-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aw7TzH8piawNMosOiy/UeHT1GAcyDuRCZ3ayZrgEt7JQBRn5J07CF8UweyYUXDAg U4kkwi/wOQFMJUxSFoRb6g== 0000899243-99-000486.txt : 19990322 0000899243-99-000486.hdr.sgml : 19990322 ACCESSION NUMBER: 0000899243-99-000486 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSOCEAN OFFSHORE INC CENTRAL INDEX KEY: 0000314047 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 720464968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07746 FILM NUMBER: 99568646 BUSINESS ADDRESS: STREET 1: 4 GREENWAY PLAZA CITY: HOUSTON STATE: TX ZIP: 77046 BUSINESS PHONE: 7138717500 MAIL ADDRESS: STREET 1: 4 GREENWAY PLAZA CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: SONAT OFFSHORE DRILLING INC DATE OF NAME CHANGE: 19930415 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-7746 ---------------- TRANSOCEAN OFFSHORE INC. (Exact name of registrant as specified in its charter) ---------------- Delaware 72-0464968 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4 Greenway Plaza Houston, Texas 77046 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (713) 871-7500 Securities registered pursuant to Section 12(b) of the Act:
Title of class Exchange on which registered -------------- ---------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc.
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. [_] As of February 28, 1999, 100,571,816 shares of common stock were outstanding and the aggregate market value of shares held by non-affiliates was approximately $2.0 billion (based on the reported closing market price of the common stock on such date of $20.625 and assuming that all directors and executive officers of the Company are "affiliates," although the Company does not acknowledge that any such person is actually an "affiliate" within the meaning of the federal securities laws). DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 1998, for its 1999 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TRANSOCEAN OFFSHORE INC. INDEX TO REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
Item Page -------- ---- PART I Items 1 through 4 Item 1. Business...................................................... 1 Background.................................................... 1 Recent Developments........................................... 1 Drilling Rig Fleet............................................ 2 Drilling Services............................................. 5 Drilling Contracts............................................ 5 Industry Conditions and Competition........................... 6 Operating Risks............................................... 7 International Operations...................................... 8 Regulation.................................................... 8 Employees..................................................... 9 Item 2. Properties.................................................... 10 Item 3. Legal Proceedings............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders........... 11 Executive Officers of the Registrant.......................... 11 PART II Items 5 through 9 Item 5. Market for Registrant's Common Equity and Related Shareholder 12 Matters...................................................... Item 6. Selected Consolidated Financial Data.......................... 13 Item 7. Management's Discussion and Analysis of Financial Condition 14 and Results of Operations.................................... Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 28 Item 8. Financial Statements and Supplementary Data................... 30 Item 9. Changes In and Disagreements With Accountants on Accounting 60 and Financial Disclosure..................................... PART III Items 10 through 13 Item 10. Directors and Executive Officers of the Registrant............ 60 Item 11. Executive Compensation........................................ 60 Item 12. Security Ownership of Certain Beneficial Owners and 60 Management................................................... Item 13. Certain Relationships and Related Transactions................ 60 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 60 K............................................................
PART I ITEM 1. Business Transocean Offshore Inc. (together with its subsidiaries, unless the context requires otherwise, the "Company" or "Transocean") is a leading international provider of deepwater and harsh environment contract drilling services for oil and gas wells. As of March 1, 1999, the Company owns, has ownership interests in or operates 31 mobile offshore drilling rigs. Transocean's fleet consists of seven fourth-generation semisubmersibles, fourteen second- and third-generation semisubmersibles, four drillships including one newbuild drillship, the "Discoverer Enterprise," which is currently in the final stages of construction and testing, and six jackup rigs. The Company also has under construction two additional Discoverer Enterprise-class drillships, to be named "Discoverer Spirit" and "Discoverer Deep Seas." The Company contracts these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill offshore wells. The Company also provides additional drilling services, including turnkey drilling, coiled tubing drilling and well intervention and management of third-party well service activities. Transocean Offshore Inc. is a Delaware corporation with its principal executive offices located at 4 Greenway Plaza, Houston, Texas 77046. Its telephone number at that address is (713) 871-7500. Background The Company was founded in 1953 by predecessors of Sonat Inc. and J. Ray McDermott & Co., Inc. to design and construct the first jackup rig in the Gulf of Mexico. The Company, then known as "The Offshore Company," began international drilling operations in the late 1950s and was one of the first contractors to offer drilling services in the North Sea. The Company was publicly traded from 1967 until 1978, when it became a wholly owned subsidiary of Sonat Inc. In June 1993, the Company, then known as "Sonat Offshore Drilling Inc.," completed an initial public offering of approximately 60 percent of the outstanding shares of its common stock. In July 1995, Sonat Inc. sold its remaining 40 percent interest in the Company through a secondary public offering and currently owns no capital stock of the Company. In September 1996, the Company acquired substantially all of the outstanding capital shares of Transocean ASA, a Norwegian offshore drilling company, for an aggregate purchase price of $1,504.8 million in common stock and cash, including direct transaction costs and costs of purchasing minority shares completed in 1997 (the "Combination"), and changed its name to "Transocean Offshore Inc." Recent Developments In December 1998, the Company and the operators of the Terra Nova field, located offshore Newfoundland, Canada, agreed to terminate their two-year drilling contract for the Transocean Explorer. In connection with the termination, the Terra Nova group agreed to pay a $40 million cash settlement to the Company. The net proceeds from the cash settlement were used to repay debt. On March 11, 1999, the Company's board of directors approved a corporate reorganization that will result in the Company becoming a Cayman Islands corporation rather than a Delaware corporation. The Company believes the reorganization will give it greater flexibility in seeking to lower its worldwide effective tax rate and improve worldwide cash management. In addition, the Company anticipates that the reorganization may increase its access to international capital markets, broaden its investor base by making its securities more attractive to non-U.S. investors and give it greater flexibility in structuring foreign joint ventures and acquisition opportunities. The Company has entered into an Agreement and Plan of Merger and Conversion relating to the reorganization. Pursuant to that agreement, the Company will merge with and into a wholly owned Texas subsidiary, which will then become a Cayman Islands corporation ("Transocean-Cayman") pursuant to a conversion and continuation procedure under Texas and Cayman Islands law. In the reorganization, each share of common stock of the Company held by the public will automatically be converted into an ordinary share of Transocean- Cayman. The Company expects the shares of Transocean-Cayman to be listed on the New York 1 Stock Exchange under "RIG," the same symbol under which the Company's common stock is currently listed. The proposed reorganization is subject to certain conditions to closing, including approval by the Company's stockholders. Following the reorganization, the name of Transocean-Cayman will be "Transocean Offshore Inc." Drilling Rig Fleet The Company's fleet includes full or partial ownership in seven of the world's thirteen fourth-generation and full ownership of thirteen second- and third-generation semisubmersibles, three dynamically positioned drillships and six jackups. As of March 1, 1999 all but two of the Company's operational drilling rigs currently are being utilized, with contracts expiring from 1999 through 2004. The Company remains a leader in deepwater and ultra-deepwater drilling, having drilled as of December 31, 1998 approximately 77 percent of all wells ever drilled in water depths greater than 5,000 feet and four of the five wells drilled in water depths exceeding 7,000 feet. Drilling Rig Types The Company principally uses three types of drilling rigs-- semisubmersibles, drillships and jackups. Semisubmersibles are floating vessels that can be submerged such that a substantial portion of the lower hull is below the water surface during drilling operations. They are well suited for operations in rough water conditions. Fourth-generation semisubmersibles are those built after 1984 that have larger physical size than other semisubmersibles, harsh environment capability, high variable deck load capability (greater than 4,000 metric tons), 15,000 psi blowout preventers and superior motion characteristics. Fourth-generation semisubmersibles are frequently the most suitable units for operations in deep water and harsh environments or for development drilling that requires larger variable loads and the ability to handle large pieces of subsea equipment. Drillships are generally self-propelled and designed to drill in the deepest water. Shaped like conventional ships, they are the most mobile of the major rig types. The Company's drillships are dynamically positioned, which allows them to maintain position without anchors through the use of their onboard propulsion and station-keeping systems. Jackup rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected support legs. They are generally suited for water depths of 350 feet or less. All of the Company's Discoverer Enterprise-class drillships will be equipped for dual-activity drilling, which is a well-construction technology developed by Transocean that allows for drilling tasks associated with a single well to be accomplished in a concurrent rather than sequential manner by utilizing two complete drilling systems under a single derrick. The Company has filed an application for a patent for this process with the U.S. Patent and Trademark Office. The patent remains pending at this time. The dual- activity well construction process is designed to reduce critical path activity and improve efficiency in both exploration and development drilling. When applied in a deepwater environment, the Company estimates that efficiency improvements of up to 40 percent on development projects and 15 percent on exploration projects could be obtained. The 100,000 metric-ton displacement Discoverer Enterprise-class drillships will each possess a large enough variable deck load (20,000 metric tons) to allow the rigs to carry tubulars and consumables for the construction of three or more wells. The Company's drilling equipment is suitable for both exploration and development drilling, and the Company is normally engaged in both types of drilling activity. The Company's drilling rigs are mobile and can be moved to new locations in response to customer demand. All of the Company's offshore drilling units are designed for operations away from port for extended periods of time and have living quarters for the crews, a helicopter landing deck and storage space for pipe and drilling supplies. Fleet Additions and Upgrades The Discoverer Enterprise, the first of a new class of advanced, ultra- deepwater drillships employing the Company's dual-activity drilling system, is in the final stages of construction, outfitting and testing at the Ingalls 2 shipyard in Pascagoula, Mississippi, and will commence working for Amoco Production Company ("Amoco") under a five-year contract upon completion and acceptance, estimated in the second quarter of 1999. The rig will initially be outfitted to drill in 8,500 feet of water, but with additional riser will be capable of exploration and development drilling in water depths up to 10,000 feet. The Company spent $154 million on this project in 1998 and expects to spend $80 million in 1999. In the first quarter of 1998, the Company announced plans to construct two additional Discoverer Enterprise-class drillships, the Discoverer Spirit and the Discoverer Deep Seas. The Discoverer Spirit will be fully outfitted with sufficient riser to drill in 10,000 feet of water, while the Discoverer Deep Seas will initially be outfitted to drill in 8,000 feet of water, but with additional riser will be capable of drilling in water depths up to 10,000 feet. The Company has received a contract commitment from Spirit Energy 76, a division of Union Oil Company of California ("Unocal") for a firm period of five years plus up to five one-year options for the Discoverer Spirit, and has signed a contract with Chevron USA, Inc. for five years plus three one-year options for the Discoverer Deep Seas. The hulls and major marine systems are being constructed at the Astillero y Talleres del Noroeste SA ("Astano") shipyard in Ferrol, Spain, with the derrick, derrick substructure, BOP and other modules to be constructed at U.S. Gulf Coast facilities. The Discoverer Spirit is expected to become operational in the first quarter of 2000 and the Discoverer Deep Seas in the third quarter of 2000. Approximately $124 million and $106 million was spent on construction of the Discoverer Spirit and Discoverer Deep Seas, respectively, in 1998 and the Company expects to spend $210 million and $230 million, respectively, to complete the projects. In August 1998, the Company completed the upgrade and conversion of the Transocean Marianas from a multi-service vessel to a semisubmersible drilling rig with a water depth capability of 7,000 feet. The rig then commenced a five-year contract with Shell Deepwater Development. In 1998, the Company spent approximately $106 million to complete this project. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Expenditures." 3 Fleet Status The following table provides certain information about the Company's drilling rig fleet as of March 1, 1999:
Year Water Drilling Entered Depth Depth Service/ Capability Capability Estimated Type and Name Upgraded(1) (in feet) (in feet) Location Customer Expiration(2) ------------- ----------- ---------- ---------- ------------------- -------------------- -------------- Fourth-generation Semisubmersibles Polar Pioneer........... 1985 1,500 25,000 Norwegian North Sea Norsk Hydro February 2000 Transocean Arctic (3)... 1986 1,650 25,000 Norwegian North Sea Statoil February 2002 Henry Goodrich (4)...... 1985 2,000 30,000 U.K. North Sea British Petroleum August 1999 Paul B. Loyd, Jr. (4)... 1991/1993 2,000 25,000 U.K. North Sea British Petroleum April 2000 Transocean Leader....... 1987/1997 4,500 25,000 Norwegian North Sea Statoil August 1999 Transocean Rather....... 1988 4,500 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. July 1999 Transocean Richardson... 1988 5,000 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. April 1999 Other Semisubmersibles Transocean Explorer..... 1976 1,250 25,000 U.K. North Sea -- Idle Transocean Discoverer... 1977/1985 1,250 25,000 U.K. North Sea Talisman February 2000 Transocean Wildcat (3).. 1977/1985 1,300 25,000 Norwegian North Sea Statoil June 2001 Transocean Winner (3)... 1983 1,500 25,000 Norwegian North Sea Statoil July 2003 Transocean Searcher (3). 1983/1988 1,500 25,000 Norwegian North Sea Statoil July 2003 Transocean Prospect (3). 1983/1992 1,500 25,000 Norwegian North Sea Statoil October 2000 Transocean John Shaw.... 1982 1,800 25,000 U.K. North Sea Shell U.K. May 1999 Kan Tan IV (5).......... 1983/1998 2,000 25,000 U.K. North Sea Amerada Hess February 2001 Transocean 96........... 1975/1997 2,300 25,000 U.S. Gulf of Mexico Texaco June 1999 Transocean 97........... 1977/1997 2,300 25,000 Trinidad Conoco May 1999 Transocean Driller...... 1991 3,000 25,000 Brazil Petrobras June 2000 Transocean Legend....... 1983 3,500 25,000 Brazil Petrobras December 1999 Transocean Amirante..... 1978/1997 3,500 25,000 U.S. Gulf of Mexico Amoco September 2002 Transocean Marianas..... 1979/1998 7,000 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. September 2003 Drillships Discoverer Seven Seas (6).................... 1976/1997 7,000 25,000 U.S. Gulf of Mexico Exxon July 1999 Discoverer 534 (6)...... 1975/1991 7,000 25,000 U.S. Gulf of Mexico Amoco February 2000 Discoverer Enterprise (6)(7)................. 1999 10,000 35,000 U.S. Gulf of Mexico Amoco May 2004 Discoverer Spirit (6)(8)................. 2000 10,000 35,000 Astano Shipyard Unocal (8) Discoverer Deep Seas (6)(9)................. 2000 10,000 35,000 Astano Shipyard Chevron (9) Discoverer 511 (10)..... 1976 2,000 25,000 Mexico Pemex March 1999 Jackup Rigs Transocean Jupiter...... 1981/1997 170 16,000 UAE -- Idle Transocean Comet........ 1980 250 20,000 Gulf of Suez, Egypt GUPCO October 2000 Transocean Mercury...... 1969/1998 250 20,000 Gulf of Suez, Egypt GUPCO October 2000 Transocean III.......... 1978/1993 300 20,000 India Enron March 1999 Shelf Explorer.......... 1982 300 25,000 Danish North Sea Maersk May 1999 Transocean Nordic....... 1984 300 25,000 U.K. North Sea Elf March 1999
- -------- (1) Dates shown are the original service date and the date of the most recent upgrade, if any. (2) Expiration dates represent the Company's current estimate of the earliest date the contract for each rig is likely to expire. (3) Participating in a cooperation agreement with Statoil. See "Drilling Contracts." (4) Owned by Arcade Drilling as, a Norwegian company in which the Company has a 25% interest and which is controlled by R&B Falcon Corporation. (5) Operated pursuant to a management contract. (6) Dynamically positioned. (7) The Discoverer Enterprise is currently in the final stages of construction, outfitting and testing in the Ingalls shipyard in Pascagoula, Mississippi, and is expected to be operational in the second quarter of 1999. The rig will be equipped with sufficient riser to drill in 8,500 feet of water, but will be capable of drilling in 10,000 feet of water with additional riser. (8) The Company announced plans to build the Discoverer Spirit in January 1998. The rig is being constructed at the Astano shipyard and is expected to be operational in the first quarter of 2000, working under a five-year contract for Unocal. (9) The Company announced plans to build the Discoverer Deep Seas in February 1998. The rig is being constructed at the Astano shipyard and is expected to be operational in the third quarter of 2000, working under a five-year contract for Chevron. The rig will initially be equipped with sufficient riser to drill in 8,000 feet of water, but will be capable of drilling in 10,000 feet of water with additional riser. (10) Operated under a bareboat charter with the rig's owner. 4 Upon the expiration of existing contracts, there can be no assurance that such contracts will be renewed or extended, that new contracts will be available or, if contracts are available, that they will provide revenues adequate to cover all fixed and variable costs associated with the rigs. As of March 1, 1999, the Company's fleet is currently located in the Gulf of Mexico (8 units), the North Sea (15 units), the Middle East (3 units) and offshore Brazil (2 units), Trinidad (1 unit), Mexico (1 unit) and India (1 unit). The Company also maintains offices, land bases and other facilities worldwide, including in Houston, Texas; Metairie and Morgan City, Louisiana; Macae and Rio de Janeiro, Brazil; Aberdeen, Scotland; Cairo and Ras Shukhair, Egypt; Bergen, Harstad and Tananger, Norway; Ciudad Del Carmen, Mexico; Bombay, India; Esbjerg, Denmark; Doha, Qatar; La Coruna, Spain and Chaguaramas, Trinidad. Most of these facilities are leased by the Company. Drilling Services The Company uses its engineering and operating expertise to provide turnkey drilling and management of third party drilling service activities. These services are provided through service teams generally consisting of Company personnel and third-party subcontractors, with the Company frequently serving as lead contractor. The work generally consists of individual contractual agreements to meet specific customer needs and may be provided on either a dayrate or fixed price basis. As of March 1, 1999, the Company was performing such services under contracts in the U.K. sector of the North Sea and offshore Mexico. The Company also provides coiled tubing services to customers in the Norwegian and U.K. sectors of the North Sea, primarily for well intervention. Unlike conventional drilling units, which use sections of straight pipe connected together to form the drillstring, coiled tubing units utilize reels of flexible steel tubing. The tubing spools off the reel continuously into the wellbore behind the bottom-hole assembly and drill bit, in contrast to conventional rotary units, which must cease drilling to add each new section of pipe. Transocean has also developed and patented proprietary technology to increase the efficiency of coiled tubing operations by mounting the tubing reel directly above the wellbore. The reduction in stress on the coil achieved by this technique increases the life of the coil and thereby reduces the cost of coiled tubing operations. The Company currently owns one drilling unit utilizing this technology through a joint venture with an affiliate of Nabors Industries, Inc. The venture is performing a drilling contract for ARCO Alaska, Inc. on the North Slope. In August 1998, the Company sold its directional drilling business to a subsidiary of Dailey International Inc. for $10 million in cash, resulting in a pre-tax gain of approximately $8.1 million ($5.3 million after tax or $0.05 per share, diluted). In December 1998, the Company and subsidiaries of Baker Hughes Incorporated formed a joint venture, Deepvision, L.L.C. The purpose of the venture is to research, develop and implement new drilling technologies using coiled tubing (reeled pipe) with applications in deepwater and ultra-deepwater environments. Drilling Contracts The Company's contracts to provide offshore drilling services are individually negotiated and vary in their terms and provisions. The Company obtains most of its contracts through competitive bidding against other contractors. Drilling contracts generally provide for payment on a dayrate basis, with higher rates while the drilling unit is operating and lower rates for periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond the control of the Company. The Company also performs drilling services under turnkey contracts, which provide for payment of a fixed price per well. Revenues from dayrate contracts have historically accounted for substantially more of the Company's revenues than turnkey contracts. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Operating Results." A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well or group of wells or covering a stated term and may be terminated by the customer in the event the drilling 5 unit is destroyed or lost or if drilling operations are suspended for a specified period of time as a result of a breakdown of major equipment or, in some cases, due to other events beyond the control of either party. The contract term in many instances may be extended by the customer exercising options for the drilling of additional wells or for an additional term, or by exercising a right of first refusal. In reaction to depressed market conditions, the Company's customers may seek renegotiation of firm drilling contracts to reduce their obligations. The Company and Statoil are parties to a cooperation agreement extending through 2005. Under the cooperation agreement, the Company has committed five semisubmersibles--the Transocean Arctic, Transocean Prospect, Transocean Searcher, Transocean Wildcat and Transocean Winner--for varying contract periods, with Statoil having options to extend the contracts at market rates in minimum two-year intervals for the remainder of the term of the cooperation agreement. Under turnkey contracts, the Company agrees to drill a well to a specified depth for a fixed price. In general, no payment is received by the Company unless the well is drilled to the specified depth. The Company must bear the costs of performing drilling services until the well has been drilled and, accordingly, such projects may require significant cash commitments by the Company. In addition, profitability of the contract is dependent upon keeping expenses within the estimates used by the Company in determining the contract price. In performing a turnkey project, the Company employs a drilling unit from its own fleet or from another contractor under a dayrate contract. Drilling a well under a turnkey contract offers the possibility of financial gains or losses that are substantially greater than those which would ordinarily result from drilling such well under a conventional dayrate contract, since the Company retains any excess of the fixed price over its expenses (including the drilling unit dayrate) but must pay any excess of expenses over such price. The financial results of turnkey contracts depend upon the performance of the drilling unit, drilling conditions and other factors. In January 1998, the Company announced that it was discontinuing turnkey drilling operations in the U.S. Gulf of Mexico after experiencing a period of unsatisfactory operating performance. The discontinuation did not include the Company's international turnkey drilling operations, which historically have been profitable. In January 1999, the Company completed the last well of a three-well turnkey program in the Bay of Campeche, offshore Mexico, and expects to recognize a profit on this well in the first quarter of 1999. See "Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations--Operating Results" and "--1998 Compared to 1997." During the past five years, the Company has engaged in offshore drilling for most of the leading international oil companies (or their affiliates) in the world, as well as for many government-controlled and independent oil companies. During this period, the Company's principal customers have included the Royal Dutch Shell Group, Statoil, Texaco, BP Amoco, Pemex, Gulf of Suez Petroleum Company ("GUPCO"), Petrobras and Norsk Hydro. The Company's largest unaffiliated customers in 1998 were Statoil, Royal Dutch Shell Group and BP Amoco, accounting for 16 percent, 17 percent and 10 percent, respectively, of the Company's 1998 consolidated operating revenues. Industry Conditions and Competition The Company depends on the levels of activity in offshore oil and gas exploration, development and production in markets worldwide. This level of activity is significantly affected by oil and gas prices, market expectations of potential changes in these prices and a variety of political and economic factors. Oil and gas prices are extremely volatile and are affected by numerous factors, including worldwide demand for oil and gas, the ability of the Organization of Petroleum Exporting Countries (commonly called "OPEC") to set and maintain production levels and pricing, the level of production of non-OPEC countries, the policies of the various governments regarding exploration and development of their oil and gas reserves, advances in exploration and development technology and the political environment of oil- producing regions. The offshore contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share. Some of the Company's competitors may have greater resources than the 6 Company. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment may also be considered. The Company's industry has historically been cyclical. There have been periods of high demand, short rig supply and high dayrates, followed by periods of low demand, excess rig supply and low dayrates. The industry is currently in a period of low demand, and the Company is unable to predict when the market will change. In addition, rig availability has increased as a result of contract expirations and construction by other drilling contractors of new rigs that are capable of competing with the Company's deepwater and harsh environment rigs. Periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Outlook." The Company requires highly-skilled personnel to operate and provide technical services and support for its drilling units. During the industry downturn in the mid- to late-1980s and early- to mid-1990s, the industry's ability and need to recruit and train new personnel were severely curtailed. The increased worldwide demand for offshore drilling services experienced in 1996 and 1997 created a shortage of qualified personnel. Although the shortage has lessened somewhat due to the declining demand for offshore drilling services that began in 1998, this shortage may become more acute over the next several years as a number of new drilling units are expected to become operational. The Company is continuing its recruitment and training programs as required to meet its anticipated personnel needs. As of March 1, 1999, the Company had three new rigs in shipyards under construction. In 1998, the Company completed one conversion project. Construction projects are subject to the risks of delay or cost overruns inherent in large construction projects, including shipyard availability, shortages of materials or skilled labor, unforeseen engineering problems, work stoppages, weather interference, unanticipated cost increases and difficulty in obtaining necessary equipment or the requisite permits or approvals. Because of the large backlog of orders for new drilling rigs, shipyards continue to experience some difficulty in hiring qualified workers and in procuring materials, despite the decline in demand for drilling services that began in 1998. Shipyards and suppliers continue to operate at or near capacity, resulting in the delay of ordered materials and equipment. These factors may contribute to cost variations and delays in the delivery of the Company's drilling units under construction. Delays in delivery of these units will result in delays in contract commencements, resulting in a loss of revenue to the Company. Operating Risks The Company's operations are subject to the usual 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, damage to or destruction of the equipment involved and injury or death to rig personnel. Damage to the environment could also result from the Company's operations, particularly through oil spillage or extensive 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 maintains broad insurance coverage, including insurance against general and marine public liability. The Company's offshore drilling equipment is covered by physical damage insurance policies against marine and other perils, including losses due to capsizing, grounding, collision, fire, lightning, hurricanes, wind, storms, action of waves, cratering, blowouts and explosions, and by policies against war risks to its rigs located in foreign countries. The Company also carries employer's liability and other insurance customary in the drilling business. The Company believes it is adequately insured in accordance with industry standards against normal risks in its operations; however, such insurance coverage may not in all situations provide sufficient funds to protect 7 the Company from all liabilities that could result from its drilling operations. Although the Company's current practice is to insure its drilling units for at least the net book value of the units, the Company's insurance would not cover completely the costs that would be required to replace certain of its units, including certain of its fourth-generation semisubmersibles and drillships. Moreover, the Company's insurance coverage in most cases does not protect against loss of revenues. Accordingly, the occurrence of a casualty or loss against which the Company is not fully insured could have a material adverse effect on the Company's financial position and results of operations. The Company is subject to liability under various environmental laws and regulations. See "--Regulation." The Company has generally been able to obtain some degree of contractual indemnification pursuant to which the Company's customer agrees to protect and indemnify the Company from liability for pollution and environmental damages; however, there is no assurance that the Company can obtain such indemnities in all of its contracts or that, in the event of extensive pollution and environmental damages, the customer will have the financial capability to fulfill its contractual obligation to the Company. Also, these indemnities may not be enforceable in all instances. No such indemnification is typically available for turnkey operations. International Operations The Company has derived a majority of its revenues from its foreign operations in each of the past three years. The Company cannot predict whether foreign operations will increase or decrease as a percentage of its revenues in future periods. The Company's foreign operations are subject to certain political and other uncertainties not encountered in domestic operations, including risks of war and civil disturbances (or other events that disrupt markets), expropriation of equipment, repatriation of income or capital, taxation policies, and the general hazards associated with foreign sovereignty over certain areas in which operations are conducted. The Company is protected to a substantial extent against capital loss (but generally not loss of revenue) from most of such risks through insurance, indemnity provisions in its drilling contracts, or both. The necessity of insurance coverage for risks associated with political unrest, expropriation and environmental remediation for operating areas not covered under the Company's existing insurance policies is evaluated on an individual contract basis. As of March 1, 1999, all areas in which the Company was operating were covered by existing insurance policies. The Company's operations are also subject to extensive regulation by foreign governments. Many foreign governments favor or effectively require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect the Company's ability to compete. The Company expects to continue to structure its operations through appropriate means in order to remain competitive in the international markets. Another risk inherent in foreign operations is the possibility of currency exchange losses where revenues are received and expenses are paid in currencies other than United States dollars. The Company may also incur losses as a result of an inability to collect dollar revenues because of a shortage of convertible currency available to the foreign country. The Company seeks to limit these risks by structuring contracts such that compensation is made in United States dollars or freely convertible foreign currencies and, to the extent possible, by limiting acceptance of blocked currencies to amounts which match its expense requirements in local currency. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk--Foreign Exchange Risk." Regulation The Company's operations are affected from time to time in varying degrees by governmental laws and regulations. The drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws relating to the energy business generally. 8 Foreign contract drilling operations are subject to various laws and regulations in countries in which the Company operates. Such laws and regulations regulate various aspects of foreign operations, including the equipping and operation of drilling units, currency conversions and repatriation, oil exploration and development, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and suppliers by foreign contractors. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exportation of oil and other aspects of the oil industries in their countries. In addition, government action, including initiatives by OPEC, may continue to cause oil price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so. In the United States, regulations applicable to the Company's operations include certain regulations controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment. For example, the Company, as an operator of mobile offshore drilling units in navigable United States waters and certain offshore areas, may be liable for damages and costs incurred in connection with oil spills for which it is held responsible, subject to certain limitations. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. 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 which 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's financial position and results of operations. The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant thereto impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by the OPA, and such liability could be substantial. A failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action. The Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations of environmental related lease conditions or regulations issued pursuant to the Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and canceling leases. Such enforcement liabilities can result from either governmental or citizen prosecution. Certain of the foreign countries in whose waters the Company is presently operating or may operate in the future have regulations covering the discharge of oil and other contaminants in connection with drilling operations. The Company believes that it has conducted its operations in substantial compliance with applicable environmental laws and regulations governing its activities. Although significant capital expenditures may be required to comply with such governmental laws and regulations, such compliance has not materially adversely affected the earnings or competitive position of the Company. Employees As of December 31, 1998, the Company had approximately 3,800 employees. The Company requires highly skilled personnel to operate its drilling units. As a result, the Company conducts extensive personnel recruiting, training and safety programs. 9 On a worldwide basis, the Company had approximately 30 percent of its employees working under collective bargaining agreements at December 31, 1998. The majority of these employees are represented by Norwegian unions. Of these represented employees, a majority are working under agreements that are subject to salary negotiation in 1999. The Company does not have any other collective bargaining agreements that are material to the Company and considers relations with its employees to be good. ITEM 2. Properties The description of the Company's property included under "Item 1. Business" is incorporated by reference herein. ITEM 3. Legal Proceedings The Company and Global Marine, Inc. ("Global Marine") were parties to an agreement pursuant to which the Company participated in the cash flow from three jackup drilling rigs owned and operated by Global Marine and Global Marine participated in the cash flow from one of the Company's jackup drilling rigs, the Transocean Nordic. During April 1997, Global Marine initiated arbitration proceedings against the Company in the United Kingdom with respect to various disputed matters under the agreement. In March 1998, the Company reached a settlement with Global Marine resolving the disputed matters under the cash flow sharing agreement and terminating such agreement as of February 1, 1998. Pursuant to the settlement, the parties have certain continuing rights to receive payments if any of the rigs covered by the former agreement are sold within three years. The Company received $29.8 million cash from Global Marine, resulting in an after tax gain of approximately $13.8 million, or $.14 per share, diluted. The net cash proceeds were used to repay debt. During 1997, Kvaerner Installasjon a.s ("Kvaerner") in Norway performed modification and refurbishment work on one of the Company's fourth-generation semisubmersible drilling rigs, the Transocean Leader. The amount owed with respect to such work is in dispute. The Company has posted a letter of credit valued at approximately $30 million pending the resolution of the dispute by agreement between the parties or by final judgment under the Norwegian judicial process. In September 1998, the Company instituted an action in the Norwegian courts alleging that it owes no additional amounts and that the letter of credit should be released. In March 1999, Kvaerner commenced proceedings in the Norwegian courts seeking judgement for approximately $35 million plus interest. As of March 15, 1999, the Company was in the process of responding to this claim. Although the Company cannot predict the outcome of the dispute at this time, the Company believes it will have no material adverse effect on its operations or financial position. In 1990 and 1991, two of the Company's subsidiaries were served with assessments valued at approximately $7.4 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services ("ISS"). The Company believes that neither subsidiary is liable for the taxes and has contested the assessments in the Brazilian administrative and court systems. The proceedings with respect to the 1991 assessment, which was valued at approximately $6.5 million, reached the first level Brazilian state court, which rejected the Company's arguments. The Company has appealed that ruling to the second level court. The August 1990 assessment also had an unfavorable ruling at the first level, and the ruling has been appealed to the second level. If the Company's defenses are ultimately unsuccessful, the Company believes that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse the Company for ISS payments required to be paid by them. The Company believes the outcome of these assessments will have no material adverse effect on the Company's operations or financial position. The Company and its subsidiaries are involved in a number of other lawsuits, all of which have arisen in the ordinary course of the Company's business. The Company does not believe that ultimate liability, if any, resulting from any pending litigation will have a material adverse effect on its operations or financial position. 10 ITEM 4. Submission of Matters to a Vote of Security Holders The Company did not submit any matter to a vote of its security holders during the fourth quarter of 1998. Executive Officers of the Registrant
Age as of Officer Office March 1, 1999 ------- ------ ------------- J. Michael Talbert...... Chairman of the Board and Chief Executive 52 Officer W. Dennis Heagney....... Director, President and Chief Operating Officer 51 Jon C. Cole............. Senior Vice President 46 Robert L. Long.......... Senior Vice President, Chief Financial Officer 53 and Treasurer Donald R. Ray........... Senior Vice President 52 Alan A. Broussard....... Vice President 53 Eric B. Brown........... Vice President, General Counsel and Secretary 47 Barbara S. Vice President and Controller 40 Koucouthakis........... Dennis R. Long.......... Vice President 51
The officers of the Company are elected annually by the Board of Directors. There is no family relationship between any of the above-named executive officers. J. Michael Talbert was elected a director and Chairman of the Board and Chief Executive Officer of the Company effective September 1, 1994 and currently serves in those capacities. Prior to assuming his current position with the Company, Mr. Talbert was President and Chief Executive Officer of Lone Star Gas Company, a division of Enserch Corporation, since May 1993, and served as President and Chief Operating Officer of Lone Star Gas Company from January 1991 to May 1993. W. Dennis Heagney was elected a director of the Company effective June 12, 1997 and President of the Company effective April 1, 1986 and currently serves in those capacities and as Chief Operating Officer. He has been employed by the Company since 1969 and was elected Vice President in 1983 and Senior Vice President in 1984. Jon C. Cole was elected Senior Vice President of the Company effective April 1, 1993 and currently serves in that capacity, with responsibility for European operations. Mr. Cole joined the Company in 1978 and was elected Vice President in 1990. Robert L. Long was elected Senior Vice President of the Company effective May 1, 1990 and Treasurer of the Company effective September 1, 1997 and currently serves in those capacities and as Chief Financial Officer. Mr. Long has been employed by the Company since 1976 and was elected Vice President in 1987. Donald R. Ray was elected Senior Vice President of the Company effective December 1, 1996 and currently serves in that capacity, with responsibility for technical services. Mr. Ray has been employed by the Company since 1972 and has served as a Vice President of the Company since 1986. Alan A. Broussard was elected Vice President of the Company effective February 12, 1998 and currently serves in that capacity, with responsibility for worldwide marketing. He has been employed by the Company since 1975. Eric B. Brown was elected Vice President and General Counsel of the Company effective February 1, 1995 and Secretary effective September 29, 1995 and currently serves in those capacities. During the past five years, prior to assuming his current position with the Company, Mr. Brown served as General Counsel of Coastal Gas Marketing Company. 11 Barbara S. Koucouthakis was elected Controller of the Company effective January 1, 1990 and Vice President effective April 1, 1993 and currently serves in those capacities. She has been employed by the Company since 1982. Dennis R. Long was elected Vice President of the Company effective July 1, 1997 and currently serves in that capacity, with responsibility for human resources and management information systems. Prior to assuming his current position with the Company, Mr. Long was Senior Vice President, Administration, since May 1995, of Enserch Corporation, and previously served Lone Star Gas Company, a division of Enserch Corporation, as Vice President, Human Resources and Services, from January 1986 to May 1995. PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters The Company's common stock is listed on the New York Stock Exchange (the "NYSE") and on the Oslo Stock Exchange under the symbol "RIG." The following table sets forth the high and low sales prices of the Company's common stock for the periods indicated as reported on the NYSE Composite Tape.
Price -------------- High Low ---- ---- 1997 First Quarter...................................... $35 11/16 $26 1/8 Second Quarter..................................... 37 5/16 27 1/8 Third Quarter...................................... 50 1/2 36 5/16 Fourth Quarter..................................... 60 1/2 39 3/8 1998 First Quarter...................................... 54 15/16 35 Second Quarter..................................... 59 15/16 41 11/16 Third Quarter...................................... 46 3/8 23 Fourth Quarter..................................... 41 1/2 23 9/16 1999 First Quarter (through February 26)................ 31 9/16 20
On February 26, 1999, the last reported sales price of the Company's common stock on the NYSE Composite Tape was $20 5/8 per share. On such date, there were approximately 1,000 holders of record of the Company's common stock and 100,571,816 shares of common stock outstanding. The Company has paid quarterly cash dividends of $0.03 per share of its common stock since the fourth quarter of 1993. Any future declaration and payment of dividends will be (i) dependent upon the Company's results of operations, financial condition, cash requirements and other relevant factors, (ii) subject to the discretion of the Board of Directors of the Company, (iii) subject to restrictions contained in the Company's bank credit agreement (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources") and (iv) payable only out of the Company's surplus or current net profits in accordance with Delaware law. 12 ITEM 6. Selected Consolidated Financial Data The selected consolidated financial data as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 has been derived from the audited consolidated financial statements of the Company included elsewhere herein. The selected consolidated financial data as of December 31, 1996, 1995 and 1994 and for each of the two years in the period ended December 31, 1995 has been derived from audited consolidated financial statements of the Company not included herein. The following data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements and the notes thereto included under "Item 8. Financial Statements and Supplementary Data." The statement of operations data for the year ended December 31, 1996 includes the operating results of Transocean ASA since September 1, 1996, the effective date of the Combination for accounting purposes.
Years ended December 31, -------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ----- ----- (In millions, except per share data) Income Statement Data Operating Revenues............................ $1,090 $ 892 $ 529 $ 323 $ 243 Operating Income.............................. 460 217 108 52 21 Net Income.................................... 343 142 78 47 13 Net Income Per Share(a)(b) Basic....................................... 3.43 1.40 1.09 0.83 0.23 Diluted..................................... 3.41 1.38 1.07 0.82 0.23 Other Financial Data Cash Flows From Operating Activities.......... $ 470 $ 164 $ 126 $ 60 $ 64 EBITDA(c)..................................... 624 331 169 98 45 Cash Dividends Declared Per Share(a).......... 0.12 0.12 0.12 0.12 0.12 Capital Expenditures(d)....................... 573 406 213 19 59 Balance Sheet Data (at end of period) Total Assets.................................. $3,251 $2,755 $2,443 $ 542 $ 493 Total Debt.................................... 833 733 420 30 30 Stockholders' Equity.......................... 1,979 1,621 1,628 364 321
- -------- (a) Net Income Per Share and Cash Dividends Declared Per Share have been retroactively restated to reflect the increased number of shares of common stock issued and outstanding as a result of a two-for-one stock split effected in the form of a 100 percent stock dividend, which was paid in September 1997. (b) Net Income Per Share amounts prior to 1997 have been restated to comply with SFAS No. 128, Earnings Per Share (see Note 1 to the Company's consolidated financial statements). (c) EBITDA (earnings before interest, taxes, depreciation and amortization) is presented here because it is a widely accepted financial indication of a company's ability to incur and service debt. EBITDA is not a measurement presented in accordance with generally accepted accounting principles ("GAAP") and is not intended to be used in lieu of GAAP presentations of results of operations and cash provided by operating activities. (d) Excludes the Combination. 13 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the information contained in the Company's consolidated financial statements and the notes thereto included under "Item 8. Financial Statements and Supplementary Data" elsewhere in this annual report. Overview Transocean Offshore Inc. is a leading international provider of deepwater and harsh environment contract drilling services for oil and gas wells. As of March 1, 1999, the Company owns, has ownership interests in or operates 31 mobile offshore drilling rigs. Transocean's fleet consists of seven fourth- generation semisubmersibles, fourteen second- and third-generation semisubmersibles, four drillships, including the "Discoverer Enterprise" which is currently in the final stages of construction and testing, and six jackup rigs. The Company also has under construction two additional Discoverer Enterprise-class drillships, to be named "Discoverer Spirit" and "Discoverer Deep Seas." The Company contracts these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill offshore wells. The Company also provides additional drilling services, including turnkey drilling, coiled tubing drilling and well intervention and management of third-party drilling service activities. In September 1997, the Company effected a two-for-one split of its common stock in the form of a 100 percent stock dividend. All references in this annual report to number of shares, per share amounts and market prices of the Company's common stock have been retroactively restated to reflect the increased number of shares of common stock issued and outstanding as a result of the dividend. The Company acquired over 99 percent of the outstanding capital shares of Transocean ASA, a Norwegian company, pursuant to an exchange offer for Company common stock and cash completed in September 1996 and subsequent purchases of Transocean ASA shares in November and December 1996 (the "Combination"). All remaining outstanding shares were purchased in July 1997. The total purchase price was approximately $1.5 billion. The Combination was deemed effective for accounting purposes as of September 1, 1996. 14 Operating Results Comparative data relating to the Company's operating revenues and operating income by segment and geographic area follows. In the table and related discussion below, the "Mobile Units" segment primarily consists of the results of operations for drilling rigs operated for customers, primarily at a contractually determined price per day (dayrate). The "Drilling Services" segment primarily includes results from providing personnel and equipment other than rigs for oil and gas exploration and production on either a dayrate or fixed price basis. The operating results of Transocean ASA are included from September 1, 1996.
Years ended December 31, ------------------------------ 1998 1997 1996 ---------- -------- -------- (In thousands) Operating Revenues Mobile Units U.S. Gulf of Mexico.......................... $ 305,582 $222,142 $148,886 Europe....................................... 463,361 361,045 179,865 Other Western Hemisphere..................... 184,265 19,884 29,193 Other Eastern Hemisphere..................... 60,212 84,233 31,035 ---------- -------- -------- Total Mobile Units............................. 1,013,420 687,304 388,979 ---------- -------- -------- Drilling Services.............................. 76,192 204,658 139,924 ---------- -------- -------- Total Operating Revenues....................... $1,089,612 $891,962 $528,903 ========== ======== ======== Operating Income (Loss) (a) Mobile Units U.S. Gulf of Mexico.......................... $ 182,688 $127,247 $ 76,461 Europe....................................... 164,823 79,589 32,003 Other Western Hemisphere..................... 119,172 5,514 5,981 Other Eastern Hemisphere..................... 31,372 41,606 4,952 Other (b).................................... (13,386) (10,789) (5,632) ---------- -------- -------- Total Mobile Units............................. 484,669 243,167 113,765 ---------- -------- -------- Drilling Services.............................. 4,811 (360) 10,079 ---------- -------- -------- Total Operating Income for Reportable Segments...................................... 489,480 242,807 123,844 Corporate Expenses............................. (29,208) (25,331) (16,230) ---------- -------- -------- Total Operating Income......................... 460,272 217,476 107,614 ---------- -------- -------- Equity in earnings of joint ventures......... 11,677 10,196 5,168 Interest income.............................. 3,451 1,854 6,228 Interest expense, net of amounts capitalized................................. (23,892) (22,853) (7,220) Gain on termination of cash flow sharing agreement................................... 21,290 -- -- Other, net................................... 14,348 572 9,862 ---------- -------- -------- Other Income (Expense), Net.................... 26,874 (10,231) 14,038 ---------- -------- -------- Income Before Income Taxes..................... $ 487,146 $207,245 $121,652 ========== ======== ========
- -------- (a) After depreciation and amortization expense. (b) Other includes operations and engineering overhead expenses not allocated to geographic areas of operations. 1998 Compared To 1997 Net income for the year ended December 31, 1998 was $343.4 million or $3.41 per share, diluted, compared to $141.9 million or $1.38 per share, diluted, for 1997, an increase of $201.5 million (142 percent) or $2.03 per 15 share, diluted. The increase in 1998 resulted primarily from increases in dayrates and rig utilization and lower operating and maintenance costs, partially offset by an increase in depreciation and amortization. In the fourth quarter of 1998, the Company recognized operating revenues of $40 million and operating income of $36.1 million ($23.5 million after tax or $0.23 per share, diluted) on a cash settlement in connection with the contract termination for the Transocean Explorer. The Company also recognized a $21.3 million net gain ($13.8 million after tax or $0.14 per share, diluted) on the termination of a cash flow sharing agreement with Global Marine Inc. ("Global Marine") and a non-recurring $13.1 million pre-tax gain ($8.5 million after tax or $0.08 per share, diluted) on the sale of certain non-core assets within the Company's Drilling Services business segment and sales of surplus drilling components during the year ended December 31, 1998. Revenues were $1,089.6 million for the year ended December 31, 1998 compared to $892.0 million for 1997, an increase of $197.6 million or 22 percent. Operating income was $460.3 million in 1998 compared to $217.5 million in 1997, an increase of $242.8 million or 112 percent. Revenues and operating income from Mobile Units increased significantly for the year ended December 31, 1998 compared to 1997. Rig utilization increased to 97 percent in 1998 from 93 percent in 1997, reflecting reduced downtime for rig repairs and upgrades. The average dayrate for the Company's semisubmersible drilling rigs and drillships was approximately $120,000 in 1998, compared to approximately $96,100 in 1997, an increase of 25 percent. The Company's jackup drilling rigs experienced a similar percentage increase in average dayrates. In the U.S. Gulf of Mexico, the increase in revenues and operating income for the year ended December 31, 1998 resulted primarily from higher average dayrates and the addition of the results of three rigs that had been in the shipyard undergoing upgrades for a significant portion of the prior year. These increases were partially offset by the relocation of a rig to Trinidad during the current year. In Europe, increases resulted from higher average dayrates and lower downtime for repairs and marine surveys over the prior period. Operating results in Other Western Hemisphere significantly increased in the current year due to (i) the net gain associated with the cash settlement in connection with the contract termination referred to previously, (ii) higher average dayrates, (iii) the relocation of two rigs from the U.S. Gulf of Mexico for a portion of the current period, including one that was in the shipyard during 1997, (iv) the relocation of one rig that had operated in Other Eastern Hemisphere in 1997, and (v) the inclusion of results from one rig that had operated in an unconsolidated joint venture in the prior year. Other Eastern Hemisphere experienced a decrease in operating results from 1997 due primarily to the relocation of a rig to Other Western Hemisphere in the first quarter of 1998. This decrease was partially offset by increases in average dayrates for the current period. Revenues from Drilling Services decreased for the year ended December 31, 1998 compared to 1997, while operating income increased during the same period. These results primarily reflect the May 1997 divestiture of certain non-core activities and assets originally acquired in the 1996 combination with Transocean ASA and the cessation of turnkey drilling services in the U.S. Gulf of Mexico in the first quarter of 1998. Depreciation and amortization expense increased by $13.9 million for the year ended December 31, 1998 compared to 1997. The increase was due primarily to additional depreciation resulting from the capitalization of equipment associated with the Company's major upgrade and construction projects. Corporate expenses increased $3.9 million, from $25.3 million in 1997 to $29.2 million in the current year, reflecting the increased activities of the Company. The previously announced fleet expansion projects required expanded recruiting and training activities for drilling crews. The Company also upgraded and expanded its communication and data processing systems to manage more effectively its geographically diversified operations. Other income, net, increased to $26.9 million for the year ended December 31, 1998 compared to other expense, net, of $10.2 million in the prior year. During 1998, the Company recognized $34.4 million in pre-tax gains on the termination of a cash flow sharing agreement with Global Marine, the sale of certain non-core assets within its Drilling Services business segment and sales of surplus drilling equipment. 16 Income tax expense increased by $78.4 million due primarily to higher pre- tax earnings for the year ended December 31, 1998 compared to the prior year. The Company's effective tax rate was lower in 1998 compared to 1997 due to an increase in the permanent reinvestment of earnings of certain foreign subsidiaries. 1997 Compared to 1996 Net income for the year ended December 31, 1997 was $141.9 million or $1.38 per share, diluted, compared to $78.0 million or $1.07 per share, diluted, for 1996, an increase of $63.9 million (82 percent) or $0.31 per share, diluted. The increase in 1997 resulted primarily from increased dayrates and the inclusion of the Transocean ASA results for the entire year, partially offset by a decrease in other income. The diluted weighted-average number of shares of common stock was 102.8 million and 73.1 million for the years ended December 31, 1997 and 1996, respectively. The increase was primarily due to the shares of common stock issued in the Combination. Revenues were $892.0 million for the year ended December 31, 1997 compared to $528.9 million for 1996, an increase of $363.1 million or 69 percent. Operating income was $217.5 million in 1997 compared to $107.6 million in 1996, an increase of $109.9 million or 102 percent. Revenues and operating income from Mobile Units increased significantly for the year ended December 31, 1997, compared to 1996. In the U.S. Gulf of Mexico, the increases resulted primarily from higher average dayrates and the inclusion during the third and fourth quarters of operations of a rig that operated in Other Western Hemisphere in 1996 and a newly upgraded rig that commenced operations in the third quarter of 1997. In Europe, the increases in revenues and operating income resulted primarily from the inclusion of the Transocean ASA results following the Combination. The decreases in revenues and operating income in Other Western Hemisphere were due to the relocation of one rig referred to above to the U.S. Gulf of Mexico in early 1997 for an upgrade and to commence operations, partially offset by operations added through the Combination. The increases in Other Eastern Hemisphere were due primarily to the results of a rig added through the Combination, higher average dayrates in 1997 and full utilization of two rigs that were stacked during a portion of 1996. Revenues from Drilling Services increased for the year ended December 31, 1997 compared to 1996, while operating income decreased during the same period. The increase in revenues resulted primarily from a higher number of turnkey wells completed during 1997 compared to 1996 and the inclusion of the Transocean ASA results following the Combination, partially offset by decreases in revenues and operating income from services provided in Qatar and Senegal during 1996 that were not performed in 1997. Operating losses increased in 1997 compared to the prior year primarily due to higher losses from turnkey drilling services, including an estimated loss on one well in progress in the U.S. Gulf of Mexico at the end of 1997. In January 1998, the Company announced that it was closing down the operations of its U.S. Gulf of Mexico turnkey drilling services. Depreciation and amortization expense increased by $56.4 million for the year ended December 31, 1997 compared to 1996. The increase was primarily due to additional depreciation on property and equipment acquired in the Combination and amortization of goodwill relating to the Combination. Corporate expenses increased $9.1 million, from $16.2 million in 1996 to $25.3 million in 1997 reflecting the increased costs to integrate and manage a larger organization. The corporate organization expanded to accommodate the overall growth of the Company as a result of the Combination and the increased activity in the industry. Other expense, net, increased to $10.2 million for the year ended December 31, 1997 compared to other income, net, of $14.0 million in 1996. Higher equity in earnings of joint ventures during 1997 resulted primarily from higher average dayrates on two rigs partially owned by the Company through Arcade Drilling. See Note 15 to the Company's consolidated financial statements. In addition, during 1997 the Company recognized lower interest income due to lower average cash balances and higher net interest expense as a result of increased debt 17 relating to the Combination and the Public Debt Offering. See "--Liquidity and Capital Resources." Other expense in 1997 included $1.6 million in realized losses on foreign exchange derivative instruments, while 1996 included a $6.6 million pre-tax gain on the disposal of a jackup rig. Income tax expense increased by $21.7 million due primarily to higher pre- tax earnings for the year ended December 31, 1997 compared to 1996, partially offset by a decrease in earnings of foreign subsidiaries subject to tax. The Company's effective tax rate was lower in 1997 compared to 1996 due to an increase in the permanent reinvestment of earnings of certain foreign subsidiaries. Market Outlook Fleet utilization continued at a high level in the fourth quarter of 1998, with a rate of 95 percent (98 percent, third quarter) fleetwide and 99 percent (99 percent, third quarter) for the Company's 20 fully owned and active floating drilling units. The fleetwide utilization decreased slightly, primarily due to the Transocean Jupiter being idle for the entire fourth quarter. Average dayrates during the fourth quarter of 1998 improved slightly from the third quarter, to $114,100 ($109,600, third quarter) fleetwide and $125,100 ($124,800, third quarter) for the Company's floaters, due primarily to the Transocean Nordic rolling over to a higher contract rate at the end of the third quarter and to the Transocean Marianas operating during the entire fourth quarter. The backlog of contracts in place for the Company's 21 fully owned and active floaters (including the Discoverer Enterprise, which is expected to be placed in service during the second quarter of 1999), with 80 percent of active fleet days committed through the end of 1999, is a result of the Company's strategy over the past two years of lengthening the average duration of contracts for its fleet. During the second quarter of 1998, demand for offshore drilling rigs began to decrease in response to substantial declines in oil prices that began in late 1997 and continued throughout 1998. As a result, rig utilization and dayrates have declined as oil and gas companies reduced the level of exploration and development activity in line with reduced price expectations. The decline has been most pronounced in the market for jackups and less capable floaters, but has also had an impact on the market for deepwater and high-specification floaters. Dayrates and utilization for these units have decreased from peak levels experienced through the first half of 1998. The Company believes that further decreases in current oil and gas prices, or extended periods at current price levels, will further depress the level of exploration and development activity and result in a corresponding decline in demand for its services. A number of oil and gas companies have announced reductions in capital spending for exploration and development; others have completed or announced consolidation transactions that have or are likely to continue to result in such reductions. These reductions adversely affect the demand for the Company's services. Rig availability has increased as a result of expiring contracts and construction by drilling contractors of new rigs that are capable of competing with the Company's deepwater and harsh-environment rigs. Although most of these new rigs are being built pursuant to long-term contract commitments, there can be no assurance that such contracts will not be cancelled or terminated, that the operators of the new rigs will not seek to "farm-out" such rigs, or that upon the expiration of such contracts and the contracts for the Company's rigs, the then-current market conditions will be favorable. The Company anticipates that dayrates for its 12 fully-owned drilling units becoming available due to contract expirations in 1999 will be adversely affected by this market weakness. Depending on market conditions at the time the units become available, the Company may be required to stack some of these units during 1999. In addition to the loss of revenues associated with stacking rigs, the Company may be required to incur additional expenses associated with severance and related payments to rig operating personnel. As of March 1, 1999, one of the Company's jackups and one second-generation semisubmersible were stacked with no contract. 18 Other Factors Affecting Operating Results The Company depends on the levels of activity in offshore oil and gas exploration, development and production in markets worldwide. This level of activity is significantly affected by oil and gas prices, market expectations of potential changes in these prices and a variety of political and economic factors. Oil and gas prices are extremely volatile and are affected by numerous factors, including worldwide demand for oil and gas, the ability of the Organization of Petroleum Exporting Countries (commonly called "OPEC") to set and maintain production levels and pricing, the level of production of non-OPEC countries, the policies of the various governments regarding exploration and development of their oil and gas reserves, advances in exploration and development technology and the political environment of oil- producing regions. The offshore contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share. Some of the Company's competitors may have greater resources than the Company. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment may also be considered. The Company's industry has historically been cyclical. There have been periods of high demand, short rig supply and high dayrates, followed by periods of low demand, excess rig supply and low dayrates. The industry is currently in a period of low demand, and the Company is unable to predict when the market will change. In addition, rig availability has increased as a result of contract expirations and construction by other drilling contractors of new rigs that are capable of competing with the Company's deepwater and harsh environment rigs. Periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. Many of the Company's term drilling contracts may be terminated if the drilling unit is destroyed or lost or if drilling operations are suspended for a specified period of time as a result of a breakdown of major equipment or, in some cases, due to other events beyond the control of either party. In reaction to depressed market conditions, the Company's customers may also seek renegotiation of firm drilling contracts to reduce their obligations. The Company's expectation, however, is that its customers will honor their contract commitments. The Company requires highly-skilled personnel to operate and provide technical services and support for its drilling units. During the industry downturn in the mid- to late-1980s and early- to mid-1990s, the industry's ability and need to recruit and train new personnel were severely curtailed. The increased worldwide demand for offshore drilling services experienced in 1996 and 1997 created a shortage of qualified personnel. Although the shortage has lessened somewhat due to the declining demand for offshore drilling services that began in 1998, this shortage may become more acute over the next several years as a number of new drilling units are expected to become operational. The Company is continuing its recruitment and training programs as required to meet its anticipated personnel needs. As of March 1, 1999, the Company had three new rigs in shipyards under construction. In 1998, the Company completed one conversion project. Construction projects are subject to the risks of delay or cost overruns inherent in large construction projects, including shipyard availability, shortages of materials or skilled labor, unforeseen engineering problems, work stoppages, weather interference, unanticipated cost increases and difficulty in obtaining necessary equipment or the requisite permits or approvals. Because of the large backlog of orders for new drilling rigs, shipyards continue to experience some difficulty in hiring qualified workers and in procuring materials, despite the decline in demand for drilling services that began in 1998. Shipyards and suppliers continue to operate at or near capacity, resulting in the delay of ordered materials and equipment. These factors may contribute to cost variations and delays in the delivery of the Company's drilling units under construction. Delays in delivery of these units will result in delays in contract commencements, resulting in a loss of revenue to the Company. 19 The Company has derived a majority of its revenues from its foreign operations in each of the past three years. The Company cannot predict whether foreign operations will increase or decrease as a percentage of its revenues in future periods. The Company's foreign operations are subject to certain political and other uncertainties not encountered in domestic operations, including risks of war and civil disturbances (or other events that disrupt markets), expropriation of equipment, repatriation of income or capital, taxation policies, and the general hazards associated with foreign sovereignty over certain areas in which operations are conducted. The Company is protected to a substantial extent against capital loss (but generally not loss of revenue) from most of such risks through insurance, indemnity provisions in its drilling contracts, or both. The necessity of insurance coverage for risks associated with political unrest, expropriation and environmental remediation for operating areas not covered under the Company's existing insurance policies is evaluated on an individual contract basis. As of March 1, 1999, all areas in which the Company is operating are covered by existing insurance policies. The Company's operations are also subject to extensive regulation by foreign governments. Many foreign governments favor or effectively require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect the Company's ability to compete. The Company expects to continue to structure its operations through appropriate means in order to remain competitive in the international markets. Another risk inherent in foreign operations is the possibility of currency exchange losses where revenues are received and expenses are paid in currencies other than United States dollars. The Company may also incur losses as a result of an inability to collect dollar revenues because of a shortage of convertible currency available to the foreign country. The Company seeks to limit these risks by structuring contracts such that compensation is made in United States dollars or freely convertible foreign currencies and, to the extent possible, by limiting acceptance of blocked currencies to amounts which match its expense requirements in local currency. See "--Liquidity and Capital Resources." On a worldwide basis, the Company had approximately 30 percent of its employees working under collective bargaining agreements at December 31, 1998. Of these represented employees, a majority are working under agreements that are subject to salary negotiation in 1999. The majority of these employees are represented by five Norwegian unions, each of which participates in one or several nationwide agreements concerning salary and other specific terms and conditions. These nationwide agreements are established as a result of bi- annual negotiations between the various employers' nationwide associations and the respective employees' unions. The general rate of inflation in the United States and the majority of the foreign countries in which the Company operates has been moderate over the past several years and has not had a material impact on the Company's results of operations. The increase in the demand for offshore drilling rigs experienced in 1996 and 1997 led to higher labor, transportation and other operating expenses as a result of an increased need for qualified personnel and services. Because of the decline in demand for offshore drilling services commencing in 1998, the Company expects that inflationary pressures on these expenses will decrease. Liquidity and Capital Resources Sources and Uses of Cash Cash flows provided by operations were $469.7 million for the year ended December 31, 1998, compared to $163.6 million for 1997, an increase of $306.1 million. The increase in cash provided by operations was primarily due to higher cash flows from net income during the year ended December 31, 1998 and increases provided by net working capital components. Cash flows used in investing activities increased $240.7 million from $305.4 million for the year ended December 31, 1997 to $546.1 million in 1998. The increase in cash used in investing activities resulted primarily from an increase in capital expenditures relating to rig construction and upgrade projects, partially offset by 20 proceeds from disposal of assets. In addition, during 1997, the Company received $99.6 million in net proceeds from the divestiture of certain non- core drilling services activities and assets (net of $5.9 million cash divested) compared to $10 million in 1998. Cash flows provided by financing activities decreased $80.3 million from $171.9 million in the year ended December 31, 1997 to $91.6 million in 1998. During 1998, the Company increased its net borrowings under its revolving credit facility. During 1997, the Company increased its borrowings through the $300 million Public Debt Offering and the Project Financing Agreement (both of which are defined below). This was partially offset by repayments of amounts borrowed under the Credit Agreement (which is defined below) and from cash used to repurchase 3,784,000 shares of the Company's common stock. Capital Expenditures The Company's investments in its existing fleet and previously announced fleet additions continue to require significant capital expenditures. Capital expenditures totaled $573 million during the year ended December 31, 1998 and are expected to be approximately $520 million in 1999, including amounts that will be spent on the construction of the deepwater drillships the Discoverer Enterprise, the Discoverer Spirit and the Discoverer Deep Seas. The following table summarizes actual and projected expenditures (including capitalized interest) for the Company's major construction and conversion projects.
Transocean Discoverer Discoverer Discoverer Marianas Enterprise Spirit Deep Seas ---------- ---------- ---------- ---------- (Expenditures in millions) Cumulative at December 31, 1997........................ $174 $148 $ -- $ -- Actual for the year ended December 31, 1998........... 106 154 124 106 ---- ---- ---- ---- Cumulative at December 31, 1998........................ 280 302 124 106 Projected--1999.............. -- 80 200 170 Projected--2000.............. -- -- 10 60 ---- ---- ---- ---- Projected Total Costs........ $280 $382 $334 $336 ==== ==== ==== ====
The amounts shown for the Discoverer Enterprise include certain costs not expected to be incurred in connection with the construction of the Discoverer Spirit and the Discoverer Deep Seas, including: engineering design costs that will not be repeated because the Discoverer Spirit and the Discoverer Deep Seas are the same design as the Discoverer Enterprise; lifting and other construction costs that will be contracted on a lump sum basis rather than time and materials; and incremental capitalized interest and administrative costs attributable to project delays, some of which were due to weather and other factors beyond the control of the Company. The Discoverer Enterprise is expected to be completed during the second quarter of 1999; the Discoverer Spirit and the Discoverer Deep Seas are expected to be completed in the first and third quarters of 2000, respectively. As with any major construction project that takes place over an extended period of time, the actual costs, the timing of expenditures, and the project completion date may vary from estimates based on numerous factors, including modification of the design, actual terms of awarded contracts, weather, exchange rates, shipyard labor conditions and the market demand for components and resources required for drilling unit construction. See "--Other Factors Affecting Operating Results." The Company intends to fund the cash requirements relating to these capital commitments through available cash balances, borrowings under the Credit Agreement referred to below and other commercial bank or capital market financings, including potential public offerings under the Company's shelf registration statement (discussed below) and, in the case of the Discoverer Enterprise, financing under the Project Financing Agreement referred to below. 21 Debt Project Financing Agreement--In connection with the on-going construction of the Discoverer Enterprise and completed upgrade of the Transocean Amirante, the Company's wholly owned subsidiary, Transocean Enterprise Inc., entered into a project financing agreement effective December 27, 1996 with a group of banks led by ABN AMRO Bank, N.V., as agent ("Project Financing Agreement"). Approximately $323 million is available for drawdowns during the construction period in two tranches. The first tranche of approximately $62.9 million is to be repaid upon completion of construction and acceptance of the two rigs by Amoco Production Company ("Amoco"). It bears an interest rate of LIBOR plus 0.35 percent. The Company expects to lend Transocean Enterprise Inc. the necessary funds to repay the $62.9 million through borrowings under the Revolving Credit Facility. The second tranche of approximately $259.9 million (of which $124.1 million in borrowings were outstanding as of December 31, 1998) bears an interest rate of LIBOR plus 0.85 percent during the construction period and is convertible to term financing upon completion of construction and acceptance of the two rigs by Amoco. The term financing, which is to be paid out of cash flows from the two rigs, matures over a period of five years. Amoco has contracted the Transocean Amirante for a period of up to five years and the Discoverer Enterprise for a period of five years following their respective acceptance dates. The Company expects the term financing to consist of borrowings under a lease securitization facility provided by the agent at a floating interest rate (which has been converted to a fixed rate by the interest rate swaps transaction described below) plus a margin of 0.36 percent for amounts fully amortized by cash flows from the Amoco contracts and a margin of 0.62 percent for the remaining amounts, if any. The Project Financing Agreement originally required acceptance of the two drilling units by Amoco, repayment of the first tranche and conversion of the second tranche to term financing no later than December 31, 1998. Although the Transocean Amirante was accepted by Amoco and commenced operations in July 1997, the Discoverer Enterprise is not expected to be completed until the second quarter of 1999 due to construction delays. As a result, during December 1998, Transocean Enterprise Inc. amended the Project Financing Agreement to extend the outside date for acceptance of the Discoverer Enterprise, repayment of the first tranche and conversion of the second tranche to term financing from December 31, 1998 to August 31, 1999. During the third quarter of 1998, Transocean Enterprise Inc. amended the terms of its two interest rate swap transactions, which effectively lock in a fixed interest rate for the term financing under the Project Financing Agreement, to adjust the payment schedule for the anticipated construction delays. In connection with the amendment, the fixed rate Transocean Enterprise Inc. will pay increased from an average of 6.4 percent to 6.545 percent. The estimated variable interest rates Transocean Enterprise Inc. will receive in the swap transactions has decreased from December 31, 1997 to December 31, 1998. The net unrealized loss on the interest rate swaps is $9.3 million as of December 31, 1998. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." Credit Agreement--In connection with the 1996 combination with Transocean ASA, the Company entered into a credit agreement dated as of July 30, 1996 with a group of banks led by ABN AMRO Bank, N.V. (the "Credit Agreement"). The Credit Agreement, as subsequently amended, provides for borrowing by the Company under a revolving credit facility in the amount of $540 million (the "Revolving Credit Facility"). Loans under the Credit Agreement bear interest, at the option of the Company, at a base rate or LIBOR plus a margin (0.25 percent at December 31, 1998) that varies depending on the Company's funded debt to total capital ratio or its public senior unsecured debt rating. The Credit Agreement requires compliance with various restrictive covenants, including an interest coverage ratio, which could limit the Company's ability to pay dividends in the future. The Credit Agreement has a maturity date of July 2002. Public Debt Offering--In April 1997, the Company completed the public offering and sale of $300 million aggregate principal amount of senior, unsecured debt securities. The securities sold consisted of $100 million aggregate principal amount of 7.45% Notes due April 15, 2027 (the "Notes") and $200 million aggregate principal amount of 8.00% Debentures due April 15, 2027 (the "Debentures"). Holders of Notes may elect to have all or any portion of the Notes repaid on April 15, 2007 at 100 percent of the principal amount. The Notes, 22 at any time after April 15, 2007, and the Debentures, at any time, may be redeemed at the option of the Company at 100 percent of the principal amount plus a make-whole premium, if any, equal to the excess of the present value of future payments due under the Notes and Debentures using a discount rate equal to the then-prevailing yield of U.S. treasury notes for a corresponding remaining term plus 20 basis points over the principal amount of the security being redeemed. Interest is payable on April 15 and October 15 of each year, commencing October 15, 1997. The indenture and supplemental indenture relating to the Notes and the Debentures place limitations on the Company's ability to (i) incur indebtedness secured by certain liens, (ii) engage in certain sale/leaseback transactions and (iii) engage in certain merger, consolidation or reorganization transactions. The net proceeds were used to repay amounts outstanding under the Credit Agreement. Notes Payable--In February 1994, the Company issued $30 million aggregate principal amount of unsecured 6.90% notes due February 15, 2004 in a private placement. The note purchase agreement underlying the notes requires compliance with various restrictive covenants substantially the same as those under the Credit Agreement including an interest coverage ratio that could limit the Company's ability to pay dividends in the future. In September 1996, the note purchase agreement was amended to conform the covenant section generally to the terms in the Credit Agreement discussed previously. In December 1997, the note purchase agreement was amended to remove the restrictions on repurchase of capital stock and the covenant regarding maintenance of a minimum consolidated net worth. Letters of Credit--The Company had letters of credit outstanding at December 31, 1998 totaling $36.7 million, including $29.3 million relating to the legal dispute with Kvaerner Installasjon a.s. See Note 11 to the Company's consolidated financial statements. The remaining $7.4 million guarantees various insurance and contract bidding activities. Shelf Registration In July 1998, the Company filed with the Securities and Exchange Commission (the "SEC") a $450 million shelf registration statement on Form S-3 for the proposed offering from time to time of senior or subordinated debt securities, preferred stock, common stock and warrants to purchase debt securities, preferred stock, common stock or other securities. The registration statement was declared effective by the SEC on July 20, 1998. The new registration statement effectively amends and carries forward the unused portion of the Company's prior registration statement on Form S-3 without registering any additional amount of securities. Authorized Stock Repurchase In May 1997, the Company's Board of Directors authorized the repurchase of up to $200 million worth of shares of the Company's common stock from time to time on the open market or in privately negotiated transactions. After purchases made during 1997, approximately $105 million remains available under this authority. The Board of Directors, from time to time, reviews the possibility of repurchasing common stock in light of prevailing stock prices and the financial position of the Company. Derivative Instruments The Company enters into a variety of derivative financial instruments in connection with the management of its exposure to fluctuations in foreign exchange rates and interest rates. The Company does not enter into derivative transactions for speculative purposes; however, for accounting purposes certain transactions may not meet the criteria for hedge accounting. Gains and losses on foreign exchange derivative instruments, which qualify as accounting hedges, are deferred and recognized when the underlying foreign exchange exposure is realized. Gains and losses on foreign exchange derivative instruments, which do not qualify as hedges for accounting purposes, are recognized currently based on the change in market value of the derivative instruments. At December 31, 1998, the Company did not have any foreign exchange derivative instruments not qualifying as hedges. 23 The Company uses interest rate swap agreements to effectively convert a portion of its floating rate debt to a fixed rate basis, reducing the impact of interest rate changes on future income. Interest rate swaps are designated as a hedge of underlying future interest payments. The interest rate differential to be received or paid on the swaps is recognized over the lives of the swaps as an adjustment to interest expense. At December 31, 1998, the net unrealized loss on open interest rate swaps was $9.3 million. See "--Liquidity and Capital Resources--Debt--Project Financing Agreement." Acquisitions The Company, from time to time, reviews possible acquisitions of businesses and drilling units, and may in the future make significant capital commitments for such purposes. Any such acquisition could involve the payment by the Company of a substantial amount of cash and the issuance of a substantial number of shares of common stock. The Company would expect to fund the cash portion of any such acquisition through cash balances on hand, the incurrence of additional debt, sales of assets or common stock, or a combination thereof. Proceeds from Termination of Drilling Contract In December 1998, the Company and the operators of the Terra Nova field, located offshore Newfoundland, Canada, agreed to terminate their two-year drilling contract for the Transocean Explorer. In connection with the termination, the Company received a cash settlement of $40 million. The net proceeds were used to repay debt. Termination of Cash Flow Sharing Agreement The Company and Global Marine were parties to an agreement pursuant to which the Company participated in the cash flow from three jackup drilling rigs owned and operated by Global Marine and Global Marine participated in the cash flow from one of the Company's jackup drilling rigs, the Transocean Nordic. In April 1997, Global Marine initiated arbitration proceedings against the Company in the United Kingdom with respect to various disputed matters under the agreement. In March 1998, the Company reached an agreement with Global Marine that terminated the cash flow sharing agreement, effective February 1, 1998, with certain continuing rights if any of the rigs are sold within three years, and settled all disputed matters. Under the terms of this agreement, the Company received $29.8 million in cash to settle outstanding accounts receivable and to terminate the cash flow sharing agreement, resulting in a pre-tax gain of $21.3 million ($13.8 million after tax or $0.14 per share, diluted). The net proceeds were used to repay debt. Asset Divestitures In August 1998, the Company sold certain non-core assets within its Drilling Services business segment to a subsidiary of Dailey International Inc. for $10.0 million in cash, resulting in a pre-tax gain of approximately $8.1 million ($5.3 million after tax or $0.05 per share, diluted). In addition, the Company sold surplus drilling components for $6.6 million in proceeds, resulting in a non-recurring pre-tax gain of approximately $5.0 million ($3.2 million after tax or $0.03 per share, diluted). The net proceeds were used to repay debt. In May 1997, the Company divested certain non-core activities and associated assets within its Drilling Services business segment originally acquired in the Combination by selling the shares of a new corporate entity, Procon Offshore ASA, to investors in Norway. The net proceeds from the sale were approximately $106 million, goodwill was reduced by approximately $69 million and no gain or loss was recognized on the sale. Sources of Liquidity The Company believes that its cash and cash equivalents, cash generated from operations, borrowings available under its Credit Agreement and Project Financing Agreement, and access to other financing sources will be adequate to meet its anticipated short-term and long-term liquidity requirements, including scheduled debt repayments and capital expenditures for new rig construction and upgrade projects. 24 New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in fiscal years beginning after June 15, 1999. Because of the Company's limited use of derivatives to manage its exposure to fluctuations in foreign exchange rates and interest rates, management does not anticipate that the adoption of the new statement will have a material effect on the results of operations or the financial position of the Company. In March 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement provides guidance on accounting for the costs of software developed or obtained for internal use and is effective for fiscal years beginning after December 15, 1998. The Company will adopt this standard in the first quarter of 1999. Its adoption is not expected to have a material effect on the results of operations or the financial position of the Company. Proposed Corporate Reorganization On March 11, 1999, the Company's board of directors approved a corporate reorganization that will result in the Company becoming a Cayman Islands corporation ("Transocean-Cayman") rather than a Delaware corporation. The Company believes the reorganization will give it greater flexibility in seeking to lower its worldwide effective tax rate and improve worldwide cash management. In addition, the Company anticipates that the reorganization may increase its access to international capital markets, broaden its investor base by making its securities more attractive to non-U.S. investors and give it greater flexibility in structuring foreign joint ventures and acquisition opportunities. In the reorganization, each share of the Company's common stock will be converted into one ordinary share of Transocean-Cayman. The Company expects the shares of Transocean-Cayman to be listed on the New York Stock Exchange under "RIG," the same symbol under which the Company's common stock is currently listed. The proposed reorganization is subject to certain conditions to closing, including approval by the Company's stockholders. Following the reorganization, the name of Transocean-Cayman will be "Transocean Offshore Inc." Year 2000 Issue The Company has instituted a plan to address the Year 2000 issue for its computer systems, microprocessors, operational and control systems and other significant computer-based devices and applications. It is possible that certain of these systems will not be able to process dates beginning in the year 2000, as many such systems are based on storing two digits to identify a particular year rather than a full four digits and are not designed to take into account the start of a new century. In addition, like every other business enterprise, the Company is at risk from year 2000 failures on the part of its major business counterparts, including suppliers and service providers, as well as potential failures in public and private infrastructure services, including electricity, water, gas, transportation and communications. The Company's Year 2000 plan focuses on Year 2000 compliance in two distinct areas--(i) rig-based operational systems and control devices and (ii) all other business, financial and engineering systems, including third-party systems upon which the Company may rely. The Company's efforts are directed towards areas that are reasonably within its control. The plan is being implemented under the direction of senior management by the Company's information systems and technology personnel and operations personnel with appropriate expertise. The five phases of the Company's plan--inventory, assessment, remediation, testing and certification, and contingency planning-- are in varying stages of completion, and ultimate completion of the plan is expected by October 31, 1999. Inventory--The Company conducted a survey of computer systems, computer- controlled equipment, control systems, and electronic devices, including equipment with embedded microprocessors, onboard each rig to identify those systems and devices to be reviewed for Year 2000 compliance. With respect to business, financial 25 and engineering systems, the Company surveyed all of its internal hardware and software systems worldwide. Key third-party businesses whose year 2000 failures would most significantly impact the Company were identified. The inventory phase is substantially complete. Assessment--Once each at-risk system or device is identified, users are asked to assess how critical the system or device is to the safety and operations of the Company. For rig-based systems, the Company has requested letters of compliance from its third-party vendors and suppliers for all at- risk items identified in the survey and, in addition, is conducting its own tests where possible to verify compliance. The assessment phase for rig-based systems, applications and devices is more than 75 percent complete. With respect to business, financial and engineering systems, letters of compliance are being sought from all vendors of standard systems, and the Company plans to conduct tests of selected systems to provide an enhanced degree of confidence for Year 2000 compliance. The assessment phase for these systems is approximately 95 percent complete. The Company's assessment phase is expected to be completed by mid-1999. Remediation--Critical systems and devices identified by the survey that are likely to be affected by the Year 2000 issue are in the process of being modified or replaced. A number of these systems and devices had already been identified for renewal or replacement in connection with the Company's ongoing maintenance programs. In some cases, systems or equipment may be covered by warranties, while other vendors are providing software upgrades at minimal costs. The Company believes its Year 2000 compliance plan has adequately identified and addressed Year 2000 issues with respect to critical operational and safety systems and devices. With respect to business, financial and engineering systems, replacement or modification of known non-compliant systems has commenced. The remediation phase is approximately 50 percent complete with respect to rig-based systems, applications and devices and is more than 50 percent complete with respect to business, financial and engineering systems. The Company's remediation phase is expected to be completed by October 31, 1999. Testing and Certification--The testing and certification phase includes establishing a test environment, performing systems testing (with third parties if necessary) and certifying the results. The certification process entails having experienced personnel review test results, computer screens and printouts against pre-established criteria to ensure system or device compliance. In the case of program logic chips, access to internal programs is frequently not possible; however, a review of program diagrams is completed to determine if any date or time dependency exists. All internal systems and devices identified as critical operational and safety systems and devices, along with critical business hardware and software systems will be tested. With respect to rig-based systems, the Company has instituted an ongoing compliance procedure that starts with the results of the initial survey followed by analysis, vendor participation, corrective action, testing and continuous reappraisal. Testing and certification is currently underway and is expected to continue throughout 1999. The Company has initiated written and telephonic communications with key third-party businesses as well as public and private providers of infrastructure services, to ascertain and evaluate their efforts in addressing Year 2000 compliance. Contingency Planning--The Company is in the process of evaluating where specific contingency plans may be required in the event of Year 2000-related disruptions. The Company's rig-based operations manuals include documented policies and procedures in the event of an emergency or equipment failure. Additional consideration will be given to the effect of significant Year 2000 disruptions with direct suppliers of materials and supplies needed for ongoing rig operations. The Company believes that the reasonably likely worst case scenario is that there will be some localized disruptions of systems that will affect individual business and operations processes, facilities or suppliers for a short time rather than systemic or long-term problems affecting its business operations as a whole. The Company's drilling units are composed of many stand-alone systems provided by a wide diversity of manufacturers. As such, the Company believes the risk of a failure that would affect the functionality or safety of the fleet is minimal, and the Company does not believe that the Year 2000 issue will have a significant effect on the operations of its drilling units. 26 The Company's contingency planning efforts are being designed to identify systems or other aspects of its business or that of its suppliers that it believes would be most likely to experience Year 2000 problems, as well as those business operations in which a localized disruption could have the potential for causing a wider problem by interrupting the flow of materials or data. Because there is uncertainty as to which activities may be affected and the exact nature of the problems that may arise, the contingency planning efforts will focus on minimizing the scope and duration of any disruptions by having sufficient personnel and other resources in place to permit a flexible response to specific problems as they may arise. The Company estimates that its contingency plans will be in place by October 31, 1999. Costs--The Company has incurred approximately $0.6 million through December 31, 1998 and expects additional expenditures of approximately $3 million to complete implementation of its Year 2000 plan. Although the Company's failure to implement fully its Year 2000 compliance plan or the occurrence of an unexpected Year 2000 problem could result in the disruption of normal business activities or operations and have a material adverse effect on the Company's results of operations, liquidity or financial condition, based upon the work performed to date and the anticipated completion of the plan during October 1999, the Company does not believe that such matters will have a material adverse effect. During 1999, the Company will continue and expand its efforts to address potential disruptions in areas where the Company's operations rely on third parties. In addition, the Company's international operations may be adversely affected by failures of businesses in other parts of the world to take adequate steps to address the Year 2000 problem. While such failures could affect the operations of the Company, either directly or indirectly, in a significant manner, the Company cannot estimate either the likelihood or the potential cost of such failures. The nature and focus of the Company's efforts to address the Year 2000 problem may be revised periodically as interim goals are achieved or new issues are identified. Forward-Looking Information The statements included in this annual report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements to the effect that the Company or management "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," or "projects" a particular result or course of events, or that such result or course of events "may" or "should" occur, and similar expressions, are also intended to identify forward-looking statements. Forward-looking statements in this annual report include, but are not limited to, statements involving expected capital expenditures, the timing and cost of completion of capital projects, the Company's plans and expectations with regard to Year 2000 issues and the Company's expectations with regard to market outlook. Such statements are subject to numerous risks, uncertainties and assumptions, including but not limited to, uncertainties relating to the level of activity in offshore oil and gas exploration, development and production (particularly in deepwater and harsh-environment regions), exploration success by producers, oil and gas prices, work stoppages by Spanish shipyard workers, competition and market conditions in the contract drilling industry, delays or cost overruns on construction projects, the ability to enter into and the terms of future contracts, risks inherent in turnkey contracts, the availability of qualified personnel, the outcome of annual wage negotiations with unions representing certain Norwegian offshore workers, operating hazards, political and other uncertainties inherent in foreign operations (including exchange and currency fluctuations), the impact of governmental laws and regulations, the adequacy of sources of liquidity, the effect of litigation and contingencies, the success of the Company in implementing its Year 2000 compliance plan, the failure of financial and other service providers to be Year 2000 compliant on a timely basis and other factors discussed in this annual report and in the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. 27 ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's long-term debt obligations and interest rate swaps. The tables below provide information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates as of December 31, 1998 and 1997. For debt obligations, the tables present expected cash flows and related weighted-average interest rates expected by maturity dates. Weighted-average variable rates are based on estimated LIBOR and commercial paper rates as of December 31, 1998 and 1997, as applicable, plus applicable margins. The fair value of fixed rate debt is based on the estimated yield to maturity for each debt issue as of December 31, 1998 and 1997, as applicable. As of December 31, 1998:
Expected Maturity Date -------------------------------------------------------------------- Fair Value 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 ------- ------- ------- ------- ------- ---------- -------- ---------- (In millions, except interest rate percentages) Long-term debt Fixed Rate............. $ 4.8 $ 4.8 $ 4.8 $ 4.8 $ 4.8 $ 302.3(b) $ 326.3 $344.3 Average interest rate................ 6.9% 6.9% 6.9% 6.9% 6.9% 7.8% 7.7% Variable Rate.......... $ 13.9(a) $ 28.5 $ 23.0 $ 405.1 $ 23.9 $ 12.6 $ 507.0 $507.0 Average interest rate................ 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% - -------- (a) Assumes $62.9 million in scheduled maturities are funded with other variable rate debt with a maturity of 2002. (b) Includes $0.8 million of unaccreted discount to be paid at maturity. As of December 31, 1997: Expected Maturity Date -------------------------------------------------------------------- Fair Value 1998 1999 2000 2001 2002 Thereafter Total 12/31/97 ------- ------- ------- ------- ------- ---------- -------- ---------- (In millions, except interest rate percentages) Long-term debt Fixed Rate............. $ 4.8 $ 4.8 $ 4.8 $ 4.8 $ 4.8 $ 307.3(b) $ 331.3 $371.5 Average interest rate................ 6.9% 6.9% 6.9% 6.9% 6.9% 7.8% 7.7% Variable Rate.......... $ --(a) $ 26.0 $ 26.0 $ 26.0 $ 298.4 $ 26.2 $ 402.6 $402.6 Average interest rate................ -- 6.0% 6.0% 6.0% 6.2% 6.0% 6.2% - -------- (a) Assumes $66 million in scheduled maturities are funded with other variable rate debt with a maturity of 2002. (b) Includes $0.8 million of unaccreted discount to be paid at maturity. For interest rate swaps, the tables below present notional amounts and weighted-average interest rates by contractual maturity dates as of December 31, 1998 and 1997. Notional amounts are used to calculate the contractual payments to be exchanged under the interest rate swaps. The average receive rate under the interest rate swaps is based on estimated commercial paper rates. The fair value of the interest rate swaps is based on the market value of similar swap arrangements as of December 31, 1998 and 1997, as applicable. As of December 31, 1998: Expected Maturity Date -------------------------------------------------------------------- Fair Value 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 ------- ------- ------- ------- ------- ---------- -------- ---------- (In millions, except interest rate percentages) Interest Rate Swaps Pay fixed/receive variable.............. $36.1 $64.7 $51.6 $47.0 $50.2 $21.9 $271.5 $ (9.3) Average pay rate..... 6.545% 6.545% 6.545% 6.545% 6.545% 6.545% 6.545% Average receive rate................ 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%
28 As of December 31, 1997:
Expected Maturity Date ---------------------------------------------------- Fair Value 1998 1999 2000 2001 2002 Thereafter Total 12/31/97 ----- ----- ----- ----- ----- ---------- ------ ---------- (In millions, except interest rate percentages) Interest Rate Swaps Pay fixed/receive variable.............. $15.1 $59.4 $58.7 $47.2 $50.6 $40.2 $271.2 $(3.5) Average pay rate..... 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% Average receive rate................ 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
Foreign Exchange Risk The Company operates internationally, resulting in exposure to foreign exchange risk. The Company uses a variety of techniques to minimize the exposure to foreign exchange risk, including customer contract terms and the use of foreign exchange derivative instruments or spot purchases. The Company does not enter into derivative transactions for speculative purposes. At December 31, 1998 the Company had no material open foreign exchange contracts. 29 ITEM 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors Transocean Offshore Inc. We have audited the accompanying consolidated balance sheets of Transocean Offshore Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transocean Offshore Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated 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. /s/ Ernst & Young LLP Houston, Texas January 26, 1999 30 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------------ 1998 1997 1996 ---------- -------- -------- (In thousands, except per share data) Operating Revenues............................. $1,089,612 $891,962 $528,903 ---------- -------- -------- Costs and Expenses Operating and maintenance.................... 484,439 547,416 359,304 Depreciation and amortization................ 116,867 103,017 46,587 General and administrative................... 28,034 24,053 15,398 ---------- -------- -------- 629,340 674,486 421,289 ---------- -------- -------- Operating Income............................... 460,272 217,476 107,614 ---------- -------- -------- Other Income (Expense), Net Equity in earnings of joint ventures......... 11,677 10,196 5,168 Interest income.............................. 3,451 1,854 6,228 Interest expense, net of amounts capitalized................................. (23,892) (22,853) (7,220) Gain on termination of cash flow sharing agreement................................... 21,290 -- -- Other, net................................... 14,348 572 9,862 ---------- -------- -------- 26,874 (10,231) 14,038 ---------- -------- -------- Income Before Income Taxes..................... 487,146 207,245 121,652 Income Taxes................................... 143,730 65,312 43,607 ---------- -------- -------- Net Income..................................... $ 343,416 $141,933 $ 78,045 ========== ======== ======== Earnings Per Share Basic........................................ $ 3.43 $ 1.40 $ 1.09 ---------- -------- -------- Diluted...................................... $ 3.41 $ 1.38 $ 1.07 ---------- -------- -------- Weighted-average Shares Outstanding Basic........................................ 100,083 101,234 71,678 Diluted...................................... 100,848 102,784 73,119 Dividends Paid Per Share....................... $ 0.12 $ 0.12 $ 0.12 ========== ======== ========
See accompanying notes. 31 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 1998 1997 ASSETS ---------- ---------- (In thousands, except share data) Cash and Cash Equivalents.............................. $ 69,453 $ 54,225 Accounts Receivable Trade................................................ 197,400 175,486 Other................................................ 20,094 24,230 Deferred Income Taxes.................................. -- 4,418 Materials and Supplies................................. 33,928 30,917 Prepayments............................................ 9,596 9,389 Costs Incurred on Drilling Services Projects in Progress.............................................. 31,161 8,425 ---------- ---------- Total Current Assets............................... 361,632 307,090 ---------- ---------- Property and Equipment................................. 2,659,020 2,113,462 Less Accumulated Depreciation.......................... 530,949 445,488 ---------- ---------- Property and Equipment, net.......................... 2,128,071 1,667,974 ---------- ---------- Goodwill, net.......................................... 675,243 693,154 Investments in and Advances to Joint Ventures.......... 55,544 45,869 Other Assets........................................... 30,453 41,001 ---------- ---------- Total Assets....................................... $3,250,943 $2,755,088 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable....................................... $ 40,939 $ 62,997 Accrued Income Taxes................................... 58,711 47,002 Current Portion of Long-Term Debt...................... 18,672 4,812 Deferred Income Taxes.................................. 1,420 -- Other Current Liabilities.............................. 72,679 70,381 ---------- ---------- Total Current Liabilities.......................... 192,421 185,192 ---------- ---------- Long-Term Debt......................................... 813,953 728,282 Deferred Income Taxes.................................. 229,979 171,306 Other Long-Term Liabilities............................ 35,947 49,130 ---------- ---------- Total Long-Term Liabilities........................ 1,079,879 948,718 ---------- ---------- Commitments and Contingencies Preferred Stock, $0.10 par value; 50,000,000 shares authorized, none issued and outstanding............... -- -- Common Stock, $0.01 par value; 150,000,000 shares authorized, 104,335,127 shares issued, including shares in treasury, and 100,551,127 shares outstanding at December 31, 1998 and 103,700,638 shares issued, including shares in treasury, and 99,916,638 shares outstanding at December 31, 1997...................... 1,043 1,037 Less Common Stock in Treasury, at cost; 3,784,000 shares at December 31, 1998 and 1997.................. (144,297) (144,297) Additional Paid-in Capital............................. 1,535,201 1,509,110 Retained Earnings...................................... 586,696 255,328 ---------- ---------- Total Stockholders' Equity......................... 1,978,643 1,621,178 ---------- ---------- Total Liabilities and Stockholders' Equity......... $3,250,943 $2,755,088 ========== ==========
See accompanying notes. 32 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock Additional Total --------------- ----------------- Paid-in Retained Stockholders' Shares Amount Shares Amount Capital Earnings Equity ------- ------ ------ --------- ---------- -------- ------------- (In thousands, except per share data) Balance at December 31, 1995................... 56,830 $ 284 -- $ -- $ 307,093 $ 56,196 $ 363,573 Net income............ -- -- -- -- -- 78,045 78,045 Exercise of stock options.............. 362 2 -- -- 3,479 -- 3,481 Restricted stock grants, net of forfeitures.......... 56 -- -- -- 491 -- 491 Reverse unrealized gain on marketable security sold during the period........... -- -- -- -- (570) -- (570) Stock issued for Combination, net..... 45,842 229 -- -- 1,191,958 -- 1,192,187 Purchase and cancellation of common stock......... (44) -- -- -- (1,292) -- (1,292) Cash dividends ($0.12 per share)........... -- -- -- -- -- (8,206) (8,206) ------- ------ ------ --------- ---------- -------- ---------- Balance at December 31, 1996................... 103,046 515 -- -- 1,501,159 126,035 1,627,709 ------- ------ ------ --------- ---------- -------- ---------- Net income............ -- -- -- -- -- 141,933 141,933 Exercise of stock options.............. 617 4 -- -- 7,177 -- 7,181 Restricted stock grants, net of forfeitures.......... 38 -- -- -- 774 -- 774 Stock split........... -- 518 -- -- -- (518) -- Treasury shares purchased............ -- -- (3,784) (144,297) -- -- (144,297) Cash dividends ($0.12 per share)........... -- -- -- -- -- (12,122) (12,122) ------- ------ ------ --------- ---------- -------- ---------- Balance at December 31, 1997................... 103,701 1,037 (3,784) (144,297) 1,509,110 255,328 1,621,178 ------- ------ ------ --------- ---------- -------- ---------- Net income............ -- -- -- -- -- 343,416 343,416 Exercise of stock options.............. 607 6 -- -- 6,672 -- 6,678 Restricted stock grants, net of forfeitures.......... 27 -- -- -- 1,069 -- 1,069 Tax benefit from exercise of stock options.............. -- -- -- -- 18,350 -- 18,350 Cash dividends ($0.12 per share)........... -- -- -- -- -- (12,048) (12,048) ------- ------ ------ --------- ---------- -------- ---------- Balance at December 31, 1998................... 104,335 $1,043 (3,784) $(144,297) $1,535,201 $586,696 $1,978,643 ======= ====== ====== ========= ========== ======== ==========
See accompanying notes. 33 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Cash Flows from Operating Activities Net income..................................... $343,416 $141,933 $ 78,045 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization................ 116,867 103,017 46,587 Deferred income taxes........................ 64,511 24,215 6,528 Equity in earnings of joint ventures......... (11,677) (10,196) (5,168) Gain on disposal of assets................... (13,521) (1,506) (8,441) Deferred income, net......................... (9,421) 9,750 2,136 Deferred expenses, net....................... 5,386 (12,986) 1,160 Other, net................................... 6,886 (5,814) (408) Changes in operating assets and liabilities, net of effects from Combination with Transocean ASA and divestiture Accounts receivable.......................... (19,198) (68,489) (15,477) Accounts payable............................. (20,326) 9,021 16,045 Income taxes receivable/payable, net......... 30,058 (10,616) 3,366 Other current assets......................... (26,330) (7,022) (419) Other current liabilities.................... 3,081 (7,743) 1,567 -------- -------- -------- Net cash provided by operating activities...... 469,732 163,564 125,521 -------- -------- -------- Cash Flows from Investing Activities Capital expenditures........................... (573,331) (406,466) (212,959) Proceeds from disposal of assets, net.......... 13,354 3,728 12,964 Divestiture of non-core drilling services activities and assets, net.................... 10,000 99,595 -- Joint ventures and other investments........... 3,891 (1,499) 3,210 Combination with Transocean ASA................ -- (756) (305,548) Cash acquired in Transocean ASA Combination, net........................................... -- -- 48,752 -------- -------- -------- Net cash used in investing activities.......... (546,086) (305,398) (453,581) -------- -------- -------- Cash Flows from Financing Activities Net borrowings on revolving credit facility.... 113,600 12,639 193,761 Exercise of stock options...................... 6,678 7,181 3,481 Dividends paid................................. (12,048) (12,122) (8,206) Proceeds from (repayments on) project financing agreement..................................... (9,220) 196,210 -- Repayment of notes payable..................... (4,616) -- -- Proceeds from (repayments on) term loan facility...................................... -- (193,250) 200,000 Repayment of debt assumed in Transocean ASA Combination................................... -- -- (139,307) Proceeds of public debt offering, net.......... -- 299,216 -- Treasury shares purchased...................... -- (144,297) -- Financing costs................................ -- (5,287) (8,789) Sale of note receivable........................ -- 11,000 -- Other, net..................................... (2,812) 615 (1,698) -------- -------- -------- Net cash provided by financing activities...... 91,582 171,905 239,242 -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents..................................... 15,228 30,071 (88,818) -------- -------- -------- Cash and Cash Equivalents at Beginning of Period.......................................... 54,225 24,154 112,972 -------- -------- -------- Cash and Cash Equivalents at End of Period....... $ 69,453 $ 54,225 $ 24,154 ======== ======== ========
See accompanying notes. 34 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Nature of Operations and Summary of Significant Accounting Policies Nature of Operations--Transocean Offshore Inc. and its consolidated subsidiaries (the "Company") provides contract drilling services for oil and gas wells located in offshore areas throughout the world through its two business segments--Mobile Units and Drilling Services. At December 31, 1998, the Company owned, had ownership interests in, or operated a total of 31 mobile offshore drilling rigs, including one newbuild drillship, the "Discoverer Enterprise", which is not yet in service. The Company also has under construction two additional Discoverer Enterprise-class drillships, to be named "Discoverer Spirit" and "Discoverer Deep Seas" (see Note 4). The Mobile Units segment primarily operates drilling rigs for customers, principally at a contractually determined price per day (dayrate). Drilling Services primarily involves providing personnel and equipment other than rigs for oil and gas exploration and production on either a dayrate or fixed price basis. Prior to September 1996, the Company was known as Sonat Offshore Drilling Inc. As part of the combination with Transocean ASA (see Note 2) the Company changed its name. Principles of Consolidation--The consolidated financial statements include the accounts of Transocean Offshore Inc. and its majority owned subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. The equity method of accounting is used for investments in joint ventures owned 50 percent or less. Accounting Estimates--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 amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Earnings Per Share--In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to fully diluted earnings per share which was previously not required to be reported if the effect of the dilution was less than three percent. Earnings per share amounts for all periods have been presented, and where appropriate restated, to conform to the SFAS No. 128 requirements. Stock Split--In August 1997, the Board of Directors declared a two-for-one stock split to be effected in the form of a 100 percent stock dividend. The dividend was paid September 19, 1997 to stockholders of record on September 5, 1997. All references in the financial statements to number of shares, per share amounts and market prices of the Company's common stock have been retroactively restated to reflect the increased number of shares of common stock issued and outstanding as a result of the dividend. Cash and Cash Equivalents--Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and consist of time deposits with a number of commercial banks with high credit ratings in the United States, United Kingdom, Cayman Islands and Norway. The Company may invest excess funds in a no-load, open-end, management investment trust ("mutual fund"). The mutual fund invests exclusively in high quality money market instruments. Generally, the maturity date of the Company's investments is the next day of business. Materials and Supplies--Materials and supplies are carried at average cost less an allowance for obsolescence. Property and Equipment--Property and equipment, consisting primarily of offshore drilling rigs and related equipment, are carried at cost. Property and equipment obtained in the combination with Transocean ASA (see 35 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 2) were recorded at fair value. The Company generally provides for depreciation on the straight-line method after allowing for salvage values. The estimated useful life of drilling units ranges from 20 to 33 years and 3 to 12 years for other drilling equipment. Effective July 1, 1996, the Company extended the useful lives of nine of its existing rigs by an average of five years, in light of the continued improvements in the market. The effect of this change in accounting estimate for the year ended December 31, 1996 on depreciation expense and net income was $4.1 million and $2.7 million ($0.04 per share, basic and diluted), respectively. Major renewals and upgrades to existing Company assets are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, related costs and accumulated depreciation are removed from the accounts. Depreciation expense was $98.8 million, $84.5 million and $40.2 million in 1998, 1997 and 1996, respectively. Goodwill--The excess of the purchase price over the estimated fair value of net assets acquired is accounted for as goodwill and is amortized on a straight-line basis over 40 years (the period when benefits are expected to be derived). Accumulated amortization as of December 31, 1998 and 1997 totaled $42.7 million and $24.8 million, respectively. Impairment of Long-Lived Assets--The carrying value of long-lived assets, principally goodwill and property and equipment, is reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of the related asset. Operating Revenues and Expenses--Operating revenues are recognized as earned, based on contractual daily rates or on a fixed price basis. Turnkey profits are recognized on completion of the well and acceptance by the customer; however, provisions for losses are made on contracts in progress when losses are anticipated. In connection with drilling contracts, the Company may receive lump sum fees for the mobilization of equipment and personnel or for capital improvements to rigs. In connection with contracted mobilizations, to the extent expenses exceed fees received, the net costs are deferred and amortized over the appropriate periods of benefit, generally the term of the contract. Profits are recognized based on contractual daily rates or percentage of completion, depending upon the contract terms. Costs of relocating drilling units without contracts to more promising market areas are expensed as incurred. Upon completion of drilling contracts, any demobilization fees received are reflected in income, as are any related expenses. Capital upgrade fees received from the client are deferred and recognized as revenue over the period of the drilling project. The actual cost incurred for the capital upgrade is depreciated over the estimated useful life of the asset. The Company incurs periodic survey and drydock costs in connection with obtaining regulatory certification to operate its rigs on an ongoing basis. Costs associated with these certifications are systematically accrued as a liability prior to the actual survey and drydock. Capitalized Interest--Interest costs for the construction and upgrade of qualifying assets are capitalized. The Company capitalized interest costs on construction work in progress of $33.5 million, $18.2 million and $3.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. Derivative Instruments--The Company enters into a variety of derivative financial instruments in connection with the management of its exposure to fluctuations in foreign exchange rates and interest rates. The Company does not enter into derivative transactions for speculative purposes; however, for accounting purposes certain transactions may not meet the criteria for hedge accounting (see Note 6). Foreign Currency Translation--The U.S. dollar is the functional currency for the Company's foreign operations. Foreign currency exchange gains and losses are included in other income as incurred. Net foreign currency gains (losses) amounted to $0.7 million, $(1.2) million and $2.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. 36 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes--Taxable income (loss) of the Company and its domestic subsidiaries for taxable periods ended prior to June 5, 1993 is included in the consolidated U.S. federal income tax return of Sonat Inc., the Company's former parent ("Sonat"). Thereafter, the taxable income (loss) of the Company and its domestic subsidiaries is included in the consolidated U.S. federal income tax return of the Company and its affiliated group. The Company's foreign income tax liabilities are based upon the results of operations of the various companies in those foreign jurisdictions in which they are subject to tax. Stock-Based Compensation--In accordance with the provisions of the FASB's Accounting for Stock-Based Compensation, SFAS No. 123, the Company has elected to follow the Accounting Principles Board's Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations ("APB 25") in accounting for its employee stock-based compensation plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant as determined by the Company's Board of Directors, no compensation expense is recognized (see Note 12). Comprehensive Income--In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. The statement requires that all items that are recognized under accounting standards as components of comprehensive income be displayed in a financial statement with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 in the first quarter of 1998. There were no significant items of comprehensive income for the years ended December 31, 1998, 1997 or 1996. New Accounting Pronouncements--In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in fiscal years beginning after June 15, 1999. Because of the Company's limited use of derivatives to manage its exposure to fluctuations in foreign exchange rates and interest rates, management does not anticipate that the adoption of the new statement will have a material effect on the results of operations or the financial position of the Company. In March 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement provides guidance on accounting for the costs of software developed or obtained for internal use and is effective for fiscal years beginning after December 15, 1998. The Company will adopt this standard in the first quarter of 1999. Management does not believe its adoption will have a material effect on the results of operations or the financial position of the Company. Reclassifications--Certain reclassifications have been made to prior period amounts to conform with the current year presentation. Note 2--Business Combination and Divestiture The Company acquired over 99 percent of the outstanding capital shares of Transocean ASA, a Norwegian company, pursuant to an exchange offer for the Company's common stock and cash completed on September 3, 1996 and subsequent purchases of Transocean ASA shares in November and December 1996 (the "Combination"). All remaining outstanding shares were purchased in July 1997. The Combination was deemed effective for accounting purposes as of September 1, 1996; the financial activity of the intervening period was not material to the financial statements. Transocean ASA is an offshore drilling company which, at the time of the Combination, owned or managed thirteen mobile offshore drilling rigs and provided a variety of drilling services. In September 1996, Transocean ASA shares were acquired from the public shareholders of Transocean ASA pursuant to an exchange offer (the "Exchange Offer") providing for consideration of 1.06 shares of Company 37 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) common stock for each of 43,248,358 Transocean ASA shares (subject to payment of cash in lieu of fractional shares) and $27.25 for each remaining Transocean ASA share. A total of 45,841,680 shares of Company common stock and $207.4 million in cash was delivered by the Company in exchange for the tendered Transocean ASA shares pursuant to the Exchange Offer. In November 1996, the Company acquired 3,114,506 Transocean ASA shares at $28.74 per share or $89.5 million in accordance with a mandatory offer (the "Mandatory Offer") pursuant to the requirements of Norwegian law. The Company then commenced a compulsory offer (the "Compulsory Offer") to acquire the remaining publicly-held shares not previously tendered to the Company. All remaining outstanding shares were purchased at an average price of approximately $25 per share in July 1997 upon the conclusion of a judicial hearing whereby a Norwegian court determined the price that the Company was obligated to pay to purchase such shares. The purchase price consisted of the following:
(In millions) Company common stock issued to Transocean ASA stockholders............................................ $1,198.2 Cash consideration paid to Transocean ASA stockholders... 299.5 Direct transaction costs................................. 7.1 -------- Total Purchase Price................................... $1,504.8 ========
The value of the common stock issued to Transocean ASA stockholders was calculated based on the average of the closing prices of Company common stock over the five-day period commencing two days before May 20, 1996, the date on which the revised offering price for the Combination was announced. The acquisition of Transocean ASA was accounted for as a purchase. The purchase price included, at estimated fair value, current assets of $166.5 million, drilling and other property and equipment of $895.9 million, other assets of $24.0 million and the assumption of current liabilities of $169.7 million, other net long-term liabilities of $18.1 million and long-term debt of $98.6 million. In addition, a deferred tax liability of $79.8 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 $784.6 million, which has been accounted for as goodwill. In May 1997, the Company divested certain non-core activities and associated assets within its drilling services business segment originally acquired in the Combination by selling the shares of a new corporate entity, Procon Offshore ASA, to investors in Norway. The divestiture had no material effect on the financial results of the Company. The net proceeds from the sale were approximately $106 million, goodwill was reduced by $68.7 million and no gain or loss was recognized on the sale. 38 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The accompanying Consolidated Statements of Operations include the operating results of Transocean ASA since the effective date of the Combination. Unaudited pro forma consolidated operating results of the Company and Transocean ASA for the year ended December 31, 1996, assuming the acquisition had been made as of January 1, 1996, are summarized as follows:
Year ended December 31, 1996 --------------------- (In thousands, except per share data) Operating revenues........................................ $785,254 ======== Income from continuing operations......................... 51,934 Income from discontinued operations....................... 32,936 -------- Net income.............................................. $ 84,870 ======== Basic earnings per share: Income from continuing operations....................... $ 0.51 Income from discontinued operations..................... 0.32 -------- Net income.............................................. $ 0.83 ======== Diluted earnings per share: Income from continuing operations....................... $ 0.50 Income from discontinued operations..................... 0.32 -------- Net income.............................................. $ 0.82 ========
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, the amortization of goodwill arising from the transaction, increased interest expense for additional borrowings under the Credit Agreement (see Note 5) as if they were incurred at the beginning of the period and related adjustments for income taxes. Pro forma net income from discontinued operations for the twelve months ended December 31, 1996 includes a $51 million pre-tax gain on the sale of a Transocean ASA discontinued business segment, which was disposed of in June 1996 prior to the Combination. The pro forma information is not necessarily indicative of the results of operations had the transaction been effected on the assumed date or the results of operations for any future periods. Note 3--Termination of Cash Flow Sharing Agreement The Company and Global Marine Inc. ("Global Marine") were parties to an agreement pursuant to which the Company participated in the cash flow from three jackup drilling rigs owned and operated by Global Marine and Global Marine participated in the cash flow from one of the Company's jackup drilling rigs, the Transocean Nordic. In April 1997, Global Marine initiated arbitration proceedings against the Company in the United Kingdom with respect to various disputed matters under the agreement. In March 1998, the Company reached an agreement with Global Marine that terminated the cash flow sharing agreement, effective February 1, 1998, with certain continuing rights if any of the rigs are sold within three years, and settled all disputed matters. Under the terms of this agreement, the Company received $29.8 million in cash to settle outstanding accounts receivable and to terminate the cash flow sharing agreement, resulting in an after tax gain of $13.8 million, or $0.14 per share, diluted. 39 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4--Upgrade and Expansion of Drilling Fleet The Company's investments in its existing fleet and previously announced fleet additions continue to require significant capital expenditures. Capital expenditures totaled $573 million during the year ended December 31, 1998 and are expected to be approximately $520 million in 1999. In February 1996, the Company purchased a semisubmersible multi-service vessel that was renamed the Transocean Marianas and converted to a deepwater drilling rig. The rig was damaged by a fire during the third quarter of 1997 while it was in the shipyard undergoing conversion. As a result of the fire, the completion of the conversion project was significantly delayed. The Transocean Marianas conversion project was completed during the third quarter of 1998 and the rig is currently operating in the U.S. Gulf of Mexico. In May 1996, the Company announced plans to construct an ultra-deepwater mobile offshore drilling rig, the Discoverer Enterprise, which is being initially outfitted to drill in 8,500 feet of water but will be capable of drilling in water depths up to 10,000 feet. The Company and Amoco Production Company ("Amoco") entered into an agreement under which the Company will provide the Discoverer Enterprise to Amoco for a period of five years from the date of acceptance by Amoco. The drillship is expected to be operational in the second quarter of 1999. In January 1998, the Company announced plans to construct a Discoverer Enterprise-class ultra-deepwater drillship, the Discoverer Spirit, which will be capable of drilling in water depths up to 10,000 feet. The Company received a contract commitment from Spirit Energy 76, a business unit of Union Oil Company of California, for a period of five years plus up to five one-year options. The drillship's hull and major marine systems will be constructed at the Astano shipyard in Spain, with the derrick, derrick substructure, BOP and other modules to be constructed at U.S. Gulf Coast facilities. The drillship is expected to be operational in the first quarter of 2000. In February 1998, the Company announced plans to construct a third Discoverer Enterprise-class ultra-deepwater drillship, the Discoverer Deep Seas, which will initially be outfitted to drill in 8,000 feet of water but will be capable of drilling in water depths up to 10,000 feet. The Company received a contract commitment from Chevron USA, Inc. for a period of five years plus three one-year options. The drillship's hull and major marine systems will be constructed at the Astano shipyard in Spain, with the derrick, derrick substructure, BOP and other modules to be constructed at U.S. Gulf Coast facilities. Initial operations in the U.S. Gulf of Mexico are expected to commence in the third quarter of 2000. The following table summarizes actual and projected expenditures (including capitalized interest) for the Company's major construction and conversion projects.
Transocean Discoverer Discoverer Discoverer Marianas Enterprise Spirit Deep Seas ---------- ---------- ---------- ---------- (Expenditures in millions) Cumulative at December 31, 1997... $174 $148 $ -- $ -- Actual for the year ended December 31, 1998......................... 106 154 124 106 ---- ---- ---- ---- Cumulative at December 31, 1998... 280 302 124 106 Projected--1999 through completion....................... -- 80 210 230 ---- ---- ---- ---- Projected Total Costs........... $280 $382 $334 $336 ==== ==== ==== ====
40 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5--Debt Debt is comprised of the following:
December 31, ----------------- 1998 1997 -------- -------- (In thousands) Revolving Credit Facility.............................. $320,000 $206,400 Project Financing Agreement............................ 186,990 196,210 8.00% Debentures, net of discount...................... 199,243 199,216 7.45% Notes............................................ 100,000 100,000 6.90% Notes Payable.................................... 25,384 30,000 Other.................................................. 1,008 1,268 -------- -------- Total Debt........................................... 832,625 733,094 Less Current Maturities................................ 18,672 4,812 -------- -------- Total Long-Term Debt................................. $813,953 $728,282 ======== ========
Project Financing Agreement--In connection with the ongoing construction of the Discoverer Enterprise and the completed upgrade of the Transocean Amirante, the Company's wholly owned subsidiary, Transocean Enterprise Inc., entered into a project financing agreement effective December 27, 1996 with a group of banks led by ABN AMRO Bank, N.V., as agent, ("Project Financing Agreement"). Approximately $323 million is available for drawdowns during the construction period and is available in two tranches. The first tranche of approximately $62.9 million is to be repaid upon completion of construction and acceptance of the two rigs by Amoco, which has contracted the Transocean Amirante for a period of up to five years and the Discoverer Enterprise for a period of five years following their respective acceptance dates. It bears an interest rate of LIBOR plus 0.35 percent. The Company expects to lend Transocean Enterprise Inc. the necessary funds to repay the $62.9 million through funds borrowed under the Revolving Credit Facility; accordingly, the $62.9 million due in 1999 was not classified as current because it is the intent of management to refinance on a long-term basis. The second tranche of approximately $259.9 million (of which $124.1 million in borrowings were outstanding as of December 31, 1998) bears an interest rate of LIBOR plus 0.85 percent during the construction period and is convertible to term financing upon completion of construction and acceptance of the two rigs by Amoco. The term financing, which is to be repaid out of cash flows from the two rigs, matures over a period of five years. The term financing would also be divided into two tranches, the relative amounts of which would depend on various factors. One tranche of the term financing would be sized based upon and repaid from the net cash flows generated from the Amoco contracts (the "Amoco Cash Flows"). Transocean Enterprise Inc. has the option to accept term financing for the Amoco Cash Flows at LIBOR plus 0.65 percent or to enter into a lease securitization program at commercial paper rates plus approximately 0.36 percent. The second tranche of the term facility would be repaid from Company cash flows to the extent the Amoco Cash Flows do not cover scheduled repayments. Transocean Enterprise Inc. has the option to accept term financing for the Company cash flows at LIBOR plus 1.125 percent for a period of three years and LIBOR plus 1.25 percent thereafter or to enter into a lease securitization program at commercial paper rates plus approximately 0.62 percent (as long as the Company's credit rating is BBB- or Baa3 or better). In the lease securitization program, bank liquidity facilities would act as backup lines of credit for the commercial paper program. The carrying amount of borrowings under the Project Financing Agreement approximates fair value. Transocean Enterprise Inc. has pledged all of its assets, consisting primarily of the two rigs with a net book value of approximately $400.2 million at December 31, 1998, to the banks for the Project Financing Agreement, the lease securitization facility (if entered into) and the interest rate swap transactions described below. In addition, during the construction period, the Company has entered into a completion guarantee so that if for any 41 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reason the vessels are not completed and accepted by Amoco, the Company will repay the indebtedness under the construction financing facility, has guaranteed the obligations of Transocean Enterprise Inc. with respect to the $62.9 million tranche of the Project Financing Agreement, and has guaranteed certain other obligations of Transocean Enterprise Inc. The Company has also entered into operations and maintenance agreements with Transocean Enterprise Inc. pursuant to which it will operate and maintain the Discoverer Enterprise and the Transocean Amirante for a fixed fee while they are subject to the Project Financing Agreement or the lease securitization facility. Transocean Enterprise Inc. entered into two interest rate swap transactions in connection with its Project Financing Agreement for an initial notional amount of approximately $271 million with the agent of the Project Financing Agreement. During the third quarter of 1998, Transocean Enterprise Inc. amended the terms of its two interest rate swap transactions, which effectively lock in a fixed interest rate for the term financing under the Project Financing Agreement, to adjust the payment schedule for the anticipated construction delays discussed below. In connection with the amendment, the fixed rate that Transocean Enterprise Inc. will pay increased from an average of 6.4 percent to 6.545 percent. Transocean Enterprise Inc. will receive interest payments at the one month commercial paper rate beginning in 1999 when the related construction financing converts to term financing. The Project Financing Agreement originally required acceptance of the two drilling units by Amoco, repayment of the first tranche and conversion of the second tranche to term financing no later than December 31, 1998. Although the Transocean Amirante was accepted by Amoco and commenced operations in July 1997, the Discoverer Enterprise is not expected to be completed until the second quarter of 1999 due to construction delays. As a result, during December 1998, Transocean Enterprise Inc. amended the Project Financing Agreement to extend the outside date for acceptance of the Discoverer Enterprise, repayment of the first tranche and conversion of the second tranche to term financing from December 31, 1998 to August 31, 1999. Credit Agreement--In connection with the Combination, the Company entered into a credit agreement dated as of July 30, 1996 with a group of banks led by ABN AMRO Bank, N.V. (the "Credit Agreement"). Prior to the amendment discussed below, the Credit Agreement provided for borrowing by the Company under a six- year term loan facility in the amount of $200 million (the "Term Loan Facility") and a six-year revolving credit facility in the amount of $400 million (the "Revolving Credit Facility"). Loans under the Credit Agreement bear interest, at the option of the Company, at a base rate or LIBOR plus a margin (0.25 percent at December 31, 1998) that varies depending on the Company's funded debt to total capital ratio or its public senior unsecured debt rating. The Credit Agreement requires compliance with various restrictive covenants and an interest coverage ratio which could limit the Company's ability to pay dividends in the future. The Credit Agreement has a maturity date of July 30, 2002. The carrying amount of borrowings under the Credit Agreement approximates fair value. As of December 31, 1998, $220 million was available under the Revolving Credit Facility. In connection with the public offering of the debt securities discussed below, the Credit Agreement was amended to, among other things, release all security, convert $140 million of the term loans into revolving loans, and change the applicable margins over LIBOR and the applicable commitment fees. Following the amendment, the Credit Agreement provides for a $540 million Revolving Credit Facility, with no Term Loan Facility. In December 1997, a second amendment to the Credit Agreement was obtained which removed restrictions on the repurchase of capital stock and eliminated the covenant regarding maintenance of a minimum consolidated net worth. In May 1998, a third amendment to the Credit Agreement was obtained to remove certain restrictions that affected borrowing capability, provide for additional indebtedness subject to financial covenants, and allow the Company to grant liens on new assets to secure additional indebtedness. 42 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Public Debt Offering--In April 1997, the Company completed the public offering and sale of $300 million aggregate principal amount of senior, unsecured debt securities. The securities sold consisted of $100 million aggregate principal amount of 7.45% Notes due April 15, 2027 (the "Notes") and $200 million aggregate principal amount of 8.00% Debentures due April 15, 2027 (the "Debentures"). Holders of Notes may elect to have all or any portion of the Notes repaid on April 15, 2007 at 100 percent of the principal amount. The Notes, at any time after April 15, 2007, and the Debentures, at any time, may be redeemed at the option of the Company at 100 percent of the principal amount plus a make-whole premium, if any, equal to the excess of the present value of future payments due under the Notes and Debentures using a discount rate equal to the then-prevailing yield of U.S. treasury notes for a corresponding remaining term plus 20 basis points over the principal amount of the security being redeemed. Interest is payable on April 15 and October 15 of each year, commencing October 15, 1997. The indenture and supplemental indenture relating to the Notes and the Debentures place limitations on the Company's ability to (i) incur indebtedness secured by certain liens, (ii) engage in certain sale/leaseback transactions and (iii) engage in certain merger, consolidation or reorganization transactions. The net proceeds were used to repay amounts outstanding under the Credit Agreement. The estimated fair value of the Notes and Debentures as of December 31, 1998 was $102 million and $215 million, respectively, based on the estimated yield to maturity for each issue as of December 31, 1998. Notes Payable--In February 1994, the Company issued $30 million aggregate principal amount of unsecured 6.90% notes due February 15, 2004 in a private placement. The note purchase agreement underlying the notes requires compliance with various restrictive covenants substantially the same as those under the Credit Agreement including an interest coverage ratio that could limit the Company's ability to pay dividends in the future. In September 1996, the note purchase agreement was amended to conform the covenant section generally to the terms in the Credit Agreement discussed previously. In December 1997, the note purchase agreement was amended to remove the restrictions on repurchase of capital stock and the covenant regarding maintenance of a minimum consolidated net worth. The fair value of the Notes Payable at December 31, 1998 was approximately $26 million based on the estimated yield to maturity as of December 31, 1998. Expected maturity of the Company's debt is as follows:
Years ended December 31, ---------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total ------- ------- ------- -------- ------- ---------- -------- (In thousands) Revolving Credit Facility............... $ -- $ -- $ -- $320,000 $ -- $ -- $320,000 Project Financing Agreement.............. 13,860 28,539 23,044 85,145 23,858 12,544 186,990 8.00% Debentures, net of discount............... -- -- -- -- -- 199,243 199,243 7.45% Notes............. -- -- -- -- -- 100,000 100,000 6.90% Notes Payable..... 4,615 4,615 4,615 4,615 4,615 2,309 25,384 Other................... 197 210 210 210 181 -- 1,008 ------- ------- ------- -------- ------- -------- -------- Total Debt............ $18,672 $33,364 $27,869 $409,970 $28,654 $314,096 $832,625 ======= ======= ======= ======== ======= ======== ========
Letters of Credit--The Company had letters of credit outstanding at December 31, 1998 totaling $36.7 million, including $29.3 million relating to the legal dispute with Kvaerner Installasjon a.s (see Note 11). The remaining $7.4 million guarantees various insurance and contract bidding activities. 43 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Financial Instruments and Risk Concentration Foreign Exchange Risk--The Company operates internationally, resulting in exposure to foreign exchange risk. This risk is primarily associated with compensation costs denominated in currencies other than the U.S. dollar and with purchases from foreign suppliers. The Company uses a variety of techniques to minimize the exposure to foreign exchange risk, including customer contract payment terms and the use of foreign exchange derivative instruments. The Company's primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both U.S. dollars and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements over the contract term. Foreign exchange derivative instruments, specifically, foreign exchange forward contracts, may be used to minimize foreign exchange risk in instances where the primary strategy is not attainable. A foreign exchange forward contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Gains and losses on foreign exchange derivative instruments, which qualify as accounting hedges, are deferred and recognized when the underlying foreign exchange exposure is realized. At December 31, 1998 and 1997, there were no material unrealized gains or losses on open foreign exchange derivative hedges. Gains and losses on foreign exchange derivative instruments which do not qualify as hedges for accounting purposes, are recognized currently based on the change in market value of the derivative instruments. At December 31, 1996, the net market value of open foreign exchange derivative instruments not qualifying as accounting hedges was approximately $1.6 million. As of December 31, 1998 and 1997, the Company had no foreign exchange derivative instruments not qualifying as accounting hedges. The Company recognized a net pre-tax loss of $1.6 million and a net pre-tax gain of $1.0 million on such instruments recorded as exchange gains/losses for the years ended December 31, 1997 and 1996, respectively. Interest Rate Risk--The Company uses interest rate swap agreements to effectively convert a portion of its floating rate debt to a fixed rate basis, reducing the impact of interest rate changes on future income. Interest rate swaps are designated as hedges of underlying future payments. These agreements involve the exchange of amounts based on variable interest rates for amounts based on a fixed interest rate over the life of the agreement without an exchange of the notional amount upon which the payments are based. The interest rate differential to be received or paid on the swaps is recognized over the lives of the swaps as an adjustment to interest expense. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income. The fair value of the interest rate swap agreements and option contracts obtained in connection with the Transocean ASA Combination was recorded as of the effective date of the Combination. At December 31, 1998, 1997 and 1996, the net unrealized losses on open interest rate swaps totaling $9.3 million, $3.5 million and $0.9 million, respectively, have been deferred because the Company intends to maintain the underlying debt through its maturity (see Note 5). Credit Risk--Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and trade receivables. It is the Company's practice to place its cash and cash equivalents in time deposits at commercial banks with high credit ratings or mutual funds which invest exclusively in high quality money market instruments. In foreign locations, local financial institutions are generally utilized for local currency needs. The Company limits the amount of exposure to any one institution and does not believe it is exposed to any significant credit risk. 44 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company derives the majority of its revenue from services to international oil companies and government-owned and government-controlled oil companies. There are concentrations of receivables in the United States, Norway and the United Kingdom (see Note 16). The Company had no significant credit losses in any of the years in the three-year period ended December 31, 1998. The Company is not aware of any significant credit risks relating to its customer base and does not generally require collateral or other security to support customer receivables. Labor Agreements--On a worldwide basis, the Company had approximately 30 percent of its employees working under collective bargaining agreements at December 31, 1998. Of these represented employees, a majority are working under agreements that are subject to salary negotiation in 1999. The majority of these employees are represented by five Norwegian unions, each of which participates in one or several nationwide agreements concerning salary and other specific terms and conditions. These nationwide agreements are established as a result of bi-annual negotiations between the various employers' nationwide associations and the respective employees' unions. Note 7--Other Current Liabilities Other current liabilities are comprised of the following:
December 31, --------------- 1998 1997 ------- ------- (In thousands) Accrued Payroll.......................................... $14,419 $13,393 Accrued Drydock.......................................... 13,065 14,498 Incentive Compensation and Bonus Accruals................ 10,811 5,799 Accrued Taxes, Other Than Income......................... 10,528 8,176 Accrued Interest......................................... 8,593 7,839 Accrued Workers' Insurance............................... 4,610 8,526 Accrued Losses on Turnkey Wells in Progress.............. -- 5,787 Other.................................................... 10,653 6,363 ------- ------- $72,679 $70,381 ======= =======
Note 8--Other Long-Term Liabilities Other long-term liabilities are comprised of the following:
December 31, --------------- 1998 1997 ------- ------- (In thousands) Accrued Retiree Life Insurance and Medical Benefits..... $12,413 $12,276 Long-Term Portion of Accrued Workers' Insurance......... 6,466 3,524 Accrued Pension and Early Retirement.................... 6,071 4,931 Deferred Income......................................... 6,067 15,488 Minority Interest....................................... 2,299 4,637 Other................................................... 2,631 8,274 ------- ------- $35,947 $49,130 ======= =======
45 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9--Supplemental Cash Flow Information Non-cash operating activities for the year ended December 31, 1998 included an $18.4 million adjustment related to the tax benefit from stock option exercises. The adjustment has been reflected in the consolidated balance sheets as a decrease in Accrued Income Taxes and an increase in Additional Paid-in-Capital. Non-cash financing activities for the year ended December 31, 1996 included $1.198 billion for the issuance of 45.8 million shares of common stock in connection with the Combination between the Company and Transocean ASA. Non- cash investing activities for the year ended December 31, 1996 included $1.439 billion of net assets acquired in the Combination with Transocean ASA (see Note 2). Cash payments for interest were $56.6 million, $35.1 million and $10.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash payments for income taxes, net, were $49.2 million, $51.9 million and $34.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. Note 10--Income Taxes The Company carries out its operations through both domestic and foreign corporations. Income before income taxes for these corporations is as follows:
Years ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Domestic...................................... $230,008 $118,046 $108,222 Foreign....................................... 257,138 89,199 13,430 -------- -------- -------- Income Before Income Taxes.................... $487,146 $207,245 $121,652 -------- -------- --------
The Company is subject to both U.S. and foreign income taxes. Provisions for income taxes represent estimates of expense which will ultimately be paid. An analysis of the Company's income taxes is as follows:
Years ended December 31, ------------------------- 1998 1997 1996 -------- ------- ------- (In thousands) Current: Federal....................................... $ 45,654 $30,727 $30,400 Foreign....................................... 33,458 10,995 6,619 State......................................... 107 (625) 60 -------- ------- ------- 79,219 41,097 37,079 -------- ------- ------- Deferred: Federal....................................... 41,189 3,426 2,873 Foreign....................................... 23,322 20,789 3,655 -------- ------- ------- 64,511 24,215 6,528 -------- ------- ------- Income Taxes.................................... $143,730 $65,312 $43,607 ======== ======= =======
Unremitted earnings of foreign subsidiaries of the Company, before provision for income taxes, as of December 31, 1998, 1997 and 1996 aggregated approximately $329.2 million, $88.0 million and $17.6 million, respectively. Foreign and federal income taxes aggregating approximately $78.6 million have been paid or accrued on such earnings as of December 31, 1998 as compared to $28.4 and $6.2 million as of December 31, 1997 and 1996, respectively. A portion of the accumulated unremitted earnings of foreign subsidiaries is 46 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) considered indefinitely reinvested in foreign operations and, accordingly, no federal tax has been provided on such unremitted earnings. Deferred tax assets and liabilities are comprised of the following:
December 31, -------------------- 1998 1997 --------- --------- (In thousands) Deferred Tax Assets--Current Accrued drydock.......................................... $ 2,806 $ 3,235 Accrued personnel taxes.................................. 1,306 1,415 Accrued workers' compensation insurance.................. 1,088 1,899 Other accruals........................................... 3,861 3,924 Retirement and benefit plan accruals..................... 1,100 1,260 Insurance accruals....................................... 555 1,145 Other.................................................... 961 961 --------- --------- Total Current Deferred Tax Assets...................... 11,677 13,839 --------- --------- Deferred Tax Liabilities--Current Deferred turnkey costs................................... (10,906) (6,769) Other.................................................... (2,191) (2,652) --------- --------- Total Current Deferred Tax Liabilities................. (13,097) (9,421) --------- --------- Net Current Deferred Tax Assets (Liabilities).......... $ (1,420) $ 4,418 ========= ========= Deferred Tax Assets--Noncurrent Net operating loss carry forward......................... $ 18,191 $ 45,897 Retirement and benefit plan accruals..................... 1,113 1,264 Other accruals........................................... 7,289 6,154 Deferred income.......................................... 1,802 5,303 Net deferred foreign tax credits......................... 3,272 3,677 Other.................................................... 2,786 1,060 --------- --------- Total Noncurrent Deferred Tax Assets................... 34,453 63,355 --------- --------- Deferred Tax Liabilities--Noncurrent Depreciation and amortization............................ (190,893) (154,795) Deferred gains........................................... (68,071) (74,885) Deferred mobilization.................................... (2,466) (3,564) Other.................................................... (3,002) (1,417) --------- --------- Total Noncurrent Deferred Tax Liabilities.............. (264,432) (234,661) --------- --------- Net Noncurrent Deferred Tax Liabilities................ $(229,979) $(171,306) ========= =========
The Company has not provided a valuation allowance to offset the deferred tax assets because, in the opinion of management, it is more likely than not that all deferred tax assets will be realized. The Company has net loss carry forwards relating to foreign tax jurisdictions resulting from the Combination with Transocean ASA totaling $65.0 million. These net loss carry forwards expire in the year 2004 and thereafter. 47 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income taxes differ from the amount computed by applying the U.S. federal income tax rate to the income before income taxes. The reasons for these differences are as follows:
Years ended December 31, -------------------------- 1998 1997 1996 -------- ------- ------- (In thousands) Income Taxes at Statutory Federal Income Tax Rate... $170,501 $72,536 $42,578 Increases (Decreases) in Tax Resulting From Foreign income taxed at rates different from the U.S. statutory rate.............................. (34,301) (3,839) -- Other............................................. 7,530 (3,385) 1,029 -------- ------- ------- Income Taxes........................................ $143,730 $65,312 $43,607 ======== ======= =======
The Company has been included in the consolidated federal income tax returns filed by Sonat during all periods in which Sonat ownership was greater than or equal to 80 percent ("Affiliation Years"). The Company and Sonat have entered into a Tax Sharing Agreement providing for the manner of determining payments with respect to federal income tax liabilities and benefits arising in Affiliation Years. Under the Tax Sharing Agreement, the Company will pay to Sonat an amount equal to the Company's share of the Sonat consolidated federal income tax liability, generally determined on a separate return basis. In addition, Sonat will pay the Company for utilization by Sonat of deductions, losses and credits which are attributable to the Company and in excess of that which would be utilized on a separate return basis. During December 1998, Sonat received notification from the IRS that the settlement proposed in connection with the examination of its consolidated federal income tax returns for the years 1989 through 1992 was accepted. The final settlement pursuant to the Tax Sharing Agreement between Sonat and the Company for these years will have no material effect on the Company's financial statements. The Company has been notified that the IRS will commence an examination of the last Affiliation Year, the Company's short taxable year ended June 4, 1993. In addition, certain foreign tax authorities have questioned the amounts of income and expense subject to tax in their jurisdiction for prior periods. The Company is currently contesting additional assessments which have been asserted and may contest any future assessments. In the opinion of management, the ultimate resolution of these asserted income tax liabilities will not have a material adverse effect on the Company's consolidated financial statements. Note 11--Commitments and Contingencies Leases--The Company has operating lease commitments expiring at various dates, principally for office space and office equipment. In addition to rental payments, some leases provide that the Company pay a pro rata share of operating costs applicable to the leased property. The Company had no significant capital leases as of December 31, 1998 or 1997. At December 31, 1998, future minimum payments for noncancellable operating leases are as follows:
(In thousands) 1999....................................................... $ 6,181 2000....................................................... 3,290 2001....................................................... 2,296 2002....................................................... 1,968 2003....................................................... 1,834 Thereafter................................................. 12,740 ------- Total.................................................... $28,309 =======
48 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rental expense for all operating leases, including leases with terms of less than one year, was $15.3 million, $12.8 million and $3.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. Upgrade and Expansion of Drilling Fleet--The Company's investments in its previously announced fleet additions continue to require significant capital expenditures. At December 31, 1998, the Company had firm commitments related to the construction of the Discoverer Enterprise, the Discoverer Spirit and the Discoverer Deep Seas (see Note 4) totaling $30.7 million, $108.8 million and $118.5 million, respectively. Legal Proceedings--During 1997, Kvaerner Installasjon a.s ("Kvaerner") in Norway performed modification and refurbishment work on one of the Company's fourth-generation semisubmersible drilling rigs, the Transocean Leader. The amount owed with respect to such work is in dispute, and the disputed amount is approximately $40 million. The Company has posted a letter of credit valued at approximately $30 million pending the resolution of the dispute by agreement between the parties or by final judgment under the Norwegian judicial process. In September 1998, the Company instituted an action in the Norwegian courts alleging that it owes no additional amounts and that the letter of credit should be released. Kvaerner has sought to dismiss the action. Although the Company cannot predict the outcome of the dispute or the court action at this time, the Company believes it will have no material adverse effect on its results of operations or financial position. In 1990 and 1991, two of the Company's subsidiaries were served with assessments valued at approximately $7.4 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services ("ISS"). The Company believes that neither subsidiary is liable for the taxes and has contested the assessments in the Brazilian administrative and court systems. The proceedings with respect to the 1991 assessment, which was valued at approximately $6.5 million, reached the first level Brazilian state court, which rejected the Company's arguments. The Company appealed that ruling to the second level court. The August 1990 assessment also had an unfavorable ruling at the first level, and the ruling has been appealed to the second level. If the Company's defenses are ultimately unsuccessful, the Company believes that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse the Company for ISS payments required to be paid by them. The Company believes the outcome of these assessments will have no material adverse effect on the Company's results of operations or financial position. Other--The Company has other contingent liabilities resulting from litigation, claims and commitments incidental to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company. Note 12--Stock-Based Compensation Plans Long-Term Incentive Plan--In 1993, the Company adopted an incentive plan for key employees and outside directors which was amended and restated during 1998 (the "Incentive Plan"). Under the Incentive Plan, awards can be granted in the form of stock options, restricted stock, stock appreciation rights ("SARs"), cash performance awards and tax-offset supplemental payments in connection with the exercise of options or SARs or the vesting of restricted stock. The Incentive Plan is authorized to grant up to (i) 6.1 million shares of common stock with respect to awards to employees; (ii) 200,000 shares of common stock with respect to outside directors; and (iii) 100,000 shares subject to awards of freestanding SARs to employees or directors. Options issued under the Incentive Plan have a ten-year term and become exercisable in three equal annual installments after the date of grant. At December 31, 1998, there were 2.3 million total shares available for future grants. 49 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes option activities of the Incentive Plan:
Weighted- Number of Average Shares Exercise Under Option Price ------------ --------- Outstanding at December 31, 1995......................... 2,050,472 $ 9.59 Granted.................................................. 587,400 23.58 Exercised................................................ (362,074) 9.62 Forfeited................................................ (9,012) 9.85 --------- ------ Outstanding at December 31, 1996......................... 2,266,786 13.21 Granted.................................................. 422,800 28.86 Exercised................................................ (617,162) 10.99 Forfeited................................................ (27,140) 24.47 --------- ------ Outstanding at December 31, 1997......................... 2,045,284 16.96 Granted.................................................. 520,236 43.37 Exercised................................................ (607,323) 11.01 Forfeited................................................ (24,070) 31.31 --------- ------ Outstanding at December 31, 1998......................... 1,934,127 $25.75 ========= ====== Exercisable at December 31, 1996......................... 1,150,560 $ 9.55 Exercisable at December 31, 1997......................... 1,080,794 $11.13 Exercisable at December 31, 1998......................... 1,029,276 $17.86
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Range of Weighted-Average ---------------------------- ---------------------------- Exercise Remaining Number Weighted-Average Number Weighted-Average Prices Contractual Life Outstanding Exercise Price Outstanding Exercise Price - -------- ---------------- ----------- ---------------- ----------- ---------------- $ 8.38--$13.50 5.70 years 583,737 $ 9.87 583,737 $ 9.87 $23.44--$31.25 7.62 years 828,954 $25.90 397,437 $25.20 $36.94--$56.31 8.42 years 521,436 $43.29 48,102 $54.07
During 1998, 35,400 restricted shares were granted at a weighted-average fair value of $41.74 per share. The Company granted 40,600 and 57,200 restricted shares at a weighted-average fair value of $31.22 and $23.45 per share in 1997 and 1996, respectively. The Company granted 25,785 and 18,000 stock appreciation rights at a weighted-average exercise price of $45.46 and $28.85 per share in 1998 and 1997, respectively. On December 31, 1998, there were 267,260 restricted shares and 36,285 stock appreciation rights outstanding under the Incentive Plan. Employee Stock Purchase Plan--In 1998, the Company established an employee stock purchase plan ("Stock Purchase Plan") for certain full-time employees of the Company. Under the terms of the Stock Purchase Plan, employees can choose each year to have between two and twenty percent of their annual base earnings withheld to purchase up to $25,000 of the Company's common stock. The purchase price of the stock is 85 percent of the lower of its beginning-of-year or end- of-year market price. The plan is authorized to purchase up to 250,000 shares of common stock. As discussed in Note 1, the Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans. Expenses related to restricted stock, stock appreciation rights and stock options recognized during the years ended December 31, 1998, 1997 and 1996 were $1.6 million, $2.3 million and $1.2 million, respectively. If compensation expense for stock options granted under the Incentive Plan and employees' 50 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchase rights under the Stock Purchase Plan were recognized using the alternative fair value method of accounting under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Years ended December 31, ------------------------- 1998 1997 1996 -------- -------- ------- (In thousands, except per share data) Net Income: As Reported........................................ $343,416 $141,933 $78,045 Pro Forma.......................................... 339,880 140,806 77,089 Basic earnings per share: As Reported........................................ $ 3.43 $ 1.40 $ 1.09 Pro Forma.......................................... 3.40 1.39 1.08 Diluted earnings per share: As Reported........................................ $ 3.41 $ 1.38 $ 1.07 Pro Forma.......................................... 3.37 1.37 1.05
The above pro forma information is not indicative of future pro forma amounts. SFAS No. 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. The fair value of each option grant under the Incentive Plan is estimated on the date of grant using the Black- Scholes model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yields of 0.30, 0.19 and 0.34 percent; expected volatility of 31.1, 30.8 and 29.4 percent; risk-free interest rates of 5.4, 6.3 and 5.6 percent; and expected lives of four years for all three years. The weighted-average fair value of options granted was $12.73, $9.98 and $7.30 for the years ended December 31, 1998, 1997 and 1996, respectively. The fair value of the employees' purchase rights under the Stock Purchase Plan is estimated using the Black-Scholes model with the following assumptions for 1998: dividend yield of 0.33 percent; expected volatility of 41.9 percent; risk-free interest rate of 5.2 percent and an expected life of one year. The weighted-average fair value of those purchase rights granted in 1998 was $16.28. Note 13--Earnings Per Share The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per share is as follows:
Years ended December 31, ------------------------- 1998 1997 1996 -------- -------- ------- (In thousands, except per share data) Net Income for basic and diluted earnings per share.. $343,416 $141,933 $78,045 ======== ======== ======= Weighted-average shares for basic earnings per share............................................... 100,083 101,234 71,678 Effect of dilutive securities: Employee stock options and unvested stock grants... 765 1,550 1,441 -------- -------- ------- Adjusted weighted-average shares and assumed conversions for diluted earnings per share.......... 100,848 102,784 73,119 ======== ======== ======= Basic earnings per share............................. $ 3.43 $ 1.40 $ 1.09 ======== ======== ======= Diluted earnings per share........................... $ 3.41 $ 1.38 $ 1.07 ======== ======== =======
51 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 14--Retirement Plans and Other Postemployment Benefits Qualified Defined Benefit Pension Plans--The Company has a qualified defined benefit pension plan (the "Retirement Plan") which covers substantially all domestic employees of the Company. The Company has also adopted a plan (the "Supplemental Benefit Plan") to provide its eligible participants with benefits in excess of those allowed under the Retirement Plan (together the "Domestic Plans"). Annual retirement benefits under the Domestic Plans are based on a combination of participants' years of service and compensation. The Company determines the amount of funding to the Retirement Plan on a year-to-year basis, with amounts consistent with minimum and maximum funding requirements established by various governmental bodies. The Company does not fund the Supplemental Benefit Plan. As a result of the Combination, the Company has assumed the assets and obligations of various retirement plans of Transocean ASA and its subsidiaries (the "Foreign Plans"). These include several defined benefit plans, primarily group pension schemes with life insurance companies. These plans apply to a majority of Transocean ASA's onshore and offshore personnel. Benefits are based on compensation once eligibility is reached. Certain of the pension schemes are financed in part by contributions from employees. Company contributions are determined primarily by the respective life insurance companies based upon plan terms. In addition to pension obligations covered through the insurance schemes, Transocean ASA has pension obligations to several employees and former employees, which are financed directly from operations. Employer's social security tax is included in the obligation for unfunded schemes. For insurance-based schemes, annual premium payments are considered to represent a reasonable approximation of the service costs of benefits earned during the period, and the amounts owed for the employer's portion of the social security tax are expensed in the period of payment. The results of the Foreign Plans are included from September 1, 1996. The pension obligations and assets of certain plans relating to Procon Offshore ASA (see Note 2) were divested in May 1997. Postretirement Benefits Other Than Pensions--The Company has plans that provide for non-contractual limited health care and life insurance benefits to domestic office employees and certain other domestic field employees when they retire from the Company. 52 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, ------------------------------------ Pension Benefits Other Benefits ---------------- ------------------ 1998 1997 1998 1997 ------- ------- -------- -------- (In thousands) Change in benefit obligation Benefit obligation at beginning of year................................... $84,989 $97,615 $ 11,509 $ 11,127 Service cost............................ 6,287 4,063 278 256 Interest cost........................... 6,047 5,350 705 766 Plan participants' contributions........ 141 123 56 56 Actuarial gains and (losses)............ 7,003 4,358 (1,829) (170) Divestitures............................ -- (22,358) -- -- Benefits paid........................... (3,993) (4,162) (762) (526) Plan amendments......................... 2,252 -- -- -- ------- ------- -------- -------- Benefit obligation at end of year..... 102,726 84,989 9,957 11,509 ------- ------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year................................ 111,555 111,708 1,070 1,149 Actual return on plan assets............ 15,287 19,710 (211) 83 Company contributions................... 1,365 2,240 541 308 Plan participants' contributions........ 141 123 56 56 Divestitures............................ -- (18,064) -- -- Benefits paid........................... (3,993) (4,162) (762) (526) ------- ------- -------- -------- Fair value of plan assets at end of year................................. 124,355 111,555 694 1,070 ------- ------- -------- -------- Funded status........................... 21,629 26,566 (9,263) (10,439) Unrecognized net transition asset....... (767) (6,063) -- -- Unrecognized net actuarial gain......... (15,635) (10,668) (3,124) (1,805) Unrecognized prior service cost......... 810 (1,410) (26) (32) ------- ------- -------- -------- Net amount recognized................. $ 6,037 $ 8,425 $(12,413) $(12,276) ======= ======= ======== ======== Amounts recognized in the balance sheet consist of: Prepaid benefit cost.................... $12,108 $13,356 $ -- $ -- Accrued benefit liability............... (6,071) (4,931) (12,413) (12,276) ------- ------- -------- -------- Net amount recognized................. $ 6,037 $ 8,425 $(12,413) $(12,276) ======= ======= ======== ========
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $10.9 million, $7.2 million and $3.4 million, respectively, at December 31, 1998 and $5.7 million, $3.3 million and $0.9 million, respectively, at December 31, 1997.
December 31, ---------------------- Pension Other Benefits Benefits ---------- ---------- Weighted-average assumptions 1998 1997 1998 1997 ---------------------------- ---- ---- ---- ---- Discount rate..................................... 6.41% 6.74% 6.75% 7.00% Expected return on plan assets.................... 8.47% 8.60% 7.00% 7.00% Rate of compensation increase..................... 4.73% 4.81% 5.50% 5.50%
53 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For measurement purposes, the rate of increase in the per capita costs of covered health care benefits is assumed to be 8.05 percent in 1999, decreasing gradually to 5.25 percent by the year 2003.
Years ended December 31, ---------------------------------------- Pension Benefits Other Benefits ---------------------- ---------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ---- ---- ---- (In thousands) Components of Net Periodic Benefit Cost Service cost........................ $6,287 $4,063 $3,791 $278 $256 $250 Interest cost....................... 6,047 5,350 4,843 705 767 764 Expected return on plan assets...... (8,089) (7,531) (6,969) (70) (76) (79) Amortization of transition obligation......................... (914) (1,218) (1,103) -- -- -- Amortization of prior service cost.. (68) (180) (146) (5) (5) (6) Recognized net actuarial gain....... (31) (49) (280) (229) (130) (14) ------ ------ ------ ---- ---- ---- Benefit cost...................... $3,232 $ 435 $ 136 $679 $812 $915 ====== ====== ====== ==== ==== ====
The assumed health care cost trend rate has a significant effect on the amounts reported for postretirement benefits other than pensions. A one- percentage-point change in the assumed health care cost trend rate would have the following effects:
1-Percentage 1-Percentage Point Point Increase Decrease ------------ ------------ (In thousands) Effect on total of service and interest cost components in 1998................................. $ 128 $(112) ------ ----- Effect on postretirement benefit obligations as of December 31, 1998.................................. $1,089 $(954) ------ -----
Defined Contribution Plans--The Company sponsors defined contribution pension and savings plans covering senior non-American field employees working outside the United States. Contributions and costs are determined as 4.5 percent to 6.5 percent of each covered employee's salary, based on years of service. The Company also sponsors a defined contribution savings plan covering domestic employees. Contributions by the Company are limited to no more than 4.5 percent of each covered employee's salary, based on the employee's contribution. As a result of the Combination, the Company also assumed various defined contribution plans of Transocean ASA and its subsidiaries. Costs of these plans have been included from September 1, 1996. Costs for the Company's defined contribution plans were $5.5 million, $5.7 million and $3.5 million in 1998, 1997 and 1996, respectively. Deferred Compensation Plan--The Company established the Transocean Offshore Inc. Deferred Compensation Plan ("the Plan") on July 1, 1998. The Plan's primary purpose is to provide tax-advantage asset accumulation for a select group of management, highly compensated employees and non-employee members of the Board of Directors of the Company. Eligible employees who enroll in the Plan may elect to defer up to a maximum of 90% of base salary, 100% of any future performance awards, 100% of any special payments and 100% of directors meeting fees and annual retainers; however, the Administrative Committee (three individuals appointed by the Compensation Committee of the Board of Directors) may at its discretion, establish minimum amounts that must be deferred by anyone electing to participate in the plan. In addition, the Compensation Committee may authorize employer contributions to participants, and the Chief Executive Officer of the Company (with Compensation Committee approval) may enter into "Deferred Compensation Award Agreements" with such participants. There were no employer contributions for the year ended December 31, 1998. 54 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 15--Investments in and Advances to Joint Ventures The Company holds a 24.89 percent interest in Arcade Drilling as ("Arcade"), a Norwegian offshore drilling company. Arcade owns two fourth- generation semisubmersible rigs, the Henry Goodrich and the Paul B. Loyd, Jr. At December 31, 1998, the Company's net investment in Arcade was $52.2 million. The Company's equity in undistributed earnings of Arcade through December 31, 1998 was $22.5 million. In December 1990, the Company contributed the Henry Goodrich to Arcade. The Company received $70.0 million in cash and common stock representing a 21.75 percent interest in Arcade. This sale resulted in a pre-tax gain of $28.8 million of which $18.8 million was recognized as other income in 1990. The remaining $10.0 million of the gain was deferred and is being amortized to income over the remaining depreciable life of the Henry Goodrich. The deferred income has been offset against the Company's investment in Arcade. The net unamortized balance of the deferred gain was $6.1 million at December 31, 1998. Note 16--Segments, Geographical Analysis and Major Customers The Company has two reportable segments: Mobile Units and Drilling Services. The Mobile Units segment primarily operates drilling rigs for customers, principally at a contractually determined price per day (dayrate). Drilling Services primarily involves providing personnel and equipment other than rigs for oil and gas exploration and production on either a dayrate or fixed price basis. For both segments, performance is evaluated based on operating income before general and administrative expenses. The accounting policies used to determine the segment information are the same as those described in Note 1.
Years ended December 31, ---------------------------- 1998 1997 1996 ---------- -------- -------- (In thousands) Operating Revenues Mobile Units U.S. Gulf of Mexico............................. $ 305,582 $222,142 $148,886 Europe.......................................... 463,361 361,045 179,865 Other Western Hemisphere........................ 184,265 19,884 29,193 Other Eastern Hemisphere........................ 60,212 84,233 31,035 ---------- -------- -------- Total Mobile Units............................ 1,013,420 687,304 388,979 ---------- -------- -------- Drilling Services................................. 76,192 204,658 139,924 ---------- -------- -------- Total Operating Revenues.......................... $1,089,612 $891,962 $528,903 ========== ======== ======== Operating and Maintenance Expenses Mobile Units U.S. Gulf of Mexico............................. $ 101,505 $ 82,241 $ 62,609 Europe.......................................... 224,559 210,712 121,083 Other Western Hemisphere........................ 53,641 9,147 20,474 Other Eastern Hemisphere........................ 25,331 36,098 22,688 Other (a)....................................... 13,386 10,789 5,632 ---------- -------- -------- Total Mobile Units............................ 418,422 348,987 232,486 ---------- -------- -------- Drilling Services................................. 66,017 198,429 126,818 ---------- -------- -------- Total Operating and Maintenance Expenses.......... $ 484,439 $547,416 $359,304 ========== ======== ========
55 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Depreciation and Amortization Mobile Units U.S. Gulf of Mexico........................... $ 21,389 $ 12,654 $ 9,816 Europe........................................ 73,979 70,744 26,779 Other Western Hemisphere...................... 11,452 5,223 2,738 Other Eastern Hemisphere...................... 3,509 6,529 3,395 -------- -------- -------- Total Mobile Units.......................... 110,329 95,150 42,728 -------- -------- -------- Drilling Services............................... 5,364 6,589 3,027 -------- -------- -------- Total Depreciation and Amortization for Reportable Segments............................ 115,693 101,739 45,755 Depreciation on Corporate Assets................ 1,174 1,278 832 -------- -------- -------- Total Depreciation and Amortization............. $116,867 $103,017 $ 46,587 ======== ======== ======== Operating Income (Loss) Mobile Units U.S. Gulf of Mexico........................... $182,688 $127,247 $ 76,461 Europe........................................ 164,823 79,589 32,003 Other Western Hemisphere...................... 119,172 5,514 5,981 Other Eastern Hemisphere...................... 31,372 41,606 4,952 Other (a)..................................... (13,386) (10,789) (5,632) -------- -------- -------- Total Mobile Units.......................... 484,669 243,167 113,765 -------- -------- -------- Drilling Services............................... 4,811 (360) 10,079 -------- -------- -------- Total Operating Income for Reportable Segments.. 489,480 242,807 123,844 Corporate Expenses.............................. (29,208) (25,331) (16,230) -------- -------- -------- Total Operating Income.......................... 460,272 217,476 107,614 -------- -------- -------- Equity in earnings of joint ventures.......... 11,677 10,196 5,168 Interest income............................... 3,451 1,854 6,228 Interest expense, net of amounts capitalized.. (23,892) (22,853) (7,220) Gain on termination of cash flow sharing agreement.................................... 21,290 -- -- Other, net.................................... 14,348 572 9,862 -------- -------- -------- Other Income (Expense), Net..................... 26,874 (10,231) 14,038 -------- -------- -------- Income Before Income Taxes...................... $487,146 $207,245 $121,652 ======== ======== ========
- -------- (a) Other includes operations and engineering overhead expenses not allocated to geographic areas of operations. 56 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- (In thousands) Assets Mobile Units U.S. Gulf of Mexico........................ $ 963,906 $ 566,925 $ 294,114 Europe..................................... 1,783,598 1,770,814 1,640,691 Other Western Hemisphere................... 197,598 83,568 129,786 Other Eastern Hemisphere................... 42,439 125,476 119,338 ---------- ---------- ---------- Total Mobile Units....................... 2,987,541 2,546,783 2,183,929 ---------- ---------- ---------- Drilling Services............................ 91,337 77,975 161,272 ---------- ---------- ---------- Total Assets for Reportable Segments......... 3,078,878 2,624,758 2,345,201 ---------- ---------- ---------- Investments In and Advances to Joint Ventures.................................... 55,544 45,869 35,608 Other Assets (Corporate)..................... 116,521 84,461 62,405 ---------- ---------- ---------- Total Assets................................. $3,250,943 $2,755,088 $2,443,214 ========== ========== ==========
Years ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Capital Expenditures (a) Mobile Units........................................ $555,202 $397,074 $196,129 Drilling Services................................... 14,455 6,271 10,814 -------- -------- -------- Total Capital Expenditures for Segment Assets....... 569,657 403,345 206,943 -------- -------- -------- Capital Expenditures for Corporate Assets........... 3,674 3,121 6,016 -------- -------- -------- Total Capital Expenditures.......................... $573,331 $406,466 $212,959 ======== ======== ========
- -------- (a) Excludes the Combination (see Note 2). A substantial portion of the Company's assets are mobile. 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. The Arcade joint venture operates in Europe. General Corporate assets are principally cash and cash equivalents and other nonoperating assets. The Company's foreign operations are subject to certain political and other uncertainties not encountered in domestic operations, including risks of war and civil disturbances (or other events that disrupt markets), expropriation of equipment, repatriation of income or capital, taxation policies, and the general hazards associated with foreign sovereignty over certain areas in which operations are conducted. Additional Geographic Information
Years ended December 31, ---------------------------- 1998 1997 1996 ---------- -------- -------- (In thousands) Operating Revenues United States..................................... $ 308,189 $270,753 $178,777 Norway............................................ 323,130 289,507 140,453 United Kingdom.................................... 159,210 170,453 95,830 Brazil............................................ 95,355 16,508 27,644 Other............................................. 203,728 144,741 86,199 ---------- -------- -------- Total Operating Revenues by Country............... $1,089,612 $891,962 $528,903 ========== ======== ========
57 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, -------------------------------- 1998 1997 1996 ---------- ---------- ---------- (In thousands) Long-Lived Assets United States............................... $ 918,047 $ 527,992 $ 290,087 Norway...................................... 654,012 750,320 596,974 United Kingdom.............................. 165,604 93,680 242,433 Spain....................................... 229,309 148,200 36,554 Goodwill-Europe (a)......................... 675,243 693,154 763,173 Other....................................... 247,096 234,652 261,747 ---------- ---------- ---------- Total Long-Lived Assets by Country............ $2,889,311 $2,447,998 $2,190,968 ========== ========== ==========
- -------- (a) Goodwill resulting from the Combination has not been allocated to individual countries. Major Customers Revenues from the following major unaffiliated customers of the Company exceeded 10% or more of operating revenues:
Years ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (In thousands) Statoil (a)................................... $169,830 $167,162 $ 67,968 Royal Dutch Shell Group (a)................... 182,817 153,824 146,769 BP Amoco (a).................................. 109,401 90,933 (b)
- -------- (a) Revenues earned by both business segments. (b) Amount was below 10% for the years indicated. The loss of significant customers could have a materially adverse effect on the Company's results of operations. Note 17--Sale of Assets In August 1998, the Company sold certain non-core assets within its drilling services business segment to a subsidiary of Dailey International Inc. for $10.0 million in cash, resulting in a pre-tax gain of approximately $8.1 million ($5.3 million after tax or $0.05 per share, diluted). In 1996, the Offshore Bahram sank while under tow offshore Egypt. The Company disposed of the rig and recognized a net pre-tax gain of approximately $6.6 million ($4.3 million after tax or $0.06 per share, basic and diluted). 58 TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 18--Quarterly Results (Unaudited) Shown below are selected unaudited quarterly data:
Quarter ----------------------------------- First Second Third Fourth -------- -------- -------- -------- (In thousands, except per share data) 1998 Operating Revenues........................ $258,313 $251,577 $269,002 $310,720 Operating Income (a)...................... 91,319 101,202 120,291 147,460 Net Income (a)............................ 77,560 69,661 92,929 103,266 Net Income Per Share (a) Basic................................... $ 0.78 $ 0.70 $ 0.93 $ 1.03 Diluted................................. 0.77 0.69 0.92 1.02 Weighted-average number of shares Basic................................... 99,673 100,082 100,283 100,284 Diluted................................. 100,683 101,006 100,869 100,780 1997 Operating Revenues........................ $219,616 $208,093 $223,201 $241,052 Operating Income (b)...................... 44,583 42,106 60,939 69,848 Net Income (b)............................ 27,709 27,916 39,119 47,189 Net Income Per Share (b)(c) Basic................................... $ 0.27 $ 0.28 $ 0.39 $ 0.47 Diluted................................. 0.27 0.27 0.38 0.46 Weighted-average number of shares (c) Basic................................... 102,188 101,167 101,280 100,323 Diluted................................. 103,610 102,640 102,807 101,888
- -------- (a) Fourth quarter 1998 included operating revenues of $40 million and operating income of $36.4 million ($23.7 million after taxes) on a cash settlement in connection with the contract termination for the Transocean Explorer. The effect of this settlement on earnings per share was $0.24, basic and diluted. (b) Fourth quarter 1997 included losses from turnkey drilling services of $10.8 million ($7.0 million after taxes). The effect of these losses on earnings per share was $0.07, basic and diluted. (c) 1997 earnings per share amounts and weighted-average number of shares have been restated to comply with SFAS No. 128, Earnings Per Share, and to reflect the increased number of shares issued and outstanding as a result of the stock split. 59 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company has not had a change in or disagreement with its accountants within twenty-four months prior to the date of its most recent financial statements or in any period subsequent to such date. 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 The information required by Items 10, 11, 12 and 13 is incorporated herein by reference to the Company's definitive proxy statement for its 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of December 31, 1998. Certain information with respect to the executive officers of the Company is set forth in Item 4 of this annual report under the caption "Executive Officers of the Registrant." 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
Page ---- Included in Part II of this report: Report of Independent Auditors..................................... 30 Consolidated Statements of Operations.............................. 31 Consolidated Balance Sheets........................................ 32 Consolidated Statements of Stockholders' Equity.................... 33 Consolidated Statements of Cash Flows.............................. 34 Notes to Consolidated Financial Statements......................... 35
Financial statements of 50 percent or less owned joint ventures are not presented herein because such joint ventures do not meet the significance test. (2) Financial Statement Schedules Schedules are omitted either because they are not required or are not applicable, or because the required information is included in the financial statements or notes thereto. 60 (3) Exhibits The following exhibits are filed in connection with this Report:
Number Description ------ ----------- 3.1 Restated Certificate of Incorporation of the Company, including amendments dated September 3, 1996 (filed as Exhibit 4(a) to the Company's Registration Statement on Form S-8 Registration No. 333-12475 dated September 20, 1996) 3.2 Amendment dated September 3, 1996 to Restated Certificate of Incorporation of the Company to change the Company's name (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-8 Registration No. 333-12475 dated September 20, 1996) 3.3 Amendment dated September 3, 1996 to Restated Certificate of Incorporation of the Company to increase authorized shares of common stock (filed as Exhibit 4(c) to the Company's Registration Statement on Form S-8 Registration No. 333-12475 dated September 20, 1996) 3.4 By-Laws of the Company (filed as Exhibit 3-(2) to the Company's Form 10-K for the year ending December 31, 1993) 4.1 Secured Credit Agreement dated as of January 17, 1997 among Transocean Enterprise Inc., the Lenders party thereto, ABN AMRO Bank, as Agent, and the Co-Agents listed therein (filed as Exhibit 4-(1) to the Company's Form 10-K for the year ending December 31, 1996) +4.2 First Amendment to Secured Credit Agreement dated as of December 21, 1998. 4.3 Credit Agreement dated as of July 30, 1996 among Sonat Offshore Drilling Inc., the Lenders party thereto, ABN AMRO Bank, as Agent, and the Co-Agents listed therein (filed as Exhibit 10-(1) to the Company's Form 10-Q for the quarter ending June 30, 1996) 4.4 First Amendment to Credit Agreement dated as of April 24, 1997 (filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ending March 31, 1997) 4.5 Second Amendment to Credit Agreement dated as of December 19, 1997 (filed as Exhibit 4.4 to the Company's Form 10-K for the year ending December 31, 1997) 4.6 Third Amendment to Credit Agreement dated May 22, 1998 (filed as Exhibit 4.9 to the Company's Form 10-Q for the quarter ending June 30, 1998). 4.7 Indenture dated as of April 15, 1997 between the Company and Texas Commerce Bank National Association, as trustee (filed as Exhibit 4.1 to the Company's Form 8-K dated April 29, 1997) 4.8 First Supplemental Indenture dated as of April 15, 1997 between the Company and Texas Commerce Bank National Association, as trustee, supplementing the Indenture dated as of April 15, 1997 (filed as Exhibit 4.2 to the Company's Form 8-K dated April 29, 1997) 4.9 Form of Note (filed as Exhibit 4.3 to the Company's Form 8-K dated April 29, 1997). 4.10 Form of Debenture (filed as Exhibit 4.4 to the Company's Form 8-K dated April 19, 1997). 10.1 Tax Sharing Agreement between Sonat Inc. and Sonat Offshore Drilling Inc. dated June 3, 1993 (filed as Exhibit 10-(3) to the Company's Form 10-Q for the quarter ending June 30, 1993) *10.2 Performance Award and Cash Bonus Plan of Sonat Offshore Drilling Inc. (filed as Exhibit 10-(5) to the Company's Form 10-Q for quarter ending June 30, 1993) *10.3 Form of Sonat Offshore Drilling Inc. Executive Life Insurance Program Split Dollar Agreement and Collateral Assignment Agreement (filed as Exhibit 10-(9) to the Company's Form 10-K for the year ending December 31, 1993) 10.4 Purchase Agreement dated as of April 1, 1987 among Sonat Offshore Drilling Inc., Sonat Offshore Ventures Inc., Dixilyn-Field Drilling Company and Panhandle Eastern Corporation (filed as Exhibit 10-(9) to the Company's Form S-1 Registration No. 33-60992 dated April 13, 1993)
61
Number Description ------ ----------- 10.5 Agreement dated as of June 14, 1995, among Sonat Offshore Ventures Inc., Sonat Offshore Drilling Inc., Dixilyn-Field Drilling Company and Panhandle Eastern Corporation (filed as Exhibit 10-(8) to the Company's Form 10-K for the year ending December 31, 1995) *10.6 Employee Stock Purchase Plan of Transocean Offshore Inc. effective May 14, 1998 (filed as Exhibit 4.5 to the Company's Form S-8 Registration No. 333-24457 filed June 30, 1998) *10.7 Employment Agreements between J. Michael Talbert, W. Dennis Heagney, Robert L. Long, Jon C. Cole, Donald R. Ray, Eric B. Brown and Barbara S. Koucouthakis, individually, and Transocean Offshore Inc. dated December 6, 1995 (filed as Exhibit 10-(18) to the Company's Form 10-K for the year ending December 31, 1995) *10.8 Long-Term Incentive Plan of Transocean Offshore Inc., as amended and restated effective March 12, 1998 (filed as Exhibit 4.5 to the Company's Form S-8 Registration No. 333-58211 filed June 30, 1998) *10.9 Employment Agreement dated as of August 14, 1997 between Dennis R. Long and Transocean Offshore Inc. (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ending September 30, 1997) *10.10 Employment Agreement dated as of August 12, 1998 between Alan A. Broussard and Transocean Offshore Inc. (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ending September 30, 1998) *10.11 Deferred Compensation Plan of Transocean Offshore Inc. effective July 1, 1998 (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ending September 30, 1998) +21 Subsidiaries of the Company +23 Consent of Ernst & Young LLP +24 Powers of Attorney +27(1) Financial Data Schedule
- -------- * Compensatory plan or arrangement. + Filed herewith. Exhibits listed above as previously having been filed with the Securities and Exchange Commission are incorporated herein by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and made a part hereof with the same effect as if filed herewith. Certain instruments relating to long-term debt of the Company and its subsidiaries have not been filed as exhibits since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of each such instrument to the Commission upon request. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ending December 31, 1998. 62 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 19, 1999. TRANSOCEAN OFFSHORE INC. /s/Robert L. Long By:__________________________________ Robert L. Long Senior Vice President 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 in the capacities indicated on March 19, 1999. Signature Title /s/ J. Michael Talbert Chairman of the Board and Chief Executive Officer (Principal Executive Officer) - ----------------------------------- J. Michael Talbert /s/ Robert L. Long Senior Vice President, Chief Financial Officer and Treasurer (Principal - ----------------------------------- Financial Officer) Robert L. Long /s/Barbara S. Koucouthakis Vice President and Controller (Principal Accounting Officer) - ----------------------------------- Barbara S. Koucouthakis * Director - ----------------------------------- Richard D. Kinder * Director - ----------------------------------- Ronald L. Kuehn, Jr. * Director - ----------------------------------- Robert J. Lanigan * Director - ----------------------------------- Max L. Lukens * Director - ----------------------------------- Martin B. McNamara * Director - ----------------------------------- Kristian Siem * Director - ----------------------------------- Fridtjof Lorentzen * Director, President and Chief Operating Officer - ----------------------------------- W. Dennis Heagney *By:/s/ Barbara S. Koucouthakis -------------------------------- Barbara S. Koucouthakis (Attorney-in-Fact)
63 EX-4.2 2 AMEND. TO SECURED CREDIT AGREEMENT EXHIBIT 4.2 FIRST AMENDMENT TO SECURED CREDIT AGREEMENT THIS FIRST AMENDMENT TO SECURED CREDIT AGREEMENT (this "Amendment") dated as of December 21, 1998, is by and among Transocean Enterprise Inc., a Delaware corporation (the "Borrower"), the lenders from time to time parties hereto (each a "Lender" and collectively, the "Lenders"), ABN AMRO Bank N.V. ("ABN AMRO"), a Netherlands chartered bank, as agent for the Lenders (in such capacity, the "Agent"), and Australia and New Zealand Banking Group Limited, Bank of Montreal, The Bank of Nova Scotia, Atlanta Agency, The Bank of Tokyo-Mitsubishi, Ltd., Houston Agency and Westdeutsche Landesbank Girozentrale, as co-agents for the Lenders (in such capacity, collectively, the "Co-Agents"). WITNESSETH WHEREAS, the Borrower, the Lenders, the Agent and the Co-Agents have entered into that certain Secured Credit Agreement dated as of January 17, 1997 (the "Credit Agreement"), pursuant to which the Lenders have made and agreed to make Loans to the Borrower; and WHEREAS, the Borrower, the Lenders, the Agent and the Co-Agents desire to amend the Credit Agreement as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Borrower, the Lenders, the Agent and the Co-Agents hereby agree as follows: 1. Amendments to Credit Agreement. (a) Section 1.1 of the Credit Agreement is hereby amended as follows: (i) The definition "Transocean Drillship Differential" is hereby deleted in its entirety. (ii) The definitions of "Acceptance Date" and "Conversion Date" are each hereby amended by deleting the date "December 31, 1998" in the last line thereof, respectively, and inserting in its place the date "August 31, 1999". (iii) The definition of "Amoco" is hereby amended by adding the following sentence at the end of such definition: "Should Amoco be succeeded by merger or consolidation, references in this Agreement to Amoco shall be deemed to be to the successor corporation or other entity." (iv) The definition of "Commitment" is hereby amended to add the clause ", including any Replacement Commitment" before the period at the end thereof. (v) The definition of "Construction Credit Commitment Amount" is hereby amended and restated in its entirety as follows: "'Construction Credit Commitment Amount' means an amount equal to $259,900,183.57 plus the Replacement Construction Credit Commitment Amount, if any, as such amount may be reduced from time to time pursuant to this Agreement." (vi) The definition of "Excess Cash Flow" is hereby amended by deleting the amount "$181,500" in the seventh line thereof and inserting in its place the amount "$181,000" and by deleting the clause "or to the extent the Borrower or the Guarantor funds the Transocean Drillship Differential (including, without limitation, pursuant to Section 1.4 of the Transocean Performance Guaranty)," in the twenty-seventh line thereof. (vii) The definition of "Maturity Date" is hereby amended and restated in its entirety as follows: "'Maturity Date' means (i) for the Tranche A Loans, August 31, 1999, or if earlier, the Conversion Date; (ii) for the portion of the Construction Loans (if any) which are not converted to Term Loans pursuant to the terms and conditions hereof, August 31, 1999, or if earlier, the Conversion Date; and (iii) for the Term Loans, the date five (5) years after the Conversion Date." (viii) The definition of "Percentage" is hereby amended and restated in its entirety as follows: "'Percentage' means, for each Lender at any time, a percentage (i) the numerator of which is the aggregate principal amount of the Loans held by such Lender at such time, subject to any assignments by such Lender of Loans pursuant to Section 10.10, and (ii) the denominator of which is the aggregate principal amount of all outstanding Loans made by the Lenders." (ix) The following definitions of "Replacement Commitment", "Replacement Construction Credit Commitment Amount", "Replacement Lender", "Replacement Tranche A Loan Amount" and "Substitution Date" are hereby added in the correct alphabetical order: "'Replacement Commitment' means the Commitment of any Lender (including any Replacement Lender) to make an additional Tranche A Loan and additional Construction Loans pursuant to Sections 2.1 and 2.2." "'Replacement Construction Credit Commitment Amount' means an amount up to $12,814,801.04 of Construction Loans committed to be made subject to the terms and conditions hereof (i) by a Lender in addition to its existing Construction Credit -2- Commitment set forth in Column C (Existing Construction Credit Commitments) in the attached Schedule 2.1 or (ii) by a Replacement Lender, if any; provided that if any portion of the Construction Loans is prepaid prior to the full amount of such commitment being made by one or more such Lenders or Replacement Lenders, as the case may be, such amount shall be reduced by a percentage (i) the numerator of which is the aggregate Construction Loans prepaid from and after December 21, 1998, and (ii) the denominator of which is the then existing Construction Credit Commitment Amount. 'Replacement Lender' means a commercial banking institution not subject to Regulation T of the Board of Governors of the Federal Reserve System which has a short-term rating of A-1 from S&P and P-1 from Moody's (unless otherwise agreed by the Agent, the Borrower and the Guarantor) and selected by the Borrower and the Guarantor with the prior written consent of the Agent (which shall not be unreasonably withheld or delayed) that becomes a party to this Agreement after December 21, 1998 (other than pursuant to Section 10.10), but before the Conversion Date and that makes a Tranche A Loan and a Construction Loan to the Borrower pursuant to Sections 2.1 and 2.2 that aggregate at least $5,000,000. Upon selection of a Replacement Lender by the Borrower and the Guarantor and its approval by the Agent and the execution of a writing among such parties setting forth the Replacement Commitment of a Replacement Lender, such Replacement Lender shall have the rights and obligations of a Lender hereunder and shall be a party to this Agreement without any further action by any other Person party hereto. 'Replacement Tranche A Loan Amount" means an amount up to $3,101,321.59 of Tranche A Loans committed to be made subject to the terms and conditions hereof (i) by a Lender in addition to its existing Tranche A Loan set forth in Column A (Existing Tranche A Loans) in the attached Schedule 2.1 or (ii) by a Replacement Lender, if any; provided that if any portion of the Tranche A Loans is prepaid prior to the full amount of such commitment being made by one or more such Lenders or Replacement Lenders, as the case may be, such amount shall be reduced by a percentage (i) the numerator of which is the aggregate Tranche A Loans prepaid from and after December 21, 1998, and (ii) the denominator of which is the aggregate principal amount of all outstanding Tranche A Loans made by the Lenders. The definition of 'Substitution Date' shall have the meaning ascribed to such term in the definition of Applicable Margin." (x) The definition of "Tranche A Credit Commitment Amount" is hereby amended and restated in its entirety as follows: "'Tranche A Credit Commitment Amount' means an amount equal to $62,898,678.42 plus the Replacement Tranche A Loan Amount, if any." (b) Section 2.1 of the Credit Agreement is hereby amended and restated in its entirety as follows: -3- "Section 2.1 Borrowings of Tranche A Loans. As of December 21, 1998, each existing Lender has severally and not jointly made to the Borrower a loan in the principal amount set forth in Column A (Existing Tranche A Loans) in the attached Schedule 2.1 (each a "Tranche A Loan"). Any such Lender may make, and following the execution of a writing among the Borrower, the Guarantor, the Agent and any such Lender setting forth a Replacement Commitment shall make, on the date of such Replacement Commitment, and any Replacement Lender shall make on the date it becomes a party to this Agreement, an additional Tranche A Loan to the Borrower in an amount agreed with the Borrower but not to exceed in the aggregate for all such additional Tranche A Loans the Replacement Tranche A Loan Amount, in each case (i) so long as such Lender or Replacement Lender, as applicable, makes a contemporaneous Construction Loan to the Borrower pursuant to Section 2.2 in an amount such that its Percentage of outstanding Tranche A Loans is equal to its Percentage of outstanding Construction Loans following such additional Tranche A Loan and such contemporaneous Construction Loan, and (ii) so long as any such additional Tranche A Loans are made before the Conversion Date." (c) Section 2.2 of the Credit Agreement is hereby amended and restated in its entirety as follows: "Section 2.2 Borrowings of Construction Loans. As of December 21, 1998, each existing Lender has severally and not jointly made to the Borrower loans in the aggregate principal amount set forth opposite its name in Column B (Existing Construction Loans) in the attached Schedule 2.1 (each a "Construction Loan"). Any such Lender which makes an additional Tranche A Loan pursuant to Section 2.1 and any Replacement Lender shall make on the date it makes such additional Tranche A Loan, a Construction Loan to the Borrower in proportion to its additional Tranche A Loan made pursuant to Section 2.1, such that its Percentage of outstanding Construction Loans following such additional Construction Loan is equal to its Percentage of all outstanding Tranche A Loans following such additional Tranche A Loan, but not to exceed in the aggregate for all such additional Construction Loans the Replacement Construction Credit Commitment Amount, in each case so long as any such additional Construction Loans are made before the Sizing Date. Prior to the Sizing Date, and subject to the other terms and conditions hereof, each Lender (including any Replacement Lender) severally and not jointly agrees to make one or more additional loans (also a "Construction Loan") to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding an amount equal to its Percentage of the Construction Credit Commitment Amount (for each Lender, its "Construction Credit Commitment"). By way of illustration only, if a Replacement Lender made a Replacement Commitment on December 21, 1998, to make an additional Tranche A Loan in the amount of $3,101,321.59 and to make Construction Loans in an aggregate amount of up to $12,814,801.04, it would make a Tranche A Loan of $3,101,321.59 and a Construction Loan of $6,118,517.83 (its Percentage of the Construction Credit Commitment Amount on such date) and it would have a Percentage of 4.6989720999% and a Construction Credit Commitment of $12,814,801.04 on such date. No Lender shall be permitted or required to make any Construction Loan if, after giving effect thereto, (i) the aggregate principal -4- amount of the Construction Loans of all Lenders would thereby exceed the Construction Credit Commitment Amount, or (ii) all Construction Loans of such Lender would thereby exceed the Percentage of such Lender of the Construction Credit Commitment Amount. Except as set forth above in this Section 2.2 with respect to the Replacement Construction Credit Commitment Amount, each Borrowing of Construction Loans shall be made ratably from the Lenders in proportion to their respective Percentages. Any portion of the Construction Credit Commitment not borrowed before the Sizing Date shall terminate and not be available for borrowing." (d) Section 2.3 of the Credit Agreement is hereby amended (i) by deleting the clause "depending upon the Amoco Contract Selection" in the sixth line thereof; (ii) by deleting the clause "less than all" in the eleventh line thereof and inserting in its place the clause "all or any portion"; and (iii) by adding the following sentence at the end thereof: "The Borrower may not convert all or any portion of the Construction Loans into Term Loans if the Borrower enters into a Lease Securitization Facility." (e) Section 2.7 of the Credit Agreement is hereby amended as follows: (i) Section 2.7(c)(i) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(c) Term Loans. (i) Initial Determination of Sizing of Term Loans and Amortization Dates. The Borrower shall repay a portion of the Tranche B Term Loans and a portion of the Tranche C Term Loans no later than the last Business Day of each calendar month, commencing (x) with respect to the Tranche B Term Loans, no later than the last Business Day of the first full calendar month after the Conversion Date, and (y) with respect to the Tranche C Term Loans, no later than the last Business Day of the calendar month as determined pursuant to the Sizing Methodology (as hereinafter defined) (each an "Amortization Date"). The Borrower shall repay in full the unpaid principal amount of the Tranche B Term Loans and the Tranche C Term Loans on the applicable Maturity Date for such Loans. By ten (10) Business Days before the Conversion Date (and/or the anticipated date of refinancing the Construction Loans (in whole or in part) by an anticipated Lease Securitization Facility) (the "Sizing Date"), the Agent shall, after consultation with the Borrower and the Guarantor, reasonably determine the relative size of each of the Tranche B Term Loans and the Tranche C Term Loans and the principal amount of each required payment of each of the Tranche B Term Loans and the Tranche C Term Loans on each Amortization Date, in each case using substantially the same methodology as used in preparing the model attached as Exhibit 2.7 (the "Sizing Methodology"), taking into account (without limitation and to the extent applicable) (w) any change in the date of Acceptance of the Drillship from June 30, 1999, (x) the outstanding principal balance of the Term Loans at the Conversion Date (limited to a maximum of $271,500,000), (y) the actual all-in interest rates under the Interest Rate -5- Protection Agreement entered into by the Borrower and the true-up costs determined pursuant to Section 6.10 after giving effect for the pre- Conversion Date true-up required therein, plus the appropriate Applicable Margins, and (z) any change in the Conversion Date from August 31, 1999. The required amortization payments for the Tranche B Term Loans shall be such that the Tranche B Term Loans (after taking into account the Fixed Operating Expenses attributable to each of the Rig and the Drillship) are fully amortized to $0 on the date five (5) years after the Conversion Date." (ii) Section 2.7(c)(ii) of the Credit Agreement is hereby amended by deleting the clause "and disregarding the portion of the Tranche C Term Loans attributable to the Transocean Drillship Differential" in the sixth line thereof. (iii) Section 2.7(c)(iii) of the Credit Agreement is hereby amended by deleting the clause "plus the Transocean Drillship Differential" in the eighth line thereof. (iv) Section 2.7(c)(iv) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(iv) Reset of Sizing of Term Loans, Amortization Payments, Transocean Contract Payments and Allocation of Amortization Payments between Rig and Drillship. The Agent shall, after consultation with the Borrower and the Guarantor, reset the sizing of the Tranche B Term Loans and the Tranche C Term Loans (keeping the aggregate principal amount of the Term Loans outstanding the same), the amortization payments for the Tranche B Term Loans and the Tranche C Term Loans, the rent payable under the Transocean Contracts, to the extent any such contract remains effective pursuant to the terms hereof, and the allocation of payments required on each Amortization Date between the Rig and the Drillship (all in accordance with the Sizing Methodology) within ten (10) Business Days from when (i) the Substitution Date with respect to a Substitute Contract shall have occurred, (ii) the Borrower provides evidence reasonably satisfactory to the Agent that Amoco is then required to pay under the terms and provisions of the applicable Amoco Contract the stated operating dayrate contained therein as opposed to any cancellation fee for the remaining term of such contract (or, if earlier, until the Maturity Date for the Term Loans), or (iii) if Amoco does not cancel the entire fourth year, the entire fifth year or the entire last eighteen (18) months, respectively, of the term of the Amoco Rig Contract (pursuant to the right to do so with no obligation to pay a cancellation fee (the "Free Cancellation Right")) prior to the commencement of the fourth year, fifth year or such last eighteen (18) month period, respectively, of the term of the Amoco Rig Contract. The Borrower shall provide written notice to the Agent of any event described in (iii) above, and the Agent shall promptly provide any such notice to all Lenders. The Agent shall, after consultation with the Borrower and the Guarantor, also reset downwards the rent payable under the Transocean Contracts, to the extent any such contract remains effective pursuant to the terms hereof, within ten (10) Business Days from any prepayment of the Tranche C Term Loans pursuant to Section 2.10 or 2.11, all in accordance with the Sizing Methodology and the principles set forth in Section 2.7(c)(ii)." -6- (v) Section 2.7(c)(v) of the Credit Agreement is hereby amended by deleting the second sentence thereof in its entirety and by deleting the clause "(labeled as Schedule 2.7A, Schedule 2.7B or amended Schedule 2.7B, as the case may be)" in the eleventh and twelfth lines thereof. (f) Section 2.10 and Section 2.11 of the Credit Agreement are hereby amended as follows: (i) Section 2.10(a), Section 2.10(b)(ii), Section 2.11(c) and Section 2.11(d) of the Credit Agreement are hereby amended to delete the sentence "The Borrower shall also pay any "true-up" costs and expenses payable to any Swap Parties as a result of such prepayment under the Interest Rate Protection Agreement as required pursuant to Section 6.10." in each of such Sections. (ii) Section 2.10(b)(ii)(x) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(x) make a principal prepayment of either (I) the Construction Loans in an amount equal to the aggregate of the Construction Loans hereunder used to construct the Drillship plus the portion of the Construction Loans that would otherwise be converted into Tranche C Loans on the Conversion Date if the Vessel Financing Termination is with respect to the Drillship, or in an amount equal to the aggregate of the Construction Loans hereunder used to purchase and upgrade the Rig if the Vessel Financing Termination is with respect to the Rig (the "Financed Amount"), as demonstrated to the reasonable satisfaction of the Agent, or (II) the Term Loans in an amount equal to the sum of the then unpaid portion of each remaining Drillship amortization payment or each remaining Rig amortization payment, as the case may be, as reflected on the schedule set or reset pursuant to Section 2.7(c)(v), plus in the event the Vessel Financing Termination is with respect to the Drillship, any remaining principal balance of the Tranche C Loans (such payments, as applicable, the "Vessel Amortization Payments"). (iii) Section 2.10(b)(iii) of the Credit Agreement is hereby amended by deleting the clause "(or, if the Amoco Contract Selection has not yet been made, ratably according to the relative sizes of such Financed Amounts at the time)" in the seventh line thereof. (iv) Section 2.11(g) of the Credit Agreement is hereby amended to add the following sentence at the end thereof: "Notwithstanding anything to the contrary contained in this Section 2.11(g), the applicable vessel and any related Collateral shall not be released from any Lien thereon under any Security Documents unless and until the Borrower shall have effected a "true-up" of the financial terms of the Interest Rate Protection Agreement or Agreements in effect at such time to the extent necessary to eliminate any over-hedged position at such time as a result of any such prepayments or, if no Default or Event of Default shall have occurred and be continuing under the Transocean Parent Credit Facility, the Borrower shall have assigned its rights -7- and obligations under such Interest Rate Protection Agreement or Agreements to the Guarantor to the extent of such prepayment pursuant to documentation in form and substance reasonably satisfactory to the affected Swap Party." (v) A new Section 2.11(h) of the Credit Agreement is hereby added in the correct numerical order: "(h) Drillship Dayrate Differential. If the stated operating dayrate (excluding any incentive or bonus rates) to be paid by Amoco pursuant to the terms of the Amoco Drillship Contract is less than $181,000 per day as a result of one or more agreements of the parties thereto to an incentive program, then the Borrower shall give prompt written notice thereof to the Agent (which the Agent will in turn forward promptly to the Lenders) and the Agent shall on or prior to the date ten (10) days after any such agreement becomes effective so as to reduce the operating day rate thereunder, after consultation with the Borrower and the Guarantor, reasonably determine the reduced size of the Tranche B Term Loans and the principal amount of each required payment of each Tranche B Loan on each remaining Amortization Date, in each case using the Sizing Methodology. The remaining required amortization payments for the Tranche B Term Loans shall be such that the Tranche B Term Loans (after taking into account the Fixed Operating Expenses attributable to each of the Rig and the Drillship) are fully amortized to $0 by the Maturity Date for the Tranche B Loans. The Borrower will, on or prior to the date fifteen (15) days after any such agreement becomes effective so as to reduce the operating dayrate thereunder, prepay the principal amount of the Tranche B Term Loans in an amount equal to the difference between the outstanding principal balance of the Tranche B Term Loans and such reduced size of the Tranche B Term Loans. Such mandatory prepayment shall be accompanied by a payment of all accrued and unpaid interest on the principal amount of the Tranche B Term Loans so prepaid and any applicable breakage fees and funding losses pursuant to Section 2.13." (g) Section 4.2 of the Credit Agreement is hereby amended as follows: (i) Section 4.2(i) of the Credit Agreement is hereby deleted in its entirety. (ii) Section 4.2(ii) of the Credit Agreement is hereby amended by deleting the date "December 31, 1998" in the third line thereof and inserting in its place the date "August 31, 1999". (h) Section 4.3(iv) of the Credit Agreement is hereby amended by deleting the letter "G" in the first and second lines thereof. (i) Section 4.4(iv)(D) of the Credit Agreement is hereby amended and restated in its entirety as follows: -8- "(D) (x) neither the Borrower nor the Guarantor has received written notice from or on behalf of Amoco that (x) any default or event of default (in each case, as defined in the relevant Amoco Contract) under either of the Amoco Contracts has occurred and any such alleged default or event of default is continuing (it being understood and agreed that such default or event of default shall cease to be "continuing" for the purposes of this Agreement when it shall cease to constitute a continuing default or event of default under the applicable Amoco Contract for any reason (including, without limitation, as a result of the curing thereof or any waiver or modification thereunder)), (y) Amoco intends to take or has taken any steps to cancel or terminate either of the Amoco Contracts (other than, with respect to the Amoco Rig Contract, if a cancellation fee or termination fee is to be paid pursuant to the terms thereof or other than the free cancellation provided in such contract), or (z) either of the Amoco Contracts is otherwise no longer in full force and effect; and (y) the Borrower is not aware, of any default or event of default under either of the Amoco Contracts that has occurred and is continuing (it being understood and agreed that such default or event of default shall cease to be "continuing" for the purposes of this Agreement when it shall cease to constitute a continuing default or event of default under the applicable Amoco Contract for any reason (including, without limitation, as a result of the curing thereof or any waiver or modification thereunder)); and" (j) Section 5.5(b) of the Credit Agreement is hereby amended by deleting the letter "G" in the third line thereof. (k) A new Section 5.20 of the Credit Agreement is hereby added in the correct numerical order: "Section 5.20 Year 2000. The Borrower has reviewed the areas within its business and operations which could reasonably be expected to be materially and adversely affected by, and the Guarantor has developed or is developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by the Guarantor and the Borrower may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), has made or is making related inquiry of material suppliers and vendors, and based on such review and program, the Borrower believes that the "Year 2000 Problem" will not have a Material Adverse Effect. The foregoing statement constitutes "year 2000 readiness disclosure" as such term is defined in the Year 2000 Information and Readiness Disclosure Act." (l) Section 6.6 of the Credit Agreement is hereby amended as follows: (i) Section 6.6(a) of the Credit Agreement is hereby amended by adding the clause "shall be reasonably acceptable to the Agent and" after the word "policies" in the third to last line thereof. -9- (ii) Section 6.6(b) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(b) Loss of Hire. From and after the Conversion Date and during the term of the Amoco Contract or any Substitute Contract with respect to the Drillship and the Rig, respectively, the Borrower shall maintain loss of hire insurance for a period of at least eighteen (18) months (or, if less, for the then remaining scheduled term of such Amoco Contract or Substitute Contract, as the case may be) and in an amount equal to at least $137,000 (reduced by the amount of any reduction in the stated operating dayrate to be paid by Amoco under the Amoco Drillship Contract to the extent the Borrower, as a result of such reduction, is required to make a prepayment of the Tranche B Term Loans pursuant to Section 2.11(h)) per day with respect to the Drillship and $68,600 (or $50,000, if the operating dayrate is reduced to $75,000 per day pursuant to the terms of the Amoco Rig Contract) per day with respect to the Rig for such period (subject to a maximum ninety (90) day deductible). If the Borrower shall make a mandatory prepayment of its Obligations of the Financed Amount or the remaining Vessel Amortization Payments for either the Drillship or the Rig as provided in Section 2.10(b) or 2.11(c), as applicable, together with all other amounts required to be paid therein, the Borrower shall no longer be required to maintain loss of hire insurance with respect to the affected vessel. Such loss of hire policy shall be reasonably acceptable to the Agent, shall name the Collateral Agent as a named assured and a loss payee and shall provide it shall not terminate without at least thirty (30) days' advance written notice to the Collateral Agent." (iii) The second and third sentences of Section 6.6(c) of the Credit Agreement are hereby amended and restated in their entirety as follows: "As used herein, the term "Insurance Reserve Required Amount" shall mean, at any date of computation, an amount equal to the aggregate of $137,000 (reduced by the amount of any reduction in the stated operating dayrate to be paid by Amoco under the Amoco Drillship Contract to the extent the Borrower, as a result of such reduction, is required to make a prepayment of the Tranche B Term Loans pursuant to Section 2.11(h)) with respect to the Drillship and $68,600 (or $50,000, if the operating dayrate is reduced to $75,000 per day pursuant to the terms of the Amoco Rig Contract) with respect to the Rig times the number of days in the period of any deductible under the applicable loss of hire policy or policies maintained by the Borrower pursuant to Section 6.6(b), subject to reduction as set forth herein. If the Borrower shall make a mandatory prepayment of its Obligations of the Financed Amount or the remaining Vessel Amortization Payments for either the Drillship or the Rig as provided in Section 2.10(b) or 2.11(c), as applicable, together with all other amounts required to be paid therein, the Insurance Reserve Required Amount shall permanently be reduced by a percentage, the numerator of which is the product of (i) either $137,000 (reduced by the amount of any reduction in the stated operating dayrate to be paid by Amoco under the Amoco Drillship Contract to the extent the Borrower, as a result of such reduction, is required to make a prepayment of the Tranche B Term Loans pursuant to Section 2.11(h)) with respect to the Drillship or $68,600 (or $50,000, if the -10- operating dayrate is reduced to $75,000 per day pursuant to the terms of the Amoco Rig Contract) with respect to the Rig, whichever is applicable, times (ii) the number of days in the period of any deductible under the loss of hire policy then in effect for the applicable vessel, and the denominator of which is the Insurance Reserve Required Amount immediately in effect before such prepayment (provided that if neither an Amoco Contract nor a Substitute Contract is then in effect with respect to the applicable vessel, all of the foregoing shall be determined, on a pro forma basis, if necessary, as of the Conversion Date) (the "Vessel Percentage")." (m) Section 6.7 of the Credit Agreement is hereby amended as follows: (i) Section 6.7(b) of the Credit Agreement is hereby amended by deleting the word "and" in the sixth line thereof and inserting in its place a ";" and by inserting the clause "; and (iii) stating that the Year 2000 remediation efforts of the Borrower are proceeding as scheduled" at the end thereof. (ii) Section 6.7(c) of the Credit Agreement is hereby amended by adding the clause "and each 'management letter' submitted to the Borrower by its independent accountants or auditors and any report by any regulator regarding the Year 2000 exposure, program or progress of the Guarantor and its Subsidiaries" at the end thereof. (n) Section 6.10 of the Credit Agreement is hereby amended by deleting the second to the last sentence thereof and inserting the following sentence in its place: "If an Event of Default shall have occurred and be continuing and the Majority Lenders shall have elected to take action with respect thereto (unless not required hereunder because of an insolvency event), the Borrower shall also in the same manner effect a "true-up" of the financial terms of the Interest Rate Protection Agreement or Agreements in effect at such time to the extent necessary to eliminate any over-hedged position at such time as a result of any prior optional or mandatory prepayment of the Obligations." (o) Section 6.13 of the Credit Agreement is hereby amended by deleting the clause "$8,300,000, subject to reduction as set forth herein" in the fourth line thereof and inserting in its place the clause "(i) $20,630,000 during the ninety (90) day period immediately following the Conversion Date, and (ii) $8,300,000 thereafter, in each case subject to reduction as set forth herein; provided, however, that for purposes of the calculation in the proviso to the next sentence, any amounts deposited by the Borrower into the Cash Flow Reserve up to $12,330,000 in the aggregate during the period that the Cash Flow Reserve Amount is $20,630,000 shall not be counted as having been previously so deposited once the Cash Flow Reserve Amount is reset to $8,300,000". (p) Section 6.15(d) of the Credit Agreement is hereby amended by deleting the clause "or to fund the Transocean Drillship Differential" in the twelfth line thereof. -11- (q) Section 6.18 of the Credit Agreement is hereby amended as follows: (i) Section 6.18(b) of the Credit Agreement is hereby amended by deleting the letter "(x)" in the twelfth line thereof and by deleting the clause "and (y) the anticipated increases in the aggregate construction cost of the Drillship and the Rig (excluding capitalized interest) as a result of all such amendments, modifications or changes of the Functional Requirements after the date hereof shall not exceed $66,000,000" in the thirteenth line thereof. (ii) Section 6.18(c) of the Credit Agreement is hereby amended by deleting the date "December 31, 1998" in the eighth line thereof and inserting in its place the date "August 31, 1999" and by deleting the clause "(x) aggregate less than $66,000,000 in the aggregate for the Drillship and the Rig (excluding capitalized interests and (y) does" in the eighth line thereof and inserting in its place the word "do". (r) Section 7.1(o) of the Credit Agreement is hereby amended by adding the letter "(i)" after the word "as" in the sixth line thereof and by adding the clause ", (ii) the Borrower has effected a "true-up" of the financial terms of the Interest Rate Protection Agreement or Agreements in effect at such time to the extent necessary to eliminate any over-hedged position at such time as a result of any prior optional or mandatory prepayment of the Obligations and (iii) the stated operating dayrate reduction described in Section 2.11(h) shall not have occurred, or if such event shall have occurred, the Borrower or the Guarantor shall have made the mandatory prepayment required in Section 2.11(h) as a result thereof" before the semicolon in the last line thereof. (s) The new Exhibit 2.7 attached hereto is hereby substituted for the Exhibit 2.7 previously attached to the Credit Agreement. Schedule 2.7 previously attached to the Credit Agreement is hereby deleted in its entirety. 2. Percentages and Commitments of Lenders. On the date hereof, (i) the Borrower shall make a non-pro rata repayment of the outstanding aggregate principal amount of the Tranche A Loan of $3,101,321.59 and the Construction Loan of $6,118,517.83 made by Societe Generale, Southwest Agency ("SocGen"), together with all accrued and unpaid interest thereon and any applicable breakage fees and funding losses pursuant to Section 2.13, such that SocGen shall no longer be a Lender under the Credit Agreement; (ii) Chase Bank of Texas, National Association shall purchase the rights and obligations of, and the Loans made by, The Sumitomo Bank Limited ("Sumitomo") under the Credit Agreement pursuant to an Assignment Agreement and Section 10.10 of the Credit Agreement, and the Borrower shall pay to Sumitomo any breakage fees and funding losses pursuant to Section 2.13 in connection therewith; and (iii) the Construction Credit Commitments and the Percentages of the Lenders as of December 21, 1998 (after giving effect to the events described in (i) and (ii) above) are as set forth in Columns C and D of Schedule 2.1. The Percentage of each Lender shall change to the extent any existing Lender or any Replacement Lender makes a Replacement Commitment. By way of illustration only, the Percentage of each existing Lender shall be as set forth in Column E of Schedule 2.1 if the full amount of the -12- Replacement Tranche A Loan Amount and the Replacement Construction Credit Commitment Amount is committed to be funded by any such Lender and/or any Replacement Lender. 3. Reaffirmation of Representations and Warranties. To induce the Lenders, the Agent and the Co-Agents to enter into this Amendment, the Borrower hereby reaffirms, as of the date hereof, that its representations and warranties contained in the Credit Agreement are true and correct in all material respects (except to the extent such representations and warranties are not so true and correct in all material respects as a result of the transactions expressly permitted under the Credit Agreement or under the other Credit Documents, or relate solely to an earlier date) and additionally represents and warrants as follows: (i) The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of its obligations under this Amendment and the Credit Agreement, as amended hereby, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action of the Borrower and do not and will not contravene in any material respect any provision of applicable law or contravene or conflict with any provision of the certificate of incorporation, bylaws or any material agreements binding upon the Borrower, and the execution and delivery by the Borrower of this Amendment have received all necessary governmental approvals or other consents (if any shall be required); (ii) This Amendment and the Credit Agreement, as amended hereby, are legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and equitable principles; (iii) There are no actions, suits, proceedings or counterclaims (including, without limitation, derivative or injunctive actions) pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which purports to affect the legality, validity or enforceability of this Amendment, the Credit Agreement, as amended hereby, or any other Credit Document; and (iv) No Default or Event of Default has occurred and is continuing (after giving effect to this Amendment). 4. Reaffirmation of Credit Agreement. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in the Credit Agreement and the other Credit Documents (excluding this Amendment) shall hereafter be deemed to refer to the Credit Agreement, as amended hereby. The parties hereto hereby undertake, in good faith, to amend any other Credit Documents necessary so as to reflect the agreements of the parties set forth in this Amendment. -13- 5. Defined Terms. Terms used but not defined herein when defined in the Credit Agreement shall have the same meanings herein unless the context otherwise requires. 6. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to receipt by the Agent of the following documents, all in form and substance satisfactory to the Agent: (i) Transocean Performance Guaranty. The duly executed Second Amended and Restated Transocean Performance Guaranty in substantially the form of Exhibit A (the "Guaranty"); (ii) Certificates. A certificate of the Secretary or Assistant Secretary and the President or Vice President of the Borrower and the Guarantor containing specimen signatures of the Persons authorized to execute this Amendment or the Guaranty, as applicable, on such Person's behalf, together with (i) a copy of resolutions of the Board of Directors of such Person authorizing the execution and delivery of this Amendment or the Guaranty, as applicable, and all other legal documents or proceedings taken by such Person in connection herewith or therewith, and (ii) copies of any amendments to the certificate of incorporation or bylaws of the Borrower or the Guarantor, as applicable, after August 5, 1998; (iii) Opinion of Counsel. The opinion of Eric B. Brown, Esq., General Counsel to the Guarantor, with respect to this Amendment, the Amoco Contracts and the Transocean Contracts; and (iv) Other Documents. Such other documents as the Agent may reasonably request. 7. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. (a) This Amendment and the other Credit Documents, and the rights and duties of the parties hereto and thereto, shall be construed in accordance with and governed by the internal laws of the state of New York. (B) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HERETO AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AMENDMENT OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE CO-AGENTS, THE LENDERS OR THE BORROWER MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE -14- OF NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS, BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OF NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AMENDMENT AND THE OTHER CREDIT DOCUMENTS. (C) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT, THE CREDIT AGREEMENT, ANY OTHER CREDIT DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT, THE CREDIT AGREEMENT, ANY OTHER CREDIT DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 8. Counterparts. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, each of which when executed shall be deemed an original, but all such counterparts taken together shall constitute one and the same agreement. 9. Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition -15- or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Headings. Section headings used in this Amendment are for reference only and shall not affect the construction of this Amendment. 11. Notice of Entire Agreement. This Amendment, together with the other Credit Documents, constitute the entire understanding among the Borrower, the Lenders, the Agent and the Co-Agents and supersede all earlier or contemporaneous agreements, whether written or oral, concerning the subject matter of the Credit Documents. THIS WRITTEN AMENDMENT, TOGETHER WITH THE OTHER CREDIT DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -16- IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Secured Credit Agreement as of the date first written above. BORROWER: TRANSOCEAN ENTERPRISE INC., a Delaware corporation By: /s/ Robert L. Long --------------------------------- Name: Robert L. Long ------------------------------- Title: Senior Vice President ------------------------------ LENDERS: ABN AMRO BANK N.V., as Agent, Collateral Agent and as a Lender By: /s/ Stuart Murray --------------------------------- Name: Stuart Murray ------------------------------- Title: Vice President ------------------------------ By: /s/ W. Bryan Chapman --------------------------------- Name: W. Bryan Chapman ------------------------------- Title: Group Vice President ------------------------------ AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED, as Co-Agent and as a Lender By: /s/ P. Couch --------------------------------- Name: P. Couch ------------------------------- Title: Vice President ------------------------------ -17- BANK OF MONTREAL, as Co-Agent and as a Lender By: /s/ Mary Lee Latta ------------------------------------- Name: Mary Lee Latta ----------------------------------- Title: Director ---------------------------------- THE BANK OF NOVA SCOTIA, ATLANTA AGENCY, as Co-Agent and as a Lender By: /s/ F.C.H Ashby ------------------------------------- Name: F.C.H Ashby ----------------------------------- Title: Senior Manager Loan Operations ---------------------------------- THE BANK OF TOKYO-MITSUBISHI, LTD., HOUSTON AGENCY, as Co-Agent and as a Lender By: /s/ Michael G. Weiss ------------------------------------- Name: Michael G. Weiss ----------------------------------- Title: VP and Manager ---------------------------------- WESTDEUTSCHE LANDESBANK GIROZENTRALE, as Co-Agent and as a Lender By: /s/ Richard R. Newman ------------------------------------- Name: Richard R. Newman ----------------------------------- Title: Director ---------------------------------- By: /s/ J. Bernan ------------------------------------- Name: J. Berman ----------------------------------- Title: Director ---------------------------------- -18- BAYERISCHE HYPO- UND VEREINSBANK AG, New York Branch, as a Lender By: /s/ Yoaam Dankner --------------------------------- Name: Yoaam Dankner ------------------------------- Title: Managing Director ------------------------------ By: /s/ Steven Atwell --------------------------------- Name: Steven Atwell ------------------------------- Title: Director ------------------------------ CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as a Lender By: /s/ Ki Allen --------------------------------- Name: Ki Allen ------------------------------- Title: Vice President ------------------------------ SUNTRUST BANK, ATLANTA, as a Lender By: /s/ John A. Fields Jr. --------------------------------- Name: John A. Fields Jr. ------------------------------- Title: First Vice President ------------------------------ By: /s/ Steven J. Newby --------------------------------- Name: Steven J. Newby ------------------------------- Title: Corporate Banking Officer ------------------------------ -19- DEUTSCHE BANK AG IN HAMBURG, as a Lender By: /s/ Wagner --------------------------------- Name: Wagner ------------------------------- Title: Senior Vice President ------------------------------ By: /s/ Ehrhardt --------------------------------- Title: Ehrhardt ------------------------------ Senior Vice President ------------------------------ THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By: /s/ Helen A. Carr --------------------------------- Name: Helen A. Carr ------------------------------- Title: Vice President ------------------------------ THE BANK OF NEW YORK, as a Lender By: /s/ Ian K. Stewart --------------------------------- Name: Ian K. Stewart ------------------------------- Title: Senior Vice President ------------------------------ DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, CAYMAN ISLAND BRANCH, as a Lender By: /s/ William G. Roos --------------------------------- Name: William G. Roos ------------------------------- Title: Senior Vice President ------------------------------ By: /s/ Karen A. Birnkman --------------------------------- Name: Karen A. Birnkman ------------------------------- Title: Vice President ------------------------------ -20- ROYAL BANK OF CANADA, as a Lender By: /s/ Gil J. Benard --------------------------------- Name: Gil J. Benard ------------------------------- Title: Senior Manager ------------------------------ KBC BANK, N.V., as a Lender By: /s/ Robert Snauffer --------------------------------- Name: Robert Snauffer ------------------------------- Title: First Vice President ------------------------------ By: /s/ Marcel Claes --------------------------------- Name: Marcel Claes ------------------------------- Title: Deputy General Manager ------------------------------ THE ROYAL BANK OF SCOTLAND plc, as a Lender By: /s/ Scott Barton --------------------------------- Name: Scott Barton ------------------------------- Title: Vice President ------------------------------ -21- SCHEDULE 2.1 TO SECURED CREDIT AGREEMENT
(A)* (B)* (C)* (D)* (E) EXISTING EXISTING EXISTING EXISTING PERCENTAGE IF FULL LENDERS TRANCHE A CONSTRUCTION CONSTRUCTION PERCENTAGE AMOUNT OF POTENTIAL LOANS LOANS CREDIT REPLACEMENT COMMITMENT COMMITMENTS COMMITTED TO - --------------------------------------------------------------------------------------------------------------------------------- ABN AMRO Bank N.V. $ 7,656,387.66 $ 15,105,090.88 $ 31,636,540.06 12.1725731861% 11.6005873657% - ---------------------------------------------------------------------------------------------------------------------------- Bayerische Hypo- und Vereinsbank $ 7,773,733.78 $ 15,336,600.03 $ 32,121,419.50 12.3591369045% 11.7783845100% AG, New York Branch - ---------------------------------------------------------------------------------------------------------------------------- Australia and New Zealand Banking $ 4,845,814.98 $ 9,560,184.11 $ 20,023,126.62 7.7041602463% 7.3421439061% Group Limited - ---------------------------------------------------------------------------------------------------------------------------- Bank of Montreal $ 4,845,814.98 $ 9,560,184.11 $ 20,023,126.62 7.7041602463% 7.3421439061% - ---------------------------------------------------------------------------------------------------------------------------- The Bank of Nova Scotia, Atlanta $ 4,845,814.98 $ 9,560,184.11 $ 20,023,126.62 7.7041602463% 7.3421439061% Agency - ---------------------------------------------------------------------------------------------------------------------------- The Bank of Tokyo-Mitsubishi, Ltd. $ 4,845,814.98 $ 9,560,184.11 $ 20,023,126.62 7.7041602463% 7.3421439061% - ---------------------------------------------------------------------------------------------------------------------------- Westdeutsche Landesbank $ 4,845,814.98 $ 9,560,184.11 $ 20,023,126.62 7.7041602463% 7.3421439061% Girozentrale - ---------------------------------------------------------------------------------------------------------------------------- KBC Bank, N.V. $ 3,886,866.89 $ 7,668,300.02 $ 16,060,709.75 6.1795684523% 5.8891922550% - ---------------------------------------------------------------------------------------------------------------------------- Deutsche Bank AG in Hamburg $ 3,101,321.59 $ 6,118,517.83 $ 12,814,801.04 4.9306625577% 4.6989720999% - ---------------------------------------------------------------------------------------------------------------------------- The First National Bank of Chicago $ 3,101,321.59 $ 6,118,517.83 $ 12,814,801.04 4.9306625577% 4.6989720999% - ---------------------------------------------------------------------------------------------------------------------------- Suntrust Bank, Atlanta $ 3,101,321.59 $ 6,118,517.83 $ 12,814,801.04 4.9306625577% 4.6989720999% - ---------------------------------------------------------------------------------------------------------------------------- Chase Bank of Texas, National $ 2,295,346.48 $ 4,528,430.22 $ 9,484,475.43 3.6492761583% 3.4777976899% Association - ---------------------------------------------------------------------------------------------------------------------------- The Bank of New York $ 1,938,325.99 $ 3,824,073.64 $ 8,009,250.65 3.0816640985% 2.9368575624% - ---------------------------------------------------------------------------------------------------------------------------- DG Bank Deutsche Genossenschaftsbank, Cayman Island Branch $ 1,938,325.99 $ 3,824,073.64 $ 8,009,250.65 3.0816640985% 2.9368575624% - ---------------------------------------------------------------------------------------------------------------------------- Royal Bank of Canada $ 1,938,325.99 $ 3,824,073.64 $ 8,009,250.65 3.0816640985% 2.9368575624% - ---------------------------------------------------------------------------------------------------------------------------- Royal Bank of Scotland plc $ 1,938,325.99 $ 3,824,073.64 $ 8,009,250.65 3.0816640985% 2.9368575624% - ---------------------------------------------------------------------------------------------------------------------------- Replacement Lender 0 0 0 0 4.6989720999% - ---------------------------------------------------------------------------------------------------------------------------- TOTAL $62,898,678.42 $124,091,189.78 $259,900,183.57 100% 100% - ----------------------------------------------------------------------------------------------------------------------------
*As of December 18, 1998 -22- EX-21 3 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF TRANSOCEAN OFFSHORE INC. JANUARY 31, 1999
NAME* JURISDICTION - ---- ------------ Offshore Petroleum Services LDC Cayman Islands Sonat Offshore Far East LDC Cayman Islands Sonat Offshore International LDC Cayman Islands Transocean Offshore Limited Cayman Islands Transocean Offshore International Limited Cayman Islands Transocean Offshore (North Sea) Limited Cayman Islands Transocean Offshore Services Ltd. Cayman Islands Transocean Alaskan Ventures Inc. Delaware Transocean-Nabors Drilling Technology LLC (50%) Delaware Transocean Drilling Services Inc. Delaware EPN-Sonat, S.A. de C.V. (50%) Mexico Offshore Turnkey Ventures (partnership) (50%) Texas Offshore Turnkey Ventures L.L.C. (50%) Delaware Transocean Enterprise Inc. Delaware Transocean Offshore Drilling International Inc. Delaware Transocean Offshore Drilling Services Inc. Delaware Transocean Offshore D.V. Inc Delaware DeepVision L.L.C. (50%) Delaware Transocean Offshore Norway Inc. Delaware Transocean Offshore USA Inc. Delaware Transocean Offshore Ventures Inc. Delaware Transocean Offshore (U.K.) Inc. Delaware Transocean Offshore Caribbean Sea, L.L.C. Delaware Transocean Hull No. 276 S. de R. L. Panama Transocean Hull No. 277 S. de R. L. Panama Sonat Offshore S.A. Panama Asie Sonat Offshore Sdn. Bhd. Malaysia Sonat Brasocean Servicos de Perfuracoes Ltda. Brazil Sonat Offshore do Brasil Perfuracoes Maritimos Ltda. Brazil Transocean Brasil Ltda. Brazil Transocean Offshore Nigeria Ltd. Nigeria Transhav AS Norway (see page 2 for subsidiaries of Transhav AS)
_____________________________ * Subsidiaries (50% or greater ownership) are owned 100% unless otherwise indicated. 1 SUBSIDIARIES OF TRANSOCEAN OFFSHORE INC. JANUARY 31, 1999
NAME JURISDICTION - ---- ------------ Transhav AS Norway Transocean ASA Norway Transocean Petroleum Technology AS Norway Transocean Petroleum Technology Ltd. U.K. Transocean I AS Norway Transocean Drilling (U.S.A.) Inc. (formerly Wilrig (U.S.A.) Inc.) Texas Transocean Drilling Co. Inc. Panama Transocean Drilling ApS Denmark Transocean Drilling Netherlands Ltd. Bahamas Transocean Drilling (Nigeria) Ltd. Nigeria Transnor Rig Ltd. U.K. SDS Offshore Ltd. U.K. Transocean Drilling Ltd. U.K. Shelf Drilling Ltd. U.K. Transocean Kan Tan Ltd. U.K. Transocean Sino Ltd. U.K. Wilrig Offshore (UK) Ltd. U.K. Wilrig Holdings (UK) Ltd. U.K. Wilrig (UK) Ltd. U.K. Wilrig Drilling (Canada) Inc. Canada SDS Offshore AS Norway Wilrig Offshore Bahamas Inc. Bahamas Transocean Drilling GmbH Germany Pelerin Drilling AS Norway Dynamic Drilling (partnership) (80%) Marshall Isl.
2 EX-23 4 CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-59001 and Form S-3 No. 333-24457) of Transocean Offshore Inc. and in the related Prospectus and to the incorporation by reference in the Registration Statements (Form S-8 No. 333-58211, Form S-8 No. 33-64776 and Form S-8 No. 333-12475) pertaining to the Long Term Incentive Plan of Transocean Offshore Inc. (formerly Sonat Offshore Drilling Inc.), the Registration Statement (Form S-8 No. 33-66036) pertaining to the Savings Plan of Transocean Offshore Inc. (formerly Sonat Offshore Drilling Inc.) and the Registration Statement (Form S-8 No. 333-24457) pertaining to the Employee Stock Purchase Plan of Transocean Offshore Drilling Inc. of our report dated January 26, 1999, with respect to the consolidated financial statements of Transocean Offshore Inc. included in the Form 10-K for the year ended December 31, 1998. /s/ Ernst & Young LLP Houston, Texas March 18, 1999 EX-24 5 POWER OF ATTORNEY EXHIBIT 24 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Robert L. Long, Eric B. Brown, Barbara S. Koucouthakis and Nicolas J. Evanoff, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 4th day of February, 1999. /s/ W. Dennis Heagney 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Richard D. Kinder 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Ronald L. Kuehn Jr. 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Robert J. Lanigan 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Fridtjof Lorentzen 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Max L. Lukens 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 11th day of February, 1999. /s/ Martin B. McNamara 1998 Form 10-K TRANSOCEAN OFFSHORE INC. Power of Attorney ----------------- WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder, an annual report on Form 10-K for the fiscal year ended December 31, 1998, together with any and all exhibits and other instruments and documents necessary, advisable or appropriate in connection therewith (the "Form 10-K"); NOW, THEREFORE, the undersigned, in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint J. Michael Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, the Form 10-K and any and all amendments thereto, including any and all exhibits and other instruments and documents said attorney or attorneys shall deem necessary, appropriate or advisable in connection therewith, and to file the same with the Commission and to appear before the Commission in connection with any matter relating thereto. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts that said attorneys and each of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of the 10th day of February, 1999. /s/ Kristian Siem EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 69,453 54,225 0 0 217,494 199,716 0 0 0 0 361,632 307,090 2,659,020 2,113,462 530,949 445,488 3,250,943 2,755,088 192,421 185,192 813,953 728,282 0 0 0 0 1,043 1,037 1,977,600 1,620,141 3,250,943 2,755,088 0 0 1,089,612 891,962 0 0 629,340 674,486 0 0 0 0 23,892 22,853 487,146 207,245 143,730 65,312 343,416 141,933 0 0 0 0 0 0 343,416 141,933 3.43 1.40 3.41 1.38
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