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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1998
OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of incorporation 76-0321760
or organization) (I.R.S. Employer Identification No.)
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15415 KATY FREEWAY
HOUSTON, TEXAS 77094
(Address and zip code of principal executive offices)
(281) 492-5300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $0.01 par value per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant.
As of January 29, 1999 $1,511,457,305
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
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As of January 29, 1999 Common Stock, $0.01 par value per share 135,815,535 shares
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 1999 Annual
Meeting of Stockholders of Diamond Offshore Drilling, Inc., which will be filed
within 120 days of December 31, 1998, are incorporated by reference in Part III
of this form.
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DIAMOND OFFSHORE DRILLING, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE NO.
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Cover Page.............................................................. 1
Document Table of Contents.............................................. 2
Part I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 25
Item 8. Financial Statements and Supplementary Data................. 27
Consolidated Financial Statements........................... 28
Notes to Consolidated Financial Statements.................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 50
Part III
Information called for by Part III has been omitted as the Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 50
Signatures ............................................................ 52
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PART I
ITEM 1. BUSINESS.
GENERAL
Diamond Offshore Drilling, Inc., incorporated in Delaware in 1989, engages
principally in the contract drilling of offshore oil and gas wells. Unless the
context otherwise requires, references herein to the "Company" shall mean
Diamond Offshore Drilling, Inc. and its consolidated subsidiaries. The Company
is a leader in deep water drilling with a fleet of 46 offshore rigs. The fleet
consists of 30 semisubmersibles, 15 jack-ups and one drillship.
TREASURY STOCK
In July 1998, the Board of Directors authorized the purchase of shares of
the Company's common stock in the open market, from time to time, depending on
market conditions. During 1998, the Company purchased 3.5 million shares of its
common stock at an aggregate cost of $88.7 million, or at an average cost of
$25.22 per share. The cost of the shares acquired is reported in "Treasury
stock" as a deduction from stockholders' equity in the Consolidated Balance
Sheets. Basic and diluted earnings per share for the year ended December 31,
1998 increased $0.03 and $0.02, respectively, as a result of the purchase of
treasury stock. See Note 1 to the Company's Consolidated Financial Statements in
Item 8 of this Report.
CONTRACT CANCELLATION
In December 1998, the Company announced that its drilling contract for use
of its drillship, the Ocean Clipper, had been terminated. The contract, which
was originally for a four-year term through July 2001, was terminated in
connection with issues arising out of performance failures with the blow-out
preventer control system. The drillship is currently in the shipyard for
replacement of this system and additional modifications and upgrades, which are
scheduled to be completed during the second quarter of 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- 1998
Significant Events" and "-- Outlook" in Item 7 of this Report.
INDUSTRY CONDITIONS
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 development and
the availability of drilling rigs. In addition, demand for drilling services
remains dependent on a variety of political and economic factors beyond the
Company'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.
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.
During 1998, the decline in product prices in the oil and gas industry,
particularly oil prices, resulted in reduced dayrates and decreased utilization.
These conditions have negatively impacted most markets worldwide, particularly
the Gulf of Mexico shallow water market, causing many rigs to become idle or, in
some cases, removed from service. As of January 31, 1999, four of the Company's
Gulf of Mexico jack-ups were idle; one of the Company's Gulf of Mexico jack-ups
was cold stacked; two of the Company's Gulf of Mexico second-generation
semisubmersibles were cold stacked; and two of the Company's other second-
generation semisubmersibles were idle. Sustained weak commodity prices, economic
problems in countries outside the United States, or a number of other factors
beyond the Company's control could further curtail spending by oil and gas
companies. Therefore, the Company cannot predict whether or not current market
conditions will deteriorate further, or to what extent. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in Item 7 of this Report.
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THE FLEET
The Company'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, the conventional semisubmersible market and the
jack-up market.
Semisubmersibles. The Company 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 approximately 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.
The Company owns and operates three fourth-generation semisubmersibles and
three fourth-generation deep water conversions. Fourth-generation
semisubmersibles are larger than many other semisubmersibles, are capable of
working in deep water or harsh environments and have other advanced features.
Currently, the Ocean America, the Ocean Victory, the Ocean Star, and the Ocean
Quest are working in deep water areas of the Gulf of Mexico; the Ocean Alliance
and the Ocean Valiant are working offshore West Africa.
The conversion of the Ocean Confidence, a semisubmersible accommodation
vessel with Class III dynamic-positioning system ("DPS") capabilities purchased
in 1997, to a drilling unit with fifth-generation capabilities, including harsh
environment and ultra-deep water capabilities up to 7,500 feet, is ongoing. This
conversion is anticipated to be completed in early 2000, when the rig will
commence a five-year contract in the Gulf of Mexico. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.
In addition, the Company owns and operates 23 other semisubmersibles which
operate in maximum water depths up to 3,500 feet. The diverse capabilities of
many of these semisubmersibles enable them to provide both shallow and deep
water service in the U.S. and in other markets outside the U.S. Currently, 12 of
these semisubmersibles are located in the Gulf of Mexico; four are located
offshore Brazil; three are located in the North Sea; three are located offshore
Australia; and one is located offshore West Africa.
Jack-ups. The Company owns 15 jack-ups. 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 the Company's jack-up rigs is currently the Gulf
of Mexico, where 12 of the Company's jack-up rigs are located. Of the Company'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, and
one is a mat-supported slot rig. All three of the Company's internationally
based jack-ups are independent-leg cantilevered rigs.
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. Deep water drillships compete in many of the
same markets as do fourth-generation semisubmersible rigs. The Company's
drillship, the Ocean Clipper, is in a Gulf of Mexico shipyard for replacement of
the blow-out preventer control system and additional upgrades that are scheduled
to be completed during the second quarter of 1999.
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Fleet Enhancements. The Company'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. The average age of
the Company's fleet of offshore drilling rigs (calculated as of December 31,
1998 and measured from the year built) is 20.6 years. Many of the Company's rigs
have been upgraded during the last five years with enhancements such as
top-drive drilling systems, additional water depth capability, mud pump
additions or increases in deck load capacity, and the Company believes it will
be feasible to continue to upgrade its rigs notwithstanding the average age of
its fleet. However, there can be no assurance whether or to what extent upgrades
will continue to be made to rigs in the Company's fleet, particularly in view of
the current market conditions of declining dayrates and decreased utilization.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.
The design of the Company's 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 upgrade projects. While no such upgrades are currently in progress,
since 1995 the Company has upgraded five of its nine Victory-class rigs with
enhancements such as increased efficiency in the handling of subsea completion
equipment, stability enhancements that allow increased variable deck load, and
increased water depth capabilities. Currently, the Company's Victory-class rigs
are outfitted for service in maximum water depths of 1,200 to 5,000 feet.
In 1998, the Company began the upgrade of the Ocean Confidence from an
accommodation vessel with Class III DPS capabilities to a semisubmersible
drilling unit capable of operating in harsh environments and ultra-deep waters,
including enhancements such as increased capability for operations in up to
7,500 foot water depths, approximately 6,000 tons variable deck load, a 15,000
psi blow-out prevention system, and four mud pumps. The upgrade is anticipated
to be completed in early 2000, when the rig will commence a five-year contract
in the Gulf of Mexico.
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More detailed information concerning the Company's fleet of mobile offshore
drilling rigs, as of January 31, 1999, is set forth in the table below.
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WATER YEAR
DEPTH BUILT/LATEST CURRENT
TYPE AND NAME CAPABILITY(FT.) ATTRIBUTES ENHANCEMENT (A) LOCATION CUSTOMER (B)
- -------------------------------- --------------- ---------------- --------------- --------------- -------------
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FOURTH-GENERATION EQUIPMENT
ORIGINAL CONSTRUCTION (3):
Ocean Alliance................ 5,000 TDS; DP; 15K; 3M 1988/1995 Angola Amoco
Ocean America................. 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico BP
Ocean Valiant................. 5,000 TDS; SP; 15K; 3M 1988/1995 Nigeria Exxon
CONVERSIONS (3):
Ocean Victory................. 5,000 TDS; VC; 15K; 3M 1972/1997 Gulf of Mexico Vastar
Ocean Star.................... 4,500 TDS; VC; 15K; 3M 1974/1997 Gulf of Mexico Texaco
Ocean Quest................... 3,500 TDS; VC; 15K; 3M 1973/1996 Gulf of Mexico Chevron
DRILLSHIP (1):
Ocean Clipper................. 7,500 TDS; DP; 15K; 3M 1976/1997 Gulf of Mexico Shipyard
OTHER
SEMISUBMERSIBLES (24):
Ocean Confidence (c).......... 5,000 DP 1987 Gulf of Mexico BP
Ocean Winner (d).............. 3,500 TDS; 3M 1977/1996 Gulf of Mexico Petrobras
Ocean Worker.................. 3,500 TDS; 3M 1982/1992 Gulf of Mexico Shell
Ocean Yatzy................... 3,300 TDS; DP; 15K 1989 Brazil Petrobras
Ocean Voyager................. 3,200 TDS; VC 1973/1995 Gulf of Mexico EEX
Ocean Yorktown................ 2,850 TDS 1976/1996 Brazil Petrobras
Ocean Concord................. 2,200 TDS; 3M 1975/1995 Gulf of Mexico Shell
Ocean Lexington............... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Ocean Saratoga................ 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Ocean Endeavor................ 2,000 TDS; VC 1975/1994 Gulf of Mexico British-Borneo
Ocean Rover................... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector.............. 1,700 VC 1971/1981 Gulf of Mexico Cold Stacked
Ocean Bounty.................. 1,500 TDS; VC; 3M 1977/1992 Australia Shell
Ocean Guardian................ 1,500 TDS; SP; 3M 1985 North Sea Enterprise
Ocean New Era................. 1,500 TDS 1974/1990 Gulf of Mexico Shipyard
Ocean Princess................ 1,500 TDS; 15K; 3M 1977/1998 North Sea Mobil
Ocean Whittington............. 1,500 TDS; 3M 1974/1995 Brazil Petrobras
Ocean Epoch................... 1,200 TDS 1977/1990 Australia Woodside
Ocean General................. 1,200 TDS 1976/1990 Australia Stacked
Ocean Nomad................... 1,200 TDS; 3M 1975/1998 North Sea Shell
Ocean Baroness................ 1,200 TDS; VC 1973/1995 Brazil Petrobras
Ocean Ambassador.............. 1,100 TDS; 3M 1975/1995 Gulf of Mexico Mariner (e)
Ocean Century................. 800 1973 Gulf of Mexico Cold Stacked
Ocean Liberator............... 600 TDS 1974/1998 Congo Stacked
JACK-UPS (15):
Ocean Titan................... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico CNG
Ocean Tower................... 350 TDS; IS; 3M 1972/1998 Gulf of Mexico Cold Stacked
Ocean King.................... 300 TDS; IC; 3M 1973/1999 Gulf of Mexico Shipyard
Ocean Nugget.................. 300 TDS; IC 1976/1995 Gulf of Mexico Coastal
Ocean Summit.................. 300 SDS; IC 1972/1991 Gulf of Mexico Stacked
Ocean Warwick................. 300 TDS; IC 1971/1998 Gulf of Mexico Stacked
Ocean Champion................ 250 MS 1975/1985 Gulf of Mexico Santa Fe
Ocean Columbia................ 250 TDS; IC 1978/1990 Gulf of Mexico Coastal
Ocean Heritage................ 250 TDS; IC 1981/1995 Indonesia Maxus
Ocean Sovereign............... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Spartan................. 250 TDS; IC 1980/1994 Gulf of Mexico Stacked
Ocean Spur.................... 250 TDS; IC 1981/1994 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 Chevron
Ocean Scotian................. 200 TDS; IC; 15K 1981/1988 The Netherlands Elf
</TABLE>
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ATTRIBUTES
----------
<S> <C> <C> <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 3M = Three Mud Pumps
IS = Independent-Leg Slot Rig VC = Victory-Class 15K = 15,000 psi Blow-Out Preventer
MC = Mat-Supported Cantilevered Rig SP = Self-Propelled
</TABLE>
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(a) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(b) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(c) In shipyard preparing for a five-year term contract with BP in the Gulf of
Mexico upon conversion to a drilling unit.
(d) In shipyard preparing for a two-year term contract with Petrobras offshore
Brazil upon completion of repairs and relocation from the Gulf of Mexico.
(e) Managed daywork project operated by Diamond Offshore Team Solutions, Inc.
MARKETS
The Company's principal markets for its offshore contract drilling services
are the Gulf of Mexico, Europe, including principally the U.K. sector of the
North Sea, South America, Africa, and Australia/Southeast Asia. The Company
actively markets its rigs worldwide. In the past, rigs in the Company's fleet
have also operated in various other markets throughout the world. See Note 15 to
the Company's Consolidated Financial Statements in Item 8 of this Report.
The Company believes its presence in multiple markets is valuable in many
respects. For example, the Company believes that its experience with safety and
other regulatory matters in the U.K. has been beneficial in Australia and in the
Gulf of Mexico and production experience gained through Brazilian and North Sea
operations has potential application worldwide. Additionally, the Company
believes its performance for a customer in one market segment or area enables it
to better understand that customer's needs and better serve that customer in
different market segments or other geographic locations.
OFFSHORE CONTRACT DRILLING SERVICES
The Company's contracts to provide offshore drilling services vary in their
terms and provisions. The Company often obtains its contracts through
competitive bidding, although it is not unusual for the Company 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 productive 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 the
Company. Under dayrate contracts, the Company generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Dayrate contracts have historically accounted for a substantial portion of the
Company's revenues. In addition, the Company has worked some of its rigs under
dayrate contracts pursuant to which the customer also agrees to pay an incentive
bonus based upon performance.
A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, or 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 period of time as a result of a
breakdown of equipment or, in some cases, due to other events beyond the control
of either party. In addition, certain of the Company'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.
During 1998, two of the Company's term contracts were cancelled by
customers. BP Exploration, a division of British Petroleum, PLC, and the Company
agreed to terminate the drilling contract for the use of the Company's
drillship, the Ocean Clipper, which had a four-year term through July 2001.
Termination was associated with issues arising out of performance failures with
the blow-out preventer control system. In October 1998, Shell Development
(Australia) Proprietary Limited ("Shell Australia") and the Company agreed to an
early termination and substitution arrangement involving two semisubmersibles in
Australia. The Shell Australia termination was not the result of performance
failures of the Company or its equipment and an associated early termination
fee, which was reflective of the anticipated cash flow that would have been
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generated throughout the remaining term, was paid to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in Item 7 of this Report.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that allow contractors to
profit from increasing dayrates. In contrast, during these periods customers
with reasonably definite drilling programs typically prefer longer term
contracts to maintain dayrate 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 customers prefer well-to-well contracts that allow them to
obtain the benefit of lower dayrates. In general, the Company seeks to have a
foundation of long-term contracts with a reasonable balance of single-well,
well-to-well and short-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. Currently, most of the Company's semisubmersible
rigs are committed under term contracts; however, many of these contracts expire
during 1999. Contracts for the Company's jack-up rigs are primarily single-well
or well-to-well arrangements.
The Company, through its wholly owned subsidiary, Diamond Offshore Team
Solutions, Inc. ("DOTS"), offers a portfolio of drilling services to complement
the Company's offshore contract drilling business. These services include
overall project management, extended well tests, and drilling and completion
operations. From time to time, DOTS also selectively engages in drilling
services pursuant to turnkey or modified-turnkey 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 greater cash commitment
by the Company and exposes the Company to risks of potential financial losses
that generally are substantially greater than those that would ordinarily exist
when drilling under a conventional dayrate contract. During 1998 and 1997, DOTS
primarily provided project management services on a dayrate basis and
contributed operating income of $0.4 million and $1.9 million, respectively, to
the Company's consolidated results of operations. DOTS also completed one
turnkey well in 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" in Item 7 of this
Report.
CUSTOMERS
The Company provides offshore drilling services to a customer base that
includes major and independent oil and gas companies and government-owned oil
companies. Occasionally, several customers have accounted for 10.0 percent or
more of the Company's annual consolidated revenues, although the specific
customers may vary from year to year. During 1998, the Company performed
services for approximately 40 different customers with Shell companies
(including domestic and foreign affiliates) ("Shell") accounting for 17.4
percent of the Company's annual total consolidated revenues. During 1997, the
Company performed services for approximately 50 different customers with Shell
accounting for 14.3 percent of the Company's annual total consolidated revenues.
During 1996, the Company performed services for approximately 80 different
customers with Shell and British Petroleum companies (including domestic and
foreign affiliates) accounting for 13.8 percent and 13.5 percent of the
Company's annual total consolidated revenues, respectively. With the declining
overall demand for offshore drilling rigs, the loss of a single significant
customer could have a material adverse effect on the Company.
The Company's services are marketed principally through its Houston office,
with support from its regional offices in New Orleans, Louisiana; Aberdeen,
Scotland; and Perth, Western Australia. Technical and administrative support
functions for the Company's operations are provided by its Houston office.
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
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record, crew quality, rig location, and quality of service and equipment, the
historical oversupply of rigs has created an intensely competitive market in
which price is the primary factor in determining the selection of a drilling
contractor. In periods of escalated drilling activity, rig availability has, in
some cases, also become a consideration, particularly with respect to
fourth-generation and other technologically advanced units. The Company believes
competition for drilling contracts will continue to be intense in the
foreseeable future. Contractors are also able to adjust localized supply and
demand imbalances by moving rigs from areas of low utilization and dayrates to
areas of greater activity and relatively higher dayrates. Such movements or
reactivations or a decrease in drilling activity in any major market could
depress dayrates and could adversely affect utilization of the Company's rigs.
Currently, competition for drilling contracts in over-supplied markets such as
the Gulf of Mexico has caused average dayrates for rigs serving those markets to
substantially decrease from previous levels. See "-- Offshore Contract Drilling
Services."
In addition, rig construction and enhancement programs are ongoing by the
Company's competitors. In current market conditions, a significant increase in
the supply of technologically advanced rigs capable of drilling in deep water
could produce an oversupply of such equipment and, in turn, adversely affect the
utilization level and average operating dayrates available for the Company's
rigs, particularly its higher specification semisubmersible units.
GOVERNMENTAL REGULATION
The Company's operations are subject to numerous federal, state and local
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, the
Company 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" rendering a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Liability under such laws and regulations may result from either
governmental or citizen prosecution. Such laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others, or for
acts of the Company 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 the Company.
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 the Company 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.
INDEMNIFICATION AND INSURANCE
The Company'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 the Company's, the Company's customer's or a
third party's property or equipment. Damage to the environment could also result
from the Company'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. The Company has insurance coverage and contractual
indemnification for certain risks, but there can be no assurance that such
coverage or indemnification will adequately cover the Company's loss or
liability in many circumstances or that the Company will continue to carry such
insurance or receive such indemnification.
9
<PAGE> 10
OPERATIONS OUTSIDE THE UNITED STATES
Operations outside the United States accounted for approximately 42.7
percent, 36.3 percent, and 37.1 percent of the Company's total consolidated
revenues for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company'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 general hazards associated with the assertion of national
sovereignty over certain areas in which operations are conducted. No prediction
can be made as to what governmental regulations may be enacted in the future
that could adversely affect the international drilling industry. The Company's
operations outside the United States may also face the additional risk of
fluctuating currency values, hard currency shortages, controls of currency
exchange and repatriation of income or capital. Recently, the Brazilian
government devalued the nation's currency, the real, with the stated intention
of increasing exports and lowering interest rates. However, the devaluation
could make it more expensive for Brazilian borrowers to repay U.S.
dollar-denominated debts, increasing the likelihood of defaults on such
obligations. The Company's operations in Brazil have historically represented a
material portion of its total consolidated revenues and the Company currently
has four of its semisubmersibles committed to the Brazilian
government-controlled oil company for term periods anticipated to be completed
in 2001 and 2003. Generally, these contracts are payable in local currency in
amounts equal to the Company's estimated operating costs payable in local
currency and in U.S. dollars for the balance of the contract. Although the
Company has not received any indications that the obligations associated with
these contracts will not be honored, it cannot predict whether or to what extent
these currency risks could affect the timely payments of all amounts owed to the
Company. Such a default could have a material adverse effect on the Company's
financial position and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Outlook" and
"-- Other -- Currency Risk" in Item 7 and Note 15 to the Company's Consolidated
Financial Statements in Item 8 of this Report.
EMPLOYEES
As of December 31, 1998, the Company had approximately 4,300 employees
(including international crews furnished through labor contractors),
approximately 197 of whom were union members. The Company has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees. The Company does not currently consider the possibility of a shortage
of qualified personnel to be a material factor in its business.
ITEM 2. PROPERTIES.
The Company owns an eight-story office building containing approximately
182,000 net rentable square feet on approximately 6.2 acres of land located in
Houston, Texas, where the Company has its corporate headquarters, an 18,000
square foot building and 20 acres of land in New Iberia, Louisiana for its
offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. Additionally, the Company currently leases various office, warehouse
and storage facilities in Louisiana, West Africa, Australia, Brazil, Indonesia,
Scotland, Singapore, and The Netherlands to support its offshore drilling
operations.
ITEM 3. LEGAL PROCEEDINGS.
Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs sued Zapata Off-Shore Company and Zapata Corporation (the "Zapata
Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract seeking $14.0 million in actual damages and
unspecified punitive damages, plus costs of court, interest and attorneys' fees.
A former subsidiary of Arethusa (Off-Shore) Limited ("Arethusa"), which is now a
subsidiary of the Company, defended and indemnified the Zapata Defendants
pursuant to a contractual defense and indemnification agreement. In November
1997, the jury awarded a take nothing judgment in favor of the Zapata
Defendants.
10
<PAGE> 11
The plaintiffs appealed the judgment and the appellate court ordered the parties
to mediation. The case went to mediation in July 1998 with no resolution and the
appeal is pending.
The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of lawsuits or other proceedings involving the Company and its
subsidiaries cannot be predicted with certainty and the amount of any liability
that could arise with respect to such lawsuits or other proceedings cannot be
predicted accurately, management does not expect these matters to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance on General Instruction G(3) to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The executive
officers of the Company are elected annually by the Board of Directors to serve
until the next annual meeting of the Board of Directors, or until their
successors are duly elected and qualified, or until their earlier death,
resignation, disqualification or removal from office. Information with respect
to the executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
AGE AS OF
NAME JANUARY 31, 1999 POSITION
---- ---------------- --------
<S> <C> <C>
James S. Tisch......................... 46 Chairman of the Board of Directors and
Chief Executive Officer
Lawrence R. Dickerson.................. 46 President, Chief Operating Officer and
Director
David W. Williams...................... 41 Executive Vice President
Rodney W. Eads......................... 47 Senior Vice President -- Worldwide
Operations
Denis J. Graham........................ 49 Senior Vice President -- Technical
Services
Gary T. Krenek......................... 40 Vice President and Chief Financial
Officer
Leslie C. Knowlton..................... 31 Controller
</TABLE>
James S. Tisch has served as Chief Executive Officer of the Company since
March 1998. Mr. Tisch has served as Chairman of the Board since 1995 and as a
director of the Company since June 1989. Mr. Tisch has served as Chief Executive
Officer of Loews Corporation ("Loews"), a diversified holding company and the
Company's controlling stockholder, since November 1998. In addition, Mr. Tisch
has served as President and Chief Operating Officer of Loews since 1994, and
prior thereto 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 85 percent owned subsidiary of Loews, and serves as a
director of Vail Resorts, Inc.
Lawrence R. Dickerson has served as President, Chief Operating Officer and
Director of the Company since March 1998. Previously, Mr. Dickerson served as
Chief Financial Officer of the Company since June 1989 and Senior Vice President
of the Company since April 1993.
David W. Williams has served as Executive Vice President of the Company
since March 1998. Previously, Mr. Williams served as Senior Vice President of
the Company since December 1994 and was a Marketing Vice President between
February 1992 and May 1994. Mr. Williams was employed by Noble Drilling
Corporation, a contract drilling company, from May 1994 through December 1994,
as Vice President of Marketing.
Rodney W. Eads has served as Senior Vice President of the Company since May
1997. Mr. Eads was employed by Exxon Company, International from August 1994
through May 1997 as Field Drilling Manager.
11
<PAGE> 12
From February 1991 through August 1994, Mr. Eads served as Drilling Manager for
Esso Exploration & Production UK.
Denis J. Graham has served as Senior Vice President of the Company since
July 1997 and from September 1993 through June 1997 as Vice President of the
Company. Previously, Mr. Graham served as Manager of Design Services for the
Company.
Gary T. Krenek has served as Vice President and Chief Financial Officer of
the Company since March 1998. Previously, Mr. Krenek served as Controller of the
Company since February 1992.
Leslie C. Knowlton has served as Controller of the Company since March
1998. Previously, Ms. Knowlton served as Assistant Controller of the Company
since August 1995 and was Accounting Manager of the Company from February 1992
through July 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "DO." The following table sets forth, for the calendar
quarters indicated, the high and low closing prices of common stock as reported
by the NYSE. Periods prior to the July 1997 two-for-one stock split in the form
of a stock dividend have been restated, giving retroactive effect to the stock
dividend. See Note 3 to the Company's Consolidated Financial Statements in Item
8 of this Report.
<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter............................................... $48 15/16 $39
Second Quarter.............................................. 54 5/8 39 5/16
Third Quarter............................................... 40 15/16 20 7/8
Fourth Quarter.............................................. 32 15/16 20 11/16
1997
First Quarter............................................... $36 1/2 $27 11/16
Second Quarter.............................................. 38 15/16 31 1/8
Third Quarter............................................... 59 1/8 39 1/4
Fourth Quarter.............................................. 66 3/4 42 5/8
</TABLE>
On January 29, 1999, the closing price of the common stock, as reported by
the NYSE, was $23 per share. As of January 29, 1999, there were approximately
536 holders of record of common stock. This number does not include the
stockholders for whom shares are held in a "nominee" or "street" name.
DIVIDEND POLICY
In 1998, the Company paid cash dividends of $0.125 per share on March 2,
1998, June 1, 1998, September 1, 1998 and December 1, 1998 and has declared a
dividend of $0.125 per share payable March 1, 1999 to stockholders of record on
February 1, 1999. In 1997, the Company paid cash dividends of $0.07 per share on
August 7, 1997 and December 1, 1997. Any future determination as to payment of
dividends will be made at the discretion of the Board of Directors of the
Company and will depend upon the Company's operating results, financial
condition, capital requirements, general business conditions and such other
factors that the Board of Directors deems relevant.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical consolidated financial
data relating to the Company. The selected consolidated financial data are
derived from the financial statements of the Company as of and for the periods
presented. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the Company's Consolidated Financial
Statements (including the Notes thereto) in Item 8 of this Report.
<TABLE>
<CAPTION>
1998 1997 1996(1) 1995 1994
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues...................... $1,208,801 $ 956,093 $ 611,430 $336,584 $307,918
Operating income (loss)............. 568,999 419,873 213,491 11,651 (14,624)
Net income (loss)................... 383,659 278,605 146,388 (7,026) (34,804)
Net income per share(2):
Basic............................. 2.78 2.01 1.18 -- --
Diluted........................... 2.66 1.93 1.18 -- --
Pro forma net income per
share(2)(3)....................... -- -- -- 0.10 --
BALANCE SHEET DATA:
Drilling and other property and
equipment, net.................... 1,551,820 1,451,741 1,198,160 502,278 488,664
Total assets........................ 2,609,716 2,298,561 1,574,500 618,052 588,158
Long-term debt...................... 400,000 400,000 63,000 -- 394,777
OTHER FINANCIAL DATA:
Capital expenditures(4)............. 224,474 281,572 267,000 66,646 21,146
Cash dividends declared per
share(5).......................... 0.50 0.14 -- -- --
Ratio of earnings to fixed
charges(6)........................ 37.57x 28.94x 31.56x -- --
</TABLE>
- ---------------
(1) The Company acquired all of the common stock of Arethusa in consideration of
35.8 million shares of common stock on April 29, 1996. See Note 2 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
(2) All per share amounts give retroactive effect to the Company's July 1997
two-for-one stock split in the form of a stock dividend. See Note 3 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
(3) Pro forma net income per share gives effect to the Company's initial public
offering in October 1995 and the after-tax effects of a reduction in
interest expense. Assuming the offering had occurred at January 1, 1995, the
Company would have recognized net income of $10.0 million, or $0.10 per
share of common stock, after adjusting for the after-tax effects of a
reduction in interest expense.
(4) In addition to these capital expenditures, the Company expended $81.0
million and $25.0 million for rig acquisitions during the years ended
December 31, 1997 and 1994, respectively.
(5) The Company paid dividends of $0.125 per share on March 2, 1998, June 1,
1998, September 1, 1998 and December 1, 1998 and has declared a dividend of
$0.125 per share payable March 1, 1999 to stockholders of record on February
1, 1999. In 1997, the Company paid cash dividends of $0.07 per share on
August 7, 1997 and December 1, 1997. In connection with the Company's
initial public offering in October 1995, the Company paid a special dividend
of $2.1 million to Loews with a portion of the proceeds. No other dividends
were declared or paid during the periods presented.
(6) The deficiency in the Company's earnings available for fixed charges for the
years ended December 31, 1995 and 1994 was approximately $13.8 million and
$46.4 million, respectively. Fixed charges for the years ended December 31,
1994 through December 31, 1995 consisted primarily of interest expense on
notes payable to Loews. For all periods presented, the ratio of earnings to
fixed charges has been computed on a total enterprise basis. Earnings
represent income (loss) from continuing operations plus income taxes and
fixed charges. Fixed charges include (i) interest, whether expensed or
capitalized, (ii) amortization of debt issuance costs, whether expensed or
capitalized, and (iii) one-third of rent expense, which the Company believes
represents the interest factor attributable to rent.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) in Item 8 of
this Report.
1998 SIGNIFICANT EVENTS
In December 1998, the Company announced that its drilling contract for use
of its drillship, the Ocean Clipper, had been terminated. The contract, which
was originally for a four-year term through July 2001, was terminated in
connection with issues arising out of performance failures with the blow-out
preventer control system. The drillship is currently in the shipyard for
replacement of this system and additional modifications and upgrades, which are
scheduled to be completed during the second quarter of 1999. See "-- Outlook."
In February 1998, a fire occurred in the engine room of the Ocean Victory,
which was operating in the Gulf of Mexico. Although the fire was contained and
extinguished, damage was done to the power and electrical systems aboard the
rig. Repairs were completed and the rig returned to work in June 1998. The
Company expects that its insurance will cover the repairs, but the loss of
revenue during the repair period was not covered by insurance.
RESULTS OF OPERATIONS
General
Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates earned. 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, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
revenues may be adversely affected. As a response to changes in demand, the
Company may withdraw a rig from the market by stacking it or may reactivate a
rig previously stacked, which may decrease or increase revenues, respectively.
Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues less costs incurred to mobilize an offshore rig
from one market to another are recognized over the term of the related drilling
contract.
Operating Income. Operating income 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, the Company 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, the Company 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. The Company
recognizes as operating expenses 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. Increased
depreciation expense decreases operating income in periods subsequent to capital
upgrades. From time to time, the Company sells assets in the ordinary course of
its business and gains or losses associated with such sales are included in
operating income.
Merger with Arethusa. On April 29, 1996, the Company acquired 100 percent
of the common stock of Arethusa, a Bermuda corporation, (the "Arethusa Merger")
in exchange for 35.8 million shares of the Company's common stock based on an
exchange ratio of 1.76 shares for each share of Arethusa's issued and
outstanding common stock. Arethusa owned a fleet of 11 mobile offshore drilling
rigs, operated two additional mobile offshore drilling rigs pursuant to bareboat
charters, and provided drilling services worldwide to international and
government-controlled oil and gas companies. The fleet was comprised of eight
semisubmersible rigs and five jack-up rigs. Because the Arethusa Merger was
accounted for as a purchase for
14
<PAGE> 15
financial reporting purposes, results of operations include those of Arethusa
from the effective date of the Arethusa Merger. See Note 2 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------- INCREASE/
1998 1997 (DECREASE)
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles.............. $ 286,875 $ 206,708 $ 80,167
Other Semisubmersibles.......................... 707,227 545,701 161,526
Jack-ups........................................ 209,134 192,169 16,965
Integrated Services............................. 26,876 36,342 (9,466)
Other........................................... -- 3,257 (3,257)
Eliminations.................................... (21,311) (28,084) 6,773
---------- --------- --------
Total Revenues.......................... $1,208,801 $ 956,093 $252,708
========== ========= ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles.............. $ 88,293 $ 64,314 $ 23,979
Other Semisubmersibles.......................... 276,633 234,578 42,055
Jack-ups........................................ 104,490 96,246 8,244
Integrated Services............................. 26,472 34,464 (7,992)
Other........................................... 10,048 6,119 3,929
Eliminations.................................... (21,311) (29,378) 8,067
---------- --------- --------
Total Contract Drilling Expense......... $ 484,625 $ 406,343 $ 78,282
========== ========= ========
OPERATING INCOME
Fourth-Generation Semisubmersibles.............. $ 198,582 $ 142,394 $ 56,188
Other Semisubmersibles.......................... 430,594 311,123 119,471
Jack-ups........................................ 104,644 95,923 8,721
Integrated Services............................. 404 1,878 (1,474)
Other........................................... (10,048) (2,862) (7,186)
Eliminations.................................... -- 1,294 (1,294)
Depreciation and Amortization Expense........... (130,271) (108,335) (21,936)
General and Administrative Expense.............. (25,324) (22,556) (2,768)
Gain on Sale of Assets.......................... 418 1,014 (596)
---------- --------- --------
Total Operating Income.................. $ 568,999 $ 419,873 $149,126
========== ========= ========
</TABLE>
Fourth-Generation Semisubmersibles. The $80.2 million increase in revenues
from fourth-generation semisubmersibles resulted primarily from a $51.2 million
increase in revenues generated by the Ocean Victory, the Ocean Clipper, and the
Ocean Star, which completed their upgrade projects in November 1997, July 1997,
and March 1997, respectively, and $37.0 million of additional revenues generated
by increased operating dayrates in the Gulf of Mexico and West Africa. These
increases were partially offset by reductions in revenues of approximately $7.6
million for the Ocean Valiant and the Ocean Alliance from rig downtime for
mandatory inspections completed in June 1998 and November 1998, respectively.
The $24.0 million increase in contract drilling expense resulted primarily from
operating costs generated by the Ocean Victory, the Ocean
15
<PAGE> 16
Clipper, and the Ocean Star upon completion of their upgrades and from costs
associated with the mandatory inspections of the Ocean Valiant and the Ocean
Alliance completed during 1998.
Other Semisubmersibles. The $161.5 million increase in revenues from other
semisubmersibles resulted primarily from $194.5 million of additional revenues
generated by increased operating dayrates. The average operating dayrate for
other semisubmersibles was $93,900 per day in 1998, as compared to $67,400 per
day in 1997. Also contributing to the increase in revenues was $9.7 million in
revenues from the Ocean Century, which was employed in the Gulf of Mexico
through July 1998 after reactivation in the fourth quarter of 1997. These
increases were partially offset by reductions in revenues of approximately $43.2
million from rig downtime for mandatory inspections and repairs of nine of the
Company's semisubmersibles performed during 1998 and from the 1997 sale of the
Ocean Zephyr. The $42.1 million increase in contract drilling expense, as
compared to the year ended December 31, 1997, was primarily due to mandatory
inspections and associated repairs performed in 1998, additional costs
associated with the Ocean Whittington while in the shipyard in early 1998 for
repairs and preparation for mobilization from the Gulf of Mexico to Brazil, and
an overall increase in operating costs, including labor and drilling supplies.
Jack-Ups. The $17.0 million increase in revenues from jack-ups resulted
primarily from $37.1 million of additional revenues generated by increased
operating dayrates. The average operating dayrate for jack-ups was $46,700 per
day in 1998 as compared to $37,000 per day in 1997. Also contributing to this
increase in revenues was $11.1 million in revenues generated by the Ocean
Warwick, which returned to work in the Gulf of Mexico in March 1998 upon
completion of its cantilever conversion upgrade. These increases were partially
offset by reductions in revenues of approximately $15.5 million due to the
relinquishment of the Miss Kitty (a bareboat chartered rig) to the owner in late
1997 and from the Ocean Tower, which was in the shipyard for upgrades and
repairs through May 1998. In addition, decreased utilization in the shallow
waters of the Gulf of Mexico during 1998 reduced revenues by approximately $15.7
million. The $8.2 million increase in contract drilling expense resulted
primarily from operating costs for the Ocean Warwick upon returning to service
in March 1998, an overall increase in operating costs, including labor and
drilling supplies, and costs associated with the mandatory inspection and repair
of the Ocean Drake, which was completed in June 1998. However, the
relinquishment of the Miss Kitty in late 1997 and the capital upgrade of the
Ocean Tower through May 1998 partially offset these increases in contract
drilling expense in the current year.
Integrated Services. Revenues and contract drilling expenses for integrated
services decreased primarily due to fewer managed day work projects in 1998 as
compared to 1997.
Other. The $3.3 million in other revenue for 1997 was due to revenue
generated by the Ocean Confidence, which operated as an accommodation vessel,
prior to the start of its conversion to a drilling unit in 1998. See "-- Capital
Resources." Other contract drilling expense increased $3.9 million primarily due
to additional expenses for maintenance and repairs to spare equipment and crew
training programs for new employees.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $130.3 million for the year ended December 31, 1998 increased
primarily due to (i) capital expenditures associated with the Company's
continuing rig enhancement program, (ii) rig upgrades completed in 1998 for the
Ocean Warwick and the Ocean Tower, and (iii) additional depreciation expense for
the Ocean Victory, the Ocean Clipper, and the Ocean Star, which completed their
upgrades in November 1997, July 1997, and March 1997, respectively.
General and Administrative Expense. General and administrative expense of
$25.3 million for the year ended December 31, 1998 increased from $22.6 million
for the year ended December 31, 1997 primarily due to accruals for the Company's
bonus and retention plan, costs associated with ongoing litigation, and
additional personnel. Also, general and administrative costs capitalized to
upgrade projects decreased as compared to the prior year.
Gain on Sale of Assets. Gain on sale of assets of $0.4 million for the year
ended December 31, 1998 decreased from $1.0 million for the year ended December
31, 1997 primarily due to the 1997 sale of the Ocean Zephyr, a semisubmersible
drilling rig which was located offshore Brazil. See Note 5 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
16
<PAGE> 17
Interest Income. Interest income of $30.6 million for the year ended
December 31, 1998 increased $11.2 million from $19.4 million for the year ended
December 31, 1997. This increase resulted primarily from the investment of
additional excess cash in 1998. See "-- Liquidity."
Interest Expense. Interest expense of $14.5 million for the year ended
December 31, 1998 consisted of $15.5 million interest accrued on the Company's
convertible subordinated notes that were issued in February 1997, partially
offset by $1.0 million of interest capitalized for the upgrade of the Ocean
Confidence. The increase of $4.2 million from interest expense of $10.3 million
for the year ended December 31, 1997 resulted primarily from the reduction of
interest capitalized for upgrade projects in 1998.
Other Income. Other income of $5.2 million for the year ended December 31,
1998 increased $4.1 million from $1.1 million for 1997. This increase resulted
primarily from realized gains on sales of marketable debt securities in 1998.
Income Tax Expense. Income tax expense for the year ended December 31, 1998
was $206.6 million as compared to $151.5 million for the prior year. This change
resulted primarily from the increase of $160.2 million in the Company's income
before income tax expense.
17
<PAGE> 18
YEARS ENDED DECEMBER 31, 1997 AND 1996
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1997 1996 (DECREASE)
--------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Fourth-Generation Semisubmersibles................ $ 206,708 $112,022 $ 94,686
Other Semisubmersibles............................ 545,701 341,163 204,538
Jack-ups.......................................... 192,169 122,503 69,666
Integrated Services............................... 36,342 32,798 3,544
Land.............................................. -- 22,675 (22,675)
Other............................................. 3,257 -- 3,257
Eliminations...................................... (28,084) (19,731) (8,353)
--------- -------- --------
Total Revenues............................ $ 956,093 $611,430 $344,663
========= ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles................ $ 64,314 $ 37,512 $ 26,802
Other Semisubmersibles............................ 234,578 191,937 42,641
Jack-ups.......................................... 96,246 85,149 11,097
Integrated Services............................... 34,464 30,344 4,120
Land.............................................. -- 19,631 (19,631)
Other............................................. 6,119 (865) 6,984
Eliminations...................................... (29,378) (22,054) (7,324)
--------- -------- --------
Total Contract Drilling Expense........... $ 406,343 $341,654 $ 64,689
========= ======== ========
OPERATING INCOME
Fourth-Generation Semisubmersibles................ $ 142,394 $ 74,510 $ 67,884
Other Semisubmersibles............................ 311,123 149,226 161,897
Jack-ups.......................................... 95,923 37,354 58,569
Integrated Services............................... 1,878 2,454 (576)
Land.............................................. -- 3,044 (3,044)
Other............................................. (2,862) 865 (3,727)
Eliminations...................................... 1,294 2,323 (1,029)
Depreciation and Amortization Expense............. (108,335) (75,767) (32,568)
General and Administrative Expense................ (22,556) (15,640) (6,916)
Gain on Sale of Assets............................ 1,014 35,122 (34,108)
--------- -------- --------
Total Operating Income.................... $ 419,873 $213,491 $206,382
========= ======== ========
</TABLE>
Fourth-Generation Semisubmersibles. The $94.7 million increase in revenues
from fourth-generation semisubmersibles resulted, in part, from a $61.4 million
increase in revenues generated by the Ocean Victory, the Ocean Clipper, the
Ocean Star, and the Ocean Quest upon completion of their upgrade projects in
November 1997, July 1997, March 1997, and September 1996, respectively. Also,
improvements in dayrates in the Gulf of Mexico and the North Sea contributed
$30.0 million of additional revenue and increased utilization in the North Sea
contributed $3.3 million of additional revenue during the year ended December
31, 1997. The $26.8 million increase in contract drilling expense resulted
primarily from additional operating expense of $23.3 million from the Ocean
Victory, the Ocean Clipper, the Ocean Star, and the Ocean
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Quest upon completion of their upgrades. Also, the Ocean Valiant recognized
increased expenses in late 1997 in preparation for its relocation from the Gulf
of Mexico to West Africa.
Other Semisubmersibles. The $204.5 million increase in revenues from other
semisubmersibles resulted primarily from $123.0 million of additional revenue
for improvements in dayrates in 1997. The average operating dayrate for other
semisubmersibles was $67,400 per day in 1997 as compared to $50,100 per day in
1996. Also, $69.4 million of additional revenue was generated primarily by the
inclusion of operating results for the eight semisubmersibles acquired in the
Arethusa Merger for twelve months in 1997 as compared to the inclusion of only
eight months in 1996. In addition, an increase of $12.1 million in revenue
resulted primarily from improved utilization in 1997 for several rigs that were
either relocating or undergoing repairs necessary for new contracts or locations
in early 1996. The $42.6 million increase in contract drilling expense resulted
primarily from $42.7 million of additional costs generated by the
semisubmersibles acquired in the Arethusa Merger. These additional costs were
primarily due to the inclusion of operating results for these rigs for twelve
months in 1997 as compared to the inclusion of only eight months in 1996. Also,
higher operating costs incurred in connection with the reactivation of the Ocean
Century to work in the Gulf of Mexico in late 1997 and regulatory inspections
and associated repairs on the Ocean Saratoga in early 1997 and the Ocean General
in late 1997 resulted in increased contract drilling expense as compared to
1996. Partially offsetting these increases was a decrease of approximately $4.5
million due to the reclassification of operations for the Ocean Clipper to
fourth-generation semisubmersibles upon completion of its upgrade in July 1997.
The sale of the Ocean Zephyr, a semisubmersible located offshore Brazil, in 1997
also reduced expenses by $3.1 million as compared to 1996.
Jack-Ups. The $69.7 million increase in revenues from jack-ups resulted
primarily from improvements in dayrates, which contributed $59.6 million of
additional revenue. The average operating dayrate for jack-ups was $37,000 per
day in 1997 as compared to $24,700 per day in 1996. In addition, the inclusion
of operating results for the jack-up rigs acquired in the Arethusa Merger for
twelve months in 1997 as compared to the inclusion of only eight months in 1996
resulted in $14.0 million of additional revenue. Partially offsetting these
increases was a decrease of $3.9 million due to downtime incurred in late 1997
for a regulatory inspection and leg reinforcement upgrade on the Ocean Tower and
leg reinforcements and other modifications on the Ocean Titan. The $11.1 million
increase in contract drilling expense resulted primarily from the rigs acquired
in the Arethusa Merger, regulatory inspections and associated repairs on the
Ocean Scotian, the Ocean Crusader, and the Ocean King, and leg reinforcement and
other modifications on the Ocean Titan. Partially offsetting these increases was
a decrease of $2.0 million resulting from the termination of the bareboat
charter agreement in 1996 for the Bonito II, a jack-up rig previously operated
by the Company.
Integrated Services. The $3.5 million increase in revenue from integrated
services resulted from an increase in project management service revenue during
1997 as compared to 1996. The $4.1 million increase in expenses for integrated
services resulted primarily from increased intercompany rates charged for rigs
utilized in project management services (offset in eliminations) during 1997 as
compared to 1996.
Land. Revenues and contract drilling expense for land decreased due to the
sale of the Company's land drilling assets in December 1996. See Note 5 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
Other. Other revenues of $3.3 million were generated by the Ocean
Confidence, which operated as an accommodation vessel when purchased in May
1997. See "-- Capital Resources." Other contract drilling expense increased $7.0
million primarily due to expenses associated with crew training programs for new
employees and certain non-recurring charges in 1997 and non-recurring credits
recognized in 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $108.3 million for the year ended December 31, 1997 increased
primarily due to additional expense for (i) the eight semisubmersibles and three
jack-up drilling rigs acquired in the Arethusa Merger, (ii) goodwill
amortization expense associated with the Arethusa Merger, (iii) rig upgrades
completed in 1997 and 1996, (iv) capital expenditures associated with the
Company's continuing rig enhancement program, and (v) the Ocean Confidence,
which was acquired in May 1997. See "-- Capital Resources."
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General and Administrative Expense. General and administrative expense of
$22.6 million for the year ended December 31, 1997 increased from $15.6 million
for the year ended December 31, 1996 primarily due to (i) additional overhead
resulting from the Arethusa Merger, (ii) increased accruals for the Company's
employee bonus and retention plan, and (iii) increased legal fees associated
with various legal matters. See Note 10 to the Company's Consolidated Financial
Statements in Item 8 of this Report. The increased accruals for the employee
bonus and retention plan resulted from a higher bonus pool for the 1997
performance year and from additional participants in the plan as compared to
1996.
Gain on Sale of Assets. Gain on sale of assets for the year ended December
31, 1997 consisted primarily of the gain associated with the sale of the Ocean
Zephyr, a semisubmersible drilling rig located offshore Brazil. Gain on sale of
assets for the year ended December 31, 1996 resulted primarily from the sale of
all of the operational assets of Diamond M Onshore, Inc., the Company's wholly
owned land drilling subsidiary, resulting in a gain of $24.0 million. Also
during 1996, the Company sold two shallow water jack-up drilling rigs, the Ocean
Magallanes and the Ocean Conquest, and one semisubmersible, the Ocean Zephyr II,
resulting in gains totaling $10.8 million. See Note 5 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
Interest Income. Interest income of $19.4 million for the year ended
December 31, 1997 consisted primarily of the accretion of discounts and interest
earned on investments of excess cash primarily generated by the issuance of the
Company's convertible subordinated notes. See "-- Liquidity."
Interest Expense. Interest expense of $10.3 million for the year ended
December 31, 1997 consisted primarily of $14.7 million interest on the Company's
convertible subordinated notes, partially offset by $4.4 million interest
capitalized to upgrade projects. Interest expense for the year ended December
31, 1996 included $2.2 million of origination costs, including costs previously
capitalized, which were expensed in connection with the restructuring of a
revolving credit facility during December 1996. See Note 8 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
Income Tax Expense. Income tax expense for the year ended December 31, 1997
was $151.5 million as compared to $66.3 million for the prior year. This change
resulted primarily from the increase of $217.4 million in the Company's income
before income tax expense and a reduction in income tax expense during 1996. In
1996, benefits for utilization of previously unrecorded net operating losses in
a foreign jurisdiction were recognized, which contributed to the reduction in
income tax expense. See Note 13 to the Company's Consolidated Financial
Statements in Item 8 of this Report.
OUTLOOK
Depressed product prices in the oil and gas industry have resulted in
declining dayrates and decreased utilization, primarily in shallow water markets
such as the Gulf of Mexico. As a result, the Company has cold stacked and
suspended marketing efforts on two of its low-end specification semisubmersible
rigs and one of its jack-up rigs located in the Gulf of Mexico. In addition, due
to the excess rig supply, several of the Company's rigs are idle in the Gulf of
Mexico and other markets. The Company will continue to assess the need to cold
stack additional rigs depending on market conditions. To date, the Company has
been able to mitigate the effect of these conditions on its results of
operations primarily with existing term contract commitments and the diversity
of the Company's fleet. However, many of these contracts expire during 1999 and
renewal rates could be significantly lower than those previously recognized.
These current trends in market conditions are expected to adversely affect the
Company's future results of operations, although the extent of such effect
cannot be accurately predicted.
The depressed conditions in the oil and gas industry have also increased
the susceptibility of term contracts previously committed at dayrates in excess
of current market rates to be terminated by the customer. Most drilling
contracts allow for termination if drilling operations are suspended for a
period of time as a result of a breakdown of equipment or by giving notice in
connection with payment of an early termination fee by the customer. During
1998, two of the Company's term contracts were cancelled by customers. The
contract for use of the Company's drillship, the Ocean Clipper, which had a
four-year term through July 2001, was terminated in December 1998 in connection
with issues arising out of performance failures with the blow-out
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preventer control system. In October 1998, the Company agreed to an early
termination and substitution arrangement involving two of its semisubmersibles
located offshore Australia. This termination was not the result of performance
failures of the Company or its equipment and an associated early termination
fee, which was reflective of the anticipated cash flow that would have been
generated throughout the remaining term, was paid to the Company. In addition,
certain drilling contracts held by the Company's competitors were also recently
cancelled. The Company believes these contract terminations were primarily the
result of specific issues involving the contracted rigs. However, the Company
cannot accurately predict the actions of its customers or the circumstances in
which further contract cancellations might occur. The Company continuously
focuses on maintaining its rigs to contract specifications and its relationships
with its customers in order to avoid exposure to termination of its term
contracts.
The Brazilian government's recent devaluation of that nation's currency,
the real, may also impact the Company's financial position and results of
operations in the future. The devaluation, which occurred in January 1999, could
make it more expensive for Brazilian borrowers to repay U.S. dollar-denominated
debts, increasing the likelihood of defaults on such obligations. The Company's
operations in Brazil have historically represented a material portion of its
total consolidated revenues and the Company currently has four of its
semisubmersibles committed to the Brazilian government-controlled oil company
for term periods anticipated to be completed in 2001 and 2003. Generally, these
contracts are payable in local currency in amounts equal to the Company's
estimated operating costs payable in local currency and in U.S. dollars for the
balance of the contract. Although the Company has not received any indications
that the obligations associated with these contracts will not be honored, it
cannot predict whether or to what extent these currency risks could affect the
timely payment of all amounts owed to the Company. Such a default could have a
material adverse effect on the Company's financial position and results of
operations. See "-- Other -- Currency Risk" and Note 15 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. The conversion of the Ocean Confidence from an
accommodation vessel to a semisubmersible drilling unit capable of operating in
harsh environments and ultra-deep water is in progress. The upgrade is
anticipated to be completed in early 2000, when the rig will begin a five-year
contract in the Gulf of Mexico. See "-- Capital Resources." Increased rig
construction and enhancement programs are also ongoing by the Company's
competitors. In current market conditions, a significant increase in the supply
of technologically advanced rigs capable of drilling in deep water could produce
an oversupply of such equipment and, in turn, adversely affect the utilization
level and average operating dayrates available for the Company's rigs,
particularly its higher specification semisubmersible units.
The Company's results of operations have also been impacted by the loss of
revenues and associated costs incurred during required regulatory inspections of
its drilling rigs. Twelve of these inspections were performed in 1998 and five
are anticipated to occur in the first quarter of 1999. The Company intends to
focus on returning these rigs to operations as soon as reasonably possible, in
order to minimize downtime and associated loss of revenues, but the extent of
such downtime cannot be accurately predicted.
LIQUIDITY
At December 31, 1998, cash and marketable securities totaled $637.0
million, up from $466.1 million at December 31, 1997. Cash provided by operating
activities for the year ended December 31, 1998 increased by $150.8 million to
$547.2 million, as compared to $396.4 million for the prior year. This increase
was primarily attributable to a $105.1 million increase in net income, a $26.8
million increase in the deferred tax provision, a $21.9 million increase in
depreciation and amortization expense, and various changes in operating assets
and liabilities.
Investing activities used $391.3 million in cash during the year ended
December 31, 1998, as compared to $706.0 million during the prior year. The
decrease resulted primarily from the initial investment in 1997 of excess cash
generated by the issuance of the Company's convertible subordinated notes. In
addition, in 1997
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the Company expended $81.0 million for the purchase of the Ocean Confidence, an
accommodation vessel currently being converted to a drilling unit.
Cash used in financing activities for the year ended December 31, 1998 of
$157.7 million resulted primarily from the repurchase of shares of the Company's
outstanding common stock and from dividends paid to stockholders. Depending on
market conditions the Company may from time to time purchase shares of its
common stock in the open market. As of December 31, 1998, the Company had
purchased 3.5 million shares of its common stock at a cost of $88.7 million. See
Note 1 to the Company's Consolidated Financial Statements in Item 8 of this
Report. Cash provided by financing activities for the year ended December 31,
1997 of $384.4 million resulted primarily from the issuance of the Company's
convertible subordinated notes.
The Company has the ability to issue an aggregate of approximately $117.5
million in debt, equity and other securities under a shelf registration
statement. In addition, the Company may issue, from time to time, up to eight
million shares of common stock, which shares are registered under an acquisition
shelf registration statement (upon effectiveness of an amendment thereto
reflecting the effect of the two-for-one stock split declared in July 1997), in
connection with one or more acquisitions by the Company of securities or assets
of other businesses.
The Company believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.
CAPITAL RESOURCES
Cash required to meet the Company's capital commitments is determined by
evaluating rig upgrades to meet specific customer requirements and by evaluating
the Company's continuing rig enhancement program, including water depth and
drilling capability upgrades. It is management's opinion that operating cash
flows and the Company's cash reserves will be sufficient to meet these capital
commitments; however, periodic assessments will be made based on industry
conditions. In addition, the Company may, from time to time, issue debt or
equity securities, or a combination thereof, to finance capital expenditures,
the acquisition of assets and businesses, or for general corporate purposes. The
Company's ability to effect any such issuance will be dependent on the Company's
results of operations, its current financial condition, current market
conditions, and other factors beyond its control.
During the year ended December 31, 1998, the Company expended $110.7
million, including capitalized interest expense, for rig upgrades, primarily for
the conversion of the Ocean Confidence from an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep waters. The conversion includes the following enhancements which will
provide capabilities greater than existing fourth-generation equipment:
capability for operation in 7,500 foot water depths; approximately 6,000 tons
variable deck load; a 15,000 psi blow-out prevention system; and four mud pumps
to complement the existing Class III dynamic-positioning system. The Company's
estimated cost of conversion for this rig is approximately $210.0 million. The
Company anticipates that the project will be completed within this budget,
although, as with any major rig conversion, the possibility of unforeseen cost
overruns exists. Upon completion of the conversion, the rig will begin a
five-year drilling program in the Gulf of Mexico, which is anticipated to
commence in early 2000. Other upgrade projects include the installation of new
engines and other equipment on the Ocean King anticipated to be completed in
early 1999, the cantilever conversion project on the Ocean Warwick completed in
March 1998, and leg strengthening and other modifications on the Ocean Tower
completed in May 1998. The Company has budgeted $173.7 million for rig upgrade
capital expenditures during 1999. Included in this amount is approximately
$138.7 million for 1999 expenditures associated with the conversion of the Ocean
Confidence.
During the year ended December 31, 1998, the Company expended $113.8
million in association with its continuing rig enhancement program to maintain
spare equipment inventory levels and meet other corporate requirements. These
expenditures included purchases of anchor chain, drill pipe, riser, and other
drilling equipment. The Company has budgeted $134.1 million for 1999 capital
expenditures associated with its continuing rig enhancement program, spare
equipment inventory, and other corporate requirements.
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The Company continues to consider transactions which include, but are not
limited to, the enhancement of existing rigs, the purchase of existing rigs,
construction of new rigs and the acquisition of other companies engaged in
contract drilling or related businesses. Certain of these potential transactions
reviewed by the Company would, if completed, result in it entering new lines of
business. In general, however, these opportunities have been related in some
manner to the Company's existing operations. Although the Company does not, as
of the date hereof, have any commitment with respect to a material acquisition,
it could enter into such agreement in the future and such acquisition could
result in a material expansion of its existing operations or result in it
entering a new line of business. Some of the potential acquisitions considered
by the Company could, if completed, result in the expenditure of a material
amount of funds or the issuance of a material amount of debt or equity
securities.
YEAR 2000 ISSUES
Introduction. The Company began to address Year 2000 ("Y2K") compliance
issues in 1997 when it formed a committee (the "Y2K Committee") to develop the
Company's Y2K compliance initiative. The Company is continuing to take steps to
determine the potential effect of the change to calendar Year 2000 on its
computer hardware, software and embedded technology systems and any impact it
may have on the Company's business.
State of Readiness. The Company manages its Y2K compliance initiative
through the Y2K Committee. The Y2K Committee has focused its efforts on both
information technology ("IT") systems (e.g., computer software and hardware) and
non-information technology ("Non-IT") systems (e.g., embedded technology such as
micro-controllers) in the Company's domestic and international onshore
locations, aboard the Company's drilling rigs and among its key suppliers. The
Y2K Committee is paying particular attention to critical safety, production, and
operational systems on-board the Company's fleet of drilling rigs. The Company's
Y2K initiative is being approached in the following five phases:
Phase 1 Awareness of Y2K Issues (appointment of the Y2K Committee, initial
research on Y2K compliance issues);
Phase 2 Identification and Investigation of the Company's Systems
(inventory of systems and investigation of readiness);
Phase 3 Communications with Suppliers (discussions and requests for
information regarding Y2K initiatives and compliance status);
Phase 4 Development and Implementation of Corrective Measures (coordination
with the Company's software and hardware vendors); and
Phase 5 Risk Assessment and Contingency Planning (evaluation of risk of
business interruptions and development of contingency plans).
As of December 31, 1998, the Company had completed Phases 1 and 2 for IT
and Non-IT systems utilized in the Company's onshore and offshore operations.
The Company currently expects substantial completion of the final three phases
of its Y2K initiative to occur by mid-1999. As of the date of this Report, the
Company has completed over half of Phase 3, communications with key suppliers,
and Phase 4, development and implementation of corrective measures. Phase 5,
risk assessment and contingency planning for worst-case business interruptions,
is in progress.
Cost to Address the Company's Y2K Issues. The total cost associated with
required modifications to become Y2K compliant is not expected to be material to
the Company's financial position primarily because the Company has utilized
existing personnel resources to assist in the implementation of its Y2K
compliance initiative. The Company is in the process of implementing certain
business and financial systems apart from the Y2K compliance initiative, the
cost of which is not expected to exceed $5.0 million. However, because the
replaced systems were not Y2K compliant, the Y2K initiative also benefited from
their replacement. The estimated total cost does not include the Company's
internal costs to be incurred which are not separately tracked. Such internal
costs are principally the related payroll costs for its information systems
group. The
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total amount of outside costs expended through December 31, 1998 was
approximately $3.3 million, of which approximately $2.0 million was incurred and
capitalized prior to 1998.
Y2K Risks and Contingency Planning. The Company is continuing to monitor,
on an ongoing basis, the problems and uncertainties associated with its Y2K
issues and their potential consequences on the Company's onshore locations,
drilling operations and suppliers as well as the legal risks associated with
interruption in the provision of drilling services and/or the delivery of
supplies and equipment. The Company is in the process of developing contingency
plans which are intended to address worst-case business interruptions, such as
the interruption of drilling services aboard the Company's drilling rigs or
interruptions in the delivery of equipment and materials utilized in the
Company's drilling operations. Such a contingency plan would take into account
the existence of certain redundant systems on some of the Company's drilling
rigs and may, in part, involve manual operation of certain systems for a period
of time in the event of Y2K related disruptions. The Company anticipates its
contingency planning phase will be substantially complete by mid-1999.
The Company's failure to fully implement its Y2K initiative or the
occurrence of an unexpected Y2K problem could result in the disruption of normal
business activities or operations and have a material adverse effect on the
Company's results of operations, liquidity or financial condition. However,
based upon the work performed to date and the anticipated completion of the
Company's Y2K initiative by mid-1999, the Company does not believe that such
matters will have a material adverse effect on its results of operations. With
respect to third parties, there can be no assurance that their systems will be
rendered Y2K compliant on a timely basis or that any resulting Y2K issues would
not have a material adverse effect on the results of operations of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS No. 133
will be effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this statement to
have a material effect on its financial position or results of operations.
OTHER
Currency Risk. Certain of the Company's subsidiaries use the local currency
in the country where they conduct operations as their functional currency.
Currency environments in which the Company has material business operations
include the U.K., Australia, Brazil, Indonesia and Africa. The Company generally
attempts to minimize its currency exchange risk by seeking international
contracts payable in local currency in amounts equal to the Company's estimated
operating costs payable in local currency and in U.S. dollars for the balance of
the contract. Because of this strategy, the Company 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 two of the Company's
three rigs operating in the U.K. sector of the North Sea are payable in U.S.
dollars. The Company 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.
In addition, in January 1999, the Brazilian government devalued the
nation's currency, the real, with the stated intention of increasing exports and
lowering interest rates. However, the devaluation could make it more expensive
for Brazilian borrowers to repay U.S. dollar-denominated debts, increasing the
likelihood for defaults on such obligations. The Company's operations in Brazil
have historically represented a material portion of its total consolidated
revenues and the Company currently has four of its semisubmersibles committed to
the Brazilian government-controlled oil company for term periods anticipated to
be completed in 2001 and 2003. Although the Company has not received any
indications that the obligations associated with these contracts will not be
honored, it cannot predict whether or to what extent these currency risks could
affect the timely payment of all amounts owed to the Company. Such a default
could have a material adverse
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effect on the Company's financial position and results of operations. See Note
15 to the Company's Consolidated Financial Statements in Item 8 of this Report.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. When the Company ceases its operations in a currency
environment, the accumulated adjustments are recognized currently in results of
operations. Additionally, translation gains and losses for the Company's
operations in areas which have experienced cumulative inflation of approximately
100 percent or more over a three-year period are recognized currently. The
effect on results of operations from these translation gains and losses has not
been material and is not expected to have a significant effect in the future.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Statements by the Company in this Report that contain
forward-looking statements include, but are not limited to, discussions
regarding the effect of market conditions on the Company's future results of
operations (see "-- Outlook"), future uses of and requirements for financial
resources, including but not limited to, expenditures related to the upgrade of
the Ocean Confidence (see "-- Liquidity" and "-- Capital Resources"), and the
impact of the Y2K issues on the Company's business (see "-- Year 2000 Issues").
Such statements inherently are subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those projected. Such
risks and uncertainties include, among others, general economic and business
conditions, casualty losses, industry fleet capacity, changes in foreign and
domestic oil and gas exploration and production activity, competition, changes
in foreign, political, social and economic conditions, regulatory initiatives
and compliance with governmental regulations, customer preferences and various
other matters, many of which are beyond the Company's control. The risks
included here are not exhaustive. Other sections of this Report and the
Company's other filings with the Securities and Exchange Commission include
additional factors that could adversely impact the Company's business and
financial performance. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any forward-looking statement is based.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included in this Item is considered to constitute "forward
looking statements" for purposes of the statutory safe harbor provided in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements" in Item 7 of this Report.
INTEREST RATE AND EQUITY PRICE SENSITIVITY
The Company's financial instruments that are potentially sensitive to
changes in interest rates include the Company's convertible subordinated notes
and investments in debt securities, including U.S. Treasury securities and
collateralized mortgage obligations ("CMO's"). In addition, the Company's
investment in equity securities is sensitive to equity price risk. The Company's
convertible subordinated notes, which are due February 15, 2007, have a stated
interest rate of 3.75 percent and an effective interest rate of 3.93 percent. At
December 31, 1998, the fair value of these notes, based on quoted market prices,
was approximately $371.2 million, as compared to a carrying amount of $400.0
million.
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At December 31, 1998, the fair market value of the Company's investment in
debt securities issued by the U.S. Treasury was approximately $329.3 million,
which includes an unrealized holding gain of $0.1 million. These securities bear
interest rates ranging from 4.00 percent to 5.00 percent. These securities do
not impose a significant market risk to the Company as they are U.S.
government-backed and generally short-term and readily marketable. The fair
value of the Company's investment in CMO's at December 31, 1998 was
approximately $203.1 million, which includes an unrealized holding loss of $0.5
million. The CMO's consist of high quality mortgage-backed principal-only
securities that are not considered high-risk. At December 31, 1998, the fair
value of the Company's investment in equity securities was approximately $3.4
million, which includes an unrealized holding loss of $8.7 million. Based on
consideration of past market movements and reasonably possible, near-term market
movements, the Company does not believe that potential, near-term losses in
future earnings, fair values, or cash flows, other than in the Company's
investment in equity securities, are likely to be material.
EXCHANGE RATE SENSITIVITY
Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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 (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 25, 1999
27
<PAGE> 28
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 101,198 $ 102,958
Marketable securities..................................... 535,774 363,137
Accounts receivable....................................... 233,719 205,589
Rig inventory and supplies................................ 35,794 33,714
Prepaid expenses and other................................ 31,939 13,377
---------- ----------
Total current assets.............................. 938,424 718,775
Drilling and other property and equipment, net of
accumulated depreciation.................................. 1,551,820 1,451,741
Goodwill, net of accumulated amortization................... 109,825 118,623
Other assets................................................ 9,647 9,422
---------- ----------
Total assets...................................... $2,609,716 $2,298,561
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 93,938 $ 57,557
Accrued liabilities....................................... 53,283 48,935
Taxes payable............................................. 13,180 24,653
---------- ----------
Total current liabilities......................... 160,401 131,145
Long-term debt.............................................. 400,000 400,000
Deferred tax liability...................................... 263,797 209,513
Other liabilities........................................... 30,260 22,376
---------- ----------
Total liabilities................................. 854,458 763,034
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock (par value $0.01, 25,000,000 shares
authorized, none issued and outstanding)............... -- --
Common stock (par value $0.01, 500,000,000 shares
authorized, 139,333,635 issued, 135,815,535 outstanding
at December 31, 1998 and 139,309,948 shares issued and
outstanding at December 31, 1997)...................... 1,393 1,393
Additional paid-in capital.................................. 1,302,806 1,302,712
Retained earnings........................................... 547,783 233,350
Accumulated other comprehensive losses...................... (7,998) (1,928)
Treasury stock, at cost (3,518,100 shares).................. (88,726) --
---------- ----------
Total stockholders' equity........................ 1,755,258 1,535,527
---------- ----------
Total liabilities and stockholders' equity........ $2,609,716 $2,298,561
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 29
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Revenues................................................... $1,208,801 $ 956,093 $611,430
Operating expenses:
Contract drilling........................................ 484,625 406,343 341,654
Depreciation and amortization............................ 130,271 108,335 75,767
General and administrative............................... 25,324 22,556 15,640
Gain on sale of assets................................... (418) (1,014) (35,122)
---------- --------- --------
Total operating expenses......................... 639,802 536,220 397,939
---------- --------- --------
Operating income........................................... 568,999 419,873 213,491
Other income (expense):
Interest income.......................................... 30,565 19,379 879
Interest expense......................................... (14,487) (10,270) (2,326)
Other, net............................................... 5,154 1,079 661
---------- --------- --------
Income before income tax expense........................... 590,231 430,061 212,705
Income tax expense......................................... (206,572) (151,456) (66,317)
---------- --------- --------
Net income................................................. $ 383,659 $ 278,605 $146,388
========== ========= ========
Net income per share:
Basic.................................................... $ 2.78 $ 2.01 $ 1.18
========== ========= ========
Diluted.................................................. $ 2.66 $ 1.93 $ 1.18
========== ========= ========
Weighted average shares outstanding:
Common shares............................................ 138,020 138,560 124,462
Dilutive potential common shares......................... 9,876 8,929 --
---------- --------- --------
Total weighted average shares outstanding........ 147,896 147,489 124,462
========== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 30
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK
--------------------- PAID-IN (ACCUMULATED GAINS --------------------
SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT
----------- ------- ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ --
Net income................. -- -- -- 146,388 -- -- --
Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- --
Stock options exercised.... 460,065 5 4,418 -- -- -- --
Exchange rate changes,
net...................... -- -- -- -- 341 -- --
----------- ------ ---------- --------- ------- --------- --------
December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- --
----------- ------ ---------- --------- ------- --------- --------
Net income................. -- -- -- 278,605 -- -- --
Issuance of common stock... 1,250,000 12 82,270 -- -- -- --
Two-for-one stock split.... 69,649,474 696 -- (696) -- -- --
Dividends to
stockholders............. -- -- -- (19,503) -- -- --
Stock options exercised.... 57,065 1 410 -- -- -- --
Exchange rate changes,
net...................... -- -- -- -- (894) -- --
Loss on investments, net... -- -- -- -- (106) -- --
----------- ------ ---------- --------- ------- --------- --------
December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- --
----------- ------ ---------- --------- ------- --------- --------
Net income................. -- -- -- 383,659 -- -- --
Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726)
Dividends to
stockholders............. -- -- -- (69,226) -- -- --
Stock options exercised.... 23,687 -- 94 -- -- -- --
Exchange rate changes,
net...................... -- -- -- -- (291) -- --
Loss on investments, net... -- -- -- -- (5,779) -- --
----------- ------ ---------- --------- ------- --------- --------
December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726)
=========== ====== ========== ========= ======= ========= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
December 31, 1995............ $ 492,894
Net income................. 146,388
Merger with Arethusa....... 550,686
Stock options exercised.... 4,423
Exchange rate changes,
net...................... 341
----------
December 31, 1996............ 1,194,732
----------
Net income................. 278,605
Issuance of common stock... 82,282
Two-for-one stock split.... --
Dividends to
stockholders............. (19,503)
Stock options exercised.... 411
Exchange rate changes,
net...................... (894)
Loss on investments, net... (106)
----------
December 31, 1997............ 1,535,527
----------
Net income................. 383,659
Treasury stock purchases... (88,726)
Dividends to
stockholders............. (69,226)
Stock options exercised.... 94
Exchange rate changes,
net...................... (291)
Loss on investments, net... (5,779)
----------
December 31, 1998............ $1,755,258
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 31
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $383,659 $278,605 $146,388
Other comprehensive gains (losses), net of tax:
Foreign currency translation gain (loss).................. (291) (894) 341
Unrealized holding loss on investments.................... (5,797) (106) --
Reclassification adjustment for losses included in net
income................................................. 18 -- --
-------- -------- --------
Total other comprehensive income (loss)........... (6,070) (1,000) 341
-------- -------- --------
Comprehensive income........................................ $377,589 $277,605 $146,729
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 32
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income.............................................. $ 383,659 $ 278,605 $ 146,388
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 130,271 108,335 75,767
Gain on sale of assets............................... (418) (1,014) (35,122)
Gain on sale of investment securities................ (1,116) (1,529) --
Deferred tax provision............................... 61,403 34,650 17,278
Accretion of discount on investment securities....... (14,568) (10,505) (159)
Amortization of debt issuance costs.................. 521 456 2,570
Changes in operating assets and liabilities:
Accounts receivable.................................. (26,153) (32,959) (64,715)
Rig inventory and supplies and other current
assets............................................. (21,911) (3,319) (2,789)
Other assets, non-current............................ (705) 949 (1,747)
Accounts payable and accrued liabilities............. 40,534 15,256 22,155
Taxes payable........................................ (3,867) 3,893 46,149
Other liabilities, non-current....................... 835 3,885 4,093
Other, net.............................................. (1,301) (335) 365
--------- --------- ---------
Net cash provided by operating activities....... 547,184 396,368 210,233
--------- --------- ---------
Investing activities:
Cash acquired in the merger with Arethusa............... -- -- 20,883
Capital expenditures.................................... (224,474) (281,572) (267,000)
Acquisition of drilling rigs and related equipment...... -- (80,990) --
Proceeds from sale of assets............................ 1,011 8,277 40,589
Net change in marketable securities..................... (167,818) (351,682) 5,200
--------- --------- ---------
Net cash used in investing activities........... (391,281) (705,967) (200,328)
--------- --------- ---------
Financing activities:
Reacquisition of common stock........................... (88,726) -- --
Payment of dividends.................................... (69,226) (19,503) --
Issuance of common stock................................ -- 82,282 --
Debt (repayments) borrowings, net....................... -- (73,000) 5,523
Issuance of convertible subordinated notes.............. -- 400,000 --
Debt issuance costs..................................... -- (6,062) (2,570)
Proceeds from stock options exercised................... 289 660 5,016
--------- --------- ---------
Net cash (used in) provided by financing
activities.................................... (157,663) 384,377 7,969
--------- --------- ---------
Net change in cash and cash equivalents................... (1,760) 74,778 17,874
Cash and cash equivalents, beginning of year............ 102,958 28,180 10,306
--------- --------- ---------
Cash and cash equivalents, end of year.................. $ 101,198 $ 102,958 $ 28,180
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 33
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 51.6 percent
of the outstanding common stock of the Company (see Note 3).
The Company, through wholly owned subsidiaries, engages in the worldwide
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The fleet is comprised of 30 semisubmersible rigs, 15 jack-up rigs,
and one drillship.
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
Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities, rather than part of its investing activities, are considered cash
equivalents.
Marketable Securities
The Company's investments are classified as available for sale and stated
at fair value under the terms of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
losses" until realized. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity and such adjustments are
included in the Consolidated Statements of Income in "Interest income." The cost
of debt securities sold is based on the specific identification method and the
cost of equity securities sold is based on the average cost method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in the Consolidated Statements of Income in "Other income
(expense)."
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt, including commitment
fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0
million, $8.7 million and $3.5 million, respectively. Cash payments made for
income taxes during the years ended December 31, 1998, 1997, and 1996 were
$151.3 million, $112.1 million, and $3.9 million, respectively.
Non-cash financing activities for the year ended December 31, 1996 included
$550.7 million for the issuance of 35.8 million shares of common stock and the
assumption of stock options for the purchase of 1.0 million shares in connection
with the merger between the Company and Arethusa (Off-Shore) Limited
("Arethusa"). Non-cash investing activities for the year ended December 31, 1996
included $532.9 million of net assets acquired in the merger with Arethusa (see
Note 2).
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.
33
<PAGE> 34
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 in service. Upon
retirement or other disposal of fixed 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.
Depreciation is provided on the straight-line method over the remaining
estimated useful lives from the date the asset is placed in service. The Company
believes that certain offshore drilling rigs, due to their upgrade and design
capabilities and their 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 year ended December 31, 1996 by approximately
$8.5 million and $5.5 million ($0.04 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. Other property and equipment is estimated
to have useful lives ranging from 3 to 10 years.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. During the years ended December 31, 1998, 1997, and 1996, the
Company incurred interest cost, including amortization of debt issuance costs,
of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost
capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0
million, respectively.
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.
Goodwill
Goodwill from the merger with Arethusa (see Note 2) is amortized on a
straight-line basis over 20 years. Amortization charged to operating expense
during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million,
$6.6 million, and $4.5 million, respectively.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Except for selective
dividends, the Company's practice prior to 1997 was to reinvest the unremitted
earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Thus, no additional U.S. taxes were provided on earnings of these
non-U.S. subsidiaries. However, beginning in 1997, the Company changed its
practice and intends to repatriate its post-1996 earnings in the foreseeable
future. As a result, beginning January 1, 1997, the Company has accrued U.S.
taxes on all its post-1996 undistributed non-U.S. earnings. The Company's
non-U.S. income tax liabilities are based upon the results of operations of the
various subsidiaries and foreign branches in those jurisdictions in which they
are subject to taxation.
34
<PAGE> 35
Treasury Stock
In July 1998, the Board of Directors authorized the purchase of shares of
the Company's common stock in the open market, from time to time, depending on
market conditions. The purchase of treasury stock is accounted for using the
cost method which reports the cost of the shares acquired in "Treasury stock" as
a deduction from stockholders' equity in the Consolidated Balance Sheets. During
the year ended December 31, 1998, the Company purchased 3.5 million shares of
its common stock at an aggregate cost of $88.7 million, or at an average cost of
$25.22 per share. Basic and diluted net income per share for the year ended
December 31, 1998 increased $0.03 and $0.02, respectively, as a result of the
purchase of treasury stock.
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. Lump-sum payments
received from customers 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
expenses to be incurred on a specific contract will exceed the revenue from that
contract.
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 Consolidated Balance Sheets in "Accumulated other comprehensive
losses." Currency transaction gains and losses are included in the Consolidated
Statements of Income in "Other income (expense)." Additionally, translation
gains and losses of subsidiaries operating in hyperinflationary economies are
included in operating results currently.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which requires dual presentation of basic
and diluted earnings per share for entities with complex capital structures.
Accordingly, basic earnings per share was computed by dividing net income by the
weighted average number of common shares outstanding for the year. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Diluted earnings per share was calculated by dividing net
income, adjusted to eliminate the after-tax effect of interest expense, by the
weighted average number of common shares outstanding and the weighted average
number of shares issuable assuming full conversion of the convertible
subordinated notes as of the issuance date, February 4, 1997 (see Note 8).
Because the Company does not maintain an ongoing plan for the issuance of
stock options, the options to purchase up to 1.0 million shares of common stock
assumed in the merger with Arethusa (the "Arethusa Options") have not been
included as dilutive potential shares. The effect on the computation of per
share earnings, had the Arethusa Options been included, was not material. At
December 31, 1998, 1997 and 1996, there were Arethusa Options outstanding for
the purchase of approximately 48,000, 0.1 million and 0.2 million shares of
common stock, respectively.
Weighted average shares outstanding and all per share amounts included
herein for all periods presented have been restated to include the retroactive
effect of the July 1997 two-for-one stock split in the form of a stock dividend
(see Note 3).
35
<PAGE> 36
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. MERGER WITH ARETHUSA
In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling
rigs, operated two additional mobile offshore drilling rigs pursuant to bareboat
charters and provided drilling services worldwide to international and
government-controlled oil and gas companies. The consideration consisted of the
following (in thousands):
<TABLE>
<S> <C>
Common stock issued to Arethusa shareholders................ $539,305
Arethusa stock options assumed.............................. 11,381
--------
Total equity consideration........................ $550,686
========
</TABLE>
The Company issued 35.8 million common shares to the Arethusa shareholders
based on an exchange ratio of 1.76 shares for each share of issued and
outstanding Arethusa common stock. The shares were valued for financial
reporting purposes at $15.07 based on a seven-day average of the closing price
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration, the Company incurred
approximately $16.9 million of cash acquisition costs associated with the
Arethusa Merger.
The Arethusa Merger was accounted for as a purchase. The purchase price
included, at estimated fair value, current assets of $67.2 million, drilling and
other property and equipment of $505.5 million, and the assumption of current
liabilities of $19.0 million, other net long-term liabilities of $2.2 million,
and debt of $67.5 million. In addition, a deferred tax liability of $66.8
million was recorded primarily for the difference in the basis for tax and
financial reporting purposes of the net assets acquired. The excess of the
purchase price over the estimated fair value of net assets acquired amounted to
approximately $133.5 million, which has been accounted for as goodwill and is
being amortized over 20 years using the straight-line method (see Note 6).
The accompanying Consolidated Statements of Income reflect the operating
results of Arethusa since April 29, 1996, the effective date of the Arethusa
Merger. Pro forma consolidated operating results of the Company and Arethusa for
the year ended December 31, 1996 assuming the acquisition had been made as of
January 1, 1996 are summarized below (in thousands, except per share date):
<TABLE>
<S> <C>
Revenue..................................................... $667,543
Net income.................................................. 153,409
Net income per share:
Basic..................................................... 1.13
Diluted................................................... 1.13
</TABLE>
The pro forma information for the year ended December 31, 1996 includes
adjustments for additional depreciation based on the fair market value of the
drilling and other property and equipment acquired and the amortization of
goodwill arising from the transaction. The pro forma information is not
necessarily indicative of the results of operations had the transactions been
effected on the assumed dates.
36
<PAGE> 37
3. COMMON STOCK
In July 1997, the Board of Directors declared a two-for-one stock split in
the form of a stock dividend which was distributed on August 14, 1997 to
stockholders of record on July 24, 1997. The dividend was charged to retained
earnings in the amount of $0.7 million, which was based on the par value of 69.6
million shares of common stock.
In April 1997, the Company completed a public offering of 2.5 million
shares of common stock generating net proceeds of approximately $82.3 million.
The net proceeds were used to acquire the Ocean Confidence, a semisubmersible
accommodation vessel (see Note 5).
4. MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year............................... $304,224 $ (21) $304,203
Due after one year through five years............. 24,982 91 25,073
Collateralized mortgage obligations................. 203,504 (452) 203,052
Equity securities................................... 12,117 (8,671) 3,446
-------- ------- --------
Total..................................... $544,827 $(9,053) $535,774
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Repurchase agreements with third parties............ $350,000 $ -- $350,000
Equity securities................................... 13,300 (163) 13,137
-------- ----- --------
Total..................................... $363,300 $(163) $363,137
======== ===== ========
</TABLE>
All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Marketable securities," representing the
investment of cash available for current operations.
During the year ended December 31, 1998, certain equity and debt securities
due within one year were sold for proceeds of $2.4 million and $1,262.0 million,
respectively. The resulting after-tax realized gains for equity and debt
securities were $0.1 million and $0.7 million, respectively. Certain debt
securities due after one year were sold for proceeds of $501.9 million during
the year ended December 31, 1998, with a resulting after-tax realized gain of
$1.3 million. Also during the year ended December 31, 1998, investments through
repurchase agreements with third parties were sold for their contracted amounts
totaling $350.0 million.
During 1997, debt securities due within one year were sold at various times
for proceeds of $710.1 million, resulting in realized gains that were
immaterial. In addition, debt securities due after one year were sold for
proceeds of $125.1 million, resulting in an after-tax realized gain of $0.7
million.
37
<PAGE> 38
5. 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,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment................................. $1,929,540 $1,781,107
Construction work in progress............................... 88,266 17,696
Land and buildings.......................................... 13,874 12,552
Office equipment and other.................................. 14,100 10,551
---------- ----------
Cost...................................................... 2,045,780 1,821,906
Less accumulated depreciation............................... (493,960) (370,165)
---------- ----------
Drilling and other property and equipment, net............ $1,551,820 $1,451,741
========== ==========
</TABLE>
Asset Acquisitions
In May 1997, the Company acquired the Ocean Confidence, a semisubmersible
accommodation vessel with dynamic-positioning capabilities, for approximately
$81.0 million in cash. The Company chartered the vessel to the seller until
December 1997. The Ocean Confidence is currently being converted to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep waters. The upgrade is anticipated to be completed in early 2000,
when the rig will commence a five-year contract in the Gulf of Mexico.
Asset Dispositions
During the year ended December 31, 1997, the Company sold a semisubmersible
drilling rig, the Ocean Zephyr, located offshore Brazil, for a $5.4 million note
receivable, which was paid in July 1998, generating an after-tax gain of $0.6
million. Also in 1997, the Company sold a warehouse facility on approximately
6.6 acres of land near Houston, Texas, which was acquired in the Arethusa
Merger, for approximately $0.6 million (see Note 2). No gain or loss was
recognized on this sale.
During the year ended December 31, 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly owned subsidiary of the
Company, for approximately $26.0 million in cash, which generated an after-tax
gain of $15.6 million, or $0.12 per share on a diluted basis. The assets sold
consisted of ten land drilling rigs, all of which were operating, 18 trucks, a
yard facility in Alice, Texas and various other associated equipment. In
addition, two of the Company's shallow water jack-up drilling rigs (the Ocean
Magallanes and the Ocean Conquest) and a semisubmersible (the Ocean Zephyr II),
all of which had previously been stacked, were sold during 1996 increasing net
income by $7.0 million, or $0.05 per share on a diluted basis.
6. GOODWILL
The Arethusa Merger generated an excess of the purchase price over the
estimated fair value of the net assets acquired (see Note 2). Cost and
accumulated amortization of such goodwill is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $127,418 $129,746
Less: Accumulated amortization.............................. (17,593) (11,123)
-------- --------
Total............................................. $109,825 $118,623
======== ========
</TABLE>
38
<PAGE> 39
During the years ended December 31, 1998 and 1997, adjustments of $2.3
million and $2.9 million, respectively, were recorded to reduce goodwill before
accumulated amortization. These adjustments represent the tax benefit of the
excess of tax deductible goodwill over the reported amounts of goodwill when
realized on the tax return.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims............................ $20,676 $23,960
Payroll and benefits........................................ 18,701 15,951
Interest payable............................................ 5,667 5,684
Other....................................................... 8,239 3,340
------- -------
Total............................................. $53,283 $48,935
======= =======
</TABLE>
8. LONG-TERM DEBT
Convertible Subordinated Notes
In February 1997, the Company issued $400.0 million of convertible
subordinated notes (the "Notes") due February 15, 2007. The Notes are
convertible into shares of the Company's common stock, at a conversion price of
$40.50 per share, subject to adjustment in certain circumstances. The Notes have
a stated interest rate of 3.75 percent and an effective interest rate of 3.93
percent. Interest is payable semi-annually on each February 15 and August 15.
The Notes are redeemable, in whole or, from time to time, in part, at the
option of the Company, at any time on or after February 22, 2001, at specified
redemption prices, plus accrued and unpaid interest to the date of redemption.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to the prior payment in full of the principal and premium, if
any, and interest on all indebtedness of the Company for borrowed money, other
than the Notes, with certain exceptions, and effectively subordinated in right
of payment to the prior payment in full of all indebtedness of the Company's
subsidiaries. The Notes do not restrict the Company's ability to incur other
indebtedness or additional indebtedness of the Company's subsidiaries.
Credit Agreements
In August 1997, the Company terminated its revolving credit facility with a
group of banks which was available through December 2001 and had provided a
maximum credit commitment of $200.0 million.
39
<PAGE> 40
9. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Comprehensive
income includes net income, foreign currency translation gains and losses, and
unrealized holding gains and losses on investments.
The income tax effects allocated to the components of other comprehensive
income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation gain (loss)............. $ (1,430) $1,139 $ (291)
Unrealized gain (loss) on investments:
Gain (loss) arising during 1998.................... (8,918) 3,121 (5,797)
Reclassification adjustment........................ 28 (10) 18
-------- ------ -------
Net unrealized gain (loss)......................... (8,890) 3,111 (5,779)
-------- ------ -------
Other comprehensive income (loss).................... $(10,320) $4,250 $(6,070)
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation loss.................... $ (894) $ -- $ (894)
Unrealized gain (loss) on investments................ (163) 57 (106)
-------- ------ -------
Other comprehensive income (loss).................... $ (1,057) $ 57 $(1,000)
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation gain.................... $ 341 $ -- $ 341
-------- ------ -------
Other comprehensive income........................... $ 341 $ -- $ 341
======== ====== =======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire
through the year 2002. Total rent expense amounted to $1.8 million, $1.8
million, and $1.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively. Minimum future rental payments under leases are approximately $0.7
million, $0.3 million, $0.1 million, and $0.1 million for the years 1999 to
2002, respectively. There are no minimum future rental payments under leases
after the year 2002.
The Company is contingently liable as of December 31, 1998 in the amount of
$21.2 million under certain performance, bid, and export bonds and bonds
securing obligations in connection with litigation. On the Company's behalf,
banks have issued letters of credit securing certain of these bonds.
In 1996, the survivors of a deceased employee of a subsidiary of the
Company, Diamond M Onshore, Inc., sued such subsidiary in Duval County, Texas,
for damages as a result of the death of the employee. The plaintiffs obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company appealed the judgment. In July 1998, the Texas Fourth Court of Appeals
in San Antonio reversed the judgment of the trial court and rendered that the
plaintiffs take nothing. A motion for a new trial filed by the plaintiffs was
denied by the Texas Fourth Court of Appeals in December 1998. In February 1999,
the plaintiffs filed a petition for review with the Supreme Court of Texas. The
Company has received notices from certain
40
<PAGE> 41
of its insurance underwriters reserving their rights to deny coverage on the
Company's insurance policies in excess of $2.0 million for damages resulting
from such lawsuit. Management believes that the Company has complied with all
conditions of coverage for final unappealable damages, if any, in the case.
While the ultimate liability in this matter is difficult to assess, it is
management's belief that the final outcome is not reasonably likely to have a
material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows. The Company has not established a
liability for such claim at this time.
A former subsidiary of Arethusa, which is now a subsidiary of the Company,
defended and indemnified Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants"), pursuant to a contractual defense and indemnification
agreement, in a suit for tortious interference with contract and conspiracy to
tortiously interfere with contract. The plaintiffs sought $14.0 million in
actual damages and unspecified punitive damages, plus costs of court, interest
and attorneys' fees. In November 1997, the jury awarded a take nothing judgment
in favor of the Zapata Defendants. The plaintiffs appealed the judgment and the
appellate court ordered the parties to mediation. The case went to mediation in
July 1998 with no resolution and the appeal is pending. No provision for any
liability has been made in the financial statements.
Various other 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 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
consolidated financial position, results of operations, or cash flows.
11. FINANCIAL INSTRUMENTS
Concentrations of Credit and Market Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit or market risk consist primarily of periodic temporary
investments of excess cash and trade accounts receivable, and investments in
debt and equity securities, including collateralized mortgage obligations
("CMO's"). The Company places its temporary excess cash investments in high
quality short-term money market instruments through several financial
institutions. At times, such investments may be in excess of the insurable
limit. 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 primarily due to the entities comprising the Company's customer base.
Since the market for the Company's services is the offshore 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 and, historically, the Company has not experienced significant
losses on trade receivables. The Company's investments in debt securities, which
are primarily U.S. government securities, do not impose a significant market
risk on the Company as they are generally short-term with ready marketability.
Investments in CMO's are not considered high-risk as they consist of high
quality mortgage-backed securities and are principal-only certificates, which
eliminates the risk of potential loss related to prepayment.
Fair Values
The amounts reported in the Consolidated Balance Sheets for cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
approximate fair value. At December 31, 1998 and 1997, the fair value of the
Notes was approximately $371.2 million and $527.0 million, respectively, as
compared to a carrying amount of $400.0 million.
The estimated fair value amounts have been determined by the Company using
appropriate valuation methodologies and information available to management as
of December 31, 1998 and 1997. 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 following
41
<PAGE> 42
methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it was practicable to estimate that value:
Cash and cash equivalents -- The carrying amounts approximate fair
value because of the short maturity of these instruments.
Marketable securities -- The fair values of the debt and equity
securities, including CMO's, available for sale were based on quoted market
prices as of December 31, 1998 and 1997.
Accounts receivable and accounts payable -- The carrying amounts
approximate fair value based on the nature of the instruments.
Long-term debt -- The fair value was based on the quoted market price
from brokers of the Notes.
12. RELATED PARTY TRANSACTIONS
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 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.
The Company was charged $0.4 million, $0.3 million, and $0.2 million by Loews
for these support functions during the years ended December 31, 1998, 1997, and
1996, respectively.
13. INCOME TAXES
An analysis of the Company's income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. -- current.................................... $(110,379) $ (99,001) $(44,950)
U.S. -- deferred................................... (61,403) (34,650) (17,278)
Non-U.S. -- current................................ (34,790) (17,300) (3,486)
State and other.................................... -- (505) (603)
--------- --------- --------
Total.................................... $(206,572) $(151,456) $(66,317)
========= ========= ========
</TABLE>
42
<PAGE> 43
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 12,236 $ 19,143
Worker's compensation accruals(1)......................... 4,960 6,188
Foreign tax credits....................................... 15,181 9,023
Other..................................................... 10,909 2,007
--------- ---------
Total deferred tax assets......................... 43,286 36,361
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................. (252,141) (196,546)
Undistributed earnings of non-U.S. subsidiaries........... (23,858) (17,668)
Non-U.S. deferred taxes................................... (15,402) (15,236)
Other..................................................... (10,722) (10,236)
--------- ---------
Total deferred tax liabilities......................... (302,123) (239,686)
--------- ---------
Net deferred tax liability........................ $(258,837) $(203,325)
========= =========
</TABLE>
- ---------------
(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.
Except for selective dividends, the Company's practice prior to 1997 was to
reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their
remittance indefinitely. Thus, no additional U.S. taxes were provided on such
earnings. However, beginning in 1997, the Company intends to repatriate its
post-1996 earnings in the foreseeable future. As a result, the Company has
accrued U.S. taxes on all undistributed non-U.S. earnings generated since
January 1, 1997. Undistributed earnings of non-U.S. subsidiaries generated prior
to 1997 for which no U.S. deferred income tax provision has been made for
possible future remittances totaled approximately $60.5 million at December 31,
1998. In addition, the Company has negative undistributed earnings of non-U.S.
subsidiaries generated prior to 1997 of $57.3 million at December 31, 1998 for
which no deferred tax benefit has been recognized. It is not practicable to
estimate the amount of unrecognized U.S. deferred taxes, if any, that might be
payable on the actual or deemed remittance of such earnings. On actual
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 believes it is probable that its deferred tax assets of $43.3
million will be realized on future tax returns, primarily from the generation of
future taxable income through both profitable operations and future reversals of
existing taxable temporary differences. However, if the Company is unable to
generate sufficient taxable income in the future through operating results, a
valuation allowance will be required as a charge to expense.
Deferred income taxes are not recorded on differences between financial
reporting and tax bases of investments in stock of the Company's subsidiaries,
unless realization of the effect is probable in the foreseeable future. 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.
In connection with the Arethusa Merger, the Company acquired net operating
loss ("NOL") carryforwards available to offset future taxable income. The
utilization of these NOL carryforwards is limited pursuant to Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). For the year ended
December 31, 1998, the Company utilized $20.7 million of such carryforwards and
has previously recorded a
43
<PAGE> 44
deferred tax asset for the benefit of the remaining NOL carryforwards available
to be carried forward to future years. Such carryforwards expire as follows:
<TABLE>
<CAPTION>
TAX BENEFIT OF
NET OPERATING
YEAR LOSSES
- ---- --------------
(IN THOUSANDS)
<S> <C>
2005........................................................ $ 6
2006........................................................ 2,364
2007........................................................ 2,739
2008........................................................ 1,972
2009........................................................ 3,838
2010........................................................ 1,317
-------
Total............................................. $12,236
=======
</TABLE>
The difference between actual income tax expense and the tax provision
computed by applying the statutory federal income tax rate to income before
taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income tax expense:
U.S...................................................... $ 532,378 $ 373,319 $153,615
Non-U.S.................................................. 57,853 56,742 59,090
--------- --------- --------
Worldwide................................................ $ 590,231 $ 430,061 $212,705
========= ========= ========
Expected income tax expense at federal statutory rate...... $(206,581) $(150,521) $(74,447)
Non-U.S. income:
Utilization of net operating loss carryforwards.......... -- -- 6,843
Impact of non-U.S. losses for which a current tax benefit
is not available...................................... -- -- (1,642)
Adjustment to prior year return............................ -- -- 1,737
State taxes and other...................................... 9 (935) 1,192
--------- --------- --------
Income tax expense............................... $(206,572) $(151,456) $(66,317)
========= ========= ========
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company maintains defined contribution retirement plans for its U.S.,
U.K. and third country national ("TCN") employees. The plan for U.S. employees
(the "401(k) Plan") is designed to qualify under Section 401(k) of the Code.
Under the 401(k) Plan, each participant may elect to defer taxation on a portion
of his or her eligible earnings, as defined by the 401(k) 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 401(k) Plan. The Company
contributes 3.75 percent of a participant's defined compensation and matches 25
percent of the first 6 percent of each employee's compensation contributed.
Participants are fully vested immediately upon enrollment in the plan. For the
years ended December 31, 1998, 1997, and 1996, the Company's provision for
contributions was $5.7 million, $4.1 million, and $2.5 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, 1998, 1997, and 1996, the Company's provision for contributions was
$0.5 million, $0.3 million, and $0.3 million, respectively.
The plan for the Company's TCN employees was effective April 1, 1998 and is
similar to the 401(k) Plan. The Company contributes 3.75 percent of a
participant's defined compensation and matches
44
<PAGE> 45
25 percent of the first 6 percent of each employee's compensation contributed.
For the year ended December 31, 1998, the Company's provision for contributions
was $0.3 million.
In connection with the Arethusa Merger, the Company assumed Arethusa's
Profit Sharing Plan. The plan was established as a defined contribution profit
sharing plan effective October 1, 1992 covering substantially all U.S. citizens,
U.S. permanent residents and third country national expatriates employed by
Arethusa Off-Shore Company, a wholly owned subsidiary of Arethusa. Participants
could elect to make contributions by directing the Company to withhold a
percentage of their earnings. A participating employee could also elect to make
after-tax contributions to the plan. The Company contributed 3.75 percent of a
participant's defined compensation. The Company's provision for such
contributions for the year ended December 31, 1996 was $0.3 million. Effective
January 1, 1997, the Company modified the 401(k) Plan by merging the Arethusa
Profit Sharing Plan into the Company's existing plan.
Deferred Compensation and Supplemental Executive Retirement Plan
The Company established its Deferred Compensation and Supplemental
Executive Retirement Plan in December 1996. The Company contributes any portion
of the 3.75 percent of the base salary contribution and the matching
contribution to the 401(k) Plan that cannot be contributed because of the
limitations of Sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g) and 415 of the
Code and because of elective deferrals that the participant makes under the
plan. Additionally, the plan provides that participants may defer up to 10
percent of base compensation and/or up to 100 percent of any performance bonus.
Participants in this plan are a select group of management or highly compensated
employees of the Company and are fully vested in all amounts paid into the plan.
The Company's provision for contributions for the years ended December 31, 1998,
1997, and 1996 were not material.
Pension Plan
The defined benefit pension plan, established by Arethusa effective October
1, 1992, was frozen on April 30, 1996. At that date, all participants were
deemed fully vested in the plan, which covered substantially all U.S. citizens
and U.S. permanent residents who were employed by Arethusa. Benefits are
calculated and paid based on an employee's years of credited service and average
compensation at the date the plan was frozen using an excess benefit formula
integrated with social security covered compensation.
Pension costs are determined actuarially and funded as required by the
Code. The plan's assets are invested in cash and cash equivalents, equity
securities, government and corporate debt securities. As a result of freezing
the plan, no service cost has been accrued for the years presented.
45
<PAGE> 46
The data and significant actuarial assumptions as of the plan's year end
set forth in the following tables are presented in accordance with SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
the Company has retroactively adopted for all periods presented.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 9,365 $ 8,536
Interest cost............................................. 668 633
Actuarial gain............................................ 877 506
Benefits paid............................................. (313) (310)
------- -------
Benefit obligation at end of year......................... 10,597 9,365
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year............ 12,971 10,119
Actual return on plan assets.............................. (87) 3,162
Benefits paid............................................. (313) (310)
------- -------
Fair value of plan assets at end of year.................. 12,571 12,971
------- -------
Funded status............................................. 1,974 3,606
Unrecognized gain......................................... (394) (2,218)
------- -------
Prepaid benefit cost...................................... $ 1,580 $ 1,388
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------- -------
<S> <C> <C>
Weighted-average assumptions:
Discount rate............................................. 6.75% 7.25%
Expected long-term rate................................... 9.00% 9.00%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Components of net periodic benefit cost:
Interest cost............................................. $ (668) $ (633)
Expected return on plan assets............................ 1,154 902
Amortization of gain...................................... 63 --
------- -------
Net periodic pension benefit income....................... $ 549 $ 269
======= =======
</TABLE>
15. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS
The Company manages its business on the basis of one reportable segment,
contract drilling of offshore oil and gas wells. Although the Company provides
contract drilling services from different types of offshore drilling rigs and
provides such services in many geographic locations, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all divisions and locations, including the nature of
services provided and the type of customers of such services. The data below is
presented in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which the Company has retroactively adopted
for all periods presented.
46
<PAGE> 47
Similar Services
Revenues from external customers for contract drilling and similar services
by equipment-type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its integrated services):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fourth-generation semisubmersibles.................. $ 286,875 $206,708 $112,022
Other semisubmersibles.............................. 707,227 545,701 341,163
Jack-ups............................................ 209,134 192,169 122,503
Integrated services................................. 26,876 36,342 32,798
Land................................................ -- -- 22,675
Other............................................... -- 3,257 --
Eliminations........................................ (21,311) (28,084) (19,731)
---------- -------- --------
Total revenues.................................... $1,208,801 $956,093 $611,430
========== ======== ========
</TABLE>
Geographic Areas
At December 31, 1998, the Company had operations offshore seven countries
outside of the United States. As a result, the Company is exposed to the risk of
changes in social, political and economic conditions inherent in foreign
operations and the Company's results of operations and the value of its foreign
assets are affected by fluctuations in foreign currency exchange rates. Revenues
by geographic area are presented by attributing revenues to the individual
country where the services were performed.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States............................................. $ 692,648 $609,470 $384,708
Foreign:
Europe/Africa.......................................... 292,579 201,893 126,618
Australia/Southeast Asia............................... 139,056 93,963 65,335
South America.......................................... 84,518 50,767 34,769
---------- -------- --------
516,153 346,623 226,722
Interarea revenues from affiliates:
United States............................................. 169,322 74,096 31,147
South America............................................. -- 971 1,921
Other..................................................... 7,284 14,658 6,156
---------- -------- --------
176,606 89,725 39,224
Eliminations................................................ (176,606) (89,725) (39,224)
---------- -------- --------
Total............................................. $1,208,801 $956,093 $611,430
========== ======== ========
</TABLE>
47
<PAGE> 48
An individual foreign country may, from time to time, contribute a material
percentage of the Company's total revenues from unaffiliated customers. For the
years ended December 31, 1998, 1997, and 1996, individual countries that
contributed five percent or more of the Company's total revenues from
unaffiliated customers are listed below.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United Kingdom.............................................. 11.0% 11.1% 15.9%
Brazil...................................................... 7.0% 5.3% 5.7%
Australia................................................... 5.3% 4.7% 6.1%
</TABLE>
Long-lived tangible assets located in the United States and all foreign
countries in which the Company holds assets as of December 31, 1998, 1997, and
1996 are listed below. 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.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Drilling and other property and equipment, net:
United States.................................. $1,073,862 $ 936,906 $ 819,120
Foreign:
Europe/Africa............................... 233,753 313,536 166,130
South America............................... 186,432 143,141 151,323
Australia/Southeast Asia.................... 57,773 58,158 61,587
---------- ---------- ----------
477,958 514,835 379,040
---------- ---------- ----------
Total.................................. $1,551,820 $1,451,741 $1,198,160
========== ========== ==========
</TABLE>
Individual countries with material concentrations of the Company's assets
included the United Kingdom and Brazil. Approximately 5.2 percent, 10.8 percent,
and 11.1 percent of the Company's total drilling and other property and
equipment were located in or offshore of the United Kingdom as of December 31,
1998, 1997, and 1996, respectively. Approximately 12.0 percent, 9.9 percent, and
12.6 percent of the Company's total drilling and other property and equipment
were located in or offshore Brazil as of December 31, 1998, 1997, and 1996,
respectively.
Major Customers
The Company's customer base includes major and independent oil and gas
companies and government-owned oil companies. During the year ended December 31,
1998, one customer contributed 17.4 percent of total revenues. During the year
ended December 31, 1997, one customer contributed 14.3 percent of total
revenues. During the year ended December 31, 1996, two customers contributed
13.8 percent and 13.5 percent of total revenues.
48
<PAGE> 49
16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years ended December
31, 1998 and 1997 is shown below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenues........................................... $286,069 $323,517 $315,786 $283,429
Operating income................................... 122,043 168,452 160,249 118,255
Income before income tax expense................... 124,648 172,430 167,220 125,933
Net income......................................... 80,722 111,665 108,702 82,570
Net income per share:
Basic............................................ 0.58 0.80 0.79 0.61
Diluted.......................................... 0.56 0.76 0.75 0.58
1997
Revenues........................................... $204,733 $228,534 $250,497 $272,329
Operating income................................... 84,306 98,229 117,013 120,325
Income before income tax expense................... 87,014 100,389 119,338 123,320
Net income......................................... 56,230 65,234 77,831 79,310
Net income per share:
Basic............................................ 0.41 0.47 0.56 0.57
Diluted.......................................... 0.39 0.45 0.54 0.55
</TABLE>
49
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 1999 Annual Meeting of Stockholders, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits
(1) Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 27
Consolidated Balance Sheets................................. 28
Consolidated Statements of Income........................... 29
Consolidated Statements of Stockholders' Equity............. 30
Consolidated Statements of Comprehensive Income............. 31
Consolidated Statements of Cash Flows....................... 32
Notes to Consolidated Financial Statements.................. 33
</TABLE>
(2) Financial Statement Schedules
No schedules have been included herein because the information
required to be submitted has been included in the Company's Consolidated
Financial Statements or the notes thereto, or the required information
is inapplicable.
<TABLE>
<S> <C>
(3) Index of Exhibits............................. 51
</TABLE>
See Index of Exhibits for a list of those exhibits filed herewith,
which index also includes and identifies management contracts or
compensatory plans or arrangements required to be filed as exhibits to
this Form 10-K by Item 601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
50
<PAGE> 51
(c) Index of Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).
3.2 -- Amended and Restated By-laws of the Company (incorporated
by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
4.1 -- Indenture, dated as of February 4, 1997, between the
Company and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K filed February 11,
1997).
4.2 -- Supplemental Indenture, dated as of February 4, 1997,
between the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed February 11,
1997).
10.1 -- Registration Rights Agreement (the 'Registration Rights
Agreement") dated October 16, 1995 between Loews and the
Company (incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.2 -- Amendment to the Registration Rights Agreement, dated
September 16, 1997, between Loews and the Company
(incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.3 -- Services Agreement dated October 16, 1995 between Loews
and the Company (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.4+ -- Diamond Offshore Management Bonus Program, as amended and
restated, and dated as of December 31, 1997 (incorporated
by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997).
10.5+ -- Diamond Offshore Deferred Compensation and Supplemental
Executive Retirement Plan effective December 17, 1996
(incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.6+ -- First Amendment to Diamond Offshore Deferred Compensation
and Supplemental Executive Retirement Plan dated March
18, 1998 (incorporated by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
11.1* -- Statement re Computation of Per Share Earnings.
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
+ Management contracts or compensatory plans or arrangements.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 1, 1999.
DIAMOND OFFSHORE DRILLING, INC.
By: /s/ GARY T. KRENEK*
----------------------------------
Gary T. Krenek
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES S. TISCH* Chairman of the Board and Chief March 1, 1999
- ----------------------------------------------------- Executive Officer
James S. Tisch
/s/ LAWRENCE R. DICKERSON* President, Chief Operating Officer March 1, 1999
- ----------------------------------------------------- and Director
Lawrence R. Dickerson
/s/ GARY T. KRENEK* Vice President and Chief Financial March 1, 1999
- ----------------------------------------------------- Officer (Principal Financial
Gary T. Krenek Officer)
/s/ LESLIE C. KNOWLTON* Controller (Principal Accounting March 1, 1999
- ----------------------------------------------------- Officer)
Leslie C. Knowlton
/s/ HERBERT C. HOFMANN* Director March 1, 1999
- -----------------------------------------------------
Herbert C. Hofmann
/s/ ARTHUR L. REBELL* Director March 1, 1999
- -----------------------------------------------------
Arthur L. Rebell
/s/ MICHAEL H. STEINHARDT* Director March 1, 1999
- -----------------------------------------------------
Michael H. Steinhardt
/s/ RAYMOND S. TROUBH* Director March 1, 1999
- -----------------------------------------------------
Raymond S. Troubh
*By: /s/ WILLIAM C. LONG
------------------------------------------------
William C. Long
Attorney-in-Fact
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).
3.2 -- Amended and Restated By-laws of the Company (incorporated
by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1998).
4.1 -- Indenture, dated as of February 4, 1997, between the
Company and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K filed February 11,
1997).
4.2 -- Supplemental Indenture, dated as of February 4, 1997,
between the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed February 11,
1997).
10.1 -- Registration Rights Agreement (the 'Registration Rights
Agreement") dated October 16, 1995 between Loews and the
Company (incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.2 -- Amendment to the Registration Rights Agreement, dated
September 16, 1997, between Loews and the Company
(incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.3 -- Services Agreement dated October 16, 1995 between Loews
and the Company (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.4+ -- Diamond Offshore Management Bonus Program, as amended and
restated, and dated as of December 31, 1997 (incorporated
by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997).
10.5+ -- Diamond Offshore Deferred Compensation and Supplemental
Executive Retirement Plan effective December 17, 1996
(incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.6+ -- First Amendment to Diamond Offshore Deferred Compensation
and Supplemental Executive Retirement Plan dated March
18, 1998 (incorporated by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
11.1* -- Statement re Computation of Per Share Earnings.
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
+ Management contracts or compensatory plans or arrangements.
<PAGE> 1
EXHIBIT 11.1
DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED(1)
AVERAGE PER AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income............. $383,659 138,020 $2.78 $278,605 138,560 $2.01
Effect of Dilutive
Potential Shares(2)
Convertible notes
issued 2/4/97(3)..... 9,419 9,876 6,583 8,929
-------- ------- ----- -------- ------- -----
Diluted EPS
Net income + assumed
conversions.......... $393,078 147,896 $2.66 $285,188 147,489 $1.93
======== ======= ===== ======== ======= =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996
------------------------------------
WEIGHTED(1)
AVERAGE PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Net income............. $146,388 124,462 $1.18
Effect of Dilutive
Potential Shares(2)
Convertible notes
issued 2/4/97(3)..... -- --
-------- ------- -----
Diluted EPS
Net income + assumed
conversions.......... $146,388 124,462 $1.18
======== ======= =====
</TABLE>
- ---------------
(1) Weighted average shares outstanding have been restated to include the
retroactive effect of the July 1997 two-for-one stock split in the form of a
stock dividend.
(2) Because the Company does not maintain an ongoing plan for the issuance of
stock options, the options to purchase up to 1.0 million shares of common
stock assumed in the merger with Arethusa (the "Arethusa Options") have not
been included as dilutive potential shares. The effect on the computation of
per share earnings, had the Arethusa options been included, was not
material. At December 31, 1998, 1997 and 1996, there were Arethusa options
outstanding for the purchase of approximately 48,000, 0.1 million and 0.2
million shares of common stock, respectively.
(3) On February 4, 1997, the Company issued $400.0 million of 3.75 percent
convertible subordinated notes due February 15, 2007. The notes are
convertible into approximately 9.8 million shares of the Company's common
stock at any time prior to February 15, 2007 at a conversion price of $40.50
per share. The number of shares outstanding for the years ended December 31,
1998 and 1997 was increased to include the weighted average number of shares
issuable assuming full conversion of the notes on February 4, 1997 and net
income was adjusted to eliminate the after-tax effect of interest expense on
these notes.
<PAGE> 1
EXHIBIT 12.1
DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF RATIOS
(THOUSANDS OF DOLLARS)
RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS:
Pretax income (loss) from continuing
operations............................ $590,231 $430,061 $212,705 $(13,803) $(46,425)
Less: Interest capitalized during the
period and actual preferred
dividend requirements of
majority-owned subsidiaries and
50%-owned persons included in
fixed charges but not deducted
from pretax income from above..... (1,031) (4,382) (3,973) -- --
Add: Previously capitalized interest
amortized during the period........ 334 192 -- -- --
-------- -------- -------- -------- --------
Total earnings, before fixed charge
addition.............................. 589,534 425,871 208,732 (13,803) (46,425)
-------- -------- -------- -------- --------
COMPUTATION OF FIXED CHARGES:
Interest, including interest
capitalized........................... 16,121 15,241 6,831 27,052 31,346
-------- -------- -------- -------- --------
Total fixed charges..................... 16,121 15,241 6,831 27,052 31,346
-------- -------- -------- -------- --------
Total earnings and fixed charges........ $605,655 $441,112 $215,563 $ 13,249 $(15,079)
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges(1)... 37.57 28.94 31.56 -- --
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The deficiency in the Company's earnings available for fixed charges for the
years ended December 31, 1995 and 1994 was approximately $13.8 million and
$46.4 million, respectively.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
<S> <C>
Diamond Offshore Company.................................... Delaware
Diamond Offshore (USA) Inc.................................. Delaware
Diamond Offshore Team Solutions, Inc........................ Delaware
Diamond Offshore General Company............................ Delaware
Diamond Offshore Exploration (Bermuda) Limited.............. Delaware
Diamond Offshore Drilling (Overseas), Inc................... Delaware
Arethusa Off-Shore Company.................................. Delaware
Diamond Offshore Guardian Company........................... Delaware
Diamond Offshore Finance Company............................ Delaware
Concord Drilling Limited.................................... Delaware
Saratoga Drilling Limited................................... Delaware
Yorktown Drilling Limited................................... Delaware
Scotian Drilling Limited.................................... Delaware
Heritage Drilling Limited (d/b/a Diamond Offshore Heritage
Drilling Limited in Texas)................................ Delaware
Sovereign Drilling Limited.................................. Delaware
Neptune Drilling Limited.................................... Delaware
Whittington Drilling Limited................................ Delaware
Yatzy Drilling Limited...................................... Delaware
Winner Drilling Limited..................................... Delaware
Diamond Offshore Management Company......................... Delaware
Diamond Offshore Development Company........................ Delaware
Brasdril-Sociedade de Perfuracoes Ltda...................... Brazil
Diamond Offshore Alaska Inc................................. Delaware
Diamond Offshore Atlantic Inc............................... Delaware
Diamond Offshore (Mexico) Company........................... Delaware
Diamond Offshore Drilling Services Inc...................... Delaware
Diamond Offshore International Corporation.................. Delaware
Ensenada Internacional S.A.................................. Panama
Diamond Offshore Enterprises Inc............................ Delaware
Cumberland Maritime Corporation............................. Delaware
Diamond Offshore Limited.................................... England
Diamond Offshore Drilling (UK) Limited...................... England
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Regulation Statement No.
333-19987 of Diamond Offshore Drilling, Inc. (the "Company") on Form S-3 of our
report dated January 25, 1999, appearing in this Annual Report on Form 10-K of
the Company for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
March 1, 1999
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
James S. Tisch hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
- ---------- ---------------
<C> <S> <C>
/s/ JAMES S. TISCH Chief Executive Officer & February 19, 1999
- ----------------------------------------------------- Chairman of the Board
James S. Tisch
</TABLE>
<PAGE> 2
EXHIBIT 24.1
POWER OF ATTORNEY
Lawrence R. Dickerson hereby designates and appoints William C. Long and
Gary T. Krenek and each of them (with full power to each of them to act alone)
as his attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LAWRENCE R. DICKERSON President and Chief February 19, 1999
- ----------------------------------------------------- Operating Officer
Lawrence R. Dickerson
</TABLE>
<PAGE> 3
EXHIBIT 24.1
POWER OF ATTORNEY
Gary T. Krenek hereby designates and appoints William C. Long and Leslie C.
Knowlton and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GARY T. KRENEK Vice President and Chief February 19, 1999
- ----------------------------------------------------- Financial Officer
Gary T. Krenek
</TABLE>
<PAGE> 4
EXHIBIT 24.1
POWER OF ATTORNEY
Leslie C. Knowlton hereby designates and appoints William C. Long and Gary
T. Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LESLIE C. KNOWLTON Controller February 19, 1999
- -----------------------------------------------------
Leslie C. Knowlton
</TABLE>
<PAGE> 5
EXHIBIT 24.1
POWER OF ATTORNEY
Herbert C. Hofmann hereby designates and appoints William C. Long and Gary
T. Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HERBERT C. HOFMANN Director February 19, 1999
- -----------------------------------------------------
Herbert C. Hofmann
</TABLE>
<PAGE> 6
EXHIBIT 24.1
POWER OF ATTORNEY
Arthur L. Rebell hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR L. REBELL Director February 19, 1999
- -----------------------------------------------------
Arthur L. Rebell
</TABLE>
<PAGE> 7
EXHIBIT 24.1
POWER OF ATTORNEY
Michael H. Steinhardt hereby designates and appoints William C. Long and
Gary T. Krenek and each of them (with full power to each of them to act alone)
as his attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL H. STEINHARDT Director February 19, 1999
- -----------------------------------------------------
Michael H. Steinhardt
</TABLE>
<PAGE> 8
EXHIBIT 24.1
POWER OF ATTORNEY
Raymond S. Troubh hereby designates and appoints William C. Long and Gary
T. Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and resubstitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RAYMOND S. TROUBH Director February 19, 1999
- -----------------------------------------------------
Raymond S. Troubh
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 101,198
<SECURITIES> 535,774
<RECEIVABLES> 233,719
<ALLOWANCES> 0
<INVENTORY> 35,794
<CURRENT-ASSETS> 938,424
<PP&E> 2,045,780
<DEPRECIATION> 493,960
<TOTAL-ASSETS> 2,609,716
<CURRENT-LIABILITIES> 160,401
<BONDS> 400,000
0
0
<COMMON> 1,393
<OTHER-SE> 1,753,865
<TOTAL-LIABILITY-AND-EQUITY> 2,609,716
<SALES> 0
<TOTAL-REVENUES> 1,208,801
<CGS> 0
<TOTAL-COSTS> 484,625<F1>
<OTHER-EXPENSES> 155,177<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,487
<INCOME-PRETAX> 590,231
<INCOME-TAX> 206,572
<INCOME-CONTINUING> 383,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 383,659
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.66
<FN>
<F1>INCLUDES CONTRACT DRILLING EXPENSES ONLY.
<F2>INCLUDES OTHER OPERATING EXPENSES.
</FN>
</TABLE>
