<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0321760
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
As of July 31, 2000 Common stock, $0.01 par value per share 135,443,833 shares
</TABLE>
<PAGE> 2
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q/A
QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE......................................................................................1
TABLE OF CONTENTS...............................................................................2
PART I. FINANCIAL INFORMATION..................................................................3
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................3
Consolidated Statements of Income.............................................4
Consolidated Statements of Cash Flows.........................................5
Notes to Consolidated Financial Statements....................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................23
PART II. OTHER INFORMATION....................................................................24
ITEM 1. LEGAL PROCEEDINGS............................................................24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..............................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................24
ITEM 5. OTHER INFORMATION............................................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................25
SIGNATURES.....................................................................................26
EXHIBIT INDEX..................................................................................27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 340,255 $ 112,316
Marketable securities and other invested assets .............................. 606,435 529,042
Accounts receivable .......................................................... 119,434 143,569
Rig inventory and supplies ................................................... 39,993 38,760
Prepaid expenses and other ................................................... 40,102 36,605
----------- -----------
Total current assets ............................. 1,146,219 860,292
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ..................................................... 1,824,758 1,737,905
GOODWILL, NET OF ACCUMULATED AMORTIZATION ...................................... 70,935 73,174
OTHER ASSETS ................................................................... 21,040 9,658
----------- -----------
Total assets ..................................... $ 3,062,952 $ 2,681,029
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 50,695 $ 72,630
Accrued liabilities .......................................................... 45,663 44,051
Taxes payable ................................................................ 7,265 18,720
----------- -----------
Total current liabilities ........................ 103,623 135,401
LONG-TERM DEBT ................................................................. 803,156 400,000
DEFERRED TAX LIABILITY ......................................................... 308,624 291,213
OTHER LIABILITIES .............................................................. 11,687 12,193
----------- -----------
Total liabilities ................................ 1,227,090 838,807
----------- -----------
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, 139,358,807
issued, 135,531,907 outstanding at June 30, 2000 and
139,342,381 issued, 135,824,281 outstanding December 31, 1999) ............. 1,394 1,393
Additional paid-in capital ................................................... 1,302,905 1,302,841
Retained earnings ............................................................ 635,148 635,943
Accumulated other comprehensive losses ....................................... (6,370) (9,229)
Treasury stock, at cost (3,826,900 shares at June 30, 2000 and
3,518,100 shares at December 31, 1999) ................................... (97,215) (88,726)
----------- -----------
Total stockholders' equity ....................... 1,835,862 1,842,222
----------- -----------
Total liabilities and stockholders' equity .... $ 3,062,952 $ 2,681,029
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES ................................................... $ 143,317 $ 215,337 $ 311,145 $ 443,374
OPERATING EXPENSES:
Contract drilling ................................... 102,883 98,801 203,706 209,519
Depreciation and amortization ....................... 36,617 35,706 73,492 71,363
General and administrative .......................... 5,915 5,921 11,935 11,922
--------- --------- --------- ---------
Total operating expenses ....................... 145,415 140,428 289,133 292,804
--------- --------- --------- ---------
OPERATING INCOME (LOSS) .................................... (2,098) 74,909 22,012 150,570
OTHER INCOME (EXPENSE):
Gain on sale of assets .............................. 65 19 14,082 144
Interest income ..................................... 9,912 8,598 18,534 16,949
Interest expense .................................... (1,607) (1,990) (2,841) (5,322)
Other, net .......................................... (597) 327 (686) (766)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE ........................... 5,675 81,863 51,101 161,575
INCOME TAX EXPENSE ......................................... (2,038) (28,636) (17,976) (56,530)
--------- --------- --------- ---------
NET INCOME ................................................. $ 3,637 $ 53,227 $ 33,125 $ 105,045
========= ========= ========= =========
EARNINGS PER SHARE:
Basic ............................................... $ 0.03 $ 0.39 $ 0.24 $ 0.77
========= ========= ========= =========
Diluted ............................................. $ 0.03 $ 0.37 $ 0.24 $ 0.74
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Common shares ....................................... 135,532 135,824 135,610 135,820
Dilutive potential common shares .................... -- 9,876 10,828 9,876
--------- --------- --------- ---------
Total weighted average shares outstanding ...... 135,532 145,700 146,438 145,696
========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................................... $ 33,125 $ 105,045
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................. 73,492 71,363
Gain on sale of assets ......................................... (14,082) (144)
(Gain) loss on sale of investment securities ................... 33 (23)
Deferred tax provision ......................................... 15,546 16,803
Accretion of discounts on investment securities ................ (3,053) (5,289)
Amortization of debt issuance costs ............................ 313 269
Amortization of discount on zero coupon convertible
debentures .................................................. 978 --
Changes in operating assets and liabilities:
Accounts receivable ............................................ 24,135 73,266
Rig inventory and supplies and other current assets ............ (5,380) (14,135)
Other assets, non-current ...................................... (2,614) 242
Accounts payable and accrued liabilities ....................... (20,323) (38,869)
Taxes payable .................................................. (11,133) 26,885
Other liabilities, non-current ................................. (506) (1,485)
Other, net ..................................................... 818 (1,524)
--------- ---------
Net cash provided by operating activities .................. 91,349 232,404
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ............................................. (175,664) (154,485)
Proceeds from sale of assets ..................................... 32,292 174
Net change in marketable securities .............................. (70,791) (49,748)
--------- ---------
Net cash used in investing activities ...................... (214,163) (204,059)
--------- ---------
FINANCING ACTIVITIES:
Acquisition of treasury stock .................................... (8,489) --
Payment of dividends ............................................. (33,920) (33,955)
Proceeds from stock options exercised ............................ 65 35
Issuance of zero coupon convertible debentures ................... 402,178 --
Debt issuance costs-zero coupon convertible debentures ........... (9,081) --
--------- ---------
Net cash provided by (used in) financing activities ........ 350,753 (33,920)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................ 227,939 (5,575)
Cash and cash equivalents, beginning of period ................... 112,316 101,198
--------- ---------
Cash and cash equivalents, end of period ......................... $ 340,255 $ 95,623
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Diamond Offshore Drilling,
Inc. and subsidiaries (the "Company") should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
1-13926).
Interim Financial Information
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the consolidated balance sheets,
statements of income, and statements of cash flows at the dates and for the
periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Cash and Cash Equivalents
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 and Other Invested Assets
The Company's investments are classified as available for sale and
stated at fair value. 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)."
In January 2000, the Company sold its jack-up drilling rig, the Ocean
Scotian, for $32.0 million in cash which was invested with a third party
pursuant to a Deferred Exchange Agreement (the "Agreement"). The Agreement
provided for investment of the $32.0 million in a money market fund at current
interest rates and restricted the use of the cash to the purchase of replacement
property for the Ocean Scotian for a period of up to 180 days subsequent to the
sale of the rig. The Agreement expired in July 2000. No replacement property was
purchased and the cash has been received by the Company. See "--Drilling and
Other Property and Equipment."
Supplementary Cash Flow Information
Cash payments made for interest on long-term debt totaled $7.5 million
during both the six months ended June 30, 2000 and 1999. Cash payments made, net
of refunds, for income taxes during the six months ended June 30, 2000 and 1999
totaled $4.6 million and $29.0 million, respectively.
Capitalized Interest
Interest cost for construction and upgrade of qualifying assets is
capitalized. The Company incurred interest cost, including amortization of debt
issuance costs, of $4.9 million and $8.8 million during the quarter and six
months ended June 30, 2000, respectively. Interest cost capitalized during the
quarter and six months ended June 30, 2000 was $3.3 million and $6.0 million,
respectively. The Company incurred interest costs of $3.9 million and
6
<PAGE> 7
$7.7 million during the quarter and six months ended June 30, 1999,
respectively. Interest cost capitalized during the quarter and six months ended
June 30, 1999 was $1.9 million and $2.4 million, respectively.
Goodwill
Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa")
is amortized on a straight-line basis over 20 years. Amortization expense
totaled $1.1 million and $2.2 million for the quarter and six months ended June
30, 2000, respectively. For the quarter and six months ended June 30, 1999,
amortization expense totaled $1.3 million and $2.8 million, respectively.
Debt Issuance Costs
Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the terms of the related debt.
Treasury Stock
Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market. 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 six months ended June 30, 2000, the
Company purchased 308,800 shares of its common stock at an aggregate cost of
$8.5 million, or at an average cost of $27.49 per share.
Comprehensive Income
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances except
those transactions resulting from investments by owners and distributions to
owners. For the quarter and six months ended June 30, 2000, comprehensive income
totaled $6.2 million and $36.0 million, respectively. For the quarter and six
months ended June 30, 1999, comprehensive income totaled $50.1 million and
$100.7 million, respectively. Comprehensive income includes net income, foreign
currency translation gains and losses, and unrealized holding gains and losses
on investments.
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.
7
<PAGE> 8
2. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic
and diluted per-share computations for net income follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
NET INCOME - BASIC (NUMERATOR): $ 3,637 $ 53,227
Effect of dilutive potential shares:
Convertible notes ....................... -- 1,293
----------- -----------
NET INCOME INCLUDING CONVERSIONS (NUMERATOR): $ 3,637 $ 54,520
=========== ===========
SHARES - BASIC (DENOMINATOR): 135,532 135,824
Effect of dilutive potential shares:
Convertible notes ....................... -- 9,876
----------- -----------
SHARES INCLUDING CONVERSIONS (DENOMINATOR): 135,532 145,700
=========== ===========
EARNINGS PER SHARE:
Basic ........................................ $ 0.03 $ 0.39
=========== ===========
Diluted ...................................... $ 0.03 $ 0.37
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
NET INCOME - BASIC (NUMERATOR): $ 33,125 $ 105,045
Effect of dilutive potential shares:
Convertible notes ....................... 1,652 3,459
Zero coupon debentures .................. 194 --
----------- -----------
NET INCOME INCLUDING CONVERSIONS (NUMERATOR): $ 34,971 $ 108,504
=========== ===========
SHARES - BASIC (DENOMINATOR): 135,610 135,820
Effect of dilutive potential shares:
Convertible notes ....................... 9,876 9,876
Zero coupon debentures .................. 952 --
----------- -----------
SHARES INCLUDING CONVERSIONS (DENOMINATOR): 146,438 145,696
=========== ===========
EARNINGS PER SHARE:
Basic ........................................ $ 0.24 $ 0.77
=========== ===========
Diluted ...................................... $ 0.24 $ 0.74
=========== ===========
</TABLE>
On June 6, 2000, the Company issued 20-year zero coupon convertible
debentures (the "Debentures"). The Debentures were issued at a discount with a
yield to maturity of 3.50% per year. The Debentures are convertible into
approximately 6.9 million shares of the Company's common stock at any time prior
to June 6, 2020 at a fixed conversion rate of 8.6075 shares per debenture. The
number of shares outstanding for the six months ended June 30, 2000 was
increased to include the weighted average number of shares issuable assuming
full conversion of the notes on June 6, 2000.
The computation of diluted EPS for the quarter ended June 30, 2000 does
not assume conversion of the convertible notes or zero coupon debentures since
there would be an antidilutive effect on earnings per share.
At the 2000 Annual Meeting of Stockholders on May 16, 2000, the Diamond
Offshore Drilling, Inc. 2000 Stock Option Plan was approved. On this date,
88,000 non-qualified stock options were granted at an exercise price of
8
<PAGE> 9
$43.03 per share. The options were not included in the computation of diluted
EPS for the periods presented because the options' exercise price was greater
than the average market price of the common stock.
3. MARKETABLE SECURITIES
Investments classified as available for sale are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year ......................... $ 99,106 $ (580) $ 98,526
Due after one year through five years ....... 24,997 (364) 24,633
Collateralized mortgage obligations .............. 454,739 (6,325) 448,414
Equity securities ................................ 1,446 1,416 2,862
--------- --------- ---------
Total ....................................... $ 580,288 $ (5,853) $ 574,435
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year ......................... $ 259,090 $ (1,123) $ 257,967
Due after one year through five years ....... 124,935 (2,180) 122,755
Collateralized mortgage obligations .............. 153,004 (6,130) 146,874
Equity securities ................................ 1,446 -- 1,446
--------- --------- ---------
Total ....................................... $ 538,475 $ (9,433) $ 529,042
========= ========= =========
</TABLE>
All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Marketable securities and other invested
assets," representing the investment of cash available for current operations.
During the six months ended June 30, 2000 and 1999, certain debt
securities due within one year were sold or matured for proceeds of $558.4
million and $393.9 million, respectively. Certain debt securities due after one
year were sold for proceeds of $197.3 million and $50.5 million during the six
months ended June 30, 2000 and 1999, respectively. The resulting after-tax
realized gain and loss for the six months ended June 30, 2000 and 1999 was not
material.
4. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Drilling rigs and equipment ...................... $ 2,100,575 $ 2,095,613
Construction work in progress .................... 382,473 241,102
Land and buildings ............................... 14,180 13,992
Office equipment and other ....................... 18,029 17,552
----------- -----------
Cost ................................... 2,515,257 2,368,259
Less accumulated depreciation .................... (690,499) (630,354)
----------- -----------
Drilling and other property and
equipment, net ....................... $ 1,824,758 $ 1,737,905
=========== ===========
</TABLE>
In January 2000, the Company sold its jack-up drilling rig, the Ocean
Scotian, for $32.0 million in cash resulting in a gain of $13.9 million ($9.0
million after-tax). The rig had been cold stacked offshore Netherlands prior to
the sale.
9
<PAGE> 10
5. GOODWILL
The merger with Arethusa in 1996 generated an excess of the purchase
price over the estimated fair value of the net assets acquired. Cost and
accumulated amortization of such goodwill are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill ................................................... $ 96,112 $ 96,112
Less accumulated amortization .............................. (25,177) (22,938)
----------- -----------
Total ............................................ $ 70,935 $ 73,174
=========== ===========
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims ........................... $ 18,333 $ 18,219
Payroll and benefits ....................................... 17,911 16,281
Interest payable ........................................... 5,667 5,667
Other ...................................................... 3,752 3,884
----------- -----------
Total ............................................ $ 45,663 $ 44,051
=========== ===========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Convertible subordinated notes-33/4% ....................... $ 400,000 $ 400,000
Zero coupon convertible debentures ......................... 403,156 --
----------- -----------
Total ............................................ $ 803,156 $ 400,000
=========== ===========
</TABLE>
Zero Coupon Convertible Debentures
On June 6, 2000, the Company issued zero coupon convertible debentures
due June 6, 2020. The Debentures were issued at a price of $499.60 per $1,000
debenture, which represents a yield to maturity of 3.50% per year. The Company
will not pay interest prior to maturity unless it elects to convert the
Debentures to interest-bearing debentures upon the occurrence of certain tax
events. The Debentures are convertible at the option of the holder at any time
prior to maturity, unless previously redeemed, into the Company's common stock
at a fixed conversion rate of 8.6075 shares of common stock per Debenture,
subject to adjustments in certain events. The Debentures are senior unsecured
obligations of the Company.
The Company has the right to redeem the Debentures, in whole or in
part, after five years for a price equal to the issuance price plus accrued
original issue discount through the date of redemption. Holders have the right
to require the Company to repurchase the Debentures on the fifth, tenth and
fifteenth anniversaries of issuance at the accreted value through the date of
repurchase. The Company may pay such repurchase price with either cash or shares
of the Company's common stock or a combination of cash and shares of common
stock.
10
<PAGE> 11
8. COMMITMENTS AND CONTINGENCIES
In August 1999, a customer terminated a contract for use of one of the
Company's drilling rigs located offshore Australia. The termination was not the
result of performance failures by the Company or its equipment. The Company
believes the contract required the customer to pay approximately $16.5 million
in remaining revenue through the end of the contract period, which was
previously scheduled to end in early January 2000. However, the customer
believes that there was no further obligation under the contract and has refused
to pay the $16.5 million early termination fee. The Company filed suit in
Australia in August 1999 requesting reconstruction of the contract and
declaratory judgment requiring the customer to pay such early termination fee.
The Company continues to vigorously pursue its claim. For financial statement
purposes, the $16.5 million early termination fee was not included in revenues
in the Company's results of operations for the year ended December 31, 1999.
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.
9. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS
The Company reports its operations as 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.
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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
High Specification Floaters ...................... $ 48,004 $ 72,909 $104,866 $136,869
Other Semisubmersibles ........................... 66,835 120,390 155,346 259,843
Jack-ups ......................................... 27,033 19,978 48,052 44,047
Integrated Services .............................. 1,350 3,942 3,951 7,410
Other ............................................ 372 -- 372 --
Eliminations ..................................... (277) (1,882) (1,442) (4,795)
-------- -------- -------- --------
Total revenues ........................... $143,317 $215,337 $311,145 $443,374
======== ======== ======== ========
</TABLE>
Geographic Areas
At June 30, 2000, the Company had drilling rigs located offshore seven
countries other than the United States. As a result, the Company is exposed to
the risk of changes in social, political and economic conditions inherent in
11
<PAGE> 12
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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
United States .................................. $ 77,885 $ 96,947 $157,506 $208,155
Foreign:
Europe/Africa ............................... 16,484 56,629 39,296 121,084
Australia/Southeast Asia .................... 11,441 28,086 29,873 56,353
South America ............................... 37,507 33,675 84,470 57,782
-------- -------- -------- --------
Total revenues ......................... $143,317 $215,337 $311,145 $443,374
======== ======== ======== ========
</TABLE>
12
<PAGE> 13
ITEM 2. 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)
included elsewhere herein.
The Company is a leader in deep water drilling with a fleet of 45
offshore drilling rigs. The fleet consists of 30 semisubmersibles, 14 jack-ups
and one drillship.
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 disposition 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,
however, revenues may be adversely affected. In response to changes in demand,
the Company may withdraw a rig from the market by stacking it or may reactivate
a rig which was previously stacked, which may decrease or increase revenues,
respectively.
Revenues from dayrate drilling contracts are recognized currently. 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.
Revenues from offshore turnkey contracts are accrued to the extent of
costs until the specified turnkey depth and other contract requirements are met.
Income is recognized on the completed contract method. 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.
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. In addition, when a rig is idle, the Company is
responsible for certain operating expenses such as rig fuel and supply boat
costs, which are typically charged to the operator under drilling contracts.
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. 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 and
upgrades are capitalized and depreciated over the expected useful lives of the
enhancements. Increased depreciation expense decreases operating income in
periods subsequent to capital upgrades.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its integrated
services). Certain amounts applicable to the prior period have been reclassified
to conform to the classifications currently followed. Such reclassifications do
not affect earnings.
13
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------- INCREASE/
2000 1999 (DECREASE)
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
High Specification Floaters .................... $ 48,004 $ 72,909 $ (24,905)
Other Semisubmersibles ......................... 66,835 120,390 (53,555)
Jack-ups ....................................... 27,033 19,978 7,055
Integrated Services ............................ 1,350 3,942 (2,592)
Other .......................................... 372 -- 372
Eliminations ................................... (277) (1,882) 1,605
--------- --------- ---------
Total Revenues ......................... $ 143,317 $ 215,337 $ (72,020)
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters .................... $ 24,844 $ 21,383 $ 3,461
Other Semisubmersibles ......................... 51,594 54,738 (3,144)
Jack-ups ....................................... 24,627 19,987 4,640
Integrated Services ............................ 881 3,513 (2,632)
Other .......................................... 1,214 1,062 152
Eliminations ................................... (277) (1,882) 1,605
--------- --------- ---------
Total Contract Drilling Expense ........ $ 102,883 $ 98,801 $ 4,082
========= ========= =========
OPERATING INCOME
High Specification Floaters .................... $ 23,160 $ 51,526 $ (28,366)
Other Semisubmersibles ......................... 15,241 65,652 (50,411)
Jack-ups ....................................... 2,406 (9) 2,415
Integrated Services ............................ 469 429 40
Other .......................................... (842) (1,062) 220
Depreciation and Amortization Expense .......... (36,617) (35,706) (911)
General and Administrative Expense ............. (5,915) (5,921) 6
--------- --------- ---------
Total Operating Income ................. $ (2,098) $ 74,909 $ (77,007)
========= ========= =========
</TABLE>
High Specification Floaters.
Revenues. Revenues from high specification floaters during the three
months ended June 30, 2000 decreased by $24.9 million from the same period in
1999. Approximately $18.4 million of the revenue decline resulted from lower
operating dayrates as compared to 1999. The average operating dayrate for high
specification floaters during the second quarter of 2000 was $102,000 per day as
compared to $127,500 per day during the second quarter of 1999. In addition,
revenues were reduced $6.5 million due to a decline in utilization. Utilization
for the Company's high specification floaters during the second quarter of 2000
was 74% as compared to 88% during the second quarter of 1999. This decline in
utilization resulted primarily because the Ocean America was mobilized from
Trinidad to the Gulf of Mexico during the second quarter of 2000 and the Ocean
Quest was stacked the entire quarter. Partially offsetting this utilization
decline was the operation of the Ocean Clipper under its three-year contract
offshore Brazil for a portion of the current quarter. During most of the second
quarter of 1999, the Ocean Clipper was in the shipyard for modifications,
upgrades and the replacement of the blow-out preventer control system.
Contract Drilling Expense. Contract drilling expense for high
specification floaters during the three months ended June 30, 2000 increased
$3.5 million from the same period in 1999. This increase resulted primarily from
an increase in contract drilling expense for the Ocean Clipper, which was
operating under its three-year contract offshore Brazil, as compared to the
second quarter of 1999 when the rig was in the shipyard for upgrades and
repairs.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles during the three months
ended June 30, 2000 decreased $53.6 million from the same quarter in 1999.
Approximately $31.8 million of the decrease resulted from a decline in
14
<PAGE> 15
utilization as compared to the second quarter of 1999. Utilization of the
Company's other semisubmersibles during the second quarter of 2000 was 53% as
compared to 66% during the second quarter of 1999. The Ocean Epoch began the
upgrade of its water depth capabilities and variable deckload during the second
quarter of 2000. The Ocean Baroness, which was cold stacked during the second
quarter of 2000, worked most of the second quarter of 1999. In addition,
revenues were reduced by approximately $20.8 million due to a decrease in
operating dayrates as compared to the same period in 1999. The average operating
dayrate for other semisubmersibles was $61,200 per day during the second quarter
of 2000 as compared to $86,900 per day during the second quarter of 1999.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the three months ended June 30, 2000 decreased $3.1
million from the same quarter in 1999. This decrease resulted primarily from
reductions in operating costs from rigs that were idle for all or part of the
quarter ended June 30, 2000.
Jack-Ups.
Revenues. Revenues from jack-ups during the three months ended June 30,
2000 increased $7.1 million from the same quarter in 1999. Approximately $14.4
million of the increase in revenues resulted from improvements in utilization as
compared to the second quarter of 1999. Utilization for the Company's jack-ups
during the second quarter of 2000 was 93% as compared to 48% during the second
quarter of 1999. This increase was partially offset by a decrease in revenues of
$7.3 million from the Ocean Scotian which was sold in January 2000 but worked
throughout the second quarter of 1999.
Contract Drilling Expense. Contract drilling expense for jack-ups
during the three months ended June 30, 2000 increased $4.6 million over the same
quarter in 1999. This increase was due to an increase in costs of $7.3 million
associated with improved utilization of jack-ups which were idle for all or part
of the second quarter of 1999. This increase was partially offset by a decrease
of $2.7 million due to the January 2000 sale of the Ocean Scotian.
Integrated Services.
Revenues and contract drilling expense for integrated services
decreased as a result of the difference in type and magnitude of projects in the
second quarter of 2000 as compared to the second quarter of 1999.
Depreciation and Amortization Expense.
Depreciation and amortization expense for the three months ended June
30, 2000 of $36.6 million increased $0.9 million from $35.7 million for the
three months ended June 30, 1999. This increase resulted primarily from an
increase in depreciation for the Ocean Clipper, Ocean General, Ocean Concord and
Ocean King, which completed various upgrades in the second half of 1999. This
increase was partially offset by a decrease in depreciation in the second
quarter of 2000 due to the January 2000 sale of the Ocean Scotian and a decrease
in goodwill amortization.
Interest Income.
Interest income of $9.9 million for the three months ended June 30,
2000 increased $1.3 million from $8.6 million for the same period in 1999. This
increase resulted primarily from the investment of additional excess cash
generated by the Company's zero coupon convertible debentures (the "Debentures")
issued June 6, 2000. See " --Liquidity."
Interest Expense.
Interest expense of $1.6 million for the three months ended June 30,
2000 decreased $0.4 million from $2.0 million for the same period in 1999. This
decrease resulted primarily from an increase in capitalized interest for the
conversion of the Ocean Confidence offset by an increase in interest expense
incurred during the second quarter of 2000. Interest cost capitalized during the
quarter ended June 30, 2000 was $3.3 million as compared to $1.9 million
capitalized during the quarter ended June 30, 1999. Interest expense incurred of
$4.9 million during the second quarter of 2000 increased from $3.9 million for
the same period in 1999. The higher interest expense resulted
15
<PAGE> 16
primarily from the amortization of the discount on the Debentures issued June 6,
2000 accrued at a rate of 3.50% per year compounded semi-annually to the date of
redemption. See "--Liquidity" and "--Capital Resources."
Income Tax Expense.
Income tax expense of $2.0 million for the three months ended June 30,
2000 decreased $26.6 million from $28.6 million for the three months ended June
30, 1999. This decrease resulted primarily from the $76.2 million decrease in
income before income tax expense as compared to the three months ended June 30,
1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Comparative data relating to the Company's revenues and operating
expenses by equipment type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its integrated
services). Certain amounts applicable to the prior period have been reclassified
to conform to the classifications currently followed. Such reclassifications do
not affect earnings.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------- INCREASE/
2000 1999 (DECREASE)
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
High Specification Floaters .................... $ 104,866 $ 136,869 $ (32,003)
Other Semisubmersibles ......................... 155,346 259,843 (104,497)
Jack-ups ....................................... 48,052 44,047 4,005
Integrated Services ............................ 3,951 7,410 (3,459)
Other .......................................... 372 -- 372
Eliminations ................................... (1,442) (4,795) 3,353
--------- --------- ---------
Total Revenues ......................... $ 311,145 $ 443,374 $(132,229)
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters .................... $ 48,151 $ 45,773 $ 2,378
Other Semisubmersibles ......................... 106,459 116,989 (10,530)
Jack-ups ....................................... 44,472 42,695 1,777
Integrated Services ............................ 3,952 6,950 (2,998)
Other .......................................... 2,114 1,907 207
Eliminations ................................... (1,442) (4,795) 3,353
--------- --------- ---------
Total Contract Drilling Expense ........ $ 203,706 $ 209,519 $ (5,813)
========= ========= =========
OPERATING INCOME
High Specification Floaters .................... $ 56,715 $ 91,096 $ (34,381)
Other Semisubmersibles ......................... 48,887 142,854 (93,967)
Jack-ups ....................................... 3,580 1,352 2,228
Integrated Services ............................ (1) 460 (461)
Other .......................................... (1,742) (1,907) 165
Depreciation and Amortization Expense .......... (73,492) (71,363) (2,129)
General and Administrative Expense ............. (11,935) (11,922) (13)
--------- --------- ---------
Total Operating Income ................. $ 22,012 $ 150,570 $(128,558)
========= ========= =========
</TABLE>
High Specification Floaters.
Revenues. Revenues from high specification floaters during the six
months ended June 30, 2000 decreased $32.0 million from the same period in 1999.
Approximately $42.7 million of the revenue decline resulted from lower operating
dayrates as compared to 1999. The average operating dayrate for high
specification floaters during the six months ended June 30, 2000 was $96,400 per
day as compared to $130,500 per day during the six months ended June 30, 1999.
This decrease was partially offset by an increase in revenues of approximately
$10.7 million due to an improvement in utilization. The Company's drillship, the
Ocean Clipper, operated most of the first half of 2000 under its three-year
contract offshore Brazil. During the first half of 1999, the rig was in the
shipyard for
16
<PAGE> 17
upgrades and repairs. Utilization for the Company's high specification floaters
during the first six months of 2000 was 85% as compared to 84% during the first
six months of 1999.
Contract Drilling Expense. Contract drilling expense for high
specification floaters during the six months ended June 30, 2000 increased $2.4
million from the same period in 1999. This increase in 2000 resulted primarily
from costs of approximately $6.2 million incurred for the Ocean Clipper which
began operating under its three-year contract offshore Brazil. During the first
half of 1999, the Ocean Clipper was in the shipyard for modifications, upgrades
and the replacement of the blow-out preventer control system. This increase was
partially offset by a decrease in contract drilling expense of approximately
$2.0 million for the 1999 mobilization of the Ocean Alliance from the North Sea
to Angola and $1.8 million in costs associated with the 1999 mandatory
inspection and repairs of the Ocean America.
Other Semisubmersibles.
Revenues. Revenues from other semisubmersibles during the six months
ended June 30, 2000 decreased $104.5 million from the same period in 1999.
Approximately $52.3 million of the decrease resulted from a decline in operating
dayrates as compared to the same period in 1999. The average operating dayrate
for the Company's other semisubmersibles was $64,200 per day during the six
months ended June 30, 2000 as compared to $90,300 per day during the six months
ended June 30, 1999. In addition, revenues were reduced by $45.9 million and
$5.3 million due to decreased utilization and rigs removed from service,
respectively. Utilization for the Company's other semisubmersibles during the
six months ended June 30, 2000 was 58% as compared to 69% during the six months
ended June 30, 1999. The Ocean Epoch began the upgrade of its water depth
capabilities and variable deckload during the second quarter of 2000. The Ocean
Baroness, which was cold stacked during the first half of 2000, worked most of
the first half of 1999.
Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the six months ended June 30, 2000 decreased $10.5
million from the same period in 1999. This decrease resulted partially from a
reduction in costs of $6.6 million from the same period in 1999 associated with
the inspection and repair of the Ocean Winner and its mobilization from the Gulf
of Mexico to Brazil in the first half of 1999. Contract drilling expense was
also reduced by $4.2 million in 2000 due to costs associated with mandatory
inspections and repairs of the Ocean New Era in 1999. In addition, 2000 costs
were reduced by $3.7 million and $2.2 million for the Ocean Baroness and the
Ocean Epoch, which were stacked in late 1999. Partially offsetting these
decreases were increases in costs in 2000 of approximately $3.0 million
associated with the mandatory inspection and repairs of the Ocean Lexington and
$3.2 million of operating costs from the Ocean General, which was stacked
throughout 1999.
Jack-Ups.
Revenues. Revenues from jack-ups during the six months ended June 30,
2000 increased $4.0 million from the same period in 1999. Approximately $19.1
million of the increase in revenues resulted from improvements in utilization as
compared to the first half of 1999. Utilization for the Company's jack-ups
during the first half of 2000 was 87% as compared to 55% during the first half
of 1999. This increase was partially offset by a decrease in revenues of $15.1
million from the Ocean Scotian, which was sold in January 2000 but worked
throughout the first half of 1999.
Contract Drilling Expense. Contract drilling expense for jack-ups
during the six months ended June 30, 2000 increased $1.8 million over the same
period in 1999. This increase was due to an increase in costs of $7.1 million
associated with improved utilization of jack-ups which were idle for all or part
of the first half of 1999. This increase was partially offset by a decrease of
$5.3 million due to the January 2000 sale of the Ocean Scotian.
Integrated Services.
Revenues and contract drilling expense for integrated services
decreased as a result of the difference in number, type and magnitude of
projects in the first half of 2000 as compared to the first half of 1999.
Depreciation and Amortization Expense.
Depreciation and amortization expense for the six months ended June 30,
2000 of $73.5 million increased $2.1 million from $71.4 million for the six
months ended June 30, 1999. This increase resulted primarily from an
17
<PAGE> 18
increase in depreciation for the Ocean Clipper, Ocean General, Ocean Concord and
Ocean King, which completed various upgrades in the second half of 1999. This
increase was partially offset by a decrease in depreciation in the first half of
2000 due to the January 2000 sale of the Ocean Scotian and a decrease in
goodwill amortization.
Gain on Sale of Assets.
Gain on sale of assets for the six months ended June 30, 2000 of $14.1
million increased $14.0 million from $0.1 million for the six months ended June
30, 1999. This increase resulted primarily from the January 2000 sale of the
Company's jack-up drilling rig, Ocean Scotian, for $32.0 million in cash
resulting in a gain of $13.9 million ($9.0 million after-tax). The rig had been
cold stacked offshore Netherlands prior to the sale.
Interest Income.
Interest income of $18.5 million for the six months ended June 30, 2000
increased $1.6 million from $16.9 million for the same period in 1999. This
increase resulted primarily from the investment of additional excess cash
generated by the Debentures issued June 6, 2000. See " --Liquidity."
Interest Expense.
Interest expense of $2.8 million for the six months ended June 30, 2000
decreased $2.5 million from $5.3 million for the same period in 1999. This
decrease resulted primarily from an increase in capitalized interest for the
conversion of the Ocean Confidence offset by an increase in interest expense
incurred during the first half of 2000. Interest cost capitalized during the six
months ended June 30, 2000 was $6.0 million as compared to $2.4 million
capitalized during the six months ended June 30, 1999. Interest expense of $8.8
million incurred during the first half of 2000 increased from $7.7 million for
the same period of 1999. The higher interest expense resulted primarily from the
amortization of the discount on the Debentures issued June 6, 2000 accrued at a
rate of 3.50% per year compounded semi-annually to the date of redemption. See
"--Liquidity" and "--Capital Resources."
Income Tax Expense.
Income tax expense of $18.0 million for the six months ended June 30,
2000 decreased $38.5 million from $56.5 million for the six months ended June
30, 1999. This decrease resulted primarily from the $110.5 million decrease in
income before income tax expense as compared to the six months ended June 30,
1999.
OUTLOOK
The offshore drilling industry has shown signs of improvement in
drilling markets around the world as strong oil and gas prices have provided an
environment of improved drilling economics for our customers leading to greater
demand for drilling services offshore. The announcement by a major oil producer
of its plans to increase exploration and production spending over the next three
years further indicates support for a long-anticipated recovery in the offshore
drilling industry. Although the Company cannot predict the extent to which
current industry conditions may or may not continue, it believes there is reason
to be optimistic that oil and gas companies will increase their spending on
exploration and development in the future, potentially resulting in increased
utilization levels and dayrates for offshore drilling rigs.
The Company continues to see improvement in the domestic jack-up market
along with some stability in its high specification floater business as the
industry concentrates on shallow water natural gas and deep water prospects
offshore. In response to high gas prices, the Company expects its jack-up fleet
to see improved results throughout the rest of the year as dayrates and
utilization continue to improve, although there can be no assurance that this
trend will continue. While some high specification floating units have seen idle
time around the world, the Company has maintained high utilization for its rigs
in this class. With a strategy of trying to maintain utilization through
short-term commitments, the Company expects it will be in a position to respond
as the high specification floater market improves. The market for intermediate
floaters remains fairly weak worldwide as a result of the industry's
concentration on shallow water natural gas and deep water prospects. However,
the Company expects that the shallow water semisubmersible market will show some
signs of improvement with the expected continuation of prevailing product
prices.
The Company believes that, with its fleet size and composition, it is
well positioned to take advantange of opportunities when market conditions
improve.
18
<PAGE> 19
LIQUIDITY
At June 30, 2000, cash and marketable securities totaled $946.7
million, up from $641.4 million at December 31, 1999. Cash provided by operating
activities for the six months ended June 30, 2000 decreased by $141.1 million to
$91.3 million, as compared to $232.4 million for the same period in 1999. This
decrease in cash was primarily attributable to a $71.9 million reduction in net
income and various other changes in operating assets and liabilities.
Investing activities used $214.2 million of cash during the six months
ended June 30, 2000, as compared to $204.1 million during the same period in
1999. This increase resulted primarily from a $21.2 million decrease in cash
resulting from an increase in capital expenditures primarily attributable to the
Ocean Confidence, a $21.0 million increase in cash used for investments in
marketable securities, and a $32.1 million increase in cash provided by proceeds
from the sale of assets, primarily the sale of the Ocean Scotian in January
2000.
Cash provided by financing activities for the six months ended June 30,
2000 increased $384.7 million to $350.8 million, as compared to $33.9 million
for the same period in 1999. Sources of financing during 2000 consisted
primarily of the Company's issuance of the Debentures, which resulted in net
proceeds of approximately $393.0 million. The Company intends to use the net
proceeds generated by the issuance of the Debentures for general corporate
purposes. The Debentures were issued in June 2000 at a discount from their value
at maturity and are due June 6, 2020. The Debentures are convertible at the
option of the holder at any time prior to maturity, unless previously redeemed,
into the Company's common stock at a fixed conversion rate of 8.6075 shares of
common stock per Debenture, subject to adjustments in certain events. The
Company will not pay interest on the Debentures prior to maturity unless it
elects to convert the Debentures to interest-bearing debentures upon the
occurrence of certain tax events. The Company has the right to redeem the
Debentures, in whole or in part, after five years for a price equal to the
issuance price plus accrued original issue discount through the date of
redemption. Holders have the right to require the Company to repurchase the
Debentures on the fifth, tenth, and fifteenth anniversaries of issuance at the
accreted value through the date of repurchase. The Company may pay such
repurchase price with either cash or shares of the Company's common stock or a
combination of cash and shares of common stock.
Other sources of liquidity include the Company's $20.0 million
short-term revolving credit agreement with a U.S. bank. The agreement provides
for borrowings at various interest rates and varying commitment fees dependent
upon public credit ratings. The Company intends to use the facility primarily
for letters of credit that the Company must post, from time to time, for bid and
performance guarantees required in certain parts of the world. The agreement
contains certain financial and other covenants and provisions that must be
maintained by the Company for compliance. As of June 30, 2000, there were no
outstanding borrowings under this agreement and the Company was in compliance
with each of the covenants and provisions.
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.
19
<PAGE> 20
The Company expects to spend $199.2 million for rig upgrade capital
expenditures during 2000, which are primarily costs associated with the
conversion of the Ocean Confidence. Also included in this amount is
approximately $18.2 million for variable deckload and water depth capability
upgrades on the Ocean Epoch and $20.0 million for the deepwater upgrade of the
Ocean Baroness. During the six months ended June 30, 2000, the Company expended
$143.2 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 of the Ocean Confidence includes the following
enhancements: capability for operation in 7,500 foot water depths; approximately
6,000 tons variable deckload; a 15,000 psi blow-out prevention system; and four
mud pumps to complement the existing Class III dynamic-positioning system. The
Company estimates its net cost of conversion for this rig to be approximately
$400.0 million. Upon completion of the conversion and customer acceptance, the
rig is scheduled to begin a five-year drilling program in the Gulf of Mexico. A
modification to the drilling contract was made providing for an extension of the
delivery date and commencement of the five-year drilling program from July 1 to
December 1, 2000. This extension will allow the Company additional time to
complete and test the rig for performance in waters up to 7,500 feet. The
Company will incur a penalty based upon the delivery date of the rig and will be
liable for certain types of downtime which could occur during the first two
wells under the drilling contract. These penalties would incrementally reduce
revenue from the customer during the five-year contract term. Based upon the
expected delivery date of September 30, 2000, future revenue is expected to be
approximately $316.4 million. Should the delivery occur on December 1, 2000, the
expected revenue would be reduced to approximately $313.9 million.
The Company has reached an agreement with a Singapore shipyard which
provides for the significant upgrade of its semisubmersible, the Ocean Baroness,
to fifth-generation capabilities. The deepwater upgrade will be an enhanced
version of the Company's successful Victory-class upgrades. Initial outfitting
will include stability enhancements and self-contained chain/wire mooring for
operation in water depths to 6,000 feet with approximately 6,200 tons operating
variable deck load, 15,000 psi blowout preventers and riser with a multiplex
control system. Additional features including a high capacity deck crane,
significantly enlarged cellar deck area and a 25' by 90' moon pool will provide
enhanced subsea completion and development capabilities. Water depths in excess
of 6,000 feet should be achievable utilizing preset taut-leg mooring systems.
The preliminary estimated cost for the deepwater upgrade of the Ocean Baroness
is approximately $180.0 million and is anticipated to take approximately 18
months, including mobilization to the shipyard. The Company expects to finance
the upgrade through the use of cash on hand or internally generated funds.
During the six months ended June 30, 2000, the Company expended $32.5
million in association with its continuing rig enhancement program and to meet
other corporate requirements. These expenditures included purchases of king-post
cranes, anchor chain, riser, and other drilling equipment. The Company has
budgeted $70.8 million for 2000 capital expenditures associated with its
continuing rig enhancement program and other corporate requirements.
From time to time, the Company may decide to add new capacity through
rig conversions, upgrades to existing drilling units, or through new
construction. The Company reviews certain criteria before committing to the
challenging task of upgrading an existing rig or constructing a new one. These
considerations include, but are not limited to, low cost opportunities, cost to
upgrade existing equipment versus the cost of new construction, anticipated
return on the upgrade or newbuild, construction time, opportunity for new
technology, and offshore drilling market development.
The Company continues to consider transactions which include, but are
not limited to, 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.
20
<PAGE> 21
INTEGRATED SERVICES
The Company's wholly owned subsidiary, Diamond Offshore Team Solutions,
Inc. ("DOTS"), from time to time, 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. In such cases, DOTS
generally is not entitled to payment unless the well is drilled to the specified
depth, with the profitability of the contract dependent upon its ability to keep
expenses within the estimates used 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. DOTS also
offers a portfolio of drilling services including overall project management,
extended well tests, and completion operations. During the six months ended June
30, 2000, DOTS provided turnkey and integrated services at the break-even level.
OTHER
On July 5, 2000, the Company's jack-up drilling unit, the Ocean
Crusader, while conducting routine operations offshore Louisiana, experienced a
fire caused by gas from a well adjacent to the rig. Emergency procedures were
initiated and the fire was extinguished. All personnel onboard the rig were
evacuated. No injuries occurred and there was no environmental effect. Damage
and related repairs were minimal. The rig did not experience any downtime and
there was no material impact on results of operations.
Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market. During July 2000, The
Company purchased 101,500 shares of its common stock at an aggregate cost of
$3.6 million, or at an average cost of $35.03 per share. From January 1, 2000
through July 31, 2000, the Company has purchased 410,300 shares of its common
stock at an aggregate cost of $12.0 million, or at an average cost of $29.36 per
share.
ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement addresses
a limited number of issues causing implementation difficulties for entities
applying SFAS No. 133. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is currently evaluating the effects of this
Statement.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin through its subsequent revised releases SAB
No. 101A and No. 101B is effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
does not expect the implementation of this bulletin to have a significant impact
on the results of operations or equity of the company.
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 future market conditions and the effect of such conditions on the
Company's future results of operations (see "-- Outlook"), and future
21
<PAGE> 22
uses of and requirements for financial resources, including, but not limited to,
expenditures related to the conversion of the Ocean Confidence (see "--
Liquidity" and "-- Capital Resources"). 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.
22
<PAGE> 23
ITEM 3. 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 2 of Part I of this report.
The Company's financial instruments include the Company's convertible
subordinated notes, zero coupon convertible debentures and investments in debt
securities, including U.S. Treasury securities and collateralized mortgage
obligations ("CMO's"). 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 June 30, 2000, the fair value of
these notes, based on quoted market prices, was approximately $413.0 million, as
compared to a carrying amount of $400.0 million. At June 30, 2000, the fair
value of the Company's zero coupon convertible debentures, based on quoted
market prices, was approximately $378.2, as compared to a carrying amount of
$403.2 million. At June 30, 2000, the fair market value of the Company's
investment in debt securities issued by the U.S. Treasury was approximately
$123.2 million, which includes an unrealized holding loss of $0.9 million. These
securities bear interest at rates ranging from 4.00 percent to 6.00 percent.
These securities are U.S. government-backed and generally short-term and readily
marketable. The fair value of the Company's investment in CMO's at June 30, 2000
was approximately $448.4 million, which includes an unrealized holding loss of
$6.3 million. The CMO's are also short-term and readily marketable with an
implied AAA rating backed by U.S. government guaranteed mortgages.
The Company believes the declines in the fair value of its investments
in debt securities due to interest rate sensitivity are temporary in nature.
This determination was based on marketability of the instruments, the Company's
ability to retain its investment in the instruments, past market movements and
reasonably possible, near-term market movements. Therefore, the Company does not
believe that potential, near-term losses in future earnings, fair values, or
cash flows are likely to be material.
At June 30, 2000, the fair value of the Company's investment in equity
securities was approximately $2.9 million, which includes an unrealized holding
gain of $1.4 million.
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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<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and its subsidiaries are named defendants in various
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders (the "Annual Meeting") of Diamond
Offshore Drilling, Inc. was held on May 16, 2000 in New York, New York. At the
Annual Meeting, the holders of 128,247,455 shares out of 135,824,281 shares
entitled to vote as of the record date were represented in person or by proxy,
constituting a quorum. The following matters were voted on and adopted by the
margins indicated:
a. To elect seven directors, each to serve until the next annual
meeting of stockholders and until their respective successors
are elected and qualified or until their earlier resignation
or removal.
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------------
BROKER
FOR WITHHELD NON-VOTE
----------- ----------- -----------
<S> <C> <C> <C>
James S. Tisch ........... 127,292,609 954,846 0
Lawrence R. Dickerson .... 127,269,090 978,365 0
Alan R. Batkin ........... 127,554,855 692,600 0
Herbert C. Hofmann ....... 127,293,975 953,480 0
Arthur L. Rebell ......... 127,276,084 971,371 0
Michael H. Steinhardt .... 120,368,772 7,878,683 0
Raymond S. Troubh ........ 127,535,295 712,160 0
</TABLE>
b. To approve the Diamond Offshore Drilling, Inc. 2000 Stock
Option Plan.
<TABLE>
<S> <C>
For 117,117,305
Against 10,838,929
Abstain 291,221
Broker Non-Vote 0
</TABLE>
c. To ratify the appointment of Deloitte & Touche LLP as
independent certified public accountants for the Company and
its subsidiaries for fiscal year 2000.
<TABLE>
<S> <C>
For 128,102,909
Against 76,409
Abstain 68,137
Broker Non-Vote 0
</TABLE>
24
<PAGE> 25
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed herewith.
(b) The Company filed the following report on Form 8-K during the second
quarter of 2000:
<TABLE>
<CAPTION>
Date of Report Description of Event
-------------- --------------------
<S> <C>
June 1, 2000 Plan to offer and pricing of the Company's zero
coupon convertible debentures with estimated net
proceeds of approximately $392 million.
</TABLE>
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements 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.
DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
Date 14-Aug-2000 By: \s\ Gary T. Krenek
----------- -----------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer
Date 14-Aug-2000 \s\ Beth G. Gordon
----------- -----------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to 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 to 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 to the Company's Current Report on Form 8-K filed
February 11, 1997).
4.2* Second Supplemental Indenture, dated as of June 6, 2000, between
the Company and The Chase Manhattan Bank, as Trustee.
10.1* Purchase Agreement, dated May 31, 2000, between the Company and
Credit Suisse First Boston Corporation.
10.2* Registration Rights Agreement, dated June 6, 2000, between the
Company and Credit Suisse First Boston Corporation.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27.1 to the Company's Quarterly Report on Form 10-Q, for the
quarterly period ended June 30, 2000, filed August 8, 2000).
</TABLE>
---------------
* Filed herewith.
27
