
improved dayrates and the increasing number of term contracts for rigs in
certain markets, in conjunction with borrowings under the Diamond Offshore Bank
Credit Facility, will be sufficient to meet these capital requirements.
In connection with the Acquisition, Diamond Offshore assumed Arethusa's
obligations with respect to approximately $69.2 million of secured indebtedness
at December 31, 1995, which was outstanding under two separate facilities. In
December 1994 Arethusa refinanced its then existing secured debt of $66.1
million with a new $80.0 million loan facility. See Note 6 to Arethusa's
Consolidated Financial Statements included elsewhere herein. This loan facility
was subsequently paid down by $38.9 million to $41.1 million at December 31,
1995. Currently, quarterly payments on this facility total $6.8 million per
annum with a
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December 1999 balloon payment of $15.4 million. Additionally, in connection with
the acquisition of the Arethusa Yatzy (see Notes 4 and 6 to Arethusa's
Consolidated Financial Statements included elsewhere herein), Arethusa drew upon
a $30.0 million loan facility. Semi-annual payments totaling $3.8 million per
annum are due under this facility, which brings total current maturities under
these facilities to $10.6 million as of December 31, 1995. In management's view,
cash generated from operations and borrowings available under the Diamond
Offshore Bank Credit Facility will be sufficient to meet Diamond Offshore's debt
service obligations under these facilities.
Diamond Offshore is analyzing financing alternatives that may be available
to it in the public or private capital markets. Proceeds of any such financing
transactions may be used for repayment of higher cost debt, to fund rig upgrades
or acquisitions or for other corporate purposes. Diamond Offshore's ability to
effect any such financings will be dependent on its historical results of
operations and its current financial condition and prospects at the time it
seeks access to the capital markets, and to other factors beyond Diamond
Offshore's control, including the prevailing interest rate environment and, with
respect to offerings of common or preferred stock or debt obligations
convertible into such common stock, other financial market conditions, and the
investment community's perception of Diamond Offshore and the offshore contract
drilling industry generally. Any such offering would be subject to the
restrictions imposed by the Shareholders Agreement on public sales or
distributions of Diamond Offshore Common Stock, or securities convertible into
common stock, and until October 10, 1996, to obtaining the prior written consent
of CS First Boston as required by the underwriting agreement entered into in
connection with the Diamond Offshore Initial Public Offering.
Also, from time to time Diamond Offshore reviews acquisition opportunities
such as that presented by Arethusa, although Diamond Offshore has no current
plans to purchase or otherwise acquire additional rigs.
OTHER
Certain of Diamond Offshore's subsidiaries use the local currency in the
country where they conduct operations as their functional currency. Currency
environments in which Diamond Offshore has material business operations include
the United Kingdom, Australia and Brazil. Diamond Offshore generally attempts to
minimize its currency exchange risk by seeking international contracts payable
in local currency in amounts equal to Diamond Offshore's estimated operating
costs payable in local currency and in U.S. dollars for the balance of the
contract. Because of this strategy, Diamond Offshore in the past has minimized
its unhedged net asset or liability positions denominated in local currencies
and has not experienced significant gains or losses associated with changes in
currency exchange rates. However, at present contracts covering three of Diamond
Offshore's four rigs operating in the United Kingdom sector of the North Sea are
payable in U.S. dollars. Diamond Offshore has not hedged its exposure to changes
in the exchange rate between U.S. dollars and pounds sterling for operating
costs payable in pounds sterling, although it may seek to do so in the future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. However, when Diamond Offshore ceases its operations in a
currency environment, the accumulated adjustments are recognized currently in
results of operations. During 1994, Diamond Offshore recognized a loss of $.7
million for the accumulated translation adjustment upon discontinuance of
operations in Venezuela. Additionally, translation gains and losses for Diamond
Offshore's operations in Brazil have been recognized currently due to the
hyperinflationary status of this environment. The effect on results of
operations has not been material and is not expected to have a significant
effect in the future due to the recent stabilization of currency rates in
Brazil.
In February 1996, Diamond Offshore purchased for approximately $8.2 million
the eight-story building containing approximately 182,000 net rentable square
feet on approximately 6.2 acres in which it had leased office space for its
corporate headquarters. A portion of the building is currently occupied by other
tenants under leases which expire through 2005. This purchase will reduce
general and administrative expenses in the future by eliminating rent expense
and will provide rental income from the leases, offset by depreciation and
related interest expense. Diamond Offshore does not expect this purchase to have
a material effect on its results of operations.
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BUSINESS
GENERAL
Diamond Offshore engages principally in the contract drilling of offshore
oil and gas wells. Diamond Offshore's fleet of mobile offshore drilling rigs is
one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Asia and consists of 30
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 19 jack-up rigs and one drillship. Diamond Offshore also
operates 10 land rigs deployed in South Texas. All of Diamond Offshore's
offshore and land rigs are wholly owned except for two jack-up rigs operated
pursuant to bareboat charters.
Diamond Offshore is a Delaware corporation with its principal executive
offices located at 15415 Katy Freeway, Suite 400, Houston, Texas 77094, where
its telephone number is (713) 492-5300.
BUSINESS STRATEGY
Diamond Offshore seeks to maximize dayrates and rig utilization by
continuously adapting to changes in its markets, improving the capabilities of
its drilling rigs and increasing the quality of its service. The key elements of
its strategy are to:
- Market worldwide its large, diverse fleet, which is capable of satisfying
customer requirements in a variety of applications;
- Continue to enhance its fleet to meet customer demand for diverse
drilling capabilities, including those required for deep water and harsh
environment operations;
- Exploit the potential of Diamond Offshore's nine Victory-class
semisubmersible rigs by pursuing projects that take advantage of this rig
type's unique design to yield significantly enhanced rigs; and
- Maintain a program of continuous improvement of quality and safety
through Diamond Offshore's Global Excellence Management System and
further capitalize on customer recognition of Diamond Offshore's quality
and safety achievements.
INDUSTRY CONDITIONS
Diamond Offshore's business and operations depend principally upon the
condition of the oil and gas industry and, specifically, the exploration and
production expenditures of oil and gas companies. Historically, the offshore
contract drilling industry has been highly competitive and cyclical, with
periods of high demand, short rig supply and high dayrates followed by periods
of low demand, excess rig supply and low dayrates. The offshore contract
drilling business is influenced by a number of factors, including the current
and anticipated prices of oil and natural gas, the expenditures by oil and gas
companies for exploration and production and the availability of drilling rigs.
For a number of years, depressed oil and natural gas prices and an oversupply of
rigs have adversely affected the offshore drilling market, particularly in the
Gulf of Mexico, where the prolonged weakness and uncertainty in the demand for
and price of natural gas resulted in a significant decline in exploration and
production activities. Demand for drilling services outside the United States,
excluding the North Sea, has been less volatile in recent years, but remains
dependent on a variety of political and economic factors beyond Diamond
Offshore's control, including worldwide demand for oil and natural gas, the
ability of OPEC to set and maintain production levels and pricing, the level of
production of non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and natural gas reserves.
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past year, due in
part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets experienced increased utilization and
significantly higher dayrates in 1995 and 1996, and customers increasingly are
seeking to contract for rigs serving these markets for a stated term (as opposed
to contracts for the drilling of a single well or a group of wells). The market
for
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<PAGE> 180
jack-up rigs in the Gulf of Mexico, which weakened during 1994, appears to have
stabilized during 1995 and has shown some signs of strengthening in recent
months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Outlook."
COMPETITION
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the oversupply of rigs has created an
intensely competitive market in which price is the primary factor in determining
the selection of a drilling contractor. Diamond Offshore believes that
competition for drilling contracts will continue to be intense for the
foreseeable future because of the worldwide oversupply of drilling rigs and the
ability of contractors to move rigs from areas of low utilization and dayrates
to areas of greater activity and relatively higher dayrates. In addition, there
are inactive non-marketed rigs or rigs being operated in non-drilling activities
that could be reactivated to meet an increase in demand for drilling rigs in any
given market. Such movement or reactivation or a decrease in drilling activity
in any major market could depress dayrates and could adversely affect
utilization of Diamond Offshore's rigs. See "-- Offshore Contract Drilling
Services."
THE ACQUISITION
BACKGROUND. In September 1995 Arethusa publicly announced that it was
exploring strategic alternatives to maximize shareholder value, including a
possible sale of Arethusa. Following completion of the Diamond Offshore Initial
Public Offering, Diamond Offshore commenced an investigation of Arethusa and in
November 1995 submitted a formal indication of interest in acquiring Arethusa,
which was rejected. However, further discussions transpired that led to
execution of a letter of intent on December 7, 1995 pursuant to which Diamond
Offshore and Arethusa agreed to work together on an exclusive basis in an effort
to agree on the terms of the definitive documentation for the Acquisition.
Subsequent negotiations among representatives of Arethusa, Alphee, Ratos,
Diamond Offshore and Loews took place in numerous meetings, telephone
conversations and correspondence, following which the definitive documentation
for the Acquisition was executed on February 9, 1996.
Diamond Offshore elected to proceed with the Acquisition principally
because it viewed the Acquisition as a means of expanding its geographic areas
of operation and the size of its semisubmersible fleet, including the addition
of some units that may be suitable for upgrading. In addition, Diamond Offshore
expects that the increase in the number of publicly traded shares of Diamond
Offshore Common Stock resulting from the Acquisition, and the anticipated
consequential increase in Diamond Offshore's market capitalization, will
heighten trading volume and institutional interest in Diamond Offshore's
securities, which should ultimately benefit all Diamond Offshore stockholders.
THE AMALGAMATION. Pursuant to the Plan of Acquisition and the Amalgamation
Agreement, at the Effective Time, (1) Arethusa and Acquisition Sub have
amalgamated and will continue their businesses as one amalgamated company under
the name "Diamond Offshore Exploration (Bermuda) Limited," a wholly owned
subsidiary of Diamond Offshore (USA), (2) each issued and outstanding share of
Arethusa Common Stock (other than any such shares held by Diamond Offshore,
Diamond Offshore (USA) or Acquisition Sub) was canceled and ceased to exist and
each holder thereof became entitled to receive in consideration of each share so
canceled 0.88 shares of Diamond Offshore Common Stock (the "Amalgamation Ratio")
and (3) each share of Arethusa Common Stock held by Diamond Offshore, Diamond
Offshore (USA) or Acquisition Sub (other than any such shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) was
canceled, retired and ceased to exist, and no payment of Diamond Offshore Common
Stock was or will be made in respect thereof. Each certificate that immediately
prior to the Effective Time represented a share or shares of Arethusa Common
Stock now represents the right to receive, upon surrender of such certificate as
provided in the Amalgamation Agreement and subject to the provisions set forth
therein governing fractional shares, that number of shares of Diamond Offshore
Common Stock determined by multiplying the number of shares of Arethusa Common
Stock formerly represented by such certificate by the Amalgamation Ratio. From
and after the Effective Time, the holders of certificates previously
representing
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shares of Arethusa Common Stock ceased to have any other rights except as
otherwise provided in the Amalgamation Agreement or by law.
MEMORANDUM OF ASSOCIATION; BYE-LAWS; DIRECTORS; OFFICERS. Under the
Amalgamation Agreement, (1) at the Effective Time, the Memorandum of Association
of Arethusa, as in effect immediately prior to the Effective Time, became the
Memorandum of Association of Diamond Offshore Exploration (Bermuda), (2) the
Bye-laws of Arethusa, as in effect immediately prior to the Effective Time,
became the Bye-laws of Diamond Offshore Exploration (Bermuda), (3) the directors
of Acquisition Sub immediately prior to the Effective Time became the directors
of Diamond Offshore Exploration (Bermuda), each to hold office in accordance
with the Memorandum of Association and Bye-laws of Diamond Offshore Exploration
(Bermuda) until their respective successors are duly elected or appointed and
qualified, and (4) the officers of Acquisition Sub immediately prior to the
Effective Time became the officers of Diamond Offshore Exploration (Bermuda),
each to hold office in accordance with the Bye-laws of Diamond Offshore
Exploration (Bermuda) until their respective successors are duly elected or
appointed and qualified.
CONTINUING ARETHUSA SEVERANCE, CONSULTING AND SALARY CONTINUATION
PLANS. Under the Plan of Acquisition, from and after the Effective Time, Diamond
Offshore will honor in accordance with their terms the following Arethusa
employment, severance, consulting and salary continuation plans: (1) the
Employment Agreement between Arethusa and Jan Rask, as amended (the "Rask
Employment Agreement"), (2) the Severance Agreement between Arethusa Off-Shore
Company, Arethusa's principal operating subsidiary ("AOC"), and O. Peter Blom,
(3) the Severance Agreement between AOC and Vincent G. Bounds, (4) the Severance
Agreement between AOC and Harris I. Knecht, (5) the Severance Agreement between
AOC and Danny R. Richardson, (6) the Severance Agreement between AOC and James
E. Traber, Jr., (7) the Severance Agreement between AOC and Charles R. Richter,
(8) the AOC Severance Policy for all AOC shore-based employees, (9) the Arethusa
1993 Employee Stock Option Plan and (10) the Arethusa 1994 Nonqualified Stock
Option Plan for Non-Employee Directors. To the extent permitted or required
under applicable law, each employee of Arethusa or its subsidiaries will be
given credit for all service with Arethusa or its subsidiaries (or service
credited by Arethusa or its subsidiaries) under all employee benefit plans
maintained by Arethusa, Diamond Offshore, Diamond Offshore (USA) or Acquisition
Sub in which they participate or in which they become participants for purposes
of eligibility and vesting.
In October 1994, Arethusa entered into the Rask Employment Agreement with
Jan Rask. The Rask Employment Agreement provides for a current annual salary of
$325,000. In addition, the Rask Employment Agreement provides that Arethusa will
pay Mr. Rask bonus compensation as may from time to time be awarded by the Board
of Directors of Arethusa and that Mr. Rask is entitled to participate in all
employee benefit plans and other compensatory arrangements sponsored by
Arethusa. The Rask Employment Agreement may be terminated by either party upon
180 days' prior written notice and by Arethusa at any time for "cause" (as
therein defined). The Rask Employment Agreement provides that until December 31,
1996, Mr. Rask will agree to assist in the pursuit of certain types of business
combinations and that Mr. Rask will receive a payment upon completion of any
such transaction. As a result of the consummation of the Acquisition, Mr. Rask
became entitled to a payment of $487,500 pursuant to the Rask Employment
Agreement, $81,250 of which was previously paid.
In October 1995, AOC entered into Executive Severance Agreements (the
"Arethusa Severance Agreements") with Messrs. Blom, Bounds, Knecht, Traber,
Richardson and Richter. The Arethusa Severance Agreements provide that these
executive officers will assist with activities arising in connection with
proposed business combinations and provide for certain benefits if any of these
executive officers are terminated or their employment is materially changed
within 2.5 years following a merger, sale or change of control, where the change
of control is to a competing drilling contractor, and the termination or change
is either (a) by the ongoing company for reasons other than for cause or as a
consequence of the executive's death, permanent disability or retirement, or (b)
by the executive if the executive is not offered continued employment in an
equivalent officer-level position in the Houston area, a compensation program at
least equal to such executive's compensation (excluding bonus) immediately prior
to such merger, sale or change of control and a comparable fringe benefit
program. In such event, such executive officers will receive a lump sum cash
payment equal to 30 times such executive's monthly base salary, outplacement
consulting assistance and
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earned and accrued vacation. The consummation of the Acquisition results in such
payments becoming due to each of such executive officers.
Under the Plan of Acquisition, following the Effective Time, except with
respect to any collective bargaining agreements, Diamond Offshore or its
subsidiaries will cause the employees of Arethusa and its subsidiaries to
receive compensation, benefits, fringe benefits, plans, programs and
arrangements that are no less favorable in the aggregate than the lesser of such
compensation, benefits, fringe benefits, plans, programs and arrangements to
which (1) such employees are entitled immediately prior the Effective Time or
(2) similarly situated employees of Diamond Offshore are entitled. With respect
to any welfare plan maintained by Arethusa or its subsidiaries or Diamond
Offshore in which employees or former employees of Arethusa or its subsidiaries
(or their dependents) participate after the Effective Time, Diamond Offshore
will waive or cause to be waived any preexisting condition provision (except for
preexisting conditions of any employee or former employee (or dependent) that
are currently excluded under existing Arethusa welfare plans in which such
employee or former employee (or dependent) currently participates) and each
employee or former employee and his dependents will be given credit for any
claims incurred prior to the Effective Time toward any applicable deductible
under any such welfare plan.
All members of Arethusa's Board of Directors resigned at the Effective
Time.
ARETHUSA STOCK OPTION PLANS. Pursuant to the Amalgamation Agreement, at the
Effective Time, each outstanding option to purchase shares of Arethusa Common
Stock under Arethusa's 1993 Employee Stock Option Plan (the "Arethusa Employee
Plan") and Arethusa's 1994 Nonqualified Stock Option Plan for Non-Employee
Directors (the "Arethusa Director Plan" and, together with the Arethusa Employee
Plan, the "Arethusa Stock Option Plans"), whether or not then vested or
exercisable (the "Arethusa Options") was assumed by Diamond Offshore. See
"Management -- Stock Option Plans."
INDEMNIFICATION. Diamond Offshore, Diamond Offshore (USA) and Acquisition
Sub agreed in the Plan of Acquisition that all rights to indemnification
existing in favor of the present or former directors, officers and employees (as
such) of Arethusa or any of its subsidiaries, as provided in Arethusa's
Memorandum of Association or Bye-laws or similar documents of any of such
subsidiaries, or any agreement to which Arethusa or any such subsidiary is a
party as in effect at February 9, 1996 with respect to matters occurring prior
to the Effective Time would survive the Amalgamation, and Diamond Offshore
agreed to cause Diamond Offshore Exploration (Bermuda) to comply fully with
Arethusa's obligations thereunder. In addition, from and after the Effective
Time, in the Plan of Acquisition Diamond Offshore agreed to, and agreed to cause
Diamond Offshore Exploration (Bermuda) to, indemnify, defend and hold harmless
the present directors and officers of Arethusa against any costs and expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages and liabilities, and amounts paid in settlement thereof with Diamond
Offshore's consent, in connection with any claim, action, suit, proceeding or
investigation relating to any of the transactions contemplated by the Plan of
Acquisition, the Amalgamation Agreement or the Fee Agreement.
RIGHTS OF DISSENTING SHAREHOLDERS. After the Effective Time, shares of
Arethusa Common Stock that were issued and outstanding immediately prior to the
Effective Time held by Arethusa shareholders who did not vote in favor of the
adoption and approval of the Amalgamation Agreement and who comply with Section
106(6), (6A), (6B) and (6C) of The Companies Act 1981 of Bermuda, as amended
("The Companies Act") will, at the election of Diamond Offshore (USA), either
(1) be canceled and shares of Diamond Offshore Common Stock delivered in
consideration thereof, subject to the rights of such shareholders under Section
106(6), (6A), (6B) and (6C) of The Companies Act, or (2) not be canceled and the
holders thereof not be entitled to receive shares of Diamond Offshore Common
Stock unless and until such holders have failed to perfect or have effectively
withdrawn or lost their rights to appraisal under The Companies Act, whereupon
such shares will be canceled and shares of Diamond Offshore Common Stock
delivered in consideration thereof. Diamond Offshore has not elected whether to
proceed with respect to any such shares under (1) or (2) as described in the
preceding sentence above.
ACCOUNTING TREATMENT. The Acquisition will be accounted for using the
purchase method of accounting pursuant to Opinion No. 16 of the Accounting
Principles Board. The purchase method accounts for a business combination as the
acquisition of one company by another. The acquiring corporation, Diamond
Offshore,
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records assets less liabilities assumed. A difference between the cost of the
acquired corporation, Arethusa, and the sum of the fair values of tangible and
identifiable intangible assets less liabilities is recorded as goodwill. The
reported income of Diamond Offshore after the Effective Time will include the
operations of Arethusa after consummation of the Acquisition.
THE FLEET
Diamond Offshore's large, diverse fleet, which includes some of the most
technologically advanced rigs in the world, enables it to offer a broad range of
services worldwide in various markets, including the deep water market, the
harsh environment market (such as the North Sea), the conventional
semisubmersible market and the jack-up market.
SEMISUBMERSIBLES. Diamond Offshore owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semi-submerged" position, remaining afloat, off bottom, in a position in which
the lower hull is from about 55 to 90 feet below the water line and the upper
deck protrudes well above the surface. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position due in
part to its wave transparency characteristics at the water line.
Diamond Offshore owns and operates three of the world's 13
fourth-generation semisubmersibles. Fourth-generation semisubmersibles are
larger than other semisubmersibles, are capable of working in harsh environments
and have other advanced features. Diamond Offshore's existing fleet of three
fourth-generation semisubmersibles are all capable of operating in water depths
of up to 5,000 feet. Currently the Ocean Valiant and the Ocean America are
located in deep water areas of the Gulf of Mexico and the Ocean Alliance is
located in the harsh environment of the North Sea market west of the Shetland
Islands. At present, nine of the world's fourth-generation semisubmersibles are
contracted for service in the harsh environment North Sea market and four are
operating in the deep water Gulf of Mexico market.
In addition to its fourth-generation semisubmersibles, Diamond Offshore
owns and operates 27 other semisubmersibles (including nine Victory-class rigs),
18 of which operate in maximum water depths of between 1,000 to 2,500 feet, and
three of which are capable of drilling in 3,000 feet or more of water. The
diverse capabilities of most of these semisubmersibles enable them to work in
both shallow and deep water environments in the United States and most markets
outside the United States. Currently, 15 of these semisubmersibles are located
in the Gulf of Mexico; four are located in the North Sea; four are located
offshore Brazil; two are located offshore Australia; one is located offshore
Nigeria; and one is located offshore Vietnam. In addition to these 27
semisubmersibles, Diamond Offshore owns one other semisubmersible held for
disposition.
JACK-UPS. Diamond Offshore owns and/or operates a total of 19 jack-up rigs.
Jack-up rigs are mobile, self-elevating drilling platforms equipped with legs
that are lowered to the ocean floor until a foundation is established to support
the drilling platform. The rig hull includes the drilling rig, jacking system,
crew quarters, loading and unloading facilities, storage areas for bulk and
liquid materials, heliport and other related equipment. Jack-ups are used
extensively for drilling in water depths from 20 feet to 350 feet. The water
depth limit of a particular rig is principally determined by the length of the
rig's legs. A jack-up rig is towed by tugboats to the drillsite with its hull
riding in the sea as a vessel with its legs retracted. Once over a drillsite,
the legs are lowered until they rest on the seabed and jacking continues until
the hull is elevated above the surface of the water. After completion of
drilling operations, the hull is lowered until it rests in the water and then
the legs are retracted for relocation to another drillsite.
The principal market for Diamond Offshore's jack-up rigs is currently the
Gulf of Mexico, where 14 of Diamond Offshore's jack-up rigs are located. Of
Diamond Offshore's jack-up rigs in the Gulf of Mexico, seven are independent-leg
cantilevered rigs, two are mat-supported cantilevered rigs, two are
independent-leg slot rigs, two are mat-supported slot rigs and one is an
independent-leg slot rig that has been modified with skid-off capability. One of
Diamond Offshore's jack-up rigs in the Gulf of Mexico is operated pursuant to a
bareboat charter and the other 13 are wholly owned by Diamond Offshore. Diamond
Offshore also owns and operates one jack-up rig offshore each of Indonesia,
Egypt and The Netherlands, and Diamond Offshore operates one
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jack-up rig offshore India pursuant to a bareboat charter. One of Diamond
Offshore's jack-ups is cold stacked in Chile. The jack-up located in the Gulf of
Mexico that Diamond Offshore bareboat charters is also under contract for sale,
upon closing of which such charter will terminate.
DRILLSHIP. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a computer
controlled thruster (dynamic positioning) system similar to those used on
certain semisubmersible rigs. Drillships normally require water depth of at
least 200 feet in order to conduct operations. Diamond Offshore's drillship, the
Ocean Clipper I, which uses a conventional anchoring system, is currently
located offshore Africa. The Ocean Clipper I currently has water depth
capability of 1,200 feet and variable deck load capacity in excess of 11,000
tons. However, the Ocean Clipper I is scheduled to be upgraded during the year
1996 through the first half of 1997 to operate in the ultra-deep water market of
the Gulf of Mexico with dynamic positioning capabilities, 15,000 psi blowout
preventers, three mud pumps and other refurbishments and upgrades. The drillship
is anticipated to commence operation in the Gulf of Mexico following completion
of the upgrade in the second quarter of 1997 pursuant to a four-year term
contract with a major oil company that has been agreed to in principle. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
FLEET ENHANCEMENTS. Diamond Offshore's strategy is to maximize dayrates and
utilization by adapting to trends in its markets, including enhancing its fleet
to meet customer demand for diverse drilling capabilities. Many of Diamond
Offshore's rigs have been upgraded during the last five years with enhancements
such as top-drive drilling systems, increases in water depth capability, mud
pump additions or increases in deck load capacity. For example, Diamond Offshore
upgraded the semisubmersible Ocean Voyager to operate in maximum water depths of
3,200 feet and has modified the semisubmersible Ocean Nomad to allow it to be
certified for service in the United Kingdom sector of the North Sea, where it is
operating under a two-year contract at improved dayrates. Diamond Offshore
converted three of its 300-foot cantilever jack-up rigs from slot rigs, which
Diamond Offshore believes has resulted in these rigs achieving higher dayrates
and utilization. Also, Diamond Offshore has added top-drive drilling systems to
many rigs, so that 36 rigs in Diamond Offshore's fleet are now so equipped.
Notwithstanding the average age of the Diamond Offshore fleet of 17.7 years
(calculated as of December 31, 1995 and measured from year built), Diamond
Offshore believes that it will be feasible to continue to upgrade its fleet,
particularly its Victory-class semisubmersible rigs. The design of the Victory-
class semisubmersible rigs, including their cruciform hull configurations, long
fatigue-life and advantageous stress characteristics, makes this class of rig
particularly well-suited for significant upgrading projects. Currently, Diamond
Offshore's Victory-class rigs are outfitted for service in maximum water depths
of 600 to 3,200 feet. Five of Diamond Offshore's nine Victory-class rigs are
equipped with top-drive drilling systems, two are modified for increased
efficiency in the handling of subsea completion equipment and one has stability
enhancements that allow increased variable deck load. In management's opinion,
it is unlikely that new semisubmersibles will be built unless there is a
substantial and sustained improvement in the market; therefore, Diamond Offshore
believes that the relative ease and efficiency with which it can significantly
enhance its Victory-class rigs is a competitive advantage in a market requiring
increasing capability from offshore drilling rigs.
The Ocean Quest, one of Diamond Offshore's Victory-class rigs, is currently
undergoing an upgrade pursuant to a contract with a major oil company for a
three-year commitment. The rig is being upgraded to conduct drilling operations
in the Gulf of Mexico in water depths of up to 3,500 feet. This project includes
enhancements to provide additional hull buoyancy, which will allow a variable
deck load exceeding 5,000 tons, the addition of a new self-contained chain/wire
mooring system, and drilling system upgrades, including the installation of a
top-drive drilling system, a 15,000 psi blowout prevention system, a third mud
pump and 2,900 barrel liquid mud capacity. The Ocean Quest is scheduled to be
placed in service in the fourth quarter of 1996. In addition, during the third
quarter of 1995 Diamond Offshore entered into a letter of intent with another
major oil company for a three-year commitment for a second Victory-class rig,
the Ocean Star (formerly named Ocean Countess), pursuant to which the rig is
being upgraded to conduct drilling operations in the Gulf of Mexico in water
depths of up to 4,500 feet. The upgrade project for the Ocean Star also includes
stability enhancements, the installation of a new mooring system and drilling
system upgrades similar to those planned
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for the Ocean Quest. The Ocean Star is scheduled to be placed in service late in
the fourth quarter of 1996. Following the upgrades, Diamond Offshore believes
that these rigs will be able to compete effectively in the fourth-generation
deep water market.
Additional Victory-class upgrade potential exists, including conceptual
plans Diamond Offshore is developing for the possible construction of an
ultra-large semisubmersible, the Ocean Legend. The Ocean Legend is intended to
take advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. Diamond Offshore has
completed its feasibility studies and has begun preliminary design engineering
in connection with the upgrade. See Note 1 to Diamond Offshore's Consolidated
Financial Statements included elsewhere herein. Although Diamond Offshore is
proposing the design to several major oil companies, there can be no assurance
that the Ocean Legend can be built in a cost-effective manner, that if a
Victory-class rig is so upgraded, there will be adequate demand for its
services, or that competitors will not achieve capability beyond that of
fourth-generation semisubmersibles through other means attractive to customers.
For the year ended December 31, 1995, Diamond Offshore spent approximately
$.6 million on conceptual design studies and related costs associated with the
Ocean Legend project. Diamond Offshore expects to evaluate other projects as
opportunities arise. Once a capital project is undertaken by Diamond Offshore,
Diamond Offshore may later determine that completion of such project is
infeasible based on its analysis of factors such as design criteria, anticipated
costs of construction, market demand and availability of financing, and Diamond
Offshore may be unable to recoup the expenditures made before such project is
abandoned. In addition, to the extent Diamond Offshore determines that its fleet
cannot be upgraded as it currently anticipates, Diamond Offshore will have fewer
rigs available to compete in the harsh environment and deep water markets than
if such upgrades had been successfully implemented.
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More detailed information as of March 28, 1996 concerning the Diamond
Offshore fleet of active mobile offshore drilling rigs is set forth in the table
below.
<TABLE>
<CAPTION>
WATER DEPTH
CAPABILITY YEAR BUILT/LATEST CURRENT
TYPE AND NAME(A) (FT) ATTRIBUTES(B) ENHANCEMENT(C) LOCATION CUSTOMER(D)
- ------------------------ ----------- ----------------------------- ------------------ --------------- ----------------------
<S> <C> <C> <C> <C> <C>
FOURTH-GENERATION
SEMISUBMERSIBLES(3):
Ocean Alliance........ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea BP
Ocean America......... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico BP
Ocean Valiant......... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
OTHER
SEMISUBMERSIBLES(27):
Arethusa Worker....... 3,300 TDS 1982/1992 Gulf of Mexico Texaco
Ocean Voyager......... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Arethusa Yatzy(e)..... 3,000 TDS; DP 1989 Brazil Petrobras
Arethusa Lexington.... 2,500 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Arethusa Neptune...... 2,500 TDS; 3M 1977/1995 Gulf of Mexico Kerr-McGee
Arethusa Concord...... 2,200 TDS 1975/1995 Gulf of Mexico Shell
Arethusa Saratoga..... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Arethusa Yorktown..... 2,200 TDS 1976/1989 Brazil Petrobras
Ocean Endeavor........ 2,000 TDS; VC 1975/1994 Gulf of Mexico Oryx
Ocean Rover........... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...... 1,700 VC 1971/1981 Gulf of Mexico Newfield(f)
Arethusa
Whittington......... 1,500 TDS; 3M 1974/1995 Gulf of Mexico Mobil
Ocean Bounty.......... 1,500 TDS; VC; 3M 1977/1992 Australia/ Phillips
Indonesia
Ocean Guardian........ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......... 1,500 TDS 1974/1990 Gulf of Mexico Hardy Oil & Gas(g)
Ocean Princess(h)..... 1,500 TDS; 15K 1977/1995 North Sea Committed
Ocean Epoch........... 1,200 TDS 1977/1990 Australia/ Enterprise
Indonesia
Ocean General......... 1,200 TDS 1976/1990 Vietnam Fina
Ocean Nomad........... 1,200 TDS 1975/1995 North Sea Shell
Ocean Ambassador...... 1,100 TDS 1975/1995 Gulf of Mexico LL&E
Ocean Baroness........ 1,100 TDS; VC 1973/1995 Brazil Committed
Ocean Star(i)(j)...... 850 VC 1974/1992 Gulf of Mexico Committed
Ocean Century......... 800 1973 Gulf of Mexico Stacked
Ocean Quest(k)........ 800 VC 1973 Gulf of Mexico Committed
Ocean Liberator....... 600 1974 Nigeria Ashland
Ocean Victory......... 600 VC 1972 North Sea Stacked
Ocean Zephyr.......... 600 1972 Brazil Petrobras
JACK-UPS(19):
Ocean Titan........... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico LL&E
Ocean Tower........... 350 IS; 3M 1972 Gulf of Mexico Sonat Exploration(l)
Bonito II(m).......... 300 TDS; IC 1983/1995 Gulf of Mexico Unocal
Miss Kitty(n)......... 300 IC 1982 India ONGC
Ocean King............ 300 TDS; IC 1973/1989 Gulf of Mexico Conoco
Ocean Nugget.......... 300 TDS; IC 1976/1995 Gulf of Mexico Amoco
Ocean Summit.......... 300 SDS; IC 1972/1991 Gulf of Mexico Forcenergy
Ocean Warwick......... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Arethusa Heritage..... 250 TDS; IC 1981/1995 Egypt EDC
Arethusa Sovereign.... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Champion........ 250 MS 1975/1985 Gulf of Mexico Chevron
Ocean Columbia........ 250 TDS; IC 1978/1990 Gulf of Mexico Coastal Oil & Gas
Ocean Spartan......... 250 TDS; IC 1980/1994 Gulf of Mexico Meridian
Ocean Spur............ 250 TDS; IC 1981/1994 Gulf of Mexico Houston Exploration(o)
Ocean Conquest........ 200 MS 1978 Gulf of Mexico Stacked
Ocean Crusader........ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........... 200 TDS; MC 1983/1986 Gulf of Mexico Murphy
Arethusa Scotian...... 180 TDS; IC; 15K 1981/1988 North Sea Elf
(Dutch sector)
Ocean Magallanes...... 150 IC 1980 Chile Stacked
DRILLSHIP(1):
Ocean Clipper I....... 1,200 SP 1976 Africa Committed(p)
</TABLE>
- ---------------
(a) Does not include one other semisubmersible rig held for disposition that is
also not included in the discussion of Diamond Offshore's fleet.
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(b) Attributes legend:
<TABLE>
<S> <C> <C> <C>
DP -- Dynamically Positioned/Self-Propelled
MS -- Mat-Supported Slot Rig
TDS -- Top-Drive Drilling System
IC -- Independent-Leg Cantilevered Rig
SDS -- Side-Drive Drilling System
VC -- Victory-Class
IS -- Independent-Leg Slot Rig
SO -- Skid-Off Capability
3M -- Three Mud Pumps
MC -- Mat-Supported Cantilevered Rig
SP -- Self-Propelled
15K -- 15,000 psi Blowout Preventer
</TABLE>
(c) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(d) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(e) Arethusa acquired the Arethusa Yatzy on May 3, 1995. Prior to this date the
rig was operated by Arethusa under a management agreement.
(f) Turnkey operator is ADTI.
(g) Turnkey operator is DOTS.
(h) Preparing for a two-year term contract that commenced late March 1996.
(i) Formerly named Ocean Countess.
(j) Committed under a letter of intent for a three-year term contract with
Texaco in the Gulf of Mexico.
(k) Committed under a three-year term contract with Chevron in the Gulf of
Mexico.
(l) Turnkey operator is Triton.
(m) Diamond Offshore charters the rig pursuant to a bareboat charter agreement
which expires in August 1996. The rig is under contract for sale, upon
closing of which such charter will terminate.
(n) Diamond Offshore operates the rig pursuant to a bareboat charter agreement
which expires in July 1997. Diamond Offshore has the option to extend the
charter agreement for one additional year.
(o) Turnkey operator is Brown/R&B.
(p) Committed under an agreement in principle for a four-year term contract in
the Gulf of Mexico following completion of rig enhancement.
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<PAGE> 188
OFFSHORE FLEET UTILIZATION
The following table sets forth certain information comparing the rig
utilization of the respective fleets of Diamond Offshore and Arethusa relative
to that of the offshore drilling industry as a whole during the year ended
December 31, 1995 and during the three months ended March 31, 1996. Industry
statistics and statistics for each of the companies were compiled by Offshore
Data Services. Diamond Offshore's one drillship had an average utilization of
59.4% and 95.6% for the year ended December 31, 1995 and the three months ended
March 31, 1996, respectively.
<TABLE>
<CAPTION>
AVERAGES FOR THREE MONTHS AVERAGES FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------------------- -----------------------------
1996 1995
----------------------------- -----------------------------
DIAMOND DIAMOND
OFFSHORE ARETHUSA INDUSTRY OFFSHORE ARETHUSA INDUSTRY
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FOURTH-GENERATION SEMISUBMERSIBLES:
Total Rigs....................... 3.0 -- 13.0 3.0 -- 13.0
Under Contract................... 3.0 -- 13.0 3.0 -- 13.0
Utilization Rate................. 100.0% -- 100.0% 100.0% -- 100.0%
OTHER SEMISUBMERSIBLES:
Total Rigs....................... 19.0 8.0 112.0 19.0 8.0 110.1
Under Contract................... 16.3 8.0 97.3 14.5 7.8 89.3
Utilization Rate................. 86.0% 100.0% 86.9% 76.3% 96.9% 81.2%
JACK-UPS:
Total Rigs....................... 14.0 5.0 302.3 14.0 5.0 306.8
Under Contract................... 11.0 5.0 254.3 10.6 4.8 249.1
Utilization Rate................. 78.6% 100.0% 84.1% 75.6% 95.0% 81.2%
</TABLE>
MARKETS
Diamond Offshore's principal markets for its offshore contract drilling
services are the Gulf of Mexico, Europe, including principally the United
Kingdom sector of the North Sea, South America and Australia/Southeast Asia.
Diamond Offshore actively markets its rigs worldwide. In the past, rigs in
Diamond Offshore's fleet have also operated in the Mediterranean Sea, the Black
Sea and other markets. See Note 11 to Diamond Offshore's Consolidated Financial
Statements included elsewhere herein.
Diamond Offshore believes that its presence in multiple markets provides a
competitive advantage. For example, Diamond Offshore believes that its
experience with safety and other regulatory matters in the United Kingdom has
been beneficial in Australia and in the Gulf of Mexico and that production
experience gained through Brazilian and North Sea operations has potential
application worldwide. Additionally, Diamond Offshore believes that its
performance for a customer in one market segment or area enables Diamond
Offshore to better understand that customer's needs and serve that customer in
different market segments or other geographic locations.
OFFSHORE CONTRACT DRILLING SERVICES
Diamond Offshore's contracts to provide offshore drilling services vary in
their terms and provisions. Diamond Offshore often obtains its contracts through
competitive bidding, although it is not unusual for Diamond Offshore to be
awarded drilling contracts without competitive bidding. Drilling contracts
generally provide for a basic drilling rate on a fixed dayrate basis regardless
of whether such drilling results in a successful well. Drilling contracts may
also provide for lower rates during periods when the rig is being moved or when
drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather or water conditions or other conditions beyond the control of
Diamond Offshore. Under dayrate contracts, Diamond Offshore generally pays the
operating expenses of the rig, including wages and the cost of incidental
supplies. Revenues from dayrate contracts have historically accounted for a
substantial portion of Diamond Offshore's revenues. In addition, Diamond
Offshore has worked some of its rigs under dayrate contracts pursuant to which
the customer also agrees to pay Diamond Offshore an incentive bonus based upon
performance.
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<PAGE> 189
A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of major equipment or in some cases due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in some
circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that give contractors the
flexibility to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain drilling prices at the lowest level possible.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while the customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, Diamond Offshore
seeks to have a reasonable balance of single well, well-to-well and term
contracts to minimize the downside impact of a decline in the market while still
participating in the benefit of increasing dayrates in a rising market. Although
many of Diamond Offshore's semisubmersible rigs are contracted on a term basis,
Diamond Offshore's jack-up fleet is primarily committed for short-term
single-well or well-to-well arrangements.
Diamond Offshore believes that more of its customers are seeking to
establish continuing relationships with a small number of preferred drilling
contractors rather than seeking bids for each drilling contract from a large
number of contractors. Diamond Offshore also believes that those contractors who
provide the highest quality and the greatest range of services will achieve
preferred contractor status. In response to this change in customer attitude, in
May 1993 DOTS began offering a portfolio of drilling and production services to
complement Diamond Offshore's offshore contract drilling business. These
services include overall project management and drilling and production
operations on a turnkey or modified-turnkey basis. Under a turnkey contract, the
drilling contractor agrees to perform a specified drilling service, such as
drilling a well to a specified depth for a fixed price. The ability of the
contractor to make a profit on this type of contract depends on the contractor's
ability to complete the specified project while keeping expenses within the
estimates used to determine the contract price. Under a turnkey contract, the
drilling contractor bears the financial risk of delays in completion of the
project. Since May 1993, DOTS has engaged in 22 turnkey drilling projects in the
Gulf of Mexico and, in conjunction with a tanker owner, has completed an
extended well test on a modified-turnkey basis for an operator in the North Sea.
Diamond Offshore also intends to seek alternative uses for the rigs in its fleet
that are no longer competitive in the drilling market and do not meet Diamond
Offshore's criteria for modification. Such alternative uses may include
employment of these rigs as mobile offshore production units or as a part of
floating production systems. These operations have not been a significant part
of Diamond Offshore's business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BAREBOAT CHARTER CONTRACTS
Diamond Offshore operates two of its rigs pursuant to bareboat charter
contracts. Under a bareboat charter, Diamond Offshore charters the use of a rig
for a specified period and operates the rig as if it were owned.
BONITO II CONTRACT. Diamond Offshore operates the Bonito II under a
bareboat charter agreement expiring in August 1996. Under the agreement, Diamond
Offshore makes periodic payments to the rig owner consisting of (i) monthly
basic charter hire payments and (ii) quarterly additional hire payments based on
certain revenue/cost criteria. Diamond Offshore recognizes all revenues and
costs, including the charter fee, in its financial statements. The rig is under
contract for sale, upon closing of which such charter will terminate.
MISS KITTY CONTRACT. Diamond Offshore operates the Miss Kitty under a
bareboat charter agreement initially expiring in July 1996, and recently
extended to July 1997. Under the agreement, Diamond Offshore
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<PAGE> 190
makes periodic payments to the rig owner consisting of (i) monthly basic charter
hire payments and (ii) quarterly additional hire payments based on certain
revenue/cost criteria. Diamond Offshore recognizes all revenues and costs,
including the charter fee, in its financial statements.
LAND DRILLING OPERATIONS
In addition to its offshore drilling fleet, Diamond Offshore owns and
operates 10 land rigs, all of which are currently located in South Texas, and a
fleet of heavy-duty trucks designed to transport these rigs to drilling
locations. Seven of Diamond Offshore's 10 land rigs are Cabot-design
trailer-mounted rigs that are highly mobile and relatively sophisticated, making
them more desirable to drilling contractors than non-trailer-mounted land rigs
of similar capability. Diamond Offshore believes that these trailer-mounted rigs
have achieved higher utilization rates than non-trailer-mounted rigs would have
achieved. Diamond Offshore's land rigs typically operate under dayrate, footage
or turnkey contracts (compensation under footage contracts is based on the
number of feet drilled and involves more risk for a contractor than dayrate
contracts and the potential for greater financial gains or losses), although
most of its contracts are dayrate contracts.
More detailed information concerning Diamond Offshore's land drilling rigs,
as of March 28, 1996, is set forth in the table below.
<TABLE>
<CAPTION>
DRILLING DEPTH
RIG CAPABILITY
NUMBER TYPE OF RIG (FT) CUSTOMER(1)
- -------------------- ---------------- -------------- ----------------------
<S> <C> <C> <C>
840............... Oilwell 840-E 18,000 UPRC
851............... National 80-B 15,000 Parker & Parsley
859............... Brewster N-75 15,000 Quisto Exploration
865............... Cabot 1200 14,000 Cox & Perkins
866............... Cabot 1200 14,000 Enron Oil & Gas
863............... Cabot 1000 13,000 Enron Oil & Gas
864............... Cabot 1000 13,000 Coastal Oil & Gas
861............... Cabot 900 11,000 Swift Energy
862............... Cabot 900 11,000 Conoco
860............... Cabot 750 9,500 Sanchez-O'Brien
</TABLE>
- ---------------
(1) For ease of presentation in this table, customer names have been shortened
or abbreviated.
CUSTOMERS
Diamond Offshore provides offshore drilling services to a customer base
that includes independent and major integrated oil companies and state-owned oil
companies. Occasionally, several customers have accounted for 10.0% or more of
Diamond Offshore's annual consolidated revenues, although the identity of such
customers may vary from year to year. During 1995, Diamond Offshore performed
services for approximately 90 different customers and British Petroleum Co., PLC
("BP"), accounted for 16.5% of Diamond Offshore's annual total consolidated
revenues. During 1994, Diamond Offshore performed services for approximately 90
different customers and no single customer accounted for more than 8.2% of
Diamond Offshore's annual total consolidated revenues. During 1993, Diamond
Offshore performed services for approximately 85 different customers and BP
accounted for 10.5% of Diamond Offshore's annual total consolidated revenues.
Management believes that at current levels of activity Diamond Offshore has
alternative customers for its services such that the loss of a single customer
would not have a material adverse effect on Diamond Offshore on a long-term
basis.
Diamond Offshore's services are marketed principally through its Houston
office, with support from its regional offices in New Orleans, Louisiana;
Aberdeen, Scotland; and Perth, Australia. Technical and administrative support
for Diamond Offshore's operations is provided by its Houston office.
39
<PAGE> 191
QUALITY
Diamond Offshore maintains a program to continuously improve quality and
safety through GEMS, which was instituted in 1993 to increase Diamond Offshore's
commitment to quality of service, safety and the environment. GEMS is a quality
system that provides for formal procedures to assist in continuous improvement
in Diamond Offshore's efforts to exceed customer expectations in safety,
environmental concerns, equipment maintenance, rig enhancements, material
handling and personnel training and performance. The key to GEMS is Diamond
Offshore's end-of-well report, which is intended to ensure feedback for
improvement and communication of Diamond Offshore's concern for customer
satisfaction. Diamond Offshore also seeks to capitalize on customer recognition
of Diamond Offshore's quality and safety achievements. Diamond Offshore is the
only drilling contractor to have won more than once (in April 1994 and April
1995) the annually awarded U.S. Minerals Management Service National Safety
Award for Excellence.
GOVERNMENTAL REGULATION
Diamond Offshore's operations are subject to numerous federal, state and
local environmental laws and regulations that relate directly or indirectly to
its operations, including certain regulations controlling the discharge of
materials into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, Diamond Offshore may be liable for damages and costs incurred in
connection with oil spills for which it is held responsible. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may in certain circumstances impose "strict liability" and
render a company liable for environmental damage without regard to negligence or
fault on the part of such company. Such laws and regulations may expose Diamond
Offshore to liability for the conduct of or conditions caused by others, or for
acts of Diamond Offshore that were in compliance with all applicable laws at the
time such acts were performed. The application of these requirements or the
adoption of new requirements could have a material adverse effect on Diamond
Offshore.
OPA '90 and similar legislation enacted in Texas, Louisiana and other
coastal states address oil spill prevention and control and significantly expand
liability exposure across all segments of the oil and gas industry. OPA '90,
such similar legislation and related regulations impose a variety of obligations
on Diamond Offshore related to the prevention of oil spills and liability for
damages resulting from such spills. OPA '90 imposes strict and with limited
exceptions joint and several liability upon each responsible party for oil
removal costs and a variety of public and private damages. OPA '90 also imposes
ongoing financial responsibility requirements on a responsible party. A failure
to comply with such ongoing requirements or inadequate cooperation in a spill
may subject a responsible party, including in some cases Diamond Offshore, to
civil or criminal enforcement action. OPA '90 also requires the U.S. Minerals
Management Service to promulgate regulations to implement the financial
responsibility requirements for offshore facilities. If implemented as written,
the financial responsibility requirements of OPA '90 could have the effect of
significantly increasing the amount of financial responsibility that oil and gas
operators must demonstrate to comply with OPA '90. While industry groups and
marine insurance carriers are seeking modification of these requirements,
implementation of these requirements in their current form could adversely
affect the ability of some of Diamond Offshore's customers to operate in U.S.
waters, which could have a material adverse effect on Diamond Offshore.
The Federal Water Pollution Control Act of 1972, commonly referred to as
the Clean Water Act ("CWA"), prohibits the discharge of certain substances into
the navigable waters of the U.S. without a permit. The regulations implementing
the CWA require permits to be obtained by an operator before certain exploration
or drilling activities occur. Violations of monitoring, reporting and permitting
requirements can result in the imposition of civil and criminal penalties. The
provisions of the CWA can also be enforced by citizens' groups. Many states have
similar laws and regulations.
The Outer Continental Shelf Lands Act authorizes regulations relating to
safety and environmental protection applicable to lessees and permittees
operating on the Outer Continental Shelf. Specific design and operational
standards may apply to Outer Continental Shelf vessels, rigs, platforms,
vehicles and structures.
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<PAGE> 192
Violation of lease terms relating to environmental matters or regulations issued
pursuant to the Outer Continental Shelf Lands Act can result in substantial
civil and criminal penalties as well as potential court injunctions curtailing
operations and the cancellation of leases. Such enforcement liabilities can
result from either governmental or citizen prosecution.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"), currently exempts crude oil, and the Resource
Conservation and Recovery Act, as amended ("RCRA"), currently exempts certain
drilling materials, such as drilling fluids and production waters, from the
definitions of hazardous substances and hazardous wastes. However, Diamond
Offshore's operations may involve the use or handling of other materials, such
as fracturing fluids or acids, that may be classified as environmentally
hazardous substances or wastes. There can be no assurance that such exemption
will be preserved in future amendments of such acts, if any, or that more
stringent laws and regulations protecting the environment will not be adopted.
CERCLA assigns strict liability to each responsible party, as defined, for all
response and remediation costs, as well as natural resource damages. Few
defenses exist to the liability imposed by CERCLA.
Diamond Offshore's operations may involve the generation, use or handling
of materials, such as unused fracturing fluids or acids, that may be classified
as hazardous waste, and that are subject to RCRA and comparable state statutes.
The Environmental Protection Agency ("EPA") and various state agencies have
limited the disposal options for certain hazardous and nonhazardous wastes and
are considering the adoption of stricter handling and disposal standards for
nonhazardous wastes. RCRA currently exempts certain drilling materials, such as
drilling fluids and production waters, from the definitions of hazardous wastes.
There can be no assurance that such exemption will be preserved in future
amendments of such acts, if any, or that more stringent laws and regulations
protecting the environment will not be adopted.
The operations of Diamond Offshore are subject to the Clean Air Act, as
amended, and comparable state statutes. Traditional air quality programs
relating to the prevention of significant deterioration of air quality in areas
with unacceptable pollution levels ("nonattainment areas") restrict drilling in
affected areas. Amendments to the Clean Air Act were adopted in 1990 and contain
provisions that may result in the imposition over the next decade of certain
requirements with respect to air emissions, which requirements may require
capital expenditures by Diamond Offshore. The EPA is currently developing
regulations to implement these requirements. Pursuant to a mandate of the Clean
Air Act, the EPA together with other agencies of the federal government is
conducting a study of the effects of emissions from drilling activities in
nonattainment areas on the Outer Continental Shelf. Upon completion of the
study, these agencies will determine whether additional regulatory requirements
are necessary for these nonattainment areas. Any greater degree of regulation in
nonattainment areas would increase the cost associated with operation in those
areas.
LIMITATION ON OWNERSHIP BY NON-U.S. CITIZENS
Diamond Offshore, as the owner of United States flag vessels, is subject to
the Shipping Act, 1916, as amended ("Shipping Act"), which provides that a
controlling interest in Diamond Offshore may not be acquired by a non-U.S.
citizen without the consent of the U.S. Secretary of Transportation, acting
through the United States Maritime Administration ("MARAD"). Current MARAD
regulations authorize the transfer of a controlling interest in a company as
long as the United States is not at war, the transferee is not a national of a
country to which the transfer would be contrary to the foreign policy of the
United States and the company's U.S. flag vessels remain documented under the
U.S. flag after the transfer. In the absence of MARAD consent (either by the
current regulations or otherwise) the transfer of a controlling interest in
Diamond Offshore to non-U.S. citizens would enable MARAD to exercise various
remedies under the Shipping Act including seizure of vessels, civil penalties
and, in certain cases, criminal penalties.
INDEMNIFICATION AND INSURANCE
Diamond Offshore has generally been able to obtain contractual
indemnification pursuant to which Diamond Offshore's customers agree to protect
and indemnify Diamond Offshore to some degree from liability for reservoir,
pollution and environmental damages, but there can be no assurance that Diamond
41
<PAGE> 193
Offshore can obtain such indemnities in all of its contracts, that the level of
indemnification that can be obtained will be meaningful, that such
indemnification agreements will be enforceable or that the customer will be
financially able to comply with its indemnity obligations. In addition, Diamond
Offshore maintains insurance coverage against certain property damage, war risk
(in the case of certain operations outside the U.S.), general liability and
environmental liabilities, including pollution caused by sudden and accidental
oil spills, but there can be no assurance that such insurance will continue to
be available or carried by Diamond Offshore or if available and carried will be
adequate to cover Diamond Offshore's loss or liability in many circumstances.
Except with respect to its fourth-generation semisubmersibles, Diamond Offshore
does not maintain business interruption insurance and may elect to discontinue
this coverage for its fourth-generation semisubmersibles at any time.
EMPLOYEES
As of December 31, 1995, Diamond Offshore and Arethusa had approximately
2,500 and 1,101 employees, respectively (including international crews furnished
through labor contractors), approximately 260 of which Diamond Offshore
employees were union members. Diamond Offshore has experienced satisfactory
labor relations and provides comprehensive benefit plans for its hourly paid
employees. Diamond Offshore does not consider the possibility of a shortage of
qualified personnel to be a material factor in its business. If demand for oil
field services were to increase rapidly, retention of qualified people might
become more difficult without significant increases in compensation.
PROPERTIES
Diamond Offshore owns an 18,000 square foot building and 20 acres of land
in New Iberia, Louisiana used for its offshore drilling warehouse and storage
facility, a 13,000 square foot building and five acres of land in Aberdeen,
Scotland used in connection with its North Sea operations, a 15,000 square foot
building and 10 acres of land in Alice, Texas for its land drilling office,
warehouse and storage facility, six acres of land near Houston, Texas used as a
warehouse facility and an eight-story office building located at 15415 Katy
Freeway, Houston, Texas, where Diamond Offshore currently has its corporate
headquarters in approximately 60,000 square feet of such building. Diamond
Offshore leases approximately 29,000 square feet of office space in downtown
Houston and various office, warehouse and storage facilities and lots in
Louisiana, The Netherlands, the United Kingdom, Australia, India, Indonesia,
Singapore and Brazil to support its offshore drilling operations.
In February 1996, Diamond Offshore purchased for approximately $8.2 million
the eight-story building containing approximately 182,000 net rentable square
feet on approximately 6.2 acres in which it had leased office space for its
corporate headquarters. A portion of the building is currently occupied by other
tenants under leases which expire through 2005. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other."
LEGAL PROCEEDINGS
Various claims have been filed against Diamond Offshore in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that Diamond Offshore has established adequate reserves on its books
for any liabilities that may reasonably be expected to result from these claims.
In the opinion of management, no pending or threatened claims, actions or
proceedings against Diamond Offshore are expected to have a material adverse
effect on Diamond Offshore's financial position or results of operations.
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<PAGE> 194
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information with respect to each person
or entity known by Diamond Offshore to be the beneficial owner of more than 5%
of Diamond Offshore Common Stock as of the Effective Time (based upon beneficial
ownership of Diamond Offshore Common Stock, with respect to Loews, as of March
28, 1996 and Arethusa Common Stock, with respect to Alphee and Ratos, as of
April 2, 1996).
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------- ------------------------------ -------------------- ----------
<S> <C> <C> <C>
Common Stock Loews Corporation 35,050,000 51.6%
667 Madison Avenue
New York, N.Y. 10021-8087
Common Stock Alphee S.A. 4,708,248 6.9%
11, Avenue de la Gare
P.O. Box 2255
L-1022 Luxembourg
Common Stock Forvaltnings AB Ratos 3,667,207 5.4%
Drottninggatan 2
P.O. Box 1661, S-111 96
Stockholm, Sweden
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table shows the amount and nature of beneficial ownership of
Diamond Offshore Common Stock and Loews common stock beneficially owned by each
director of Diamond Offshore, each Named Executive Officer of Diamond Offshore
and all directors and officers of Diamond Offshore as a group, as of March 28,
1996. Directors and executive officers of Diamond Offshore individually and as a
group own less than 1% of equity securities of Diamond Offshore, Loews or any
subsidiary of Diamond Offshore. Except as otherwise noted, the named beneficial
owner has sole voting power and sole investment power with respect to the
number(s) of shares shown below.
<TABLE>
<CAPTION>
DIAMOND OFFSHORE LOEWS
NAME OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
------------------------------------------------------ ---------------- ------------
<S> <C> <C>
James S. Tisch........................................ 0 80,000(1)
Herbert C. Hofmann.................................... 1,000(2) 400(2)
David M. Ifshin....................................... 0 0
Robert E. Rose........................................ 2,100(3) 0
Raymond S. Troubh..................................... 2,500 5,000
Lawrence R. Dickerson................................. 500(3) 200
Ronald C. Johnson(4).................................. 0 0
Thomas P. Richards.................................... 6,000(5) 0
David W. Williams..................................... 100 0
Richard L. Lionberger................................. 0 0
All Directors and Executive Officers as a Group....... 12,300 85,950
</TABLE>
- ---------------
(1) In addition, 58,000 shares of Loews common stock are held by a charitable
foundation as to which Mr. Tisch has shared voting and investment power.
(2) In addition, 350 shares of Loews common stock and 300 shares of Diamond
Offshore Common Stock are owned by Mr. Hofmann's son, as to which shares
Mr. Hofmann disclaims any beneficial ownership.
(3) Voting power and investment power with respect to shares listed with Mr.
Rose and Mr. Dickerson are shared with each such individual's spouse.
(4) Mr. Johnson ceased to be an executive officer of Diamond Offshore in March
1996.
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<PAGE> 195
(5) The number of shares shown includes 4,000 shares owned by Richards Brothers
Company, a Texas corporation, of which all non-voting common stock is owned
by the children of Mr. Richards, and as to which Mr. Richards disclaims any
beneficial ownership.
DIRECTORS
Diamond Offshore's Board of Directors presently consists of five directors.
The directors are James S. Tisch, Herbert C. Hofmann, David M. Ifshin, Robert E.
Rose and Raymond S. Troubh. Two of such directors, Mr. Troubh and Mr. Ifshin,
are not directors, officers or employees of Loews or officers or employees of
Diamond Offshore. All directors are elected annually to serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. Each of the five directors is serving a term of one year to expire at
the 1997 annual meeting of stockholders and until his successor is elected and
qualifies or until his earlier death, resignation, disqualification or removal
from office. Information with respect to the current directors of Diamond
Offshore is set forth below.
<TABLE>
<CAPTION>
AGE AS OF
JANUARY
31, DIRECTOR
NAME POSITION 1996 SINCE
- ------------------------- ---------------------------------------- --------- --------
<S> <C> <C> <C>
James S. Tisch(1)........ Chairman of the Board 43 1989
Herbert C. Hofmann(1).... Director 53 1992
David M. Ifshin(2)....... Director 47 1995
Robert E. Rose(1)........ Director, President and Chief Executive
Officer 57 1989
Raymond S. Troubh(2)..... Director 69 1995
</TABLE>
- ---------------
(1) Member, Executive Committee of the Board of Directors.
(2) Member, Audit Committee of the Board of Directors.
James S. Tisch has served as the Chairman of the Board since 1995 and as a
director of Diamond Offshore since June 1989. Mr. Tisch has served as President
and Chief Operating Officer of Loews, a diversified holding company, since 1994
and prior thereto served as Executive Vice President of Loews for more than five
years. Mr. Tisch, a director of Loews since 1986, also serves as a director of
CNA Financial Corporation, an 84% owned subsidiary of Loews, and Gillett
Holdings, Inc.
Herbert C. Hofmann has served as a director of Diamond Offshore since
January 1992. Mr. Hofmann has served as Senior Vice President of Loews since
January 1992, and prior thereto served as Vice President -- Operations Planning
of Loews for more than five years. He has served as President and Chief
Executive Officer of Bulova Corporation, a 97% owned subsidiary of Loews since
August 1989, and as Chief Operating Officer of Bulova Corporation prior thereto.
Bulova Corporation distributes and sells watches and clocks.
David M. Ifshin has served as a director of Diamond Offshore since November
1995. Mr. Ifshin currently holds several professional positions. Since 1993, he
has served as a Senior Advisor of Galway Partners, Senior Vice President of
Cassidy Associates, and as partner in the law firm Ifshin & Friedman. Between
1983 and 1993, Mr. Ifshin served as a Managing Director of Prudential
Securities, Inc., Senior Vice President and Managing Director of Kemper
Securities (Prescott, Ball & Turben), Director, Washington, Capital Markets
Office of E.F. Hutton & Company, Inc. and a partner with the law firm of Manatt,
Phelps, Rothenberg & Phillips.
Robert E. Rose has served as President and Chief Executive Officer of
Diamond Offshore and as a director since June 1989.
Raymond S. Troubh has served as a director of Diamond Offshore since
November 1995. Mr. Troubh is a financial consultant in New York City and a
former Governor of the American Stock Exchange. For the past five years, Mr.
Troubh has been the principal of Raymond Troubh & Company. Mr. Troubh also
serves as a director of ADT Limited, America West Airlines, Inc., Applied Power
Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and Company, Benson Eyecare
Corporation, Foundation Health Corporation, General
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<PAGE> 196
American Investors Company, Manville Corporation, Olsten Corporation, Petrie
Stores Corporation, Riverwood International Corporation, Time Warner Inc.,
Triarc Companies, Inc., and WHX Corporation.
DIRECTOR COMPENSATION. Directors who are employees of Diamond Offshore are
not paid any fees or additional compensation for service as members of the Board
of Directors or any committee thereof. The annual retainer payable to directors
of Diamond Offshore who are not employees of Diamond Offshore or any of its
subsidiaries or affiliated companies, for services as directors, is $20,000 per
annum, payable quarterly. Each member of the Audit Committee of the Board of
Directors of Diamond Offshore receives a retainer of $2,500 per annum, payable
quarterly, and each director of Diamond Offshore who is not an employee of
Diamond Offshore or any of its subsidiaries or affiliated companies is paid a
fee of $1,000 for attendance at each meeting of the Board of Directors and of
the Audit Committee thereof in addition to the reasonable costs and expenses
incurred by such directors in relation to their services as such.
BOARD OF DIRECTORS AND COMMITTEES. Diamond Offshore's Board of Directors
has five members, and the Board has two standing committees. Further information
concerning the Board's standing committees appears below.
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
consists of three members, Mr. Tisch, Mr. Hofmann and Mr. Rose. The Executive
Committee has all the powers and exercises all the duties of the Board of
Directors in the management of the business of Diamond Offshore that may
lawfully be delegated to it by the Board of Directors. These powers and duties
include, among other things, declaring a dividend, authorizing the issuance of
stock, recommending to stockholders mergers or a sale of substantially all of
the assets of Diamond Offshore, providing advice and counsel to management of
Diamond Offshore, reviewing management's recommendations for significant changes
to the organizational structure of Diamond Offshore and recommending changes to
the Board of Directors.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors consists
of two members, Mr. Ifshin and Mr. Troubh. The Audit Committee reviews and
reports to the Board of Directors on the scope and results of audits by Diamond
Offshore's independent auditors. See "-- Certain Relationships and Related
Transactions -- Services Agreement." It recommends a firm of certified public
accountants to serve as auditors for Diamond Offshore, subject to nomination by
the Board of Directors and election by the stockholders, authorizes all audit
and other professional services rendered by the auditor and periodically reviews
the independence of the auditor. Membership on the Audit Committee is restricted
to directors independent of management and free from any relationship that, in
the opinion of the Board of Directors, would interfere with the exercise of
independent judgment as a committee member. Directors who are affiliates of
Diamond Offshore or officers or employees of Diamond Offshore or its
subsidiaries or its affiliates are not qualified for Audit Committee membership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During
Diamond Offshore's fiscal year ended December 31, 1995, Diamond Offshore had no
compensation committee or other committee of the Board of Directors performing
similar functions. Decisions concerning compensation of executive officers were
made during such fiscal year by persons who were members of Diamond Offshore's
Board of Directors, including Robert E. Rose, an executive officer of Diamond
Offshore.
NOMINATING COMMITTEE. During Diamond Offshore's fiscal year ended
December 31, 1995, Diamond Offshore had no nominating committee or other
committee of the Board of Directors performing similar functions.
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<PAGE> 197
EXECUTIVE OFFICER TENURE AND IDENTIFICATION
The executive officers of Diamond Offshore are elected annually by the
Board of Directors to serve until the next annual meeting of the Board of
Directors and until their successors are duly elected and qualified, or until
their earlier death, resignation, disqualification or removal from office.
Information with respect to the current executive officers of Diamond Offshore
is set forth below.
<TABLE>
<CAPTION>
AGE AS OF
JANUARY
31,
NAME 1996 POSITION
- ---------------------------- ---------- ----------------------------------------------
<S> <C> <C>
Robert E. Rose.............. 57 President, Chief Executive Officer and
Director
Lawrence R. Dickerson....... 43 Senior Vice President and Chief Financial
Officer
Thomas P. Richards.......... 52 Senior Vice President -- Worldwide Operations
David W. Williams........... 38 Senior Vice President -- Contracts and
Marketing
Richard L. Lionberger....... 45 Vice President, General Counsel and Secretary
Gary T. Krenek.............. 37 Controller
</TABLE>
Robert E. Rose has served as President and Chief Executive Officer of
Diamond Offshore and as a director since June 1989.
Lawrence R. Dickerson has served as Senior Vice President of Diamond
Offshore since April 1993 and has served as a Vice President and the Chief
Financial Officer of Diamond Offshore since June 1989.
Thomas P. Richards has served as Senior Vice President of Diamond Offshore
since September 1990. Since March 1996, Mr. Richards has been in charge of
worldwide operations, and prior thereto, since March 1993, Mr. Richards was in
charge of domestic operations. From 1990 to 1993 Mr. Richards was in charge of
land operations.
David W. Williams has served as Senior Vice President of Diamond Offshore
since December 1994 and was a Marketing Vice President between February 1992 and
May 1994. Mr. Williams was employed by Noble Drilling Corporation, an offshore
contract drilling company, from May 1994 through December 1994 as Vice President
of Marketing. Mr. Williams worked in marketing positions at Odeco, an offshore
contract drilling company, from 1990 to February 1992.
Richard L. Lionberger has served as Vice President, General Counsel and
Secretary of Diamond Offshore since February 1992. Mr. Lionberger was engaged in
the private practice of law from 1985 to 1992, principally as the owner of
Lionberger & Associates, and was counsel for Diamond Offshore during that
period.
Gary T. Krenek has served as Controller of Diamond Offshore since February
1992 and was Accounting Manager of Diamond Offshore since 1989.
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<PAGE> 198
EXECUTIVE COMPENSATION
The following table shows for the years ended December 31, 1995 and 1994
the cash compensation paid by Diamond Offshore, and a summary of certain other
compensation paid or accrued for such year, to its Chief Executive Officer and
each of Diamond Offshore's four other most highly compensated executive officers
(the "Named Executive Officers") for service in all capacities with Diamond
Offshore and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)(2)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3)
- --------------------------------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Robert E. Rose..................................... 1995 $390,000 $230,000 $ 6,075
President and Chief Executive Officer 1994 363,315 -- 6,075
Thomas P. Richards(4).............................. 1995 210,128 60,000 5,913
Senior Vice President -- Domestic Operations 1994 199,615 -- 5,913
Lawrence R. Dickerson.............................. 1995 190,000 107,000 5,727
Senior Vice President and Chief Financial Officer 1994 168,000 -- 5,727
Ronald C. Johnson(5)............................... 1995 178,928 -- 5,913
Senior Vice President -- International Operations 1994 182,902 -- 5,913
David W. Williams.................................. 1995 175,000 102,500 5,691
Senior Vice President -- Contracts and Marketing
Richard L. Lionberger.............................. 1994 134,842 -- 5,159
Vice President, General Counsel and Secretary
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser or $50,000 and 10% of the total
annual salary reported for each Named Executive Officer.
(2) Amounts include salary and bonus earned, as well as earned but deferred, by
the Named Executive Officers.
(3) The amounts shown include (i) Diamond Offshore's contributions under the
Retirement Plan referred to below for the years shown on behalf of the Named
Executive Officers, as follows: Mr. Rose, 1994 and 1995 -- $5,625; Mr.
Richards, 1994 and 1995 -- $5,625; Mr. Dickerson, 1994 and 1995 -- $5,625;
Mr. Johnson, 1994 and 1995 -- $5,625; Mr. Williams, 1995 -- $5,625; and Mr.
Lionberger, 1994 -- $5,057; and (ii) the term portion of the life insurance
premiums paid by Diamond Offshore for the years shown on behalf of the Named
Executive Officers, as follows: Mr. Rose, 1994 and 1995 -- $450; Mr.
Richards, 1994 and 1995 -- $288; Mr. Dickerson, 1994 and 1995 -- $102; Mr.
Johnson, 1994 and 1995 -- $288; Mr. Williams, 1995 -- $66; and Mr.
Lionberger, 1994 -- $102.
(4) Mr. Richards became Senior Vice President -- Worldwide Operations in March
1996.
(5) Mr. Johnson ceased to be an executive officer of Diamond Offshore in March
1996.
Diamond Offshore maintains a defined contribution plan (the "Retirement
Plan") designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"), pursuant to which Diamond Offshore contributes
3.75% of the participant's base and overtime salary subject to limitations of
eligible salary. Employees are vested in all contributions as made.
In addition Diamond Offshore expects to adopt an Executive Deferred
Compensation Plan pursuant to which Diamond Offshore will contribute any portion
of the 3.75% of the base salary contribution to the Retirement Plan that cannot
be contributed to the Retirement Plan because of the limitations of Sections
401(a)(17) and 415 of the Code. Additionally, the plan is expected to provide
that participants may defer a percentage of their salary and bonuses pursuant to
such plan. Participants in the plan will be highly compensated officers of
Diamond Offshore and will be fully vested in all amounts paid into the plan. The
plan
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<PAGE> 199
is anticipated to be effective in 1996 and there is proposed to be a make-up
Diamond Offshore contribution for any amounts that were not contributed to the
Retirement Plan for 1994 and 1995 because of the Code limitations described
above.
ANNUAL CASH BONUS INCENTIVES
Bonuses were awarded under the Diamond Offshore Management Bonus Program,
which is intended to provide a means whereby certain selected officers and key
employees of Diamond Offshore may develop a sense of proprietorship and personal
involvement in the development and financial success of Diamond Offshore, and
encourage the participants to remain with and devote their best efforts to the
business of Diamond Offshore, thereby advancing the interests of Diamond
Offshore and its stockholders. At the beginning of each year, the Executive
Committee of the Diamond Offshore Board of Directors establishes a bonus pool
(the "Annual Bonus Pool") equal to (i) a percentage (the "Applicable
Percentage") ranging from 10% to 35% (as determined by the Executive Committee
based on such committee's evaluation of Diamond Offshore during the prior year
(the "performance year") relative to peer companies, and the performance of
Diamond Offshore's share price and extraordinary events during the performance
year) of the total salaries of all participants for the performance year,
divided by (ii) the arithmetical average of (x) Diamond Offshore's cash flow
plus capital expenses for the year prior to the performance year and (y) cash
flow plus capital expenses as budgeted for the performance year, multiplied by
(iii) actual cash flow plus capital expenses for such performance year. The
Executive Committee establishes the bonus payout from the Annual Bonus Pool to
each participant (not to exceed 30% of such participant's eligible salary) based
upon corporate, group or individual performance, or a combination thereof, or
such other subjective criteria as the Executive Committee may determine to be
appropriate. The bonuses are payable in annual installments (50%, 25% and 25%)
over the three calendar year period following the performance year and, with
certain exceptions, are forfeited if not paid prior to termination of
employment. In addition, certain executive officers, including Mr. Rose,
received an additional bonus, to recognize the performance of certain executive
officers of Diamond Offshore in consummating the Diamond Offshore Initial Public
Offering. For performance year 1995, the Executive Committee elected to pay
bonuses under the Diamond Offshore Management Bonus Program aggregating
approximately $685,000 although the Annual Bonus Pool, if calculated based on
the formula set forth in the Diamond Offshore Management Bonus Program and
assuming the maximum permissible Applicable Percentage, would have been
approximately $1.2 million. This deviation was based on the Executive
Committee's subjective evaluation of the overall favorable performance of the
eligible officers in 1995, particularly in connection with the successful
completion of the Diamond Offshore Initial Public Offering.
EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
Diamond Offshore and Robert E. Rose entered into and subsequently extended
an agreement, dated November 1, 1992 (the "Employment Agreement"), providing
for, among other things, the employment of Mr. Rose as the President and Chief
Executive Officer of Diamond Offshore until December 31, 1998. Mr. Rose
currently receives a salary at an annual rate of $500,000, subject to such
increases as the Board of Directors of Diamond Offshore may from time to time
determine. Pursuant to the Employment Agreement, Mr. Rose and Diamond Offshore
agree that during the term of Mr. Rose's employment under the Employment
Agreement and for a period of one year immediately following termination of such
employment by Diamond Offshore for cause, Mr. Rose will not engage in any other
business which is in competition with Diamond Offshore without written consent
from Diamond Offshore. The Employment Agreement provides that, for a 120-day
period after consummation of a Change of Control (as defined in the Employment
Agreement), Mr. Rose has the right to terminate his employment and Diamond
Offshore would be obligated to continue to compensate him for a three-year
period.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONTROLLING STOCKHOLDER. As of the date of this Prospectus, Loews
beneficially owns approximately 51.6% of the outstanding shares of Diamond
Offshore Common Stock. Diamond Offshore understands that Loews
48
<PAGE> 200
has no current intention of disposing of any of the shares of Diamond Offshore
Common Stock owned by it. Loews entered into an agreement, dated October 10,
1995, with the underwriters of the Diamond Offshore Initial Public Offering
providing that Loews will not, and will not permit its affiliates (other than
Diamond Offshore) to offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of Diamond Offshore Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
Diamond Offshore Common Stock for a period of one year after the date of such
agreement, without the prior written consent of CS First Boston. After such date
such shares may be sold (i) in accordance with Rule 144 promulgated under the
Securities Act, (ii) in private offerings or (iii) upon registration under the
Securities Act without regard to the volume limitations of Rule 144.
In general, under Rule 144 as currently in effect, Loews will be entitled
to sell on the open market in broker's transactions within any three-month
period a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Diamond Offshore Common Stock (currently 678,933 shares)
or (ii) the average weekly trading volume in Diamond Offshore Common Stock on
the open market during the four calendar weeks preceding such sale.
Shares held by Loews may be freely sold if registered under the Securities
Act. Diamond Offshore has agreed to use its best efforts, upon request by Loews,
to register under the Securities Act any or all shares of Diamond Offshore
Common Stock held by Loews and, under certain conditions, when shares of Diamond
Offshore Common Stock are registered by Diamond Offshore. See "-- Transactions
Between Diamond Offshore and Loews -- Registration Rights Agreement."
Loews incorporated Diamond Offshore as a wholly owned subsidiary in 1989
and owned all of the outstanding shares of Diamond Offshore Common Stock since
that time until the consummation of the Diamond Offshore Initial Public
Offering. Proceeds from the Diamond Offshore Initial Public Offering were used
to repay all of Diamond Offshore's then outstanding indebtedness to Loews of
$336.2 million and the remainder of such proceeds was used to pay Loews a
special dividend of $2.1 million. By virtue of its ownership of a majority of
the outstanding shares of Diamond Offshore Common Stock, Loews is in a position
to control actions that require the consent of stockholders, including the
election of directors, payment of dividends, amendment of Diamond Offshore's
Restated Certificate of Incorporation and mergers or a sale of substantially all
the assets of Diamond Offshore. In addition, certain officers, directors or
employees of Loews serve on Diamond Offshore's Board of Directors. See
"-- Directors." Loews and Diamond Offshore have entered into various agreements
relating to the ongoing relationship between Loews and Diamond Offshore. See
"-- Transactions Between Diamond Offshore and Loews."
Loews is a diversified holding company, incorporated under the laws of
Delaware in 1969. Loews, through its subsidiaries, is engaged in a variety of
distinct businesses, including the production and sale of cigarettes; the
operation of hotels; through Diamond Offshore, the operation of oil and gas
drilling rigs; through its approximately 84% ownership of CNA Financial
Corporation, property, casualty and life insurance; and through its
approximately 97% ownership of Bulova Corporation, the distribution and sale of
watches and clocks. In 1995, the consolidated revenues of Loews were
approximately $18.7 billion. The address of Loews is 667 Madison Avenue, New
York, New York 10021-8087.
TRANSACTIONS BETWEEN DIAMOND OFFSHORE AND LOEWS. Diamond Offshore and Loews
have entered into intercompany transactions and agreements incident to their
respective businesses and may enter into material transactions and agreements
from time to time. In connection with the Diamond Offshore Initial Public
Offering, Diamond Offshore and Loews entered into agreements pursuant to which
certain management, administrative and other services are provided by Loews to
Diamond Offshore and certain other obligations were assumed by the parties.
These agreements were not the result of arm's length negotiations between the
parties.
The following description of certain terms of certain agreements,
arrangements and transactions between Diamond Offshore and Loews accurately
summarizes those terms thereof considered by Diamond Offshore to be material to
a prospective investor in the Offered Shares and is qualified in its entirety by
reference to the complete agreements filed as exhibits to the Registration
Statement or, in the case of the Tax Sharing Agreement, the registration
statement filed in connection with the Diamond Offshore Initial Public Offering.
49
<PAGE> 201
Services Agreement. Diamond Offshore and Loews entered into a Services
Agreement effective upon consummation of the Diamond Offshore Initial Public
Offering (the "Services Agreement") pursuant to which Loews agreed to continue
to perform certain administrative and technical services on behalf of Diamond
Offshore. Such services include personnel, telecommunications, purchasing,
internal auditing, accounting, data processing and cash management services, in
addition to advice and assistance with respect to preparation of tax returns and
obtaining insurance. Under the Services Agreement, Diamond Offshore is to
reimburse Loews for (i) allocated personnel costs (such as wages, salaries,
employee benefits and payroll taxes) of the Loews personnel actually providing
such services and (ii) all out-of-pocket expenses related to the provision of
such services. The Services Agreement may be terminated at Diamond Offshore's
option upon 30 days' notice to Loews and at the option of Loews upon six months'
notice to Diamond Offshore. In addition, Diamond Offshore has agreed to
indemnify and hold harmless Loews for all claims and damages arising from the
provision of services by Loews under the Services Agreement, unless due to the
gross negligence or willful misconduct of Loews.
Tax Sharing Agreement. Diamond Offshore has been and will be included in
the consolidated U.S. federal income tax returns filed by Loews with respect to
all periods in which it was a wholly owned subsidiary of Loews. Prior to 1992,
Diamond Offshore's profitable subsidiaries were allocated a share of the Loews
consolidated federal income tax expense and no benefit was given to any of
Diamond Offshore's subsidiaries generating taxable losses. Effective January 1,
1992, a Tax Sharing Agreement (the "Tax Sharing Agreement") with Loews was
adopted to allow for the recognition of expenses and benefits related to taxable
income or loss as if Diamond Offshore and its subsidiaries filed a separate
consolidated return. Upon completion of the Diamond Offshore Initial Public
Offering, Diamond Offshore was owned less than 80% by Loews and was therefore
removed from the consolidated federal income tax return of Loews, which
triggered the automatic termination of the Tax Sharing Agreement. Pursuant to a
termination and settlement agreement entered into effective upon consummation of
the Diamond Offshore Initial Public Offering, Diamond Offshore and Loews agreed
to offset the net amount owed by Loews to Diamond Offshore as a result of the
termination of the Tax Sharing Agreement against Diamond Offshore's notes
payable to Loews. Such offset constituted a full settlement and satisfaction of
Loews's payment obligations to Diamond Offshore arising upon termination of the
Tax Sharing Agreement.
Registration Rights Agreement. Under a Registration Rights Agreement
(the "Registration Rights Agreement") between Diamond Offshore and Loews,
Diamond Offshore will file, upon the request of Loews, one or more registration
statements under the Securities Act, subject to a maximum of three such
requests, in order to permit Loews to offer and sell any Diamond Offshore Common
Stock that Loews may hold. Subject to the restrictions described under
"-- Controlling Stockholder" and "-- Registration Rights of Selling
Stockholders," Loews may exercise these rights at any time, provided shares
comprising at least 5% of the outstanding Diamond Offshore Common Stock are to
be sold. Loews will bear the costs of any such registered offering, including
any underwriting commissions relating to shares it sells in any such offering,
any related transfer taxes and the costs of complying with non-U.S. securities
laws, and any fees and expenses of separate counsel and accountants retained by
Loews. The Registration Rights Agreement will terminate at such time as Loews's
percentage of ownership of the outstanding Diamond Offshore Common Stock falls
below 15%. Diamond Offshore has the right to require Loews to delay any exercise
by Loews of its rights to require registration and other actions for a period of
up to 90 days if, in the judgment of Diamond Offshore, any offering by Diamond
Offshore then being conducted or about to be conducted would be adversely
affected.
Subject to certain conditions, Diamond Offshore has also granted Loews the
right to include its Diamond Offshore Common Stock in any registration
statements covering offerings of Diamond Offshore Common Stock by Diamond
Offshore, and Diamond Offshore will pay all costs of such offerings other than
underwriting commissions and transfer taxes attributable to the shares sold on
behalf of Loews. There is no limitation on the number of times that Loews may
exercise this right with respect to registration statements relating to Diamond
Offshore Common Stock. Diamond Offshore will indemnify Loews, and Loews will
indemnify Diamond Offshore, against certain liabilities in respect of any
registration statement or offering covered by the Registration Rights Agreement.
The rights of Loews under the Registration Rights Agreement are transferable to
affiliates of Loews.
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<PAGE> 202
TRANSACTIONS BETWEEN DIAMOND OFFSHORE AND THE SELLING STOCKHOLDERS.
Pursuant to the Shareholders Agreement, each of Alphee and Ratos agreed to vote
all shares of Arethusa Common Stock it owned in favor of the approval and
adoption of the Amalgamation Agreement and in favor of the ratification of the
Plan of Acquisition and the Fee Agreement, and against any change in a majority
of the persons who constituted the Board of Directors of Arethusa. Under the
Shareholders Agreement, each of Alphee and Ratos irrevocably appointed
Acquisition Sub and its officers, agents and nominees, with full power of
substitution, as proxy to so vote its shares of Arethusa Common Stock. Also
pursuant to the Shareholders Agreement, each of Alphee and Ratos agreed to vote
all shares of Arethusa Common Stock with respect to which it held a proxy for
such purpose in favor of the ratification of the Fee Agreement and each of the
actions that were to be taken by Arethusa pursuant thereto. In addition, Diamond
Offshore granted the Selling Stockholders certain registration rights pursuant
to the Shareholders Agreement. See "-- Registration Rights of Selling
Stockholders."
REGISTRATION RIGHTS OF SELLING STOCKHOLDERS. Pursuant to the Plan of
Acquisition and the Shareholders Agreement, Diamond Offshore agreed for the
benefit of Alphee and Ratos to use its best efforts (i) to cause the
Registration Statement to be filed and declared effective at the earliest
practicable date and to remain effective until the Effective Time, to include
this Prospectus intended to permit each of Alphee and Ratos to sell after the
Effective Time without restriction, at its election, all or part of the shares
of Diamond Offshore Common Stock received by such person in connection with the
Acquisition and (ii) to maintain the continued effectiveness of the Registration
Statement with respect to such shares, including this Prospectus for use by such
persons, for a period of two years from the Effective Time, plus the aggregate
number of days in all Suspension Periods (as such term is defined in the
Shareholders Agreement) after the Effective Time (the "Required Period").
During the Required Period and assuming continued effectiveness of the
registration statement covering their shares of Diamond Offshore Common Stock,
Alphee and Ratos may sell such shares in or outside the United States through
underwriters or dealers, through agents, or directly to one or more purchasers.
The distribution of the shares of Diamond Offshore Common Stock offered by
Alphee or Ratos may be effected from time to time in one or more transactions
(which may involve crosses or block transactions) (i) on the NYSE (or on such
other national stock exchanges on which the Diamond Offshore Common Stock may be
listed from time to time) in transactions which may include special offerings,
exchange distributions and/or secondary distributions pursuant to and in
accordance with the rules of such exchanges, including sales to underwriters who
will acquire the Offered Shares for their own account and resell them in one or
more transactions or through brokers, acting as principal or agent, (ii) in the
over-the-counter market, including sales through brokers, acting as principal or
agent, (iii) in transactions other than on such exchanges or in the
over-the-counter market, or a combination of such transactions, including sales
through brokers, acting as principal or agent, (iv) through the issuance of
securities by issuers other than Diamond Offshore convertible into, exchangeable
for, or payable in such shares (whether such securities are listed on a national
securities exchange or otherwise) or (v) through the writing of options on the
shares (whether such options are listed on an options exchange or otherwise).
Any such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. Diamond Offshore has the right to require each of Alphee and
Ratos to suspend use of any resale prospectus for any period (not to exceed 20
days in any one instance and, when combined with any other such periods, 60 days
in any 12-month period) determined by Diamond Offshore if Diamond Offshore
would, in the opinion of Diamond Offshore's counsel, be required to disclose in
such prospectus information not otherwise then required by law to be publicly
disclosed and, in the judgment of the Board of Directors of Diamond Offshore,
such disclosure might adversely affect Diamond Offshore or any material business
transaction or negotiation in which Diamond Offshore is then engaged.
Each of Alphee and Ratos will have the right to elect during the 180-day
period beginning on the Effective Time (the "Initial Standstill Period") to
proceed with one, and only one, and thereafter such shareholders shall have the
right to proceed with one, and only one (for both such shareholders
collectively) underwritten offering of their shares of Diamond Offshore Common
Stock pursuant to the registration statement covering such shares, but if during
the Initial Standstill Period, only one underwritten offering of Diamond
Offshore Common Stock is effected pursuant to such registration statement, then
each of Alphee
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<PAGE> 203
and Ratos will have the right to proceed with one, and only one, underwritten
offering thereafter until the end of the Required Period. During the Initial
Standstill Period, and thereafter during the period commencing 14 days prior to
the commencement of, and continuing through the completion of the public
distribution of, shares of Diamond Offshore Common Stock in an underwritten
public offering by Alphee or Ratos, Diamond Offshore and Loews have agreed not
to effect any public sale or distribution of Diamond Offshore Common Stock, or
any securities convertible into such stock, subject to certain exceptions.
Diamond Offshore will pay the costs of all such underwritten offerings other
than (i) underwriting commissions attributable to the shares of Diamond Offshore
Common Stock sold on behalf of Alphee or Ratos, (ii) out-of-pocket costs
incurred in connection with "road shows" and other marketing support involving
members of Diamond Offshore's management, (iii) costs of any special audits,
(iv) fees and expenses of underwriter's counsel and (v) any out-of-pocket
expense (including fees and expenses of counsel) of Alphee or Ratos.
Subject to certain conditions, Diamond Offshore also granted each of Alphee
and Ratos the right to include their shares of Diamond Offshore Common Stock in
any registration statements covering offerings of Diamond Offshore Common Stock
filed during the Required Period by Diamond Offshore for its own account or for
holders of Diamond Offshore Common Stock other than Alphee or Ratos, and Diamond
Offshore will pay all costs of such offerings other than underwriting
commissions attributable to any shares sold on behalf of Alphee or Ratos. There
is no limitation on the number of times that Alphee and Ratos may exercise this
right during the Required Period with respect to registration statements
relating to Diamond Offshore Common Stock.
Diamond Offshore will indemnify Alphee and Ratos, and each of Alphee and
Ratos, severally, will indemnify Diamond Offshore, against certain liabilities
in respect of any registration statement or resale prospectus covering offerings
by Alphee or Ratos, as applicable, of shares of Diamond Offshore Common Stock.
The rights of Alphee and Ratos under the Shareholders Agreement with respect to
registration rights are transferable by each of Alphee and Ratos to their
respective affiliates, but are not otherwise transferable without the prior
written consent of Diamond Offshore.
STOCK OPTION PLANS
Pursuant to the Amalgamation Agreement, at the Effective Time, each
Arethusa Option was assumed by Diamond Offshore and now constitutes a fully
vested and currently exercisable option to acquire, on substantially the same
terms and conditions (modified as described below) as were applicable under the
Arethusa Stock Option Plans, the same number of shares of Diamond Offshore
Common Stock as the holder thereof would have been entitled to receive pursuant
to the Amalgamation had such holder exercised such Arethusa Option in full
immediately prior to the Effective Time, at a price per share equal to the per
share exercise price of the Arethusa Option being assumed divided by the
Amalgamation Ratio. No fractional shares of Diamond Offshore Common Stock will
be issued in connection with the exercise of any such Arethusa Option. Fractions
of Diamond Offshore Common Stock resulting from any such exercise will be paid
in cash based upon the market value of a share of Diamond Offshore Common Stock
on the date of exercise. Except as otherwise described above, the Arethusa Stock
Option Plans terminated as of the Effective Time. Diamond Offshore has filed
with the Commission a registration statement on Form S-8 with respect to the
shares of Diamond Offshore Common Stock subject to such Arethusa Options, as so
amended by Diamond Offshore.
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<PAGE> 204
PRICE RANGE OF DIAMOND OFFSHORE COMMON STOCK
Diamond Offshore Common Stock is listed on the NYSE under the symbol "DO."
The following table shows for the periods indicated the high and low closing
prices of Diamond Offshore Common Stock as reported by the NYSE. No information
is provided for Diamond Offshore Common Stock prior to the date of the Diamond
Offshore Initial Public Offering.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter Ended
March 31............................................ 43 3/8 33 3/8 -- --
June 30(1).......................................... 50 1/2 43 1/2 -- --
December 31......................................... -- -- 34 24
</TABLE>
- ---------------
(1) As of April 11, 1996.
On April 11, 1996, the closing price of the Diamond Offshore Common Stock,
as reported by the NYSE, was $50 1/2 per share. As of April 11, 1996, there were
approximately 73 record holders, and approximately 1,400 beneficial holders, of
Diamond Offshore Common Stock.
DESCRIPTION OF CAPITAL STOCK
The following description of certain terms of Diamond Offshore's capital
stock accurately summarizes those terms considered by Diamond Offshore to be
material to a prospective investor in the Offered Shares and is qualified in its
entirety by reference to Diamond Offshore's Restated Certificate of
Incorporation (the "Certificate"), a copy of which was included as an exhibit to
the Registration Statement.
COMMON STOCK
The authorized capital stock of Diamond Offshore consists of 225,000,000
shares of capital stock, 200,000,000 of such shares being Diamond Offshore
Common Stock, par value $0.01 per share. After giving effect to the issuance of
shares of Diamond Offshore Common Stock in connection with the Acquisition (the
exchange of each share of Arethusa Common Stock outstanding immediately prior to
the Acquisition in consideration of 0.88 shares of Diamond Offshore Common
Stock), there were 67,893,344 shares of Diamond Offshore Common Stock issued and
outstanding, of which 8,375,455 shares were held by the Selling Stockholders. In
addition, at the Effective Time, 1,000,000 shares of Diamond Offshore Common
Stock were reserved for issuance upon the exercise of Arethusa Options assumed
by Diamond Offshore.
Holders of Diamond Offshore Common Stock are entitled to one vote for each
share held and are not entitled to cumulative voting for the purpose of electing
directors and have no preemptive or similar right to subscribe for, or to
purchase, any shares of Diamond Offshore Common Stock or other securities to be
issued by Diamond Offshore in the future. Accordingly, the holders of more than
50% in voting power of the shares of Diamond Offshore Common Stock voting
generally for the election of directors will be able to elect all of Diamond
Offshore's directors. As described in "Management -- Certain Relationships and
Related Transactions -- Controlling Stockholder," Loews beneficially owns
approximately 51.6% of the outstanding shares of Diamond Offshore Common Stock
and is in a position to control actions that require the consent of
stockholders, including the election of directors, amendment of the Certificate
and any mergers or any sale of substantially all of the assets of Diamond
Offshore.
Holders of shares of Diamond Offshore Common Stock have no exchange,
conversion or preemptive rights and such shares are not subject to redemption.
All outstanding shares of Diamond Offshore Common Stock are duly authorized,
validly issued, fully paid and non-assessable. Subject to the prior rights, if
any, of holders of any outstanding class or series of capital stock having a
preference in relation to Diamond Offshore Common Stock as to distributions upon
the dissolution, liquidation and winding-up of Diamond Offshore and
53
<PAGE> 205
as to dividends, holders of Diamond Offshore Common Stock are entitled to share
ratably in all assets of Diamond Offshore which remain after payment in full of
all debts and liabilities of Diamond Offshore, and to receive ratably such
dividends, if any, as may be declared by Diamond Offshore's Board of Directors
from time to time out of funds and other property legally available therefor.
See "Dividend Policy" and "Capitalization."
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
Diamond Offshore Common Stock, to issue up to 25,000,000 shares of preferred
stock, $.01 par value (the "Preferred Stock"), in one or more series, to
establish the number of shares to be included in each such series and to fix the
designations, preferences, relative, participating, optional and other special
rights of the shares of each such series and the qualifications, limitations and
restrictions thereof. Such matters may include, among others, voting rights,
conversion and exchange privileges, dividend rates, redemption rights, sinking
fund provisions and liquidation rights that could be superior and prior to
Diamond Offshore Common Stock.
The issuance of one or more series of the Preferred Stock could, under
certain circumstances, adversely affect the voting power of the holders of
Diamond Offshore Common Stock and could have the effect of discouraging or
making more difficult any attempt by a person or group to effect a change in
control of Diamond Offshore.
DELAWARE BUSINESS COMBINATION STATUTE
Diamond Offshore is a Delaware corporation and is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"). In
general, Section 203 will prevent an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) of
Diamond Offshore from engaging in a "business combination" (as therein defined)
with Diamond Offshore for three years following the date such person became an
interested stockholder, unless (i) before such person became an interested
stockholder, the Board of Directors of Diamond Offshore approved the business
combination in question, or the transaction which resulted in such person
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in the interested stockholder becoming such, the interested
stockholder owns at least 85% of the voting stock of Diamond Offshore
outstanding at the time such transaction commenced (excluding stock held by
directors who are also officers of Diamond Offshore and by employee stock plans
that do not provide employees with rights to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer),
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the Board of Directors of
Diamond Offshore and authorized at a meeting of stockholders by the affirmative
vote of the holders of not less than 66 2/3% of the outstanding voting stock of
Diamond Offshore not owned by the interested stockholder. Under Section 203, the
restrictions described above do not apply to certain business combinations
proposed by an interested stockholder following the announcement (or
notification) of one of certain extraordinary transactions involving Diamond
Offshore and a person who had not been an interested stockholder during the
preceding three years or who became an interested stockholder with the approval
of Diamond Offshore's directors, and which transactions are approved or not
opposed by a majority of the members of the Board of Directors then in office
who were directors prior to any person becoming an interested stockholder during
the previous three years or were recommended for election or elected to succeed
such directors by a majority of such directors.
Section 203 does not apply to Loews because it has been more than three
years since Loews became an interested stockholder.
POTENTIAL RESTRICTIONS ON SALES OF DIAMOND OFFSHORE COMMON STOCK TO NON-U.S.
CITIZENS
Pursuant to recent amendments to United States maritime laws relating to
sales of interests in and control of vessels owned by United States citizens to
non-citizens, the Secretary of Transportation, acting
54
<PAGE> 206
through the United States Maritime Administration, has prior consent authority
over certain transfers of Diamond Offshore's capital stock. See
"Business -- Limitation on Ownership by Non-U.S. Citizens."
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, L.L.C., whose principal offices are
located at 450 West 33rd Street, New York, New York 10001, acts as transfer
agent and registrar for Diamond Offshore Common Stock.
PLAN OF DISTRIBUTION
Any distribution of the Offered Shares by the Selling Stockholders may be
effected from time to time in one or more of the following transactions (which
may involve crosses or block transactions): (i) on the NYSE (or on such other
national stock exchanges on which the Diamond Offshore Common Stock may be
listed from time to time) in transactions which may include special offerings,
exchange distributions and/or secondary distributions pursuant to and in
accordance with the rules of such exchanges, including sales to underwriters who
will acquire the Offered Shares for their own account and resell them in one or
more transactions or through brokers, acting as principal or agent, (ii) in the
over-the-counter market, including sales through brokers, acting as principal or
agent, (iii) in transactions other than on such exchanges or in the
over-the-counter market, or a combination of such transactions, including sales
through brokers, acting as principal or agent, (iv) through the issuance of
securities by issuers other than Diamond Offshore convertible into, exchangeable
for, or payable in such shares (whether such securities are listed on a national
securities exchange or otherwise) or (v) through the writing of options on the
shares (whether such options are listed on an options exchange or otherwise).
Any such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices.
The Selling Stockholders and any such underwriters, brokers, dealers or
agents, upon effecting the sale of the Offered Shares may be deemed
"underwriters" as that term is defined by the Securities Act.
Underwriters participating in any offering made pursuant to this Prospectus
(as amended or supplemented from time to time) may receive underwriting
discounts and commissions, and discounts or concessions may be allowed or
reallowed or paid to dealers, and brokers or agents participating in such
transactions may receive brokerage or agent's commissions or fees.
In order to comply with the securities laws of certain states, if
applicable, the Offered Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Offered Shares may not be sold unless the Offered Shares have been registered or
qualified for sale in such state or any exemption from registration or
qualification is available and complied with.
Pursuant to the Shareholders Agreement, Diamond Offshore agreed to cause
the Registration Statement to include a resale prospectus that would permit the
Selling Stockholders to sell the Offered Shares without restriction and to keep
the Registration Statement continuously effective for the Required Period.
Diamond Offshore has agreed to pay certain expenses in connection with such
registration, including (1) all registration and filing fees, (2) fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications of
the securities registered), (3) printing expenses, (4) internal expenses of
Diamond Offshore (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (5)
reasonable fees and disbursements of counsel for Diamond Offshore and customary
fees and expenses for independent certified public accountants retained by
Diamond Offshore (including the expenses of any comfort letters or costs
associated with the delivery by independent certified public accountants of a
comfort letter or comfort letters but excluding costs associated with special
audits), (6) the reasonable fees and expenses of any special experts retained by
Diamond Offshore in connection with such registration, (7) fees and expenses in
connection with any review of underwriting arrangements by the National
Association of Securities Dealers, Inc. including fees and expenses of any
"qualified independent underwriter" in connection with an underwritten offering
and (8) fees and disbursements of underwriters customarily paid by issuers or
sellers of securities in connection
55
<PAGE> 207
with an underwritten offering. Diamond Offshore will not be responsible for any
underwriting fees, discounts or commissions in connection with an underwritten
offering or any out-of-pocket expenses (including counsel fees and expenses) of
the Selling Stockholders or any fees and expenses of underwriters' counsel in
connection with an underwritten offering. In addition, the Selling Stockholders
have agreed to pay all costs of any special audits in connection with an
underwritten offering and have agreed to pay, or in the case of an underwritten
offering to cause the underwriters to pay, all out-of-pocket expenses of Diamond
Offshore in connection with any domestic "road show" presentations. Diamond
Offshore and the Selling Stockholders have agreed to indemnify each other and
certain other persons against certain liabilities in connection with the
offering of the Offered Shares including liabilities arising under the
Securities Act. In connection with an underwritten offering, Diamond Offshore
has agreed to indemnify any underwriter thereof and certain other persons to the
same extent as provided with respect to the indemnification of the Selling
Stockholder(s) if such underwriter agrees to indemnify Diamond Offshore to the
same extent as provided with respect to the indemnification of Diamond Offshore
by such Selling Stockholder(s). See "Management -- Certain Relationships and
Related Transactions -- Registration Rights of Selling Stockholders."
LEGAL MATTERS
The validity of the shares of Diamond Offshore Common Stock offered hereby
will be passed on for Diamond Offshore by Weil, Gotshal & Manges LLP, Houston,
Texas.
EXPERTS
The consolidated financial statements of Diamond Offshore as of December
31, 1995 and 1994, and for each of the three years in the period ended December
31, 1995 included herein have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Arethusa as of September 30, 1995
and 1994, and for each of the three years in the period ended September 30, 1995
included in this Prospectus, have been audited by Arthur Andersen & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
56
<PAGE> 208
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets -- December 31, 1995 and 1994........................... F-3
Consolidated Statements of Operations -- Years Ended December 31, 1995, 1994 and
1993............................................................................. F-4
Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1995,
1994 and 1993.................................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and
1993............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets -- December 31 and September 30, 1995......... F-18
Consolidated Condensed Statements of Income -- Three Months Ended December 31, 1995
and 1994......................................................................... F-19
Consolidated Condensed Statements of Cash Flows -- Three Months Ended December 31,
1995 and 1994.................................................................... F-20
Notes to Consolidated Condensed Financial Statements................................ F-21
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................................ F-23
Consolidated Balance Sheets -- September 30, 1995 and 1994.......................... F-24
Consolidated Statements of Income -- Years Ended September 30, 1995, 1994 and
1993............................................................................. F-25
Consolidated Statements of Shareholders' Investment -- Years Ended September 30,
1995, 1994 and 1993.............................................................. F-26
Consolidated Statements of Cash Flows -- Years Ended September 30, 1995, 1994 and
1993............................................................................. F-27
Notes to Consolidated Financial Statements.......................................... F-28
</TABLE>
F-1
<PAGE> 209
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Houston, Texas
January 29, 1996
(February 13, 1996 as to Note 12)
F-2
<PAGE> 210
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 10,306 $ 17,770
Short-term investments.......................................... 5,041 4,926
Accounts receivable............................................. 74,496 57,804
Rig inventory and supplies...................................... 15,330 15,024
Prepaid expenses and other...................................... 10,601 3,970
--------- ---------
Total current assets....................................... 115,774 99,494
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION.................................................... 502,278 488,664
--------- ---------
Total assets............................................... $ 618,052 $ 588,158
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 18,322 $ 13,596
Accrued liabilities............................................. 33,929 28,377
--------- ---------
Total current liabilities.................................. 52,251 41,973
NOTES PAYABLE TO LOEWS............................................. -- 394,777
DEFERRED TAX LIABILITY............................................. 72,907 27,342
--------- ---------
Total liabilities.......................................... 125,158 464,092
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares authorized,
none issued and outstanding at December 31, 1995).............. -- --
Common stock (par value $.01, 200,000,000 shares authorized,
50,000,000 shares issued and outstanding and par value $1.00,
1,000 shares authorized, 100 shares issued and outstanding at
December 31, 1995 and 1994, respectively)..................... 500 1
Additional paid-in capital...................................... 665,107 289,685
Accumulated deficit............................................. (171,444) (164,418)
Cumulative translation adjustment............................... (1,269) (1,202)
--------- ---------
Total stockholders' equity................................. 492,894 124,066
--------- ---------
Total liabilities and stockholders' equity................. $ 618,052 $ 588,158
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 211
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES..................................................... $336,584 $307,918 $288,069
OPERATING EXPENSES:
Contract drilling....................................... 259,560 256,919 228,211
General administrative.................................. 13,857 11,993 11,785
Depreciation............................................ 52,865 55,366 46,819
Gain on sale of assets.................................. (1,349) (1,736) (3,201)
-------- -------- --------
Total operating expenses........................... 324,933 322,542 283,614
-------- -------- --------
OPERATING INCOME (LOSS)...................................... 11,651 (14,624) 4,455
Other income (expense):
Interest expense........................................ (27,052) (31,346) (25,906)
Currency transaction losses............................. (191) (1,316) (1,474)
Other, net.............................................. 1,789 861 1,255
-------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT............................... (13,803) (46,425) (21,670)
INCOME TAX BENEFIT........................................... 6,777 11,621 5,041
-------- -------- --------
NET LOSS..................................................... $ (7,026) $(34,804) $(16,629)
======== ======== ========
PRO FORMA NET INCOME PER SHARE (NOTE 1)...................... $ 0.20
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 212
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1992..................... 100 $ 1 $ 389,685 $(112,985) $(1,401) $ 275,300
Net loss............................ -- -- -- (16,629) -- (16,629)
Exchange rate changes, net.......... -- -- -- -- (310) (310)
Dividend to Loews................... -- -- (100,000) -- -- (100,000)
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1993..................... 100 1 289,685 (129,614) (1,711) 158,361
Net loss............................ -- -- -- (34,804) -- (34,804)
Exchange rate changes, net.......... -- -- -- -- 509 509
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1994..................... 100 1 289,685 (164,418) (1,202) 124,066
Net loss............................ -- -- -- (7,026) -- (7,026)
Exchange rate changes, net.......... -- -- -- -- (67) (67)
Capital contribution................ -- -- 39,676 -- -- 39,676
350,500-for-one stock split......... 35,049,900 350 (350) -- -- --
Issuance of common stock from
initial public offering.......... 14,950,000 149 338,214 -- -- 338,363
Dividend to Loews................... -- -- (2,118) -- -- (2,118)
---------- ---- ---------- --------- ------- ---------
DECEMBER 31, 1995..................... 50,000,000 $500 $ 665,107 $(171,444) $(1,269) $ 492,894
========== ==== ========== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 213
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (7,026) $(34,804) $(16,629)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 50,794 49,908 46,819
Write-down of asset.................................... 2,071 5,458 --
Gain on sale of assets and other....................... (1,349) (1,736) (3,201)
Accrued interest converted to notes payable to Loews... 27,044 31,294 25,894
Deferred tax benefit................................... (7,472) (13,534) (8,053)
Changes in operating assets and liabilities:
Accounts receivable.................................... (16,692) 4,458 (16,376)
Rig inventory and supplies and other current assets.... (4,896) (698) (1,393)
Accounts payable and accrued liabilities............... 10,278 1,455 6,184
Other, net............................................. 29 761 (341)
--------- -------- --------
Net cash provided by operating activities.............. 52,781 42,562 32,904
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of St. Vincent Drilling Ltd...................... -- -- (10,600)
Acquisition of drilling rigs and related equipment........ -- (25,000) --
Capital expenditures...................................... (66,646) (21,146) (14,345)
Proceeds from sale of assets.............................. 1,516 2,486 4,194
Change in short-term investments.......................... (115) 95 20
--------- -------- --------
Net cash used in investing activities.................. (65,245) (43,565) (20,731)
--------- -------- --------
FINANCING ACTIVITIES:
Net (repayments) borrowings (to) from Loews............... (331,245) 10,000 (5,627)
Proceeds from issuance of common stock.................... 338,363 -- --
Dividend to Loews......................................... (2,118) -- --
--------- -------- --------
Net cash provided by (used in) financing activities.... 5,000 10,000 (5,627)
--------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (7,464) 8,997 6,546
Cash and cash equivalents, beginning of year.............. 17,770 8,773 2,227
--------- -------- --------
Cash and cash equivalents, end of year.................... $ 10,306 $ 17,770 $ 8,773
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 214
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 70.1% of the
outstanding common stock of the Company (see Note 2).
The Company engages principally in the contract drilling of offshore oil
and gas wells primarily for independent and major integrated oil companies and
state-owned oil companies. The Company's fleet of mobile offshore drilling rigs
is one of the largest in the world and includes the largest fleet of
semisubmersible rigs. The fleet is deployed in the Gulf of Mexico, the North
Sea, Africa, South America, Australia and Southeast Asia and consists of 22
semisubmersible rigs (including three of the world's 13 fourth-generation
semisubmersibles), 14 jack-up rigs and one drillship. The Company also operates
10 land rigs deployed in South Texas. All of the Company's offshore and land
rigs are wholly owned.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.
Supplementary Cash Flow Information
Non-cash financing activities for the year ended December 31, 1995 included
a capital contribution by Loews in September 1995 of $39.7 million which reduced
the outstanding debt to Loews. In addition, $27.0 million of interest expense
was accrued and included in "Notes payable to Loews" prior to such notes being
repaid with a portion of the proceeds from the Common Stock Offering (see Note
2). In connection with the Common Stock Offering, the tax sharing agreement with
Loews was terminated and all liabilities were settled by offsetting $50.9
million owed by Loews to the Company under the agreement against notes payable
to Loews.
Non-cash financing activities for the years ended December 31, 1994 and
1993 included $31.3 million and $25.9 million, respectively, of interest expense
accrued and included in "Notes payable to Loews." Non-cash financing activities
for 1993 also included a $100.0 million dividend declared to Loews in the form
of additional debt (see Note 7).
Rig Inventory and Supplies
Inventories primarily consist of replacement parts and supplies held for
use in the operations of the Company. Inventories are stated at the lower of
cost or estimated value.
Drilling and Other Property and Equipment
Drilling and other property and equipment is carried at cost. Maintenance
and repairs are charged to income currently while replacements and betterments
are capitalized. Costs incurred for major rig upgrades are accumulated in
construction work in progress, with no depreciation recorded on the additions,
until the month the upgrade is completed and the rig is placed into service.
Upon retirement or other disposal of fixed
F-7
<PAGE> 215
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets, the cost and related accumulated depreciation are removed from the
respective accounts and any gains or losses are included in the results of
operations.
For financial reporting purposes, depreciation is provided on the
straight-line method over the remaining estimated useful lives from the date the
asset is placed into service. The estimated useful lives of the Company's
offshore drilling rigs range from 10 to 25 years. Other property and equipment
is estimated to have useful lives ranging from 3 to 10 years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
Income Taxes
Taxable income (loss) of the Company and its domestic subsidiaries was
included in the consolidated U.S. federal income tax return of Loews and other
members of the Loews affiliated group for all taxable periods ending prior to
the Common Stock Offering. Thereafter, the taxable income (loss) of the Company
and its domestic subsidiaries is included in the consolidated U.S. federal
income tax return of the Company and its affiliated group.
Deferred income taxes are recognized for the effect of temporary
differences between financial and tax reporting. Except for selective dividends,
the Company intends to reinvest the unremitted earnings of its non-U.S.
subsidiaries and postpone their remittance indefinitely. Thus, no additional
U.S. taxes have been provided on earnings of these non-U.S. subsidiaries. The
Company's non-U.S. income tax liabilities are based upon the results of
operations of the various subsidiaries in those jurisdictions in which they are
subject to taxation.
Revenue Recognition
Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. The net of mobilization fees
received and costs incurred to mobilize an offshore rig from one market to
another is recognized over the term of the related drilling contract. Absent a
contract, mobilization costs are recognized currently. Revenues received from
customers for asset enhancements relating to specific contracts are deferred and
amortized to income over the term of the drilling contract.
Income from offshore turnkey contracts is recognized on the completed
contract method, with revenues accrued to the extent of costs until the
specified turnkey depth and other contract requirements are met. Provisions for
future losses on turnkey contracts are recognized when it becomes apparent that
contract drilling expenses to be incurred on a specific contract will exceed the
revenue from the contract.
F-8
<PAGE> 216
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at year-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the stockholders' equity section titled "Cumulative translation
adjustment." Currency transaction gains and losses are included in current
operating results. Additionally, translation gains and losses of subsidiaries
operating in hyperinflationary economies are included in operating results
currently.
Research and Development Expenses
Research and development expenses are expensed when incurred and are
reflected in the Consolidated Statements of Operations in "Contract drilling
expenses." For the year ended December 31, 1995, research and development
expenses of approximately $.6 million were incurred in connection with
preliminary feasibility studies for the development of an ultra-large
semisubmersible, the Ocean Legend. There were no research and development
expenses for the years ended December 31, 1994 and 1993.
Pro Forma Net Income Per Share Data
As described in Note 2, after its initial public offering, the Company had
50,000,000 shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the period, the Company would have
recognized net income of $10.0 million, or $0.20 per share, after adjusting for
the after-tax effects of a reduction in interest expense.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
2. COMMON STOCK OFFERING
Pursuant to the Common Stock Offering, the Company sold 14,950,000 shares
of common stock, including 1,950,000 shares from an over-allotment option.
Subsequent to the Common Stock Offering, the exercise of the over-allotment
option and a 350,500-for-one stock split, which was effective immediately prior
to consummation of the Common Stock Offering, the Company had 50,000,000 shares
of common stock outstanding.
Proceeds from the Common Stock Offering were used to repay all of the
Company's then outstanding debt to Loews of $336.2 million and the remainder of
such proceeds was used to pay Loews a special dividend of $2.1 million. In
addition, pursuant to a termination and settlement agreement, all assets and
liabilities under the tax sharing agreement with Loews were settled by
offsetting amounts owed by Loews to the Company thereunder against notes payable
to Loews (see Note 8).
F-9
<PAGE> 217
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SHORT-TERM INVESTMENTS
The Company has entered into a pledge agreement with a bank whereby the
bank has or will extend various financial accommodations to or for the account
of the Company, including issuing letters of credit, entering into foreign
exchange contracts or permitting intra-day overdrafts. In consideration of and
as a condition precedent to the making of such financial accommodations by the
bank, the Company is required to maintain a pledged collateral account in which
the bank has a continuing security interest. As of December 31, 1995 and 1994,
the Company had $5.0 million and $4.9 million, respectively, in U.S. Treasury
Bills deposited in such pledged collateral account.
4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment................................... $ 689,438 $ 645,922
Construction work in progress................................. 19,016 --
Land and buildings............................................ 3,655 3,599
Office equipment and other.................................... 6,300 5,391
--------- ---------
718,409 654,912
Less accumulated depreciation................................. (216,131) (166,248)
--------- ---------
Total............................................... $ 502,278 $ 488,664
========= =========
</TABLE>
Construction Work in Progress
The Company entered into letters of intent with two major oil companies for
three-year commitments on both the Ocean Quest and Ocean Star (formerly named
Ocean Countess) pursuant to which the rigs are being upgraded to conduct
drilling operations in the Gulf of Mexico deep water market. The upgrade
projects include stability enhancements to provide additional hull buoyancy, the
addition of a new mooring system, and drilling system upgrades. In connection
with these upgrades, the Company mobilized the Ocean Star, which had been
previously idle in the North Sea, to the Gulf of Mexico during the fourth
quarter of 1995. Both rigs entered the shipyard to begin their upgrades in
December 1995 and are scheduled to be placed into service in the fourth quarter
of 1996. As of December 31, 1995, $6.6 million and $3.2 million of construction
work in progress was related to the Ocean Quest and Ocean Star, respectively.
The remaining $9.2 million of construction work in progress was related to
upgrades to prepare the Ocean Baroness and Ocean Princess for contracts in
Brazil and the North Sea, respectively.
Impairment of Assets
During 1995 and 1994, the Company recorded impairment losses of $2.1
million and $5.5 million, respectively, to decrease the carrying value of two
semisubmersible drilling rigs (one located in the Gulf of Mexico and the other
located in South America). The rig in the Gulf of Mexico was sold in the fourth
quarter of 1995 and management plans to sell the rig in South America during
1996. The impairment losses represent the amount by which the carrying value of
the rigs exceeded the fair value of such rigs, based on expected future cash
flows to be generated by such rigs. The impairment losses, reflected in
"Depreciation" in the Consolidated Statements of Operations, reduce the carrying
value of both rigs to zero. Operating losses provided by the rig located in the
Gulf of Mexico during the years ended December 31, 1995, 1994 and 1993 were
approximately $2,000, $324,000 and $333,000, respectively. Operating income
(loss) contributed by the rig located in South America during the years ended
December 31, 1995, 1994 and 1993 was approximately $(.6) million, $(2.1) million
and $2.4 million, respectively.
F-10
<PAGE> 218
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits........................................ $17,402 $15,480
Other............................................................ 16,527 12,897
------- -------
Total.................................................. $33,929 $28,377
======= =======
</TABLE>
6. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable. The Company maintains cash and cash equivalents and certain other
financial instruments with various financial institutions. An accounting loss
would occur if one or more of these institutions fails to perform according to
the terms of its agreements. However, these financial institutions are located
throughout the world, and the Company's strategy is designed to limit exposure
to any one institution. The Company's periodic evaluations of the relative
credit standing of these financial institutions are considered in the Company's
investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. Since the market for the Company's services is the oil and gas industry,
this customer base consists primarily of major oil companies and independent oil
and gas producers. The Company provides allowances for potential credit losses
when necessary. No such allowances were deemed necessary for the years
presented. As of December 31, 1995 and 1994, the Company had no significant
concentrations of credit risk.
Fair Values
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments, both
assets and liabilities, for which it is practicable to estimate fair value. The
Company's financial instruments include short-term investments, accounts
receivable and notes payable to Loews. The carrying amounts of the Company's
financial instruments approximate fair value due to the nature of such
instruments. The estimated fair value amounts have been determined by the
Company using appropriate valuation methodologies and information available to
management as of December 31, 1995 and 1994. Considerable judgment is required
in developing these estimates, and accordingly, no assurance can be given that
the estimated values are indicative of the amounts that would be realized in a
free market exchange.
The carrying amount of the Company's investment in U.S. Treasury Bills is
at fair value based upon the closing market prices obtained from public sources.
The Company believes it has the ability to hold its fixed income investment
until maturity. However, the Company may sell its securities and reinvest the
proceeds to take advantage of opportunities generated by changing interest
rates. Therefore, the Company considers its securities as available for sale.
7. NOTES PAYABLE TO AND TRANSACTIONS WITH LOEWS
As described in Note 2, a portion of the proceeds from the Common Stock
Offering was used to repay all of the Company's then outstanding debt to Loews
of $336.2 million. Prior to the Common Stock Offering, the Company received from
Loews loans for acquisitions, capital expenditures and working capital depending
on its cash requirements and cash position. These loans, net of amounts repaid,
were $41.3 million and
F-11
<PAGE> 219
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$20.3 million, including interest at 10 percent per annum of $26.3 million and
$24.7 million, during the years ended December 31, 1994 and 1993, respectively.
Loews had represented to the Company that no repayment of the debt outstanding
was required within twelve months and the debt was, therefore, classified as
noncurrent at December 31, 1994.
On October 7, 1993, the Company declared a $100.0 million dividend to Loews
in the form of additional debt, with interest accruing at 5 percent per annum.
Interest accrued at December 31, 1994 and 1993 was $5.0 million and $1.2
million, respectively.
The Company and Loews have entered into a services agreement which was
effective upon consummation of the Common Stock Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is required to reimburse
Loews for (i) allocated personnel costs (such as wages, salaries, employee
benefits and payroll taxes) of the Loews personnel actually providing such
services and (ii) all out-of-pocket expenses related to the provision of such
services. The Services Agreement may be terminated at the Company's option upon
30 days' notice to Loews and at the option of Loews upon six months' notice to
the Company. In addition, the Company has agreed to indemnify Loews for all
claims and damages arising from the provision of services by Loews under the
Services Agreement, unless due to the gross negligence or willful misconduct of
Loews. Prior to the Common Stock Offering, Loews provided such services at an
allocated rate. The Company has been charged $.7 million, $.9 million and $.6
million by Loews for these support functions during the years ended December 31,
1995, 1994 and 1993, respectively.
Subsequent to the Common Stock Offering, Loews provided the Company with a
$150.0 million revolving line of credit available through October 31, 1996 or
until alternative financing is arranged. Borrowings under the line of credit
bear interest, at the Company's option, at a per annum rate equal to a base rate
(equal to the greater of (i) the prime rate announced by Bankers Trust Company
or (ii) the Federal Funds rate plus .50%) plus .25% or the Eurodollar rate plus
1.25%. The line of credit is unsecured, has no financial or restrictive
covenants, and the Company is not required to pay a commitment fee to Loews. As
of December 31, 1995, there were no amounts outstanding under this line of
credit.
8. INCOME TAXES
The Company and its subsidiaries were party to a tax sharing agreement with
Loews and the Company has provided a tax provision calculated as if on a
stand-alone basis for U.S. federal income tax purposes prior to the Common Stock
Offering. In conjunction with the Common Stock Offering, the tax sharing
agreement was terminated and all assets and liabilities were settled by
offsetting amounts owed by Loews to the Company under the agreement against
notes payable to Loews (see Note 2).
An analysis of the Company's income (taxes) benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. -- current.......................................... $ -- $ -- $ --
U.S. -- deferred......................................... 7,472 13,559 8,558
Non-U.S. -- current...................................... (489) (1,541) (2,519)
Non-U.S. -- deferred..................................... -- (25) (505)
State and other.......................................... (206) (372) (493)
------ ------- -------
Total.......................................... $6,777 $11,621 $ 5,041
====== ======= =======
</TABLE>
F-12
<PAGE> 220
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards........................... $ 15,641 $ 69,241
Investment tax credit carryforwards........................ 7,638 8,838
U.S. taxes on foreign income............................... 8,136 7,180
Workers compensation accruals(1)........................... 2,971 930
Foreign tax credits........................................ 5,160 3,060
Other...................................................... 432 1,432
-------- --------
Total deferred tax assets.......................... $ 39,978 $ 90,681
-------- --------
DEFERRED TAX LIABILITIES:
Drilling and other property and equipment.................. (98,401) (106,288)
Non-U.S. deferred taxes.................................... (10,146) (10,060)
Other...................................................... (1,367) (745)
-------- --------
Total deferred liabilities......................... (109,914) (117,093)
-------- --------
Net deferred tax liability......................... $ (69,936) $ (26,412)
======== ========
</TABLE>
- ---------------
(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.
In connection with the purchase of Odeco Drilling Inc. in 1992, the Company
acquired net operating loss ("NOL") and investment tax credit ("ITC")
carryforwards available to offset future taxable income. The amount of these
acquired NOL and ITC carryforwards, which are expected to be utilized on future
income tax returns, is $49.9 million and $8.8 million, respectively. At December
31, 1995, the Company has recorded a deferred tax asset for the NOL and ITC
carryforwards available, including those generated subsequent to the Common
Stock Offering, which expire as follows:
<TABLE>
<CAPTION>
TAX BENEFIT OF
NET OPERATING INVESTMENT TAX
YEAR LOSSES CREDITS
- ---- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
2001........................................................ $ 8,134 $ --
2002........................................................ -- --
2003........................................................ 2,627 7,638
2004........................................................ 216 --
2005........................................................ 66 --
2006........................................................ 272 --
2008........................................................ 2,321 --
2010........................................................ 2,005 --
------- ------
Total............................................. $ 15,641 $7,638
======= ======
</TABLE>
No valuation allowance has been provided on the Company's deferred tax
assets because management believes that future reversals of existing taxable
temporary differences will generate taxable income sufficient to utilize these
benefits. However, if the Company is unable to generate sufficient taxable
income in the future through operating results, a valuation allowance will be
required through a charge to expense.
F-13
<PAGE> 221
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the expected income tax benefit resulting from the use
of statutory tax rates to the effective income tax benefit follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income tax benefit:
U.S................................................ $(19,591) $(29,667) $(26,290)
Non-U.S............................................ 5,788 (16,758) 4,620
-------- -------- --------
Worldwide.......................................... $(13,803) $(46,425) $(21,670)
======== ======== ========
Expected tax benefit at statutory rate............... $ 4,831 $ 16,249 $ 7,585
Increase in U.S. statutory rate...................... -- -- (1,530)
Non-U.S. income (loss):
Impact of taxation at different rates.............. 1,270 1,716 198
Impact of non-U.S. losses for which a current tax
benefit is not available........................ (1,004) (6,094) (2,490)
State taxes and other................................ 1,680 (250) 1,278
-------- -------- --------
Income tax benefit.............................. $ 6,777 $ 11,621 $ 5,041
======== ======== ========
</TABLE>
As a result of legislation enacted in August 1993, the federal tax rate for
corporations was increased from 34 to 35 percent, effective January 1, 1993. An
adjustment of $1.5 million to increase the net federal deferred tax liability
was recorded in the third quarter of 1993 for the effect of such legislation.
Undistributed earnings of non-U.S. subsidiaries for which no deferred
income tax provision has been made for possible future remittances totaled
approximately $46.1 million at December 31, 1995. Substantially all of this
amount represents earnings reinvested as part of the Company's ongoing business.
It is not practicable to estimate the amount of taxes that might be payable on
the eventual remittance of such earnings. On remittance, certain countries
impose withholding taxes that, subject to certain limitations, are then
available for use as tax credits against a U.S. tax liability, if any. The
Company also has certain income tax loss carryforwards in non-U.S. tax
jurisdictions to which it has assigned no value because of the uncertainty of
utilization of these carryforwards.
9. EMPLOYEE BENEFIT PLANS
The Company maintains defined contribution retirement plans for its U.S.
and U.K. employees. The plan for U.S. employees is designed to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan
for U.S. employees, each participant may elect to defer taxation on a portion of
his or her eligible earnings, as defined by the plan, by directing the Company
to withhold a percentage of such earnings. A participating employee may also
elect to make after-tax contributions to the plan. The Company contributes 3.75
percent of a participant's defined compensation. For the years ended December
31, 1995, 1994 and 1993, the Company's provision for contributions was $2.4
million, $2.3 million and $2.0 million, respectively.
The plan for U.K. employees provides that the Company contribute amounts
equivalent to the employee's contributions generally up to a maximum of 3
percent of the employee's defined compensation per year. For the years ended
December 31, 1995, 1994 and 1993, the Company's provision for contributions was
$.2 million, $.2 million and $.3 million, respectively.
F-14
<PAGE> 222
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire
through the year 2000. Total rent expense amounted to $1.5 million, $1.5 million
and $.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Minimum future rental payments under leases are approximately
$327,000, $85,000, $15,000, $15,000 and $10,000 for the years 1996 to 2000,
respectively (see Note 12).
Various claims have been filed against the Company in the ordinary course
of business, particularly claims alleging personal injuries. Management believes
that the Company has established adequate reserves on its books for any
liabilities that may reasonably be expected to result from these claims. In the
opinion of management, no pending or threatened claims, actions or proceedings
against the Company are expected to have a material adverse effect on the
Company's financial position or results of operations.
As security for certain bids and performance on certain contracts, the
Company is contingently liable as of December 31, 1995 and 1994 in the amount of
$.8 million and $1.1 million, respectively, under performance/bid bonds. On the
Company's behalf, banks have issued letters of credit securing these bonds.
11. GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS
The following table summarizes, by geographic area, operating revenues and
operating income (loss) for the years ended December 31, 1995, 1994 and 1993,
and identifiable assets at the end of those periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES:
United States...................................... $213,998 $203,198 $158,916
Europe/Africa...................................... 47,645 19,159 47,765
Australia/Southeast Asia........................... 53,113 57,129 30,284
South America...................................... 21,828 26,133 32,489
Other areas........................................ -- 2,299 18,615
-------- -------- --------
Total...................................... $336,584 $307,918 $288,069
======== ======== ========
OPERATING INCOME (LOSS):
United States...................................... $ 19,002 $ 4,125 $ 12,255
Europe/Africa...................................... 5,753 (10,365) (8,432)
Australia/Southeast Asia........................... (7,675) 2,783 (5,960)
South America...................................... (5,429) (11,546) 3,943
Other areas........................................ -- 379 2,649
-------- -------- --------
Total...................................... $ 11,651 $(14,624) $ 4,455
======== ======== ========
IDENTIFIABLE ASSETS:
United States...................................... $386,282 $366,575 $327,370
Europe/Africa...................................... 165,277 125,773 153,619
Australia/Southeast Asia........................... 36,705 48,059 47,386
South America...................................... 29,788 47,751 48,014
Other areas........................................ -- -- 15,773
-------- -------- --------
Total...................................... $618,052 $588,158 $592,162
======== ======== ========
</TABLE>
A substantial portion of the Company's assets are mobile, therefore, asset
locations at the end of the period are not necessarily indicative of the
geographic distribution of the earnings generated by such assets during the
periods.
F-15
<PAGE> 223
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets located outside the U.S. include cash and cash equivalents of
$1.3 million, $2.5 million and $3.3 million at December 31, 1995, 1994 and 1993,
respectively.
The Company has performed drilling activities for certain major customers.
For the year ended December 31, 1995, one customer contributed 16.5 percent of
total revenues. For the year ended December 31, 1994, no single customer
contributed 10.0 percent or more of total revenues. For the year ended December
31, 1993, one customer contributed 10.5 percent of total revenues.
12. SUBSEQUENT EVENTS
Arethusa (Off-Shore) Limited Acquisition
The Company and Arethusa (Off-Shore) Limited, a Bermuda company
("Arethusa"), have entered into an agreement to merge the two companies. The
agreement provides that, upon consummation of the merger, holders of Arethusa
stock will receive 17.9 million shares of common stock to be issued by the
Company based on 20.3 million shares of Arethusa's common stock issued and
outstanding and on a ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The merger is subject to requisite
shareholder approval. It is anticipated that the consummation of the merger will
occur no later than July 31, 1996. The merger will be accounted for as a
purchase for financial reporting purposes, and accordingly, the costs of the
merger will be allocated to assets acquired and liabilities assumed based on
their estimated fair market values.
Arethusa owns a fleet of 11 mobile offshore drilling rigs, operates two
additional mobile offshore drilling rigs, and provides drilling services
worldwide to domestic, international and state-owned oil and gas companies. For
the year ended September 30, 1995, Arethusa reported revenues of $122.1 million,
net income of $21.6 million, and net income per share of $1.06. The following
pro forma information presents the consolidated results of operations, assuming
consummation of the merger had occurred at the beginning of the period. The
historical operating results for the Company included in the pro forma financial
data have been adjusted to give effect to the Common Stock Offering and interest
expense for working capital borrowings.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1995
------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Revenues.................................................................. $456,750
Operating income.......................................................... 3,347
Net loss.................................................................. (963)
Net loss per share........................................................ (0.01)
</TABLE>
Building Purchase
In February 1996, the Company purchased for approximately $8.2 million the
land and the eight-story building containing approximately 182,000 net rentable
square feet on approximately 6.2 acres in which it had leased office space for
its corporate headquarters. A portion of the building is currently occupied by
other tenants under leases which expire through the year 2005. This purchase
will reduce general and administrative expenses in the future by eliminating
rent expense and will provide rental income from the leases, offset by
depreciation and related interest expense. The Company, therefore, does not
expect the result of this purchase to have a material effect on its results of
operations.
F-16
<PAGE> 224
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility
In February 1996, the Company executed a definitive credit agreement
governing a $150.0 million credit facility with a group of banks (the "Diamond
Offshore Bank Credit Facility"). This line of credit bears interest at the same
per annum rate as the revolving line of credit with Loews. Borrowings are
secured by security interests in certain of the Company's assets. The Diamond
Offshore Bank Credit Facility also contains covenants that limit the amount of
total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments. The Company is
required to pay a commitment fee on the unused available portion of the maximum
credit commitment. Upon execution of the definitive agreement for the Diamond
Offshore Bank Credit Facility, the revolving line of credit with Loews was
terminated.
13. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years 1995 and 1994
is shown below. Per share information has not been provided for periods prior to
the Common Stock Offering.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Revenues................................ $ 70,760 $ 76,106 $ 91,716 $ 98,002
Operating income (loss)................. (8,730) 56 11,572 8,753
Income (loss) before income tax
benefit.............................. (16,861) (8,299) 3,003 8,354
Net income (loss)....................... (11,572) (2,770) 1,422 5,894
Pro forma net income per share(1)....... -- -- -- 0.13
1994:
Revenues................................ $ 73,759 $ 75,074 $ 78,872 $ 80,213
Operating income (loss)................. 107 (3,248) (4,535) (6,948)
Loss before income tax benefit.......... (7,355) (12,021) (12,152) (14,897)
Net loss................................ (8,555) (8,505) (7,929) (9,815)
</TABLE>
- ---------------
(1) As described in Note 2, after its initial public offering, the Company had
50,000,000 shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the fourth quarter, the Company
would have recognized net income of $6.4 million, or $0.13 per share, after
adjusting for the after-tax effects of a reduction in interest expense.
F-17
<PAGE> 225
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash investments........................................ $ 27,215 $ 20,251
Restricted cash.................................................. 2,345 2,469
Marketable equity securities..................................... -- 6,000
Accounts receivable.............................................. 29,426 28,625
Supplies and spare parts, at cost................................ 16,564 16,952
Prepayments and other current assets............................. 1,305 1,206
--------- ---------
Total current assets..................................... 76,855 75,503
--------- ---------
MOBILE DRILLING RIGS AND EQUIPMENT, at cost........................ 350,780 348,426
Accumulated depreciation......................................... (119,244) (111,102)
--------- ---------
Net mobile drilling rigs and equipment........................... 231,536 237,324
--------- ---------
OTHER ASSETS....................................................... 2,020 2,505
--------- ---------
Total assets............................................. $ 310,411 $ 315,332
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 10,603 $ 10,603
Accounts payable................................................. 5,085 12,942
Accrued liabilities.............................................. 3,625 4,050
Interest payable................................................. 641 662
Income taxes payable............................................. 328 302
--------- ---------
Total current liabilities................................ 20,282 28,559
--------- ---------
LONG-TERM DEBT..................................................... 58,587 62,175
--------- ---------
DEFERRED CREDITS................................................... 700 1,000
--------- ---------
OTHER LONG-TERM LIABILITIES........................................ 1,021 1,019
--------- ---------
SHAREHOLDERS' INVESTMENT:
Common stock, $.10 par value per share, 50,000 shares authorized,
20,333 shares issued and outstanding.......................... 2,033 2,033
Additional paid-in capital....................................... 218,800 218,800
Accumulated earnings............................................. 8,988 132
Unrealized gain on equity securities............................. -- 1,614
--------- ---------
Total shareholders' investment........................... 229,821 222,579
--------- ---------
Total liabilities and shareholders' investment........... $ 310,411 $ 315,332
========= =========
</TABLE>
See accompanying notes.
F-18
<PAGE> 226
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
CONTRACT DRILLING REVENUE................................................ $40,364 $28,279
------- -------
OPERATING EXPENSES:
Direct costs........................................................... 20,367 20,821
General and administrative............................................. 2,664 2,045
Depreciation........................................................... 8,193 7,067
------- -------
OPERATING INCOME (LOSS).................................................. 9,140 (1,654)
OPERATING INCOME (EXPENSE):
Interest expense....................................................... (1,485) (1,421)
Interest income........................................................ 371 1,716
Gain on sales of equity securities..................................... 1,602 --
Loss on sales of assets................................................ (17) 7
Other, net............................................................. (371) (23)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................................ 9,240 (1,375)
TAX PROVISION............................................................ (384) (315)
------- -------
NET INCOME (LOSS)........................................................ $ 8,856 $(1,690)
======= =======
EARNINGS (LOSS) PER COMMON SHARE......................................... $ .44 $ (.08)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................... 20,333 20,333
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 227
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities............................. $12,324 $ 2,883
------- --------
INVESTING ACTIVITIES:
Capital expenditures for mobile drilling rigs and equipment........... (7,936) (2,051)
Proceeds from dispositions of equipment............................... 12 18
Proceeds from sales-type lease of mobile drilling rig, net............ -- 1,414
Sales of marketable securities........................................ 5,988 --
Changes in other assets............................................... 164 105
------- --------
Net cash used in investing activities......................... (1,772) (514)
------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.............................. -- 80,000
Principal payments on long-term debt.................................. (3,588) (71,809)
Payments for debt financing arrangements.............................. -- (371)
------- --------
Net cash provided by (used in) financing activities........... (3,588) 7,820
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 6,964 10,189
CASH AND CASH EQUIVALENTS, beginning of period.......................... 20,251 26,410
------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $27,215 $ 36,599
======= ========
</TABLE>
See accompanying notes.
F-20
<PAGE> 228
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements for the interim periods
shown in this report have not been audited by independent public accountants
but, in the opinion of management, all adjustments necessary for the fair
presentation of these financial statements have been made. All such adjustments
are of a normal recurring nature. Results of operations for interim periods are
not necessarily indicative of results to be expected for the full fiscal year.
The condensed consolidated financial statements should be read in
connection with the consolidated financial statements of Arethusa (Off-Shore)
Limited ("Arethusa") as of September 30, 1995 and 1994, and for each of the
three years in the period ended September 30, 1995 and the related notes
thereto, included elsewhere herein.
2. PENDING MERGER OF ARETHUSA AND DIAMOND OFFSHORE DRILLING, INC.
On February 9, 1996, Arethusa and Diamond Offshore Drilling, Inc. ("Diamond
Offshore") executed and delivered definitive agreements in connection with the
previously announced proposed merger of the two companies. Merrill Lynch and CS
First Boston, financial advisers to Arethusa and Diamond Offshore, respectively,
have each rendered a fairness opinion in respect of the transaction and each
company's Board of Directors has resolved to recommend the transaction to its
shareholders.
Under the proposed merger each Arethusa share would be exchanged for .88
share of Diamond Offshore on a taxable basis to Arethusa's United States
shareholders. The transaction is subject to approval by the shareholders of each
company at meetings presently expected to be held in April. Commitments to vote
in favor of the merger have been made by shareholders representing approximately
47% of Arethusa's shares and by Loews Corporation, representing approximately
70% of Diamond Offshore shares. If the Plan of Acquisition is terminated under
certain circumstances, Arethusa must pay to Diamond Offshore a fee of up to $18
million.
Upon successful consummation of the merger, options awarded to officers,
directors and employees of Arethusa will become fully vested and exercisable.
Also, Arethusa Off-Shore Company ("AOC"), a wholly owned subsidiary of Arethusa,
has entered into executive severance agreements with certain executive officers
and has amended its severance policy for most shore based employees which will
provide payment of certain additional benefits to the employees if they are
terminated following the merger.
Additionally, on February 9, 1996 Arethusa declared a cash dividend of $.25
per common share payable on March 15 to shareholders of record as of March 1,
1996.
Additionally, subject to approval by Arethusa shareholders and to a
successful merger, the exercise price of options granted under the 1993 Employee
Stock Option Plan (approximately 462,000 shares granted) would be reduced by $3
per share. In the event the option exercise price is reduced to $7 per share,
Arethusa would be required to record compensation expense in its financial
statements for the difference between the revised exercise price of $7 per share
and the market value on the date approval is received from shareholders. To the
extent the market value of Arethusa shares continues to increase above the
exercise price there will be an increased charge to compensation expense.
3. ACQUISITION OF THE ARETHUSA YATZY
In May 1995, Arethusa acquired the Arethusa Yatzy (see footnote 4 to
Arethusa's September 30, 1995 Annual Report on Form 10-K). The following
unaudited pro forma income statement data for the three months ended December
31, 1994 present the consolidated results of operations as if the acquisition
had occurred on September 30, 1994. The unaudited pro forma income statement
data also reflect two additional significant fiscal 1995 transactions, the sale
of the Treasure Stawinner and the June 30, 1995 dividend and capital
distribution (both discussed in footnote 5 to Arethusa's September 30, 1995
Annual Report on Form 10-K), as if each had occurred on September 30, 1994. Such
unaudited pro forma financial data may
F-21
<PAGE> 229
not be indicative of the results of operations of Arethusa had the transactions
been completed on such earlier date, nor is it necessarily indicative of future
financial results.
PRO FORMA INCOME STATEMENT DATA
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Contract Drilling Revenue.................................................. $28,393
-------
Net Loss................................................................... $(2,095)
-------
Net Loss Per Common Share.................................................. $ (.10)
-------
</TABLE>
The historical operating results for the Arethusa Yatzy included in the
unaudited pro forma financial data have been adjusted for (i) duplicate
administrative expenses, (ii) depreciation expense calculated based upon
Arethusa's cost and estimated useful life, (iii) a reduction in insurance
expense based upon Arethusa's lower insured value, and (iv) interest calculated
based upon Arethusa's $30.0 million note.
4. COMMITMENTS AND CONTINGENCIES:
Operating Lease -- Arethusa is committed under a lease agreement for office
space which continues until August 30, 2002. The lease may be canceled in
December 1996 for a lump-sum payment of approximately $1,023,000.
Litigation -- Arethusa is engaged in various claims and litigation arising
from operations. In the opinion of management, uninsured losses, if any,
resulting from these matters will not have a material adverse effect on
Arethusa's results of operations or financial position.
Revenue Agent Reviews -- Revenue agent reviews are currently in progress
with respect to certain of Arethusa's subsidiaries and operations in Indonesia
and the United States. While Arethusa cannot predict with certainty the outcome
of such reviews, management does not believe the ultimate outcome of these
reviews will have a material adverse impact on Arethusa's consolidated financial
position or results of operations.
F-22
<PAGE> 230
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Arethusa (Off-Shore) Limited:
We have audited the accompanying consolidated balance sheets of Arethusa
(Off-Shore) Limited (a Bermuda company) and subsidiaries as of September 30,
1995 and 1994, and the related consolidated statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1995, which, as described in Note 1, have been prepared on the
basis of accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. United States standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arethusa (Off-Shore) Limited
and subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
November 14, 1995
F-23
<PAGE> 231
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................... $ 20,251 $ 26,410
Restricted cash.................................................... 2,469 2,161
Equity securities.................................................. 6,000 --
Accounts receivable................................................ 28,625 23,076
Lease receivable................................................... -- 57,321
Supplies and spare parts, at cost.................................. 16,952 12,591
Prepayments and other current assets............................... 1,206 1,316
--------- ---------
Total current assets....................................... 75,503 122,875
--------- ---------
Mobile drilling rigs and equipment, at cost
Drilling rigs --
Semisubmersibles................................................ 267,417 227,768
Jack-ups........................................................ 73,823 72,446
Drill pipe and other drilling equipment............................ 5,767 5,450
Furniture, fixtures, automobiles and other......................... 1,419 1,310
--------- ---------
348,426 306,974
Accumulated depreciation........................................... (111,102) (85,818)
--------- ---------
Net mobile drilling rigs and equipment............................. 237,324 221,156
--------- ---------
Other assets......................................................... 2,505 3,791
--------- ---------
Total assets............................................... $ 315,332 $ 347,822
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities
Current maturities of long-term debt............................... $ 10,603 $ 30,899
Accounts payable................................................... 12,942 8,317
Accrued liabilities................................................ 4,050 3,154
Interest payable................................................... 662 763
Income taxes payable............................................... 302 306
--------- ---------
Total current liabilities.................................. 28,559 43,439
--------- ---------
Long-term debt....................................................... 62,175 40,910
--------- ---------
Deferred credits..................................................... 1,000 2,201
--------- ---------
Other long-term liabilities.......................................... 1,019 931
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' Investment:
Common stock, $.10 par value per share, 50,000 shares authorized,
20,333 shares issued and outstanding............................ 2,033 2,033
Additional paid-in capital......................................... 218,800 274,386
Accumulated earnings............................................... 132 (16,078)
Unrealized gain on equity securities............................... 1,614 --
--------- ---------
Total shareholders' investment..................................... 222,579 260,341
--------- ---------
Total liabilities and shareholders' investment............. $ 315,332 $ 347,822
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 232
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Contract drilling revenue...................................... $122,147 $120,212 $ 94,161
-------- -------- --------
Operating expenses
Direct costs................................................. 87,953 79,857 63,882
General and administrative................................... 8,658 7,609 6,300
Depreciation................................................. 29,547 27,446 23,784
-------- -------- --------
Total operating expenses............................. 126,158 114,912 93,966
-------- -------- --------
Operating income (loss)........................................ (4,011) 5,300 195
-------- -------- --------
Other income (expense)
Interest expense............................................. (6,311) (6,090) (10,194)
Interest income.............................................. 5,692 5,842 6,196
Gains on sales of assets..................................... 27,820 330 1,015
Gain on sale of equity securities............................ 67 -- --
Other, net................................................... (193) (253) (154)
-------- -------- --------
Total other income (expense)......................... 27,075 (171) (3,137)
-------- -------- --------
Income (loss) before income taxes.............................. 23,064 5,129 (2,942)
Tax provision.................................................. (1,440) (1,542) (2,061)
-------- -------- --------
Net income (loss).............................................. $ 21,624 $ 3,587 $ (5,003)
-------- -------- --------
Net income (loss) per common share............................. $ 1.06 $ .18 $ (.31)
-------- -------- --------
Weighted average common shares outstanding..................... 20,333 20,333 16,073
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 233
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
---------------- ADDITIONAL GAIN ON
PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL EARNINGS SECURITIES
------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992.............. 15,333 $1,533 $ 228,467 $ (14,662) $ --
Net loss for fiscal year 1993............ -- -- -- (5,003) --
Issuance of Common Stock:
-- Through Initial Public Offering.... 4,000 400 36,019 -- --
-- In connection with rig
acquisitions........................ 1,000 100 9,900 -- --
------ ------ -------- -------- ------
Balance at September 30, 1993.............. 20,333 2,033 274,386 (19,665) --
Net income for fiscal year 1994.......... -- -- -- 3,587 --
------ ------ -------- -------- ------
Balance at September 30, 1994.............. 20,333 2,033 274,386 (16,078) --
Net income for fiscal year 1995.......... -- -- -- 21,624 --
Dividend and capital distribution -- $3
per share............................. -- -- (55,586) (5,414) --
Unrealized gain on equity securities -- -- -- -- 1,614
------ ------ -------- -------- ------
Balance at September 30, 1995.............. 20,333 $2,033 $ 218,800 $ 132 $1,614
====== ====== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 234
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income (loss).......................................... $ 21,624 $ 3,587 $ (5,003)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization........................... 29,547 27,187 23,794
Gains on sales of assets................................ (27,820) (330) (1,015)
Gain on sale of equity securities....................... (67) -- --
Changes in operating assets and liabilities --
(Increase) decrease in restricted cash................ (308) 993 2,473
Increase in accounts receivable....................... (5,189) (1,967) (4,949)
Increase in supplies and spare parts.................. (554) (931) (729)
(Increase) decrease in prepayments and other current
assets............................................. 110 (477) 193
Increase (decrease) in accounts payable............... 530 338 (695)
Increase in accrued liabilities....................... 896 692 1,117
Decrease in interest payable.......................... (101) (710) (439)
Increase (decrease) in income taxes payable........... (4) (137) 220
--------- -------- --------
Total adjustments.................................. (2,960) 24,658 19,970
--------- -------- --------
Net cash provided by operating activities........ 18,664 28,245 14,967
--------- -------- --------
Investing activities
Acquisitions of mobile drilling rigs and equipment......... (69,498) (5,989) (61,814)
Proceeds from dispositions of mobile drilling rigs
and equipment, net...................................... 53,191 674 21,997
Proceeds from sales-type lease of mobile drilling rig,
net..................................................... 56,069 5,362 4,898
Changes in other assets, including deferral and
reimbursement of mobilization expenditures.............. 631 (3,027) --
Investment in equity securities............................ (4,538) -- --
Proceeds from sale of equity securities.................... 218 -- --
Other...................................................... (66) (8) (56)
--------- -------- --------
Net cash provided by (used in) investing
activities.................................... 36,007 (2,988) (34,975)
--------- -------- --------
Financing activities
Proceeds from issuance of long-term debt................... 110,000 -- 25,000
Principal payments on long-term debt....................... (109,032) (23,490) (35,191)
Payments for debt financing arrangements................... (798) (84) (589)
Dividend and capital distribution.......................... (61,000) -- --
Proceeds from issuance of common stock, net of issuance
costs................................................... -- -- 36,419
--------- -------- --------
Net cash provided by (used in) financing
activities.................................... (60,830) (23,574) 25,639
--------- -------- --------
Net increase (decrease) in cash and cash equivalents......... (6,159) 1,683 5,631
Cash and cash equivalents, beginning of period............... 26,410 24,727 19,096
--------- -------- --------
Cash and cash equivalents, end of period..................... $ 20,251 $ 26,410 $ 24,727
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
General Organization
Arethusa (Off-Shore) Limited (herein referred to as Arethusa or the
Company) is a Bermuda corporation, incorporated on August 31, 1990. Arethusa was
formed for the purpose of acquiring offshore drilling rigs and certain other
property and equipment owned by Zapata Off-Shore Company and its subsidiaries
(Zapata or ZOS), and on October 31, 1990, these assets were purchased for $298
million.
In June 1993, the Company effected a two-for-three reverse stock split and
reduced the par value of its stock from $10 to $.10 per share. In connection
with the reverse stock split, the shareholders authorized additional shares of
common stock, resulting in a total of 50,000,000 shares authorized. In August
1993, Arethusa completed an Initial Public Offering (IPO) of 4,896,000 shares of
common stock at an initial price to the public of $10 per share, of which
4,000,000 shares were sold by the Company and 896,000 shares were sold by a
shareholder. These shares are publicly traded on the NASDAQ National Market
System.
Consolidation
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, expressed in
United States dollars and include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Equity Securities
As of September 30, 1995, the Company had investments in equity securities.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", such equity
securities are reflected in the accompanying balance sheet as available-for-sale
securities at the quoted market value as of September 30, 1995. Unrealized gains
on the investment are reported as a separate component of shareholders'
investment, until realized. The quoted market value of the shares held by the
Company may not be the value that would be realized should the Company dispose
of all of the shares in a short period of time.
Supplies and Spare Parts
Supplies and spare parts are stated at average cost which does not exceed
market value.
Mobile Drilling Rigs and Equipment
Mobile drilling rigs and equipment are recorded at cost. Depreciation is
provided on the straight-line method without salvage value, using an estimated
useful life, as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C>
Mobile drilling rigs..................................................... 25 years
Drill pipe and other drilling equipment.................................. 4-6 years
Furniture, fixtures, automobiles and other............................... 3-25 years
</TABLE>
For mobile drilling rigs acquired, the estimated useful life is based upon
when the asset was placed in service by its original owner but will not be less
than five years.
Routine repairs and maintenance are charged to expense as incurred. Repair
and maintenance expense totaled approximately $16,400,000, $14,500,000 and
$10,100,000 for fiscal years 1995, 1994 and 1993, respectively. Major renewals
and improvements are capitalized and are generally depreciated over five years.
F-28
<PAGE> 236
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Upon disposal of assets subject to depreciation, the accounts are relieved of
related costs and accumulated depreciation.
Mobilization Costs
When significant costs are incurred in connection with mobilizing a
drilling rig for a new contract, such costs, net of any mobilization fees
received, are deferred and amortized over the new contract term. When a rig is
mobilized before obtaining a new contract, the market in the new locale is
analyzed and the projected return on the mobilization investment is determined,
and mobilization costs are deferred and amortized over a period not to exceed 24
months. Mobilization costs incurred in connection with rig purchases are
capitalized as part of the purchase price and are depreciated over the life of
the rig.
Interest Rate Swap Agreements
From time to time, the Company has entered into interest rate swap
agreements whereby the Company has exchanged the floating interest rate under
certain debt agreements for a fixed interest rate. The differential paid or
received is accrued as interest rates change and recognized over the life of the
agreements. No such financial instruments have been in effect since October
1993.
Revenue Recognition
Contract drilling revenues are recognized as earned, based on contractual
drilling rates. Losses are recognized in the period in which the loss is
identified.
Foreign Currency Translation
Arethusa accounts for foreign currency translation in accordance with SFAS
No. 52, "Foreign Currency Translation." In connection therewith, the United
States dollar was determined to be the functional currency as revenues are
received and operating costs are paid primarily in United States dollars.
Earnings (Loss) per Share Data
Earnings (loss) per share data is based on the weighted average number of
common shares and common equivalent shares outstanding during each year, if
dilutive.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." The Company
believes that the fair value of its financial instruments approximates their
book value. This determination was made as follows:
Long-Term Debt. The fair value of the Company's long-term debt, all of
which is floating rate, is estimated based on rates currently available to
the Company for debt with similar maturities.
Currency Exchange Contracts. Currency exchange contracts in place on
September 30, 1993, expired between October 1993 and December 1993. As
market value gains and losses on currency exchange contracts are recognized
as an offset to currency exchange losses in the statements of income
(discussed in Note 8) in the period in which they occur, the carrying value
is therefore equal to the fair value. At September 30, 1995 and 1994, no
currency exchange contracts were outstanding.
Recent Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation" which defines a fair value based
method of accounting for an employee stock
F-29
<PAGE> 237
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
option or similar equity instrument and is effective for fiscal years beginning
after December 15, 1995. As allowed by SFAS No. 123, the Company plans to
continue to measure compensation cost for their compensation plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" with pro forma
disclosure in the future of the difference, if any, between compensation cost
included in net income and the related cost measured under the fair value
method.
2. RELATED-PARTY TRANSACTIONS:
Sale of 50-Percent Interest in Arethusa Heritage
On December 31, 1991, a subsidiary of Ymer Offshore AB (Ymer), a former
shareholder of Arethusa, purchased a 50-percent interest in the Arethusa
Heritage, for an aggregate purchase price of $10 million. The purchase price was
paid $2 million in cash and the remaining $8 million in the form of a secured
note.
As a part of this sale, Ymer and Arethusa also entered into option
agreements in which Ymer had the right to sell back to Arethusa, and Arethusa
had the right to repurchase, the Ymer interest in the rig at specified prices.
Effective January 31, 1994, the Company repurchased this 50 percent interest in
the Arethusa Heritage for $8.4 million. As payment for the repurchase, the
Company paid $400,000 in cash and accepted cancellation of the $8.0 million
promissory note which was due on January 31, 1994. The Company now owns 100% of
the Arethusa Heritage.
As a result of these option agreements, Arethusa did not recognize this
transaction as a sale. The Company recorded a deferred credit for the amount of
the gain which was amortized based upon the approximate period of time the
options were expected to be outstanding. For the years ended September 30, 1994
and 1993, respectively, Arethusa recognized $49,100 and $884,300 of gain, and
$142,700 and $435,900 of interest income related to this transaction.
During fiscal years 1994 and 1993 Arethusa operated the Arethusa Heritage
under a bareboat charter agreement. The charter fee totaled $357,300 and
$1,076,100, respectively, during the years ended September 30, 1994 and 1993.
This bareboat charter agreement terminated on January 31, 1994, in connection
with Arethusa's repurchase of the 50-percent interest in the rig.
Yatzy Management and Operating Services Agreement
Prior to Arethusa's acquisition of the Yatzy in May 1995 (see Note 4), the
rig was managed by Arethusa under a management and operating services agreement
with Exmar, N.V. (a Belgium corporation which is related to Alphee S.A., a
principal shareholder of the Company). Under the terms of the agreement,
Arethusa was paid a management fee, and all operating expenses were paid by
Exmar, N.V. This management fee totaled $374,500, $638,700 and $638,700 for
fiscal 1995, 1994 and 1993 respectively, and the Company has recorded such fees
as a reduction of Arethusa's administrative expenses.
Other Related-Party Transactions
The Company previously provided $710,000 in financing for the homes of the
president and a vice president of Arethusa Off-Shore Company (AOC), a wholly
owned subsidiary of Arethusa, who were recruited from outside the United States.
These notes, which originally bore interest at 9 percent per annum, matured
during fiscal 1994 and were renewed for additional three year terms. During
fiscal year 1995, AOC agreed to take possession of the home of the vice
president in full payment of his note. The remaining note receivable from the
president is now payable in full in 1997, with interest due quarterly in arrears
based upon the stated rate of 8.12 percent per annum. This note receivable is
secured by a real estate lien note and the deed of trust for the home.
F-30
<PAGE> 238
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Ymer and International Maritime Investors S.A. (IMI), the majority
shareholder of Alphee S.A., each guaranteed $4.5 million of the rig secured debt
due August 20, 1996. The Company agreed to compensate Ymer and IMI at the rate
of 1 1/2 percent per annum of the guaranteed amount. Such guarantees expired
with the debt repayment in December 1994.
3. CASH FLOW INFORMATION:
For purposes of the statements of cash flows, all investments with an
original maturity of three months or less are considered to be cash equivalents.
Net cash used in operating activities reflects cash interest payments of
approximately $7,109,000, $6,139,000 and $11,209,000; and income and withholding
tax payments of approximately $1,389,000, $1,744,000 and $1,852,000 for fiscal
years 1995, 1994 and 1993, respectively.
Restricted cash is comprised of balances maintained to guarantee the
Company's performance under drilling contracts in Indonesia and India, and rig
availability for certain drilling contract bids.
4. ASSET ACQUISITIONS:
Acquisition of the Arethusa Yatzy
On May 3, 1995, the Company acquired the Arethusa Yatzy (formerly the
Yatzy), a dynamically-positioned semisubmersible drilling rig built in 1989. The
rig has been managed by Arethusa since 1991 and in May 1995 began a drilling
contract with Petroleos Brasileiros, S.A. (Petrobras), which is expected to keep
the unit working offshore Brazil through November 1998. The purchase price was
$50.2 million, $20.2 million of which was paid from existing cash balances and
$30.0 million of which was funded through a new eight-year, rig-secured loan.
The following unaudited pro forma income statement data for the years ended
September 30, 1995 and 1994, present the consolidated results of operations as
if the acquisition had occurred at the beginning of the fiscal year 1994. The
unaudited pro forma income statement data also reflect two additional
significant fiscal 1995 transactions, the sale of the Treasure Stawinner
discussed in Note 5 and the June 30, 1995, dividend and capital distribution of
$61.0 million ($3.00 per share), as if each had occurred at the beginning of
fiscal 1994. Since the gain on the sale of the Treasure Stawinner is a
nonrecurring credit, this gain has not been included in this pro forma income
statement data. If calculated as if the sale occured at the beginning of fiscal
1994, this gain amount would approximate $24.4 million. Such unaudited pro forma
financial data may not be indicative of the results of operations of the Company
had the transactions been completed on such earlier date, nor is it necessarily
indicative of future financial results.
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Contract Drilling Revenue...................................... $120,166 $122,675
======== ========
Net Income (Loss).............................................. $ (8,496) $ 883
======== ========
Net Income (Loss) Per Common Share............................. $ (.42) $ .04
======== ========
</TABLE>
The historical operating results for the Arethusa Yatzy included in the
unaudited pro forma financial data, have been adjusted for (i) duplicate
administrative expenses, (ii) depreciation expense calculated based upon
Arethusa's cost and estimated useful life, (iii) a reduction in insurance
expense based upon Arethusa's lower insured value, and (iv) interest expense
calculated based upon Arethusa's $30.0 million note.
F-31
<PAGE> 239
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Acquisition of Arethusa Worker and Treasure Stawinner.
On August 20, 1993, Arethusa acquired two deepwater semisubmersible
drilling rigs, the Arethusa Worker and the Treasure Stawinner, for $59.0 million
in cash and 1,000,000 shares of common stock of the Company. Arethusa funded the
cash portion of this acquisition with $34.0 million of cash proceeds from the
IPO and $25.0 million of bank debt.
5. ASSET DISPOSITIONS:
Sale of the Treasure Stawinner
On June 30, 1995, Arethusa completed the Sale of the Treasure Stawinner for
conversion to a floating production unit for Petrobras. Arethusa received $55.0
million in cash and has retained ownership of certain drilling equipment, which
was removed from the rig and will be used by the Company for other purposes.
Upon closing of the transaction, the Company recognized a gain of approximately
$27.9 million, repaid $12.6 million of secured debt, and declared a $3 per share
dividend and capital distribution to shareholders. The dividend/distribution
totaled $61.0 million, and was paid on July 28, 1995 to shareholders of record
as of July 14, 1995.
Sale of Miss Kitty
In July 1993, Arethusa sold the jackup Miss Kitty for $22.0 million in
cash. Arethusa continues to operate the Miss Kitty pursuant to a bareboat
charter agreement with the new owners which has recently been extended for an
additional year through July 30, 1997. The Company realized a gain of $3.6
million which is being amortized ratably over the initial three-year charter
term. The charter provides for a fixed charter fee of $9,765 per day for the
first eighteen months, and thereafter a basic charter rate of $6,750 per day
plus a revenue sharing component. The Company used $18.2 million of the proceeds
to reduce outstanding debt.
Sale of Zapata Arctic
Effective March 30, 1992, Arethusa sold the Petrobras XXV (formerly the
Zapata Arctic) to an affiliate of Petrobras, effected through a sales-type lease
with a term of 10 years, for a gain of approximately $27.3 million. The lease
stipulated a down payment of $2,642,500 and 40 quarterly installments, for total
principal payments of $75,500,000 plus interest. The interest component of the
installment was adjusted quarterly to the three-month London Interbank Market
Rate plus 4 percent. At September 30, 1994 and 1993, this rate was 9.31 and 7.19
percent per annum, respectively.
The lessee had two options to purchase the rig for the then unpaid
principal balance of the lease, in March 1995 or December 1997. On March 31,
1995 Petrobras exercised their purchase option under the lease of the Petrobras
XXV. The Company transferred title of this rig to the Petrobras affiliate and
received lease proceeds of $54.4 million in cash, which were used to pay $17.9
million of secured debt and $1.2 million in commissions.
Sale of Bonito II
Arethusa sold the Bonito II on December 31, 1991, for a gain of
approximately $5.1 million. The buyer paid $25.3 million in cash for the rig and
services provided by Arethusa in connection with the sale. Arethusa continues to
operate the Bonito II pursuant to a bareboat charter agreement which currently
extends to August 1996. The charter rate is currently $7,550 per day plus a
revenue sharing component. The Company has the option to extend the charter for
two additional one-year periods from August 1996.
During March 1994, the Bonito II ended its contract in India and was
mobilized to the Gulf of Mexico where it commenced operations under a drilling
contract in July 1994. In connection with this mobilization,
F-32
<PAGE> 240
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
the Company and the owner agreed to share equally the mobilization costs. The
net costs to be borne by the Company, which is approximately $1.7 million, is
being deferred and amortized over a period of twenty-four months.
6. DEBT:
Long-term debt at September 30, 1995 and 1994, consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Rig-secured debt due May 3, 2003............................... $ 30,000 $ --
Rig-secured debt due December 22, 1999......................... 42,778 --
Rig-secured debt due October 30, 1996.......................... -- 52,809
Rig-secured debt due August 20, 1996........................... -- 19,000
-------- --------
72,778 71,809
Less -- Current maturities..................................... (10,603) (30,899)
-------- --------
$ 62,175 $ 40,910
======== ========
</TABLE>
Rig-Secured Debt Due May 3, 2003
In connection with the acquisition of the Arethusa Yatzy on May 3, 1995,
the Company entered into a credit agreement to borrow $30.0 million from its
lending banks. Under the terms of the agreement, principal is payable in sixteen
semi-annual installments of $1.9 million. Interest rates are based upon an
average of the Reuters FRBD reference rates plus 1 1/2 percent per annum, and
payable in arrears. The effective interest rate for fiscal year 1995 was 7.54
percent.
The loan is secured by a first mortgage on the Arethusa Yatzy. Loan
covenants included, among other financial provisions, (a) maintenance of minimum
collateral values, (b) restrictions on the sale of collateralized assets, (c)
restrictions on declarations of dividends and (d) limitations on further
indebtedness.
Rig-Secured Debt Due December 22, 1999
On December 20, 1994, the Company entered into a new credit agreement with
its lending banks. Under this agreement, certain wholly-owned subsidiaries of
the Company borrowed $80 million to refinance then existing rig-secured debt.
During fiscal 1995 this loan was paid down by $37.2 million, which included
three scheduled quarterly installments totalling $6.7 million, and two
additional payments totalling $30.5 million made in connection with the
monetization of the Petrobras XXV lease and the Sale of the Treasure Stawinner
(see Note 5). Currently, quarterly payments on this loan total $1.7 million with
a final payment of $15.4 million due in December 1999. Interest is payable
quarterly in arrears and is based upon the London Interbank Market Rate plus
1 1/2 percent per annum. The effective interest rate for fiscal year 1995 was
7.97 percent.
The loan is secured by the first priority fleet mortgage on all rigs owned
by the Company other than the Arethusa Yatzy. Other loan covenants are similar
to those in the rig-secured debt due May 3, 2003.
F-33
<PAGE> 241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Annual Maturities
The annual maturities of long-term debt (including the current portion),
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending September 30 --
1996.......................................................... $10,603
1997.......................................................... 10,603
1998.......................................................... 10,603
1999.......................................................... 10,603
2000.......................................................... 19,118
Thereafter.................................................... 11,248
-------
$72,778
=======
</TABLE>
7. TAXES:
Arethusa's United States subsidiaries and Bermuda subsidiaries with
operations in United States territorial waters provide taxes at the United
States federal statutory rate. As of September 30, 1995, these subsidiaries
collectively had United States net operating loss carryforwards of approximately
$85.6 million for United States tax reporting purposes. These losses are
available to benefit future United States tax expense and expire in fiscal years
2006 through 2010.
Arethusa's subsidiaries operating in the territorial waters of countries
outside of the United States provide taxes at the rates applicable in those
countries. The tax provision includes income and withholding taxes applicable to
operations in India, Indonesia, Brazil and the Netherlands.
At the present time, no income, profit, capital or capital gain taxes are
levied in Bermuda and, accordingly, no provision for such taxes has been
recorded by the Company. In the event that such taxes are levied, the Company
has received an undertaking from Bermuda Government exempting it from all such
taxes until March 28, 2016.
Revenue agent reviews are currently in progress with respect to certain of
the Company's subsidiaries and operations in Indonesia and the United States.
While the Company cannot predict with certainty the outcome of such reviews,
management does not believe the ultimate outcome of these reviews will have a
material adverse impact on the Company's consolidated financial position or
results of operations.
F-34
<PAGE> 242
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
The Company's income (loss) before income taxes and income tax provision
were (in thousands):
<TABLE>
<CAPTION>
INCOME
(LOSS) BEFORE TAX
INCOME TAXES PROVISION
------------- ---------
<S> <C> <C>
For the year Ended September 30, 1995:
Bermuda...................................................... $ (179) $ --
Non-Bermuda.................................................. 23,245 (1,440)
------- -------
$23,064 $(1,440)
======= =======
For the year Ended September 30, 1994:
Bermuda...................................................... $ 247 $ --
Non-Bermuda.................................................. 4,882 (1,542)
------- -------
$ 5,129 $(1,542)
======= =======
For the year Ended September 30, 1993:
Bermuda...................................................... $ (399) $ --
Non-Bermuda.................................................. (2,543) (2,061)
------- -------
$(2,942) $(2,061)
======= =======
</TABLE>
Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have not been
recognized in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on differences between
the financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Prior-year financial statements were not restated for
SFAS No. 109. The adoption of SFAS No. 109 had no material effect on the
Company's consolidated financial position or results of operations.
No deferred taxes were required to be provided during fiscal 1995, 1994, or
1993.
The components of the net deferred tax asset (liability) as of September
30, 1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets --
Net U.S. operating loss carryforwards......................... $ 29,964 $ 24,481
Accruals and reserves......................................... 514 409
Valuation allowance........................................... (23,543) (19,761)
-------- --------
6,935 5,129
======== ========
Deferred tax liabilities --
Excess of tax over book depreciation.......................... (6,935) (5,129)
-------- --------
Net deferred tax asset (liability).............................. $ -- $ --
======== ========
</TABLE>
8. CURRENCY EXCHANGE:
In an effort to minimize the effects of exchange rate fluctuations, the
Company generally hedges its exposure through obtaining payment for drilling
contracts in United States Dollars. During fiscal years 1994 and 1993, the
Company also entered into currency exchange contracts to address specific risks.
The Company does not engage in currency speculation. At September 30, 1993, the
Company had contracts maturing between October and December 1993 requiring it to
purchase $3.6 million in foreign currency (the equivalent
F-35
<PAGE> 243
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
of 119.0 million Indian rupees). During fiscal year 1994, the Company committed
to an additional $1.0 million of currency exchange contracts which matured
between December 1993 and June 1994. There were no currency exchange contracts
in place at September 30, 1995 or 1994. Market value gains and losses on the
currency exchange contracts have been recognized as an offset to currency
exchange losses in the statements of income. Total currency exchange losses
recorded in the statements of income were approximately $1.2 million, $1.2
million and $1.8 million for fiscal years 1995, 1994 and 1993, respectively.
These losses primarily resulted from operations in Brazil and India.
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS:
Arethusa's customer base includes major and independent oil and gas
companies and government owned oil companies. During fiscal 1995, 1994 and 1993,
the Company earned 52.1 percent, 54.3 percent, and 49.1 percent, respectively,
of its revenues from major customers. A summary of the major customers for these
years were as follows: year ended September 30, 1995 -- Petrobras and Shell Oil
Company, 27.8 percent and 24.3 percent, respectively; year ended September 30,
1994 -- Petrobras, Marathon Oil Company, and Maxus Southeast Sumatra, Inc., 26.3
percent, 15.0 percent and 13.0 percent, respectively; year ended September 30,
1993 -- Indian Oil & Natural Gas Commission, Maxus Southeast Sumatra, Inc. and
Petrobras, 17.4 percent, 15.8 percent and 15.9 percent, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Operating Lease
Arethusa is committed under a lease agreement for office space which
continues until August 30, 2002. The lease may be canceled in December 1996 for
a lump-sum payment of approximately $1,023,000. Under the terms of the lease,
the Company only made cash payments to reimburse the landlord for operating
expenses through December 31, 1993. The Company began making additional payments
for base, rental installments on January 1, 1994. Rental charges are expensed on
a straight-line basis over the term of the lease. The Company recognized rental
expense of approximately $566,000, $552,000 and $524,000 of which approximately
$203,000, $211,000 and $183,000 were paid as operating expenses in fiscal years
1995, 1994 and 1993, respectively. Estimated future minimum lease payments,
excluding reimbursable operating expenses, under this operating lease are as
follows (in thousands):
<TABLE>
<S> <C>
Fiscal year --
1996........................................................... $ 373
1997........................................................... 392
1998........................................................... 463
1999........................................................... 487
2000........................................................... 509
Thereafter..................................................... 989
------
$3,213
======
</TABLE>
Litigation
Arethusa is engaged in various claims and litigation arising from
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse effect on Arethusa's results
of operations or financial position.
F-36
<PAGE> 244
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
11. BENEFIT PLANS:
Pension Plan
AOC established a defined benefit pension plan effective October 1, 1992,
which covers substantially all U. S. citizens and U. S. permanent residents who
are employed by AOC. Employees are automatically enrolled in the plan following
the completion of one year of service and are 100 percent vested after five
years of service. Benefits are calculated and paid based on employees' years of
credited service and average final compensation using an excess benefit formula
integrated with social security covered compensation.
Pension costs are determined actuarially and funded to the extent allowable
under the Internal Revenue Code. The plan's assets are invested in cash and cash
equivalents, equity securities, government and corporate debt securities.
The significant actuarial assumptions as of the plan's year-end are set
forth in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1995 1994
---- ----
<S> <C> <C>
Discount rate........................................................ 7.5% 8.1%
Expected long-term rate.............................................. 9.0% 9.0%
Compensation projection rate......................................... 5.0% 5.0%
</TABLE>
The funded status as of September 30, 1995 and September 30, 1994, is set
forth in the following table (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Benefit obligation -- Vested............................................ $ (7,159) $(5,394)
-- Non-vested........................................ (663) (254)
-------- -------
Accumulated benefit obligation.......................................... (7,822) (5,648)
Effect of compensation projection....................................... (3,061) (2,916)
-------- -------
Projected benefit obligation............................................ (10,883) (8,564)
Plan assets at fair value............................................... 8,421 6,725
-------- -------
Projected benefit obligation in excess of plan assets................... (2,462) (1,839)
Unrecognized loss....................................................... 2,329 1,339
Unrecognized prior service cost......................................... (299) --
Contributions........................................................... 123 --
-------- -------
Accrued pension cost.......................................... $ (309) $ (500)
======== =======
</TABLE>
Net periodic pension cost for the fiscal year ended September 30, 1995 and
1994 includes the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -----
<S> <C> <C>
Service cost of benefits earned........................................... $ 566 $ 575
Interest cost on projected benefit obligations............................ 692 619
Actual return on plan assets.............................................. (1,014) 227
Deferred gain (loss)...................................................... 401 (855)
Amortization of loss...................................................... 43 53
Amortization of prior service cost........................................ (21) --
------- -----
Net period pension cost......................................... $ 667 $ 619
======= =====
</TABLE>
F-37
<PAGE> 245
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
Profit-Sharing Plan
AOC established a defined contribution profit-sharing plan effective
October 1, 1992 which covers substantially all U.S. citizens, U.S. permanent
residents and third country national expatriates who are employed by AOC. The
plan and trust agreement are intended to meet the requirements of Section 401(a)
and all related sections of the Internal Revenue Code.
Employees may enroll in the plan following the completion of one year of
service. Participants may elect to make contributions from 1 percent up to 16
percent of gross monthly salary to the plan: a maximum of 10 percent on a 401(k)
basis; a maximum of 16 percent on a 401(m) basis. All amounts contributed to the
plan are deposited in a trust with a national bank and administered by
independent trustees.
At the end of the plan year on September 30, the Company will match a
minimum of 10 percent up to a maximum of 100 percent of eligible basic
contributions made by participants during the plan year. The basic rate of
contribution used to determine the Company matching amount is 6 percent, on a
401(k) or 401(m) basis. The actual matching percentage is determined by the
Company's Board of Directors at the end of the plan year. AOC made
profit-sharing provisions of approximately $276,000, $134,000 and $120,000 for
1995, 1994 and 1993, respectively.
Employee Stock Option Plan
In August 1993, the Company adopted the Arethusa (Off-Shore) Limited 1993
Employee Stock Option Plan (the Employee Plan) pursuant to which a maximum
aggregate of 666,667 shares of Common Stock are available for grant to eligible
employees. Options granted pursuant to the Employee Plan vest in equal
installments over three years and remain exercisable for a period of seven
years, so long as the option holder remains an employee of the Company as of the
date of exercise. The exercise price of options granted under the Employee Plan
equal the market price of the Common Stock on the date of grant. The Employee
Plan provides for the adjustment of the number of shares awarded thereunder, and
the exercise price thereof, on any stock dividend, any subdivision or
combination of the outstanding shares of Common Stock and any merger,
consolidation, recapitalization of the Company or similar event which affects
the issued and outstanding shares of Common Stock.
In August 1993, the Company granted 466,666 options at an option price of
$10 per share, the market price in the IPO. Accordingly, no compensation expense
has been recorded with respect to these options.
As of September 30, 1995 there were 308,000 exercisable options, and 4,667
options had been canceled and surrendered. No options have been exercised.
In September 1995 the board of directors approved a $3 per share reduction
in the option price to $7 per share, subject to shareholder approval at the next
annual general meeting. This action was proposed as a result of the $3 per share
dividend and capital distribution paid by the Company in July 1995.
Non-employee Director Stock Option Plan
In February 1995, the Company's shareholders approved the Arethusa
(Off-Shore) Limited 1994 Nonqualified Stock Option Plan for Non-Employee
Directors ("Directors' Plan"), pursuant to which a maximum aggregate of 250,000
shares of common stock were authorized. Under the Directors' Plan eligible
directors were granted an option to purchase 20,000 shares of the Company's
common stock, at an exercise price equal to the fair market value of the common
stock on the date of grant. Options granted under this plan vest in equal annual
installments over a three-year period, and expire seven years from date of
grant.
As of September 30, 1995, 160,000 options had been granted under the
Directors' Plan; 100,000 of these options carry an option price of $11.25 based
upon a May 1994 date of grant, and the remaining 60,000 options
F-38
<PAGE> 246
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
have an option price of $12.625 based on a February 1995 date of grant. In May
1995, approximately 33,000 options became exercisable. No options have been
exercised or cancelled.
12. GEOGRAPHIC INFORMATION (UNAUDITED):
The nature of the Company's operations and assets requires movement among
geographic areas in response to market conditions and contract requirements.
Therefore, the operations and assets reported within a particular geographic
area may not be indicative of a long-term operating commitment in that area.
Assets are included in the geographic information shown below according to
operating location (in thousands):
<TABLE>
<CAPTION>
BERMUDA
UNITED NORTH SOUTHEAST SOUTH AND
STATES SEA ASIA AMERICA INDIA OTHER ELIMINATIONS TOTAL
-------- ------- --------- -------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 1995 --
Revenues.......................... $ 72,008 $ 8,769 $ 6,902 $ 33,979 $ 7,289 $32,788 $(39,588) $122,147
Operating income (loss)........... (8,667) (2,172) (1,117) 7,022 1,488 (565) -- (4,011)
Identifiable assets............... 170,159 29,736 16,937 82,331 2,797 13,372 -- 315,332
Year Ended September 30, 1994 --
Revenues.......................... $ 64,273 $ 6,116 $15,593 $ 31,648 $10,255 $22,123 $(29,796) $120,212
Operating income (loss)........... (3,346) (2,513) 3,910 7,662 281 (694) -- 5,300
Identifiable assets............... 163,610 31,501 33,165 116,982 2,408 156 -- 347,822
Year Ended September 30, 1993 --
Revenues.......................... $ 40,994 $12,582 $14,887 $ 19,911 $16,307 $ -- $(10,520) $ 94,161
Operating income (loss)........... (9,383) 550 2,726 4,813 1,967 (478) -- 195
Identifiable assets............... 168,494 34,210 33,454 126,509 6,346 -- -- 369,013
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for fiscal 1995 and 1994 is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995 --
Contract drilling revenue................. $28,279 $27,167 $32,232 $34,469 $122,147
Operating income (loss)................... (1,654) (3,246) (525) 1,414 (4,011)
Income (loss) before income taxes......... (1,375) (2,957) 26,687 709 23,064
Net income (loss)......................... (1,690) (3,232) 26,414 132 21,624
Net income (loss) per common share........ $ (.08) $ (.16) $ 1.30 $ .01 $ 1.06
1994 --
Contract drilling revenue................. $30,147 $30,967 $29,219 $29,879 $120,212
Operating income.......................... 1,786 2,042 971 501 5,300
Income before income taxes................ 1,518 2,094 948 569 5,129
Net income................................ 1,059 1,632 546 350 3,587
Net income per common share............... $ .05 $ .08 $ .03 $ .02 $ .18
</TABLE>
14. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS:
On December 7, 1995, Arethusa entered into a letter of intent with Diamond
Offshore Drilling, Inc. ("Diamond Offshore") for the merger of the two
companies. The terms of the proposed transaction provide that, upon satisfaction
of certain conditions precedent, including execution of definitive agreements
(which execution occurred February 9, 1996) and obtaining approval from Arethusa
and Diamond Offshore shareholders and certain regulatory agencies, each of the
issued and outstanding shares of Arethusa common stock would be converted into
the right to receive .88 shares of Diamond Offshore common stock. On
F-39
<PAGE> 247
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARETHUSA (OFF-SHORE) LIMITED AND SUBSIDIARIES -- (CONTINUED)
February 9, 1996, Arethusa declared a cash dividend of $.25 per share to the
holders of its common stock. Management anticipates the merger will be
consummated no later than July 31, 1996.
Upon successful consummation of the merger, options awarded to certain
officers, directors and employees of Arethusa will become fully vested and
exercisable. Additionally, AOC has entered into executive severance agreements
with certain executive officers and has amended its severance policy for most
shore based employees which will provide payment of certain additional benefits
to the employees if they are terminated following the merger.
Additionally, subject to approval by Arethusa shareholders and to a
successful merger, the exercise price of options granted under the 1993 Employee
Stock Option Plan (approximately 462,000 shares granted) would be reduced by $3
per share. In the event the option exercise price is reduced to $7 per share,
Arethusa would be required to record compensation expense in its financial
statements for the difference between the revised exercise price of $7 per share
and the market value on the date approval is received from shareholders. To the
extent the market value of Arethusa shares continues to increase above the
exercise price there will be an increased charge to compensation expense.
F-40
<PAGE> 248
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- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DIAMOND
OFFSHORE OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF DIAMOND OFFSHORE SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Diamond Offshore Drilling, Inc........... S-2
Use of Proceeds.......................... S-3
Selling Stockholders..................... S-3
Capitalization........................... S-4
Selected Consolidated Financial Data..... S-5
Unaudited Pro Forma Consolidated
Condensed Financial Statements......... S-6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-11
Active Mobile Offshore Drilling Rigs..... S-16
Underwriting............................. S-18
Legal Matters............................ S-20
Index to Prospectus Supplement Financial
Statements............................. SF-1
PROSPECTUS
Available Information.................... 2
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 10
Selling Stockholders..................... 10
Dividend Policy.......................... 11
Capitalization........................... 12
Selected Consolidated Financial Data..... 13
Unaudited Pro Forma Consolidated
Condensed Financial Statements......... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 20
Business................................. 28
Management............................... 43
Description of Capital Stock............. 53
Plan of Distribution..................... 55
Legal Matters............................ 56
Experts.................................. 56
Index to Financial Statements............ F-1
</TABLE>
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7,523,140 SHARES
[DIAMOND OFFSHORE LOGO]
COMMON STOCK
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH INTERNATIONAL
CS FIRST BOSTON
SALOMON BROTHERS
INTERNATIONAL LIMITED
May 20, 1996
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