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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
Commission file number 1-7746
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TRANSOCEAN SEDCO FOREX INC.
(Exact name of registrant as specified in its charter)
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Cayman Islands N/A
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 Greenway Plaza
Houston, Texas 77046
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (713) 232-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of class Exchange on which registered
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Ordinary Shares, par value $0.01 per share 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 29, 2000, 210,247,625 ordinary shares were outstanding and
the aggregate market value of such shares held by non-affiliates was
approximately $8.2 billion (based on the reported closing market price of the
ordinary shares on such date of $39 7/16 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, 1999,
for its 2000 annual general meeting of shareholders are incorporated by
reference into Part III of this Form 10-K.
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TRANSOCEAN SEDCO FOREX INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
Item Page
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PART I
Items 1 through 4
Item 1. Business...................................................... 1
Recent Developments........................................... 1
Merger of Transocean Offshore Inc. and Sedco Forex............ 1
Background of Transocean Offshore Inc. and Sedco Forex........ 2
Drilling Rig Types............................................ 2
Fleet Additions and Upgrades.................................. 4
Fleet Status.................................................. 4
Drilling Services............................................. 7
Drilling Contracts............................................ 7
Significant Clients........................................... 8
Industry Conditions and Competition........................... 8
Markets....................................................... 9
Operating Risks............................................... 9
International Operations...................................... 10
Regulation.................................................... 10
Employees..................................................... 11
Item 2. Properties.................................................... 12
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Executive Officers of the Registrant.......................... 14
PART II
Items 5 through 9
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters...................................................... 16
Item 6. Selected Combined Financial Data.............................. 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 17
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
and Financial Disclosure..................................... 58
PART III
Items 10 through 13
Item 10. Directors and Executive Officers of the Registrant............ 58
Item 11. Executive Compensation........................................ 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 58
Item 13. Certain Relationships and Related Transactions................ 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................................................ 58
PART I
ITEM 1. Business
On December 31, 1999, Transocean Sedco Forex Inc. (together with its
subsidiaries and predecessors, unless the context requires otherwise, the
"Company") completed its merger with Sedco Forex Holdings Limited ("Sedco
Forex"), the former offshore contract drilling business of Schlumberger.
Effective upon the merger, the Company changed its name from "Transocean
Offshore Inc." to "Transocean Sedco Forex Inc." The merger followed the spin-
off of Sedco Forex to Schlumberger shareholders on December 30, 1999. As a
result of the merger, Schlumberger shareholders exchanged all of the Sedco
Forex shares distributed to them by Schlumberger in the Sedco Forex spin-off
for ordinary shares of the Company, and Sedco Forex became a wholly owned
subsidiary of the Company.
The Company is a leading international provider of offshore contract
drilling services for oil and gas exploration, development and production. As
of March 1, 2000, the Company owns, has partial ownership interests in,
operates or has under construction 73 mobile offshore drilling units. The
Company's active fleet includes 12 high-specification semisubmersibles, 31
second- and third-generation semisubmersibles, one ultra-deepwater Discoverer
Enterprise-class drillship, four other drillships, 16 jackup rigs and three
tenders. The Company also has under construction two additional Discoverer
Enterprise-class drillships, the Discoverer Spirit and the Discoverer Deep
Seas; three Sedco Express-class semisubmersibles, the Sedco Express, Sedco
Energy and Cajun Express; and one independent-leg cantilevered jackup rig, the
Trident 20. In addition to the 73 mobile offshore drilling units, the fleet
includes one multi-purpose service jackup rig, six swamp barges and two land
drilling rigs.
The Company's core business is to contract these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
The Company specializes in technically demanding segments of the offshore
drilling business with a particular focus on deepwater and harsh environment
drilling services. The Company also provides additional services, including
international turnkey drilling and management of third-party well service
activities. The Company's ordinary shares are listed on the New York Stock
Exchange under the symbol "RIG".
Transocean Sedco Forex Inc. is a Cayman Islands corporation with offices
located at 4 Greenway Plaza, Houston, Texas 77046. Its telephone number at
that address is (713) 232-7500.
Recent Developments
The Company and Amoco Production Company, a unit of BP Amoco plc, agreed to
terminate the drilling contract for the semisubmersible Transocean Amirante
effective January 4, 2000 and cancel the remaining 14 months of firm contract
time on the rig for a cash settlement of approximately $25 million. The
Transocean Amirante is currently idle in the U.S. Gulf of Mexico.
The Company sold its coiled tubing drilling services business, Transocean
Petroleum Technology, to Schlumberger for approximately $25 million. The sale
closed February 29, 2000 and included 11 coiled tubing units in the United
Kingdom and Norwegian sectors of the North Sea. The Company excluded from the
sale its coiled tubing joint venture, Transocean-Nabors Drilling Technology
LLC, and its drilling services joint venture with Baker Hughes Incorporated,
Deep Vision L.L.C.
Merger of Transocean Offshore Inc. and Sedco Forex
In the merger, Schlumberger shareholders received 0.1936 ordinary shares of
the Company for each share of capital stock of Sedco Forex distributed in the
spin-off of Sedco Forex. The Company issued 109,419,166 ordinary shares to
Schlumberger shareholders in the merger, and issued an additional 145,102
ordinary shares that were sold on the market for cash paid in lieu of
fractional shares. These aggregate issuances of 109,564,268
1
shares constituted approximately 52% of outstanding Company shares immediately
following the merger. The Company has accounted for the merger using the
purchase method of accounting, with Sedco Forex as the acquiror for accounting
purposes.
On December 31, 1999 following the merger, Sedco Forex repaid indebtedness
to Schlumberger in the aggregate amount of $303.6 million with the proceeds of
an intercompany loan from the Company to Sedco Forex. The Company borrowed the
amount it required to fund this advance under a $400 million term loan
agreement with a group of financial institutions led by SunTrust Bank,
Atlanta.
Background of Transocean Offshore Inc. and Sedco Forex
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. 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 approximately $1.5
billion in common stock and cash, including direct transaction costs and costs
of purchasing minority shares completed in 1997, and changed its name to
"Transocean Offshore Inc." On May 14, 1999, the Company completed a corporate
reorganization by which it changed its place of incorporation from Delaware to
the Cayman Islands.
The offshore contract drilling business of Sedco Forex resulted from the
integration over time by Schlumberger of several drilling companies,
principally Forex (Forages et Exploitations Petroliers) and Sedco Inc., and
other asset acquisitions. Forex was founded in France in 1942 and began as a
land drilling company in France, North Africa and the Middle East. Forex later
moved into the offshore drilling market largely through its Neptune joint
venture formed in the early 1960s with Languedocienne-Forenco. By the early
1970s, Schlumberger had acquired all of the shares of Forex and Neptune and
had integrated their activities. Schlumberger acquired Sedco Inc. in 1984.
Founded in 1947 and originally known as Southeastern Drilling Company, Sedco
Inc. began drilling in shallow water marsh environments in the U.S. in the
early 1950s and then expanded into international operations and deeper water
markets.
At the effective time of the merger, Sedco Forex owned, had an ownership
interest in or operated 40 active mobile offshore drilling rigs. Sedco Forex's
fleet consisted of four high-specification semisubmersibles, 20 other
semisubmersibles, two drillships, 10 jackup rigs and four tenders, as well as
one multi-purpose service jackup rig, six swamp barges and two land drilling
rigs. Sedco Forex also had under construction three Sedco Express-class
semisubmersibles and one independent-leg cantilevered jackup rig.
Drilling Rig Types
The Company principally uses five types of drilling rigs:
. semisubmersibles
. drillships
. jackups
. tenders
. swamp barges
2
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 generally well suited for operations in rough
water conditions. High-specification semisubmersibles are those that were
built or extensively upgraded since 1984 and have one or more of the following
characteristics: larger physical size than other semisubmersibles; rated for
drilling in water depths of over 4,000 feet; year-round harsh environment
capability; variable deck load capability of greater than 4,000 metric tons;
dynamic positioning; and superior motion characteristics. High-specification
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. The
Company is constructing three advanced semisubmersibles based on its
proprietary Sedco Express design. The Company estimates that the Sedco Express
rigs will be capable of reducing total well construction time by up to 25
percent. In addition to being dynamically positioned, these rigs are equipped
for faster penetration rates, streamlined logistics, extensive mechanization
and parallel tubular handling operations, supported by an integrated well
construction center. Savings contributions are also designed to come from a
high-powered, integrated mud and cement pumping system and built-in electric
wireline logging, measurement while drilling (MWD), logging while drilling
(LWD) and coiled tubing operations.
Drillships are generally self-propelled and designed to drill in the
deepest water in which offshore drilling rigs currently operate. Shaped like
conventional ships, they are the most mobile of the major rig types. The
Company's drillships are either dynamically positioned, which allows them to
maintain position without anchors through the use of their onboard propulsion
and station-keeping systems, or are operated in a moored configuration. The
Company's three Discoverer Enterprise-class drillships are equipped for dual-
activity drilling, which is a well-construction technology developed by the
Company that allows for drilling tasks associated with a single well to be
accomplished in a parallel rather than sequential manner by utilizing two
complete drilling systems under a single derrick. The dual-activity well
construction process is designed to reduce critical path activity and improve
efficiency in both exploration and development drilling. When the technology
is 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.
Jackup rigs are mobile self-elevating drilling platforms equipped with legs
that can be lowered to the ocean floor until a foundation is established to
support the drilling platform. Once a foundation is established, the drilling
platform is then jacked further up the legs so that the platform is above the
highest expected waves. The rig hull includes the drilling rig, jacking
system, crew quarters, loading and unloading facilities, storage areas,
helicopter landing deck and related equipment. These rigs are generally suited
for water depths of 300 feet or less.
Tenders are usually barges or semisubmersibles that are not self-propelled,
but can be moored alongside a platform, and contain quarters, mud pits, mud
pumps, power generation and other equipment. Tenders allow smaller, less
costly platforms to be used for development projects. Self-erecting tenders
carry their own derrick equipment set and have a crane capable of erecting the
derrick on the platform, thereby eliminating the cost associated with a
separate derrick house and related equipment. Tenders are generally suited for
water depths of 460 feet or less.
Swamp barges are usually not self-propelled, but can be moored alongside a
platform, and contain quarters, mud pits, mud pumps, power generation and
other equipment. Like tenders, swamp barges allow smaller, less costly
platforms to be used for development projects. Swamp barges often carry their
own derrick equipment set and crane. Swamp barges are generally suited for
water depths of 25 feet or less.
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 client demand. All of the Company's mobile
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.
3
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,
commenced operations for a unit of BP Amoco under a five-year contract in
December 1999. The rig is equipped with sufficient riser to drill in 8,500
feet of water and is capable of operating in water depths up to 10,000 feet
with additional riser. The Company has two additional Discoverer Enterprise-
class drillships, the Discoverer Spirit and the Discoverer Deep Seas, under
construction. The Discoverer Spirit will be equipped with sufficient riser to
drill in 10,000 feet of water, while the Discoverer Deep Seas will initially
be equipped with sufficient riser to drill in 8,000 feet of water, but will be
capable of drilling in water depths of up to 10,000 feet with additional
riser. The Discoverer Spirit is currently in a U.S. Gulf Coast shipyard for
outfitting with drilling equipment, and the Company expects it to be
operational in the third quarter of 2000, working under a five-year contract
for Spirit Energy 76, a division of Unocal. The Discoverer Deep Seas is under
construction at the Astano shipyard in Spain and is expected to be operational
in the fourth quarter of 2000, working under a five-year contract for Chevron.
The Company expects to spend $69 million and $117 million in 2000 to complete
construction of the Discoverer Spirit and Discoverer Deep Seas, respectively.
The Company has three Sedco Express-class semisubmersible drilling rigs
currently under construction, with two in France, the Sedco Express and Sedco
Energy, and the remaining unit, the Cajun Express, in Singapore. The Trident
20 jackup is also under construction in Azerbaijan. The Sedco Express and
Sedco Energy will be outfitted for operations in water depths of up to 6,000
feet and 7,500 feet, respectively, although each rig's design allows
operations in up to 8,500 feet of water with additional riser. The Sedco
Express is expected to commence a three year contract with Elf in Angola in
the third quarter of 2000. The Sedco Energy is expected to commence a five
year contract with Texaco in Nigeria in the third quarter of 2000. The Company
expects to spend $77 million and $87 million in 2000 to complete construction
of the Sedco Express and Sedco Energy, respectively.
The Cajun Express will be equipped for operations in water depths of up to
8,500 feet, and the Company expects it to commence a three year contract with
Marathon in the Gulf of Mexico in the third quarter of 2000. The Trident 20
jackup is a traditional independent-leg cantilevered jackup, designed for
operations in the Caspian Sea in water depths of up to 300 feet. The rig is
currently in a shipyard in Azerbaijan and is expected to be operational in the
fourth quarter of 2000, working under a three year contract with Elf. The
Company expects to spend $65 million and $32 million in 2000 to complete
construction of the Cajun Express and Trident 20, respectively.
In addition, the Company completed a $41 million life enhancement and
upgrade project during 1999 for the Sedco 709 semisubmersible.
For further discussion, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital Expenditures".
Fleet Status
As of March 1, 2000, all but 25 of the Company's operational drilling rigs
were working or had signed contracts for future operations, with contracts
expiring from 2000 through 2005.
4
The following table provides certain information about the Company's
drilling rig fleet as of March 1, 2000.
Year Water Drilling
Entered Depth Depth
Service/ Capability Capability Estimated
Type and Name Upgraded(a) (in feet) (in feet) Location Customer Expiration(b)
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Sedco Express-class
Semisubmersibles(3)
Cajun Express(e)(j)..... Newbuild 8,500 35,000 Shipyard (Singapore) Marathon August 2003
Sedco Energy(f)(j)...... Newbuild 7,500 25,000 Shipyard (France) Texaco August 2005
Sedco Express(g)(j)..... Newbuild 7,500 25,000 Shipyard (France) Elf August 2003
Other High-Specification
Semisubmersibles(12)
Transocean Marianas..... 1979/1998 7,000 25,000 U.S. Gulf of Mexico Shell September 2003
Sedco 707(j)............ 1976/1997 6,500 25,000 Brazil Petrobras January 2002
Sedco 710(j)............ 1983 6,000 25,000 Brazil Petrobras January 2001
Transocean Richardson... 1988 5,000 25,000 U.S. Gulf of Mexico Kerr McGee March 2000
Anadarko May 2000
Sedco 709(j)............ 1977/1999 5,000 25,000 Nigeria Shell April 2002
Transocean Leader....... 1987/1997 4,500 25,000 U.K. North Sea BP Amoco March 2001
Transocean Rather....... 1988 4,500 25,000 U.S. Gulf of Mexico -- Idle
Sovereign Explorer...... 1984 4,000 25,000 U.K. North Sea Marathon May 2000
Henry Goodrich(d)....... 1985 2,000 30,000 Canada PetroCanada February 2002
Paul B. Loyd, Jr.(d).... 1991/1993 2,000 25,000 U.K. North Sea BP Amoco July 2000
Transocean Arctic(c).... 1986 1,650 25,000 Norwegian North Sea Statoil February 2002
Polar Pioneer........... 1985 1,500 25,000 Norwegian North Sea Norsk Hydro September 2001
Other
Semisubmersibles(31)
Sedco 700............... 1973/1997 3,600 25,000 Gabon (Shipyard) Energy Africa June 2000
Transocean Legend....... 1983 3,500 25,000 Brazil Petrobras June 2000
Transocean Amirante..... 1978/1997 3,500 25,000 U.S. Gulf of Mexico -- Idle
Transocean Driller...... 1991 3,000 25,000 Brazil Petrobras June 2000
Omega(i)(q)............. 1983 3,000 25,000 South Africa -- Idle
Transocean 96........... 1975/1997 2,300 25,000 U.S. Gulf of Mexico Anadarko July 2000
Transocean 97........... 1977/1997 2,300 25,000 U.S. Gulf of Mexico -- Idle
Transocean John
Shaw(q)................ 1982 1,800 25,000 U.K. North Sea -- Idle
Sedco 711............... 1982 1,800 25,000 U.K. North Sea Total March 2000
Enterprise June 2000
Sedco 712............... 1983 1,600 25,000 U.K. North Sea Shell December 2000
Sedco 714............... 1983/1997 1,600 25,000 Canada Huskey November 2000
Actinia................. 1982 1,500 25,000 Malta -- Idle
Drillstar(h)............ 1982 1,500 25,000 U.K. North Sea Chevron November 2000
Sedco 600(q)............ 1983/1994 1,500 25,000 Vietnam -- Idle
Sedco 601............... 1983 1,500 25,000 Indonesia Unocal July 2000
Sedco 602(q)............ 1983 1,500 25,000 Singapore -- Idle
Sedneth 701............. 1972/1993 1,500 25,000 Congo Elf August 2000
Sedco 702............... 1973/1992 1,500 25,000 Australia BHP May 2000
Sedco 703............... 1973/1995 1,500 25,000 Australia INPEX June 2000
Sedco 708............... 1976 1,500 25,000 Angola Chevron April 2000
Transocean Winner(c).... 1983 1,500 25,000 Norwegian North Sea Statoil July 2003
Transocean Searcher(c).. 1983/1988 1,500 25,000 Norwegian North Sea Statoil July 2003
Transocean Prospect(c).. 1983/1992 1,500 25,000 Norwegian North Sea Statoil October 2000
Transocean Wildcat(c)... 1977/1985 1,300 25,000 Norwegian North Sea Statoil June 2001
Transocean Explorer..... 1976 1,250 25,000 U.K. North Sea -- Idle
Transocean Discoverer... 1977/1985 1,250 25,000 U.K. North Sea -- Idle
Sedco 704............... 1974/1993 1,000 25,000 U.K. North Sea Kerr McGee March 2000
Texaco February 2002
Sedco 706............... 1976/1994 1,000 25,000 U.K. North Sea Total June 2000
Sedco Explorer(h)....... 1975/1995 1,000 25,000 U.K. North Sea -- Idle
Sedco I-Orca(i)......... 1970/1987 900 25,000 South Africa Soekor May 2001
Sedco 135D.............. 1966/1977 600 25,000 Brazil -- Idle
Discoverer Enterprise-
class Drillships(3)
Discoverer
Enterprise(j).......... 1999 10,000 35,000 U.S. Gulf of Mexico BP Amoco December 2004
Discoverer
Spirit(j)(k)........... Newbuild 10,000 35,000 Shipyard (U.S.) Unocal July 2005
Discoverer Deep
Seas(j)(l)............. Newbuild 10,000 35,000 Shipyard (Spain) Chevron December 2005
Other Drillships(4)
Discoverer Seven
Seas(j)................ 1976/1997 7,000 25,000 Brazil Petrobras March 2002
Discoverer 534(j)....... 1975/1991 7,000 25,000 U.S. Gulf of Mexico Elf March 2000
BP Amoco October 2000
Joides
Resolution(j)(m)....... 1978 27,000 30,000 Worldwide Texas A&M September 2003
Sagar Vijay(i).......... 1985 2,950 20,000 India ONGC December 2000
5
Year Water Drilling
Entered Depth Depth
Service/ Capability Capability Estimated
Type and Name Upgraded(a) (in feet) (in feet) Location Customer Expiration(b)
------------- ----------- ---------- ---------- -------------------- ------------ --------------
Jackup Rigs(17)
Transocean Jupiter...... 1981/1997 170 16,000 UAE -- Idle
Offshore Comet.......... 1980 250 20,000 Gulf of Suez, Egypt GUPCO September 2000
Offshore Mercury........ 1969/1998 250 20,000 Gulf of Suez, Egypt GUPCO September 2000
Transocean III.......... 1978/1993 300 20,000 UAE -- Idle
Shelf Explorer.......... 1982 300 25,000 Danish North Sea Maersk August 2000
Transocean Nordic....... 1984 300 25,000 German North Sea Wintershall June 2000
Trident II.............. 1977/1985 300 25,000 India ONGC January 2001
Trident IV.............. 1980/1999 300 25,000 Angola Chevron February 2002
Trident VI.............. 1981 300 21,000 Nigeria -- Idle
Trident VIII(q)......... 1981 300 21,000 Nigeria -- Idle
Trident IX(o)........... 1982 400 21,000 Thailand SOCO March 2000
Trident XII............. 1982/1992 300 25,000 Brunei Shell July 2000
Trident XIV............. 1982/1994 300 20,000 Angola Chevron June 2000
Trident 15.............. 1982 300 25,000 Vietnam Petrovietnam March 2000
Trident 16(o)........... 1982 300 25,000 Thailand PTTEP July 2000
Trident 17.............. 1983 355 25,000 Indonesia Premier August 2000
Trident 20(p)........... Newbuild 300 Shipyard (Azerbaijan) Elf December 2003
Tenders(3)
Searex 9................ 1981 460 21,000 Congo Elf December 2000
Searex 10............... 1983/1994 450 21,000 Angola -- Idle
Searex 11............... 1983 350 20,000 Singapore -- Idle
Multi-Purpose Service
Vessel
Mr. John(n)............. 1985/1993 N/A N/A Nigeria -- Idle
Swamp Barges(6)
Searex 4................ 1981/1989 21 25,000 Nigeria -- Idle
Searex 6................ 1981/1991 22 25,000 Nigeria -- Idle
Searex 7................ 1980 25 20,000 Indonesia -- Idle
Searex 8................ 1985/1989 25 21,000 Indonesia -- Idle
Searex 12............... 1982/1992 25 25,000 Nigeria Shell July 2000
Hibiscus(p)............. 1979/1993 25 16,000 Indonesia Total April 2000
Land Rigs(2)
Rig 1................... 1976/1996 N/A 15,000 Nigeria -- Idle
Rig 54.................. 1981 N/A 15,000 Nigeria -- Idle
- -------
(a) Dates shown are the original service date and the date of the most recent
upgrade, if any.
(b) Expiration dates represent the Company's current estimate of the earliest
date the contract for each rig is likely to expire. Some rigs have two
contracts in continuation, so the second line shows the estimated earliest
availability. Many contracts permit the client to extend the contract.
(c) Participating in a cooperation agreement with Statoil. See "Drilling
Contracts."
(d) Owned by Arcade Drilling as, a Norwegian company in which the Company has
a 25% interest and which is controlled by a competitor. See Note 13 to the
combined financial statements of the Company.
(e) The Cajun Express is expected to be operational in the third quarter of
2000. The contract provides for termination if the rig is not delivered by
March 31, 2001.
(f) The Sedco Energy is expected to be operational in the third quarter of
2000. If delivery of the rig is delayed beyond the contract delivery date,
the contract provides for a reduction in its term equivalent to the period
of delayed delivery.
(g) The Sedco Express is expected to be operational in the third quarter of
2000. The contract provides for termination if the rig is not made
available by December 28, 2000.
(h) Operated under a bareboat charter with the rig's owner, a wholly owned
subsidiary of Sea Wolf Drilling Limited, in which the Company has a 25%
interest. See Note 13 to the combined financial statements of the Company.
(i) Operated under a management contract with the rig's owner.
(j) Dynamically positioned.
(k) The Discoverer Spirit is in a U.S. Gulf Coast shipyard for outfitting with
drilling equipment. The Company expects it to be operational in the third
quarter of 2000, working under a five-year contract for Spirit Energy 76,
a division of Unocal.
(l) The Discoverer Deep Seas is under construction at the Astano shipyard in
Spain. The Company expects it to be operational in the fourth quarter of
2000, working under a five-year contract for Chevron.
(m) The Joides Resolution is currently engaged in scientific geological coring
activities and is owned by a joint venture in which the Company has a 50%
interest. See Note 13 to the combined financial statements of the Company.
(n) The Mr. John is a multi-purpose service jackup rig capable of being used
for workovers or associated services.
(o) Owned by an unrelated third party and leased by the Company as a part of a
secured rig financing. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Debt."
(p) Owned by a joint venture owned more than 50% by the Company. The Trident
20 is expected to be operational in the fourth quarter of 2000. The
contract provides for termination if the rig is not delivered by February
12, 2002.
(q) As of March 1, 2000, the client had awarded a letter of intent although
the drilling contract was not yet signed.
6
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, 2000, the Company's active fleet was located in the Gulf of
Mexico (8 units), the North Sea (20 units), the Middle East (4 units), Asia
including Australia (14 units), Africa (18 units), Brazil (6 units), India (2
units), Canada (2 units) and Malta (1 unit). Additionally, the Joides
Resolution is contracted for a worldwide research program and as of such date
was in Antartica.
The Company maintains offices, land bases and other facilities worldwide,
including corporate offices in Houston, Texas and regional offices in the
U.S., Brazil, UK, Norway, France, Dubai and Indonesia. The Company's remaining
offices and bases are located in various countries in North America, South
America, Europe, Africa, the Middle East and Asia. Most of these facilities
are leased by the Company.
Drilling Services
The Company uses its engineering and operating expertise to provide
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 client needs and may be provided on either a dayrate or fixed
price basis. As of March 1, 2000, the Company performed such services under a
contract in the North Sea.
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. At times, the Company 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.
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. These contracts typically can be terminated by the client in the
event the drilling unit is destroyed or lost, or if drilling operations are
suspended for a specified period of time as a result of a breakdown of major
equipment or, in some cases, due to other events beyond the control of either
party. In addition, the drilling contracts for certain newbuild rigs contain
termination or term reduction provisions tied to late delivery of these units.
The contract term in some instances may be extended by the client 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 clients may seek renegotiation of firm drilling
contracts to reduce their obligations or may seek to terminate their contracts
by paying a termination fee to the Company.
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
7
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, because 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, some of which are beyond the Company's
control. As of March 1, 2000, the Company had no ongoing turnkey drilling
operations.
Significant Clients
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. Principal clients included the Royal Dutch Shell Group, Statoil,
Texaco, BP Amoco, Chevron, Total, Woodside, Unocal, Elf, Pemex, Gulf of Suez
Petroleum Company, Petrobras and Norsk Hydro. The Company's largest
unaffiliated clients in 1999 were Statoil, Royal Dutch Shell Group and
Petrobras, accounting for 16 percent, 15 percent and 11 percent, respectively,
of the Company's 1999 pro forma combined operating revenues. No other
unaffiliated client accounted for ten percent or more of the Company's 1999
pro forma combined operating revenues (see Note 3 to the combined financial
statements of the Company). The loss of any of these significant clients
could, at least in the short term, have a material adverse effect on the
Company.
Industry Conditions and Competition
The Company's business depends on the level of activity in offshore oil and
gas exploration, development and production in markets worldwide. Oil and gas
prices, market expectations of potential changes in these prices and a variety
of political and economic factors significantly affect this level of activity.
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 in 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
experienced a period of significantly lower demand in 1999 as a result of
reduced spending for exploration and development by the Company's customers in
response to dramatically lower crude oil prices during 1998. In addition, rig
availability has increased as a result of contract expirations and
construction by other drilling contractors of new rigs that compete with the
Company's 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. To the extent demand
for drilling services and the size of the worldwide industry fleet increase,
8
shortages of qualified personnel could arise, creating upward pressure on
wages. The Company is continuing its recruitment and training programs as
required to meet its anticipated personnel needs.
As of March 1, 2000, the Company had six newbuild rigs in shipyards under
construction or undergoing sea trials. These construction projects are subject
to the risks of delay or cost overruns inherent in large construction
projects, including shipyard availability, shortages of equipment, 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. 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. These delays may also cause clients to terminate the drilling
contracts for certain of these rigs pursuant to late delivery termination
clauses. In the event of termination of a drilling contract for one of these
rigs, it is unlikely that the Company would be able to secure a replacement
contract on as favorable terms. See "Item 7. Management Discussion and
Analysis of Financial Condition and Results of Operations--Market Outlook."
Markets
Rigs can be moved from one region to another, but the cost of moving a rig
and the availability of rig-moving vessels may cause the supply and demand
balance to vary somewhat between regions. However, significant variations
between regions do not tend to exist long-term because of rig mobility. Rig
mobility causes markets to be defined more by technical capability than by
region.
In recent years, there has been increased emphasis by oil companies on
exploring for hydrocarbons in deeper waters. This is, in part, because of
technological developments that have made such exploration more feasible and
cost-effective. Shallow water regions have been developed much more than deep
water regions because shallow regions are more accessible and operations there
are less costly to conduct.
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, punchthroughs, cratering or fires. The
occurrence of these events could result in the suspension of drilling
operations, damage to or destruction of the equipment involved and injury or
death to rig personnel. Operations also may be suspended because of machinery
breakdowns, abnormal drilling conditions, failure of subcontractors to perform
or supply goods or services or personnel shortages. In addition, offshore
drilling operations are subject to perils peculiar to marine operations,
including capsizing, grounding, collision and loss or damage from severe
weather. Damage to the environment could also result from the Company's
operations, particularly through oil spillage or extensive uncontrolled fires.
The Company maintains broad insurance coverage, including insurance against
general and marine third-party liabilities. The Company's offshore drilling
equipment is covered by physical damage insurance policies, which cover
against marine and other perils, including losses due to capsizing, grounding,
collision, fire, lightning, hurricanes, wind, storms, action of waves,
punchthroughs, cratering, blowouts, explosions and war risks. The Company also
carries employer's liability and other insurance customary in the offshore
contract drilling business.
Consistent with standard industry practice, the Company's clients generally
assume, and indemnify the Company against, well control and subsurface risks
under dayrate contracts. These risks are those associated with the loss of
control of a well, such as blowout or cratering, the cost to regain control or
redrill the well and associated pollution. The Company typically does not
carry insurance against such risks under dayrate contracts. However, the
Company cannot guarantee that these clients will necessarily be financially
able to indemnify it against all these risks.
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
9
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 high specification 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
client agrees to protect and indemnify the Company from liability for
pollution, well 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 clients will
have the financial capability to fulfill their contractual obligations to the
Company. No such indemnification is typically available for turnkey
operations. Also, these indemnities may not be enforceable in all instances.
For some contracts where the risk allocation or counterparty risk exposure is
considered high, the Company can purchase additional insurance such as
"operators extra expense insurance" against well control risks.
International Operations
The Company's operations are geographically dispersed in oil and gas
exploration and development areas throughout the world. Because the Company's
drilling rigs are mobile assets and able to be moved according to prevailing
market conditions, the Company cannot predict the percentage of its revenues
that will be derived from particular geographic or political areas in future
periods.
The Company's operations are subject to certain political and other
uncertainties, including risks of war and civil disturbances or other events
that disrupt markets, expropriation of equipment, inability to repatriate
income or capital, taxation policies and the general hazards associated with
governmental 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, 2000, all areas in which the Company was operating were
covered by existing insurance policies.
The Company's operations are also subject to significant government
regulation. Many 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 in order to remain
competitive in the international markets.
Another risk inherent in the Company's operations is the possibility of
currency exchange losses where revenues are received and expenses are paid in
nonconvertible currencies. The Company may also incur losses as a result of an
inability to collect revenues because of a shortage of convertible currency
available to the country of operations. The Company seeks to limit these risks
by structuring contracts such that compensation is made in freely convertible
currencies and, to the extent possible, by limiting acceptance of blocked
currencies to amounts that 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.
10
International contract drilling operations are subject to various laws and
regulations in countries in which the Company operates, including laws and
regulations relating to the equipping and operation of drilling units,
currency conversions and repatriation, oil and gas exploration and
development, taxation of offshore 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 gas and other aspects of the oil and
gas 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 U.S. 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 U.S. 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 other 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.
Although significant capital expenditures may be required to comply with
these governmental laws and regulations, such compliance has not materially
adversely affected the earnings or competitive position of the Company.
Employees
As of December 31, 1999, the Company had approximately 7,300 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.
On a worldwide basis, the Company had approximately 22 percent of its
employees working under collective bargaining agreements at December 31, 1999,
most of whom were working in Norway and Nigeria.
11
Of these represented employees, a majority are working under agreements that
are subject to salary negotiation in 2000.
ITEM 2. Properties
The description of the Company's property included under "Item 1. Business"
is incorporated by reference herein.
ITEM 3. Legal Proceedings
During 1997, Kvaerner Installasjon a.s ("Kvaerner") in Norway performed
modification and refurbishment work on a high specification semisubmersible
drilling rig, the Transocean Leader. The amount owed with respect to such work
is in dispute. A letter of credit valued at approximately $27.5 million as of
December 31, 1999 has been posted 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 judgment for approximately $33
million plus interest. The Company vigorously denies the material allegations
of Kvaerner's petition and expects a trial date to be set in the fourth
quarter of 2000. Although the Company cannot predict with certainty the
outcome of the dispute at this time, the Company does not expect the
liability, if any, resulting from this matter to have a material adverse
effect on its business or financial position.
In 1990 and 1991, two of the Company's subsidiaries were served with
various assessments collectively valued at approximately $7.4 million from the
municipality of Rio de Janeiro, Brazil to collect a municipal tax on services.
The Company believes that neither subsidiary is liable for the taxes and has
contested the assessments in the Brazilian administrative and court systems.
The proceeding with respect to a June 1991 assessment, which was valued at
approximately $6.3 million, is now pending before the Brazil Supreme Court.
The lower courts and the superior court of appeals have rejected the Company's
arguments. An August 1990 assessment also had an unfavorable ruling at the
first and second court levels and is being submitted to the Brazil Supreme
Court. The Company is awaiting a ruling from the Taxpayer's Council as to an
October 1990 assessment. 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 municipal tax payments required to be paid by them. The Company does not
expect the liability, if any resulting from these assessments to have a
material adverse effect on the Company's business or financial position.
Global Marine Drilling Company ("Global Marine") initiated an arbitration
proceeding in London in December 1997 against a subsidiary of Sedco Forex.
Global Marine alleges a claim for approximately $85 million (plus interest and
costs) for an alleged late return of a chartered rig and for breach of
maintenance obligations under the charter. In February 1998, the tribunal held
that the charter expired January 20, 1998, plus time for physical delivery.
The rig was not redelivered until May 1998 and, accordingly, the Company will
probably be required to pay some dayrate for the period from January 1998
until redelivery. The amount of any damages has not been set and hearings on
various issues are set for later this year. The Company disputes Global
Marine's allegations and is vigorously defending the case. The arrestment
previously placed on the rig, Sovereign Explorer, in connection with the
proceedings has been lifted. Although the Company cannot predict with
certainty the outcome of the dispute at this time, the Company does not expect
that the ultimate liability, if any, resulting from the matter will have a
material adverse effect on its business or financial position.
RIGCO North America, LLC ("RIGCO"), a subsidiary of Tatham Offshore Inc.,
filed suit in Texas state court in July 1999 asserting various claims in
connection with shipyard and rig management contracts for two rigs managed on
behalf of RIGCO. As a result of the merger, Sedco Forex assumed liability for
these claims. RIGCO alleges breach of contract, negligence and fraud and
claims damages of approximately $51 million, plus exemplary damages,
attorney's fees and other unspecified damages. In August 1999, RIGCO filed for
voluntary bankruptcy protection in the U.S. federal bankruptcy court sitting
in Texas. As part of the bankruptcy
12
proceedings, RIGCO filed a preference action in September 1999. RIGCO seeks to
avoid alleged transfers of approximately $4.2 million and to have those funds
returned to the RIGCO bankruptcy estate. The Company disputes the allegations
and is vigorously defending the case. Although the Company cannot predict with
certainty the outcome of the dispute at this time, the Company does not expect
that the liability, if any, resulting from the matter will have a material
adverse effect on its business or financial position.
The Indian Customs Department, Mumbai, filed a "show cause notice" against
a subsidiary of Sedco Forex and various third parties on July 8, 1999. The
show cause notice alleges that the entry into India and other subsequent
movements of the Trident 2 jackup rig operated by the subsidiary constituted
imports and exports for which proper customs procedures were not followed and
that customs duties should have been paid, and seeks payment of customs
duties, with interest and penalties, and confiscation of the rig. In
connection with these allegations, the customs authorities confiscated the
rig, which confiscation was stayed by application to the High Court, Mumbai,
until one month following the order of the Customs Department in respect of
the show cause notice. In January 2000, the Customs Department issued an order
in respect of the show cause notice, directing the Company to pay an
approximately $3.5 million redemption fee for the rig in lieu of confiscation
and approximately $1.5 million in penalties in addition to the amount of
customs duties owed, which were unspecified in the order. The Company disputes
the ruling and is vigorously defending the case. In February 2000, the Company
filed an appeal with the Customs, Excise, Gold (Exchange), Appellate Tribunal
(CEGAT) and an application with the High Court in Mumbai to have the
confiscation of the rig stayed pending the outcome of the appeal. The Company
does not expect that the ultimate liability, if any, resulting from the matter
will have a material adverse effect on its business 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 such other pending litigation will have a material adverse
effect on its business or financial position.
In January 2000, an anchor from one of the Company's drilling rigs was
accidentally released as a result of an anchor winch failure while the rig was
under tow to a drilling location in the U.S. Gulf of Mexico. The incident
resulted in damage to offshore facilities, including a crude oil pipeline, the
release of hydrocarbons from the damaged section of the pipeline and the
shutdown of the pipeline and affected production platforms. All appropriate
governmental authorities were notified, and the Company cooperated fully with
the operator and relevant authorities in support of the remediation efforts.
Following the incident, the operator of the pipeline and certain other joint
owners and affected producers have notified the Company that they consider the
Company liable for the resulting damages. The Company expects that existing
insurance will substantially cover any potential liability associated with
this matter.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, the Company submitted to a vote of its
shareholders the proposed merger with Sedco Forex and certain related matters.
These matters were submitted to a vote of the Company's shareholders at an
Extraordinary General Meeting of Shareholders held on December 10, 1999. At
that meeting, the shareholders voted to approve all of the matters presented
to them for consideration. Of the 100,574,790 ordinary shares outstanding at
the time, 69,056,133 were eligible to be voted at the meeting. There were no
broker non-votes. The results were as follows:
Proposal 1: The increase of the Company's authorized ordinary share capital to
$3,000,000, consisting of 300,000,000 ordinary shares, par value
$0.01 per share.
For............................................................ 68,486,649
Against........................................................ 434,423
Abstain........................................................ 135,061
13
Proposal 2: The issuance of ordinary shares under the terms of the Agreement
and Plan of Merger, dated as of July 12, 1999, among Schlumberger
Limited, Sedco Forex Holdings Limited, Transocean Offshore Inc.
and the Company's wholly owned subsidiary, Transocean SF Limited.
For............................................................ 68,489,713
Against........................................................ 381,268
Abstain........................................................ 185,152
Proposal 3: The change of the Company's name to "Transocean Sedco Forex Inc."
as a special resolution to be implemented only upon the completion
of the merger under the Agreement and Plan of Merger.
For............................................................ 68,540,459
Against........................................................ 393,795
Abstain........................................................ 121,879
Proposal 4: The amendment of the Company's Long-Term Incentive Plan to, among
other things, increase the number of ordinary shares reserved for
issuance under the plan from 6,300,000 to 13,300,000.
For............................................................ 63,018,567
Against........................................................ 5,803,364
Abstain........................................................ 234,202
Proposal 5: The amendment of the Company's Employee Stock Purchase Plan to,
among other things, increase the number of ordinary shares
reserved for issuance under the plan from 250,000 to 750,000.
For............................................................ 67,953,930
Against........................................................ 906,652
Abstain........................................................ 195,551
Executive Officers of the Registrant
As of
Officer Office March 1, 2000
------- ------ -------------
J. Michael Talbert...... President, Chief Executive Officer and Director 53
Jean P. Cahuzac......... Executive Vice President and President, Europe, 46
Middle East and Africa
W. Dennis Heagney....... Executive Vice President and President, Asia and 52
Americas
Jon C. Cole............. Executive Vice President, Marketing 47
Robert L. Long.......... Executive Vice President, Chief Financial 54
Officer and Treasurer
Donald R. Ray........... Senior Vice President, Technical Services 53
Eric B. Brown........... Vice President, General Counsel and Secretary 48
Barbara S. Vice President and Chief Information Officer 41
Koucouthakis...........
David Mullen............ Vice President, Human Resources 42
Ricardo Rosa............ Vice President and Controller 43
Brian C. Voegele........ Vice President, Finance 40
Each of the Company's executive officers was elected to his or her current
position effective December 31, 1999 in connection with the Sedco Forex
merger. 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 has served as the Chief Executive Officer and a member
of the Board of Directors of the Company since August 1994. Mr. Talbert also
served as Chairman of the Board of the Company from August 1994 until the time
of the Sedco Forex merger, at which time he assumed the additional position of
President of the Company. Mr. Talbert is also a director of Equitable
Resources, Inc. Prior to assuming his duties with the Company, Mr. Talbert was
President and Chief Executive Officer of Lone Star Gas Company, a natural gas
distribution company and a division of Ensearch Corporation.
14
Jean P. Cahuzac is an Executive Vice President and the President, Europe,
Middle East and Africa of the Company. Mr. Cahuzac served as the President of
Sedco Forex from January 1999 until the time of the Sedco Forex merger, at
which time he assumed his current positions with the Company. Mr. Cahuzac
served as Vice President--Operations Manager of Sedco Forex from May 1998 to
January 1999, Region Manager--Europe, Africa and CIS of Sedco Forex from
September 1994 to May 1998 and Vice President/General Manager--North Sea
Region of Sedco Forex from February 1994 to September 1994. He had been
employed by Schlumberger since 1979.
W. Dennis Heagney is an Executive Vice President and the President, Asia
and the Americas of the Company. Mr. Heagney served as a director of the
Company from June 12, 1997 and President and Chief Operating Officer of the
Company from April 1, 1986 until the time of the Sedco Forex merger, at which
time he assumed his current positions. 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 is the Executive Vice President, Marketing of the Company. Mr.
Cole served as Senior Vice President of the Company from April 1, 1993 until
the time of the Sedco Forex merger, at which time he assumed his current
position. Mr. Cole joined the Company in 1978 and was elected Vice President
in 1990.
Robert L. Long is an Executive Vice President, Chief Financial Officer and
Treasurer of the Company. Mr. Long has served as Chief Financial Officer of
the Company since August 1996. Mr. Long also served as Senior Vice President
of the Company from May 1, 1990 and Treasurer of the Company from September 1,
1997 until the time of the Sedco Forex merger, at which time he assumed the
additional position as Executive Vice President. Mr. Long has been employed by
the Company since 1976 and was elected Vice President in 1987.
Donald R. Ray is the Senior Vice President, Technical Services of the
Company. Mr. Ray served as Senior Vice President of the Company, with
responsibility for technical services, from December 1, 1996 until the time of
the Sedco Forex merger, at which time he assumed his current position. Mr. Ray
has been employed by the Company since 1972 and has served as a Vice President
of the Company since 1986.
Eric B. Brown has served as the Vice President and General Counsel of the
Company since February 1, 1995 and Secretary of the Company since September
29, 1995. Prior to assuming his current position with the Company, Mr. Brown
served as General Counsel of Coastal Gas Marketing Company.
Barbara S. Koucouthakis is the Vice President and Chief Information Officer
of the Company. Ms. Koucouthakis served as Controller of the Company from
January 1, 1990 and Vice President from April 1, 1993 until the time of the
Sedco Forex merger, at which time she assumed her current position. She has
been employed by the Company since 1982.
David Mullen is the Vice President, Human Resources of the Company. Mr.
Mullen served Schlumberger as Director of Personnel Geco-Prakla from 1998
until the time of the Sedco Forex merger, at which time he assumed his current
position with the Company. Mr. Mullen was elected Managing Director--
Schlumberger (Nigeria) Ltd. in 1996, District Manager--Eastern Venezuela
Schlumberger (Wireline & Testing) in 1994 and had been employed by
Schlumberger since 1983.
Ricardo Rosa is a Vice President and the Controller of the Company. Mr.
Rosa served as Controller of Sedco Forex from September 1995 until the time of
the Sedco Forex merger, at which time he assumed his current positions with
the Company. He was appointed Gas Management Controller in October 1993. Mr.
Rosa had been with Schlumberger since 1983.
Brian C. Voegele has served as Vice President, Finance of the Company since
March 1998. Previously, he served as Director of Tax for the Company from June
1993 until such date. Prior to joining the Company in 1993, he served as Tax
Manager for Sonat Inc. and as a Tax Manager for the accounting firm of Ernst &
Young LLP.
15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's ordinary shares are listed on the New York Stock Exchange
(the "NYSE") under the symbol "RIG." The following table sets forth the high
and low sales prices of the Company's ordinary shares for the periods
indicated as reported on the NYSE Composite Tape.
Price
--------------
High Low
---- ----
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...................................... 31 9/16 19 5/8
Second Quarter..................................... 32 1/2 22 5/8
Third Quarter...................................... 36 1/2 25 9/16
Fourth Quarter..................................... 34 3/8 23 7/8
2000
First Quarter (through March 1).................... 42 15/16 29 1/4
On March 1, 2000, the last reported sales price of the Company's ordinary
shares on the NYSE Composite Tape was $41 1/2 per share. On such date, there
were approximately 32,800 holders of record of the Company's ordinary shares
and 210,257,041 ordinary shares outstanding.
The Company has paid quarterly cash dividends of $0.03 per ordinary share
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 agreements and
note purchase agreement (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Debt") and (iv) payable only out of the Company's profits or share
premium account in accordance with Cayman Islands law.
ITEM 6. Selected Combined Financial Data
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco
Forex Holdings Limited ("Sedco Forex") was completed. Sedco Forex was the
offshore contract drilling service business of Schlumberger Limited and was
spun-off immediately prior to the merger transaction. As a result of the
merger, Sedco Forex became a wholly owned subsidiary of "Transocean Offshore
Inc.," which changed its name to Transocean Sedco Forex Inc. The merger was
accounted for as a purchase, with Sedco Forex as the acquiror for accounting
purposes.
The selected combined financial data as of December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999 has been
derived from the audited combined financial statements included elsewhere
herein. The selected combined financial data as of December 31, 1997, and for
the year ended December 31, 1996 has been derived from audited combined
financial statements not included herein. The selected combined financial data
as of December 31, 1996 and 1995, and for the year ended December 31, 1995 are
unaudited. 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 combined financial statements and the notes thereto
included under "Item 8. Financial Statements and Supplementary Data."
16
The balance sheet data as of December 31, 1999 represents the consolidated
financial position of the merged company. The income statement data and other
financial data for the periods presented, and the balance sheet data for the
periods prior to the merger, reflect the operating results and financial
position of Sedco Forex and not that of historical Transocean Offshore Inc.
Years ended December 31,
-------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ---- -----------
(In millions, except per share data)
(Unaudited)
Income Statement Data
Operating Revenues........ $ 648 $1,091 $ 891 $663 $437
Operating Income.......... 49 377 299 163 60
Net Income................ 58 342 260 148 62
Unaudited Pro Forma
Earnings Per Share(a)
Basic................... 0.53 3.12 2.38 1.35 0.57
Diluted................. 0.53 3.12 2.38 1.35 0.57
Other Financial Data(b)
Cash Flows From Operating
Activities............... $ 241 $ 473 $ 318 $236
Capital Expenditures...... 537 425 187 151
EBITDA(c)................. 186 508 420 272
(Unaudited)
Balance Sheet Data (at end
of period)
Total Assets.............. $6,140 $1,473 $1,051 $899 $781
Total Debt................ 1,266 100 160 53 44
Total Equity.............. 3,910 564 363 462 574
- --------
(a) Unaudited pro forma earnings per share calculated using the Transocean
Sedco Forex shares and options issued pursuant to the merger agreement.
(b) Other Financial Data is not available for the year ended December 31,
1995.
(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 accounting principles generally accepted in
the United States ("GAAP") and is not intended to be used in lieu of GAAP
presentations of results of operations and cash provided by operating
activities.
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 combined financial statements and the notes
thereto included under "Item 8. Financial Statements and Supplementary Data"
elsewhere in this annual report.
Overview
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco
Forex Holdings Limited ("Sedco Forex") was completed. Sedco Forex was the
offshore contract drilling service business of Schlumberger Limited
("Schlumberger") and was spun-off immediately prior to the merger transaction.
As a result of the merger, Sedco Forex became a wholly owned subsidiary of
"Transocean Offshore Inc." which changed its name to Transocean Sedco Forex
Inc. The merger was accounted for as a purchase, with Sedco Forex as the
acquiror for accounting purposes.
Transocean Sedco Forex Inc. (together with its subsidiaries and
predecessors, unless the context requires otherwise, the "Company", "we" or
"our") is a leading international provider of deepwater and harsh environment
contract drilling services for oil and gas wells. As of March 1, 2000, the
Company owns, has partial
17
ownership interests in, operates or has under construction 73 mobile offshore
drilling units. The Company's active fleet consists of twelve high-
specification semisubmersibles, thirty-one second- and third-generation
semisubmersibles, one Discoverer Enterprise-class drillship, four other
drillships, sixteen jackup rigs and three tenders. The Company has under
construction two Discoverer Enterprise-class drillships, three Sedco Express-
class semisubmersibles and one independent-leg cantilevered jackup. In
addition, the fleet includes one multipurpose service jackup, six swamp barges
and two land drilling rigs. The Company contracts these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
The balance sheet as of December 31, 1999 represents the consolidated
financial position of the merged company. The results of operations and cash
flows for the periods presented in the combined financial statements, and the
balance sheets for periods prior to the merger, reflect the operating results
and financial position of Sedco Forex and not that of historical Transocean
Offshore Inc. At the time of the merger, Sedco Forex owned, had ownership
interest in or operated 40 mobile offshore drilling rigs and had four such
rigs under construction.
Historical Operating Results
Years ended December 31,
------------------------------
1999 1998 1997
-------- ---------- --------
(In thousands)
Operating Revenues............................. $648,236 $1,090,523 $891,334
-------- ---------- --------
Costs and Expenses
Operating and maintenance...................... 450,756 562,565 466,269
Depreciation................................... 131,933 124,707 110,780
General and administrative..................... 16,703 25,986 15,664
-------- ---------- --------
599,392 713,258 592,713
-------- ---------- --------
Operating Income............................... 48,844 377,265 298,621
-------- ---------- --------
Other Income (Expense), Net
Equity in earnings of joint ventures........... 5,610 5,389 4,946
Interest income................................ 5,433 3,361 3,296
Interest expense, net of amounts capitalized... (10,250) (12,950) (19,639)
Other, net..................................... (830) 956 5,235
-------- ---------- --------
(37) (3,244) (6,162)
-------- ---------- --------
Income Before Income Taxes..................... 48,807 374,021 292,459
Income Taxes................................... (9,296) 32,443 32,004
-------- ---------- --------
Net Income..................................... $ 58,103 $ 341,578 $260,455
======== ========== ========
Historical 1999 compared to 1998
Operating revenues for the year ended December 31, 1999 were $648.2 million
compared to $1,090.5 million for 1998, a decrease of $442.3 million or 41
percent. The decrease in revenues for 1999 resulted primarily from decreased
utilization, which declined from an average of 91 percent in 1998 to 64
percent in 1999, and a decrease in dayrates from an average of approximately
$70,000 in 1998 to approximately $61,000 in 1999.
Operating and maintenance expense for the year ended December 31, 1999 was
$450.8 million compared to $562.6 million for 1998, a decrease of $111.8
million or 20 percent. The decrease in 1999 resulted primarily from reduced
operating activity for rigs during the year. A large portion of operating and
maintenance expense consists of employee-related costs and is fixed or only
semi-variable. Accordingly, operating and maintenance expense does not vary in
direct proportion to activity. Operating and maintenance expense for the years
ended December 31, 1999 and 1998 included charges totaling $42.0 million and
$23.4 million, respectively, relating to severance liabilities, the write-down
of obsolete fixed assets and provisions for legal disputes. In addition, 1999
18
included expense of $13.4 million related to provision for doubtful accounts
receivable in West Africa and dayrate contract penalties in Brazil.
Depreciation expense increased from $124.7 million in 1998 to $131.9
million in 1999, an increase of $7.2 million or 6 percent. The increase
primarily resulted from the capitalization of equipment associated with rig
life extension and upgrade projects.
General and administrative expense for the year ended December 31, 1999 was
$16.7 million compared to $26.0 million for 1998, a decrease of $9.3 million
or 36 percent. The decrease in 1999 resulted from the lower allocation by
Schlumberger of corporate overhead due to lower revenues. General and
administrative expense included an allocation by Schlumberger that amounted to
approximately $8.0 million for 1999 and $9.4 million for 1998. The general and
administrative expense allocation by Schlumberger was dependent on a number of
factors, including the level of corporate costs and the proportion of revenues
to Schlumberger's worldwide group revenues. Accordingly, the allocation
methods were considered to be reasonable. The level of general and
administrative expenses prior to the merger may not be indicative of ongoing
costs for the Company.
Interest income for the year ended December 31, 1999 was $5.4 million
compared to $3.4 million for 1998, an increase of $2.0 million or 59 percent.
The increase resulted from higher average cash balances during the year.
Interest expense for the year ended December 31, 1999 was $10.3 million
compared to $13.0 million for 1998, a decrease of $2.7 million or 21 percent.
The decrease in 1999 resulted primarily from the capitalization of $27.2
million in interest relating to construction projects compared to $8.7 million
capitalized in 1998, partially offset by increased interest expense on higher
long-term debt balances during the year.
Income tax benefit for the year ended December 31, 1999 was $9.3 million
compared to expense of $32.4 million for 1998. The Company operates in a
number of countries where income tax is charged on a deemed profit basis.
Accordingly, income tax expense does not necessarily vary in direct proportion
with pre-tax income. The decrease in income tax expense in relation to pre-tax
income for 1999 resulted primarily from additional U.K. tax loss carryforwards
for which no valuation allowance was provided and the adjustment of UK tax
loss carryforwards for prior years. These carryforwards, which the Company
believes will be fully utilized, are available to the Company indefinitely.
Net income for the year ended December 31, 1999 was $58.1 million compared
to $341.6 million for 1998, a decrease of $283.5 million or 83 percent. The
decrease in 1999 resulted primarily from lower operating income due to
decreased dayrates and rig utilization.
Historical 1998 compared to 1997
Operating revenues for the year ended December 31, 1998 were $1,090.5
million compared to $891.3 million for 1997, an increase of $199.2 million or
22 percent. The increase in revenues for 1998 resulted primarily from an
increase in dayrates from an average of approximately $56,000 in 1997 to
approximately $70,000 in 1998 and from increased utilization, which improved
from an average of 90 percent in 1997 to 91 percent in 1998. Dayrates
increased in early 1998 as a result of higher market demand converging with
tightening supply.
Operating and maintenance expense for the year ended December 31, 1998 was
$562.6 million compared to $466.3 million for 1997, an increase of $96.3
million or 21 percent. The increase in 1998 resulted primarily from rig
reactivation and mobilization costs and higher maintenance costs and employee
compensation. A large portion of operating expense consists of employee-
related costs and is fixed or only semi-variable. Accordingly, operating and
maintenance expense does not vary in direct proportion to activity. Operating
and maintenance expense for the year ended December 31, 1998 also included
charges totaling $23.4 million relating to severance liabilities, the write-
down of obsolete fixed assets and provisions for legal disputes.
19
Depreciation expense increased by $13.9 million or 13 percent, from $110.8
million for the year ended December 31, 1997 to $124.7 million for 1998. The
increase was due primarily to additional depreciation resulting from
capitalization of equipment associated with rig life extension and upgrade
projects.
General and administrative expense for the year ended December 31, 1998 was
$26.0 million compared to $15.7 million for 1997, an increase of $10.3 million
or 66 percent. The increase in 1998 resulted from the higher allocation of
corporate overhead by Schlumberger due to higher revenues and from increased
marketing and business development efforts. General and administrative expense
included an allocation by Schlumberger that amounted to approximately $9.4
million for 1998 and $4.4 million for 1997. The general and administrative
expense allocation by Schlumberger was dependent on a number of factors,
including the level of corporate costs and the proportion of revenues to
Schlumberger's worldwide group revenues. Accordingly, the allocation methods
were considered to be reasonable.
Interest expense for the year ended December 31, 1998 was $13.0 million
compared to $19.6 million for 1997, a decrease of $6.6 million or 34 percent.
The decrease in 1998 resulted primarily from the capitalization of $8.7
million in interest relating to construction projects compared to no interest
capitalized in 1997.
Income tax expense for the year ended December 31, 1998 was $32.4 million
compared to $32.0 million for 1997. The Company operates in a number of
countries where income tax is charged on a deemed profit basis. Accordingly,
income tax expense does not necessarily vary in direct proportion with pre-tax
income. The decrease in income tax expense in relation to pre-tax income for
1998 resulted primarily from the release of a valuation allowance relating to
U.K. tax loss carryforwards of $14.5 million. These carryforwards, which the
Company believes will be fully utilized, are available to the Company
indefinitely.
Net income for the year ended December 31, 1998 was $341.6 million compared
to $260.5 million for 1997, an increase of $81.1 million or 31 percent. The
increase in 1998 resulted primarily from higher operating income due to
increased dayrates and rig utilization, partially offset by charges included
in operating and maintenance expense totaling $20.4 million after tax as
discussed above.
1999 and 1998 Charges
Operating and maintenance expense for the years ended December 31, 1999 and
1998 included charges totaling $42.0 million and $23.4 million, respectively.
Reduced exploration and development activity by customers, resulting from a
period of low oil prices from late 1997 through early 1999 and industry
consolidation over the same time period, resulted in a slowdown in the
offshore drilling industry during 1998 and 1999. As a result of this slowdown
approximately 1000 operating personnel were determined to be redundant, and
charges associated with termination and severance benefits of $13.2 million
and $3.6 million were recognized during 1999 and 1998, respectively.
Substantially all of these employees have been terminated and severance and
termination costs have been paid as of December 31, 1999. Provisions for
potential legal claims of $28.8 million and $10.0 million were recognized
during 1999 and 1998, respectively (see Note 10 to the Company's combined
financial statements). Asset impairment charges of $9.8 million were
recognized in 1998 related to assets retired from the active fleet.
1999 Pro Forma Operating Results
Unaudited pro forma combined results for Transocean Sedco Forex Inc. for
the twelve months ended December 31, 1999, reflected net income of $237.9
million or $1.13 per diluted share on pro forma revenues of $1,579.0 million.
The pro forma operating results assume the spin-off and merger was completed
on January 1, 1999. See Note 3 to the combined financial statements. These pro
forma results do not reflect the effects of reduced depreciation expense
related to conforming the estimated lives of Sedco Forex rigs and the
elimination of certain allocated costs from Schlumberger, which will not be
incurred in the future. The pro forma financial data should not be relied on
as an indication of operating results that Transocean Sedco Forex Inc. would
have achieved had the spin-off and merger taken place earlier or of the future
results that Transocean Sedco Forex Inc. may achieve.
20
Market Outlook
Fleet utilization on a pro forma combined basis, as if the merger had
occurred on January 1, 1999, averaged 69 percent for the fourth quarter of
1999 and 74 percent for the year 1999 for our 62 active, fully owned or
chartered mobile offshore drilling units (i.e., excluding newbuilds under
construction, managed rigs and partially owned rigs). Combined semisubmersible
and drillship ("floater") utilization was 71 percent and 77 percent,
respectively, during the corresponding periods. Average dayrates during 1999
for these 62 rigs were $85,000 fleetwide and $105,300 for floaters.
Fleet activity in 1999 was negatively influenced by a global reduction in
exploration and development spending by our customers, resulting from the
sustained period of dramatically lower oil prices from late 1997 through early
1999 and consolidation activity among major oil producers over the same time
period. Spending levels in 1999 are estimated to have declined by more than 18
percent from levels experienced during 1998. Rig availability also increased
as a result of expiring contracts and delivery of newly constructed drilling
rigs by several offshore drilling contractors. The decline in exploration and
development activity and increased rig availability created a highly
competitive market for contract drilling services throughout 1999, with
corresponding reductions in utilization and dayrates for all classes of
offshore rigs.
With crude oil prices improving 34 percent during 1999 and 80 percent from
lows experienced in 1998, signs of improving fleet activity are emerging in
several operating regions. In February 2000, the semisubmersible Transocean
Richardson returned to work for an estimated 45-day contract in the U.S. Gulf
of Mexico following a brief idle period. In the North Sea, we have recently
secured new work assignments for the semisubmersibles Transocean Leader and
Sovereign Explorer, which are expected to return to work by April 2000 for
firm periods of approximately one year and approximately 60 days,
respectively. Both rigs have been idle since the fourth quarter of 1999. In
West Africa, operator interest in our jackup fleet has strengthened, with
several customers discussing term contracts. Finally, in Southeast Asia, we
currently expect two semisubmersibles and two jackups to begin contracts by
March 31, 2000, which will place all of our semisubmersibles and jackups in
the region on contract. However, these increases in customer interest and
activity have not yet led to significant increases in dayrates.
As of March 1, 2000, 46 of the 62 active and fully owned or chartered
mobile offshore drilling units were either operating or had signed contracts
for future operations, including 30 of 42 floaters. As of that date,
approximately 52 percent of our floater and jackup fleet days were committed
for the remainder of 2000 and 27 percent for the year 2001. Of the idle rigs,
two jackups and two semisubmersibles are currently cold-stacked.
Other Factors Affecting Operating Results
Our business depends on the level of activity in offshore oil and gas
exploration, development and production in markets worldwide. Oil and gas
prices, market expectations of potential changes in these prices and a variety
of political and economic factors significantly affect this level of activity.
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 in 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 in oil-producing regions.
21
The offshore contract drilling industry is highly competitive with numerous
industry participants, none of which has a dominant market share. Some of our
competitors may have greater financial resources than we do.
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.
Our industry has historically been cyclical. There have been periods of
high demand, short rig supply and high dayrates, followed by periods of lower
demand, excess rig supply and low dayrates. The industry experienced a period
of significantly lower demand during 1999 as a result of reduced spending for
exploration and development by the Company's customers in response to
dramatically lower crude oil prices during 1998. In addition, rig availability
has increased as a result of contract expirations and construction by other
drilling contractors of new rigs that are competing with our rigs. Periods of
excess rig supply intensify the competition in the industry and often result
in rigs being idled for long periods of time.
Our customers may terminate some of our term drilling contracts 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
addition, the drilling contracts for the Sedco Forex newbuild rigs contain
termination or term reduction provisions tied to late delivery of these units.
In reaction to depressed market conditions, our customers may also seek
renegotiation of firm drilling contracts to reduce their obligations.
As of March 1, 2000, we had six new rigs in shipyards under construction or
undergoing sea trials. These construction projects are subject to the risks of
delay or cost overruns inherent in any large construction project resulting
from numerous factors, including the following:
. shipyard unavailability;
. shortages of equipment, materials or skilled labor;
. unscheduled delays in the delivery of ordered materials and equipment;
. engineering problems, including those relating to the commissioning of
newly designed equipment;
. work stoppages;
. weather interference;
. unanticipated cost increases; and
. difficulty in obtaining necessary permits or approvals.
These factors may contribute to cost variations and delays in the delivery
of our drilling units under construction. Delays in delivery of these units
would result in delays in contract commencements, resulting in a loss of
revenue to us, and may also cause customers to terminate or shorten the term
of the drilling contracts for these rigs pursuant to late delivery clauses for
the Sedco Express-class semisubmersibles and the Trident 20. In the event of
termination of a drilling contract for one of these rigs, it is unlikely that
we would be able to secure a replacement contract on as favorable terms.
We operate in various regions throughout the world that may expose us to
political and other uncertainties, including risks of:
. war and civil disturbances;
. expropriation of equipment;
. the inability to repatriate income or capital; and
. changing taxation policies.
22
We are protected to a substantial extent against loss of capital assets,
but generally not loss of revenue, from most of these risks through insurance,
indemnity provisions in our drilling contracts or both. As of March 1, 2000,
all areas in which we were operating were covered by existing insurance
policies.
The offshore drilling business is subject to significant government
regulations in different jurisdictions. Many 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 our ability to
compete. We expect to continue our efforts to structure our operations in
order to remain competitive in international markets.
Another risk inherent in our operations is the possibility of currency
exchange losses where revenues are received and expenses are paid in
nonconvertible currencies. We may also incur losses as a result of an
inability to collect revenues because of a shortage of convertible currency
available to the country of operation. We seek to limit these risks by
structuring contracts such that compensation is made in freely convertible
currencies and, to the extent possible, by limiting acceptance of blocked
currencies to amounts that match our expense requirements in local currency.
We require highly skilled personnel to operate and provide technical
services and support for our drilling units. To the extent demand for drilling
services and the size of the worldwide industry fleet increase, shortages of
qualified personnel could arise, creating upward pressure on wages. We are
continuing our recruitment and training programs as required to meet our
anticipated personnel needs.
On a worldwide basis, we had approximately 22 percent of our employees
working under collective bargaining agreements at December 31, 1999, most of
whom were working in Norway and Nigeria. Of these represented employees, a
majority are working under agreements that are subject to salary negotiation
in 2000.
The general rate of inflation in the majority of the countries in which we
operate has been moderate over the past several years and has not had a
material impact on our 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 since 1998, these inflationary pressures have
decreased.
Merger Purchase Price Allocation
The purchase price allocation for the merger of Transocean Offshore Inc.
and Sedco Forex included, at estimated fair value, total assets of $3.8
billion and the assumption of total liabilities of $1.9 billion. The excess of
the purchase price over the estimated fair value of net assets acquired was
approximately $1.1 billion, which has been accounted for as goodwill. As of
December 31, 1999, this goodwill represented approximately 17 percent of total
assets and 27 percent of total shareholders' equity. The goodwill is being
amortized over 40 years based on the nature of the offshore drilling industry,
long-lived drilling equipment and the long-standing relationships with core
customers. Goodwill amortization expense will be approximately $27 million per
year.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash flows provided by operations were $240.6 million for the year ended
December 31, 1999, compared to $473.4 million for 1998, a decrease of $232.8
million. The decrease in cash provided by operations was primarily due to
lower net income during the year ended December 31, 1999, partially offset by
increases provided by net working capital components.
Cash flows used in investing activities decreased $331.3 million from
$421.5 million for the year ended December 31, 1998 to $90.2 million in 1999.
The decrease in cash used in investing activities resulted primarily
23
from cash acquired in the merger partially offset by an increase in capital
expenditures relating to rig construction and upgrade projects.
Cash flows used in financing activities increased $186.8 million from 1998
to 1999. During 1999, net borrowings from related parties were repaid.
Capital Expenditures
Capital expenditures, including capitalized interest, totaled $537 million
during the year ended December 31, 1999 and include $132 million, $138 million
and $151 million spent on the construction of the Sedco Express, Sedco Energy,
and Cajun Express, respectively. Capital expenditures also included $60
million on the construction of the Trident 20 during 1999. As discussed above,
these capital expenditures do not include amounts expended by Transocean
Offshore Inc.
The Company's investments in its existing fleet and previously announced
fleet additions, including the Sedco Express-class semisubmersibles, the
Trident 20 and the Discoverer Enterprise-class drillships, continue to require
significant capital expenditures and are expected to be approximately $573
million in 2000.
The following table summarizes projected expenditures (including
capitalized interest) during 2000 for the Company's major construction
projects.
Projected
Projected Recorded Value
Expenditures At Completion
------------ --------------
(In millions)
Sedco Express................................. $ 77 $ 326
Sedco Energy.................................. 87 332
Cajun Express................................. 65 273
Discoverer Spirit............................. 69 310
Discoverer Deep Seas.......................... 117 315
Trident 20.................................... 32 135
---- ------
$447 $1,691
==== ======
The Company has under construction three Sedco Express-class
semisubmersibles. These semisubmersibles will be capable of ultra-deepwater
drilling operations and are designed to reduce total well construction time by
up to 25 percent through several technological innovations. The Sedco Express
is expected to be operational in the third quarter of 2000, when it will begin
a three-year contract with Elf. The Sedco Energy is expected to be operational
in the third quarter of 2000, when it will begin a five-year contract with
Texaco. The Cajun Express is also expected to be operational in the third
quarter of 2000, when it will begin a three-year contract with Marathon.
The Company has two Discoverer Enterprise-class drillships under
construction. These drillships represent a new class of advanced, ultra-
deepwater drilling rigs employing the Company's dual-activity drilling system
which aims to reduce the cost of deepwater projects by up to 40 percent. The
Discoverer Spirit is expected to be operational in the third quarter of 2000,
when it will begin a five-year contract with Spirit Energy 76, a division of
Unocal. The Discoverer Deep Seas is expected to be operational in the fourth
quarter of 2000, when it will begin a five-year contract with Chevron.
The Company also has an independent-leg cantilevered jackup, the Trident
20, under construction in Azerbaijan. This rig will be 75 percent owned by the
Company through a joint venture. The rig is expected to be operational in the
fourth quarter 2000, when it will begin a three-year contact for Elf.
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,
24
including 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
Revolving Credit Agreement referred to below and other commercial bank or
capital market financings.
Debt
Revolving Credit Agreement--The Company is a party to a $540 million
revolving credit agreement, as amended, with a group of banks led by ABN AMRO
Bank, NV, as agent, dated as of July 30, 1996 (the "Revolving Credit
Agreement"). Borrowings under the Revolving Credit Agreement bear interest, at
the option of the Company, at a base rate or LIBOR plus a margin (0.20 percent
per annum at January 31, 2000) that varies depending on the Company's funded
debt to total capital ratio or its public senior unsecured debt rating. The
Revolving Credit Agreement requires compliance with various restrictive
covenants and provisions customary for an agreement of this nature including
an interest coverage ratio that could limit the Company's ability to pay
dividends in the future. The Revolving Credit Agreement has a maturity date of
July 30, 2002. As of December 31, 1999, $235 million was outstanding and $305
million was available for additional borrowings under the Revolving Credit
Agreement.
Term Loan Agreement--The Company is a party to a $400 million unsecured
five-year term loan agreement with a group of banks led by SunTrust Bank,
Atlanta, as agent, dated as of December 16, 1999 (the "Term Loan Agreement").
Borrowings available under the Term Loan Agreement were used to repay
indebtedness to Schlumberger upon completion of the merger and for general
corporate purposes. Amounts outstanding under the Term Loan Agreement bear
interest at the Company's option, at a base rate or LIBOR plus a margin (0.55
percent per annum at December 31, 1999) that varies depending on the Company's
public senior unsecured debt rating. No principal amortization is required for
the first two years, and the Company may prepay some or all of the debt at any
time without premium or penalty. The Term Loan Agreement requires compliance
with various restrictive covenants and provisions customary for an agreement
of this nature including an interest coverage ratio that could limit the
Company's ability to pay dividends in the future.
Secured Loan Agreement--The Company is a party to a $235.2 million secured
five-year term loan agreement with a group of banks led by ABN AMRO Bank, NV,
as agent, dated as of December 22, 1999 (the "Secured Loan Agreement").
Borrowings under the Secured Loan Agreement were used to repay debt incurred
for construction of the Discoverer Enterprise and upgrade of the Transocean
Amirante and were secured by both rigs. At December 31, 1999, both rigs were
operating under term contracts of up to five years with BP Amoco based on
their respective acceptance dates (see below). Cash flow from the BP Amoco
contracts will be used to repay the debt outstanding under the Secured Loan
Agreement in scheduled monthly payments. The Company may prepay some or all of
the debt at any time without premium or penalty. Approximately 92 percent of
the amounts outstanding under the Secured Loan Agreement bear interest at a
commercial paper rate plus a margin (0.31 percent per annum at December 31,
1999) while the remaining 8 percent of the amounts outstanding bear interest
at LIBOR plus a margin (0.65 percent per annum at December 31, 1999). The
floating rates under the Secured Loan Agreement have been converted to a fixed
rate by the interest rate swap agreement described below. (See "Quantitative
and Qualitative Disclosures About Market Risk--Interest Rate Risk"). The
Secured Loan Agreement contains covenants and provisions customary for a
secured agreement of this nature.
In January 2000, the Company agreed to cancel the remaining 14 months of
the contract with BP Amoco for the Transocean Amirante for a cash settlement
of $25 million. The cash received was used to repay borrowings under the
Secured Loan Agreement relating to the Transocean Amirante and the security
interest in the rig was released by the banks. The interest rate swap
agreement was also amended to reflect the reduced amounts subject to the swap.
Public Debt Offering--The Company has outstanding $300 million aggregate
principal amount of senior, unsecured debt securities originally issued in a
public offering. The securities consist of $100 million aggregate
25
principal amount of 7.45 percent notes due April 15, 2027 (the "Notes") and
$200 million aggregate principal amount of 8.00 percent debentures due April
15, 2027 (the "Debentures"). Holders of the 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. The indenture and supplemental indenture relating to the Notes and
the Debentures place limitations on the Company's ability to incur
indebtedness secured by certain liens, engage in certain sale/leaseback
transactions and engage in certain merger, consolidation or reorganization
transactions.
Secured Rig Financing--The Company has outstanding $85.1 million of debt
secured by the Trident IX and the Trident 16 (the "Secured Rig Financing").
Payments under these financing agreements include an interest component of
7.95 percent for the Trident IX and 7.20 percent for the Trident 16. The
Trident IX facility expires in April 2003 while the Trident 16 facility
expires in September 2004. The financing arrangements provide for a call right
on the part of the Company to repay the financing prior to expiration of their
scheduled terms and in some circumstances a put right on the part of the banks
to require the Company to repay the financings. Under either circumstance, the
Company would retain ownership of the rigs.
Notes Payable--The Company has outstanding $20.8 million aggregate
principal amount of unsecured 6.90 percent notes due February 15, 2004
originally issued in a private placement. The note purchase agreement
underlying the notes requires compliance with various restrictive covenants
and provisions customary for an agreement of this nature and on substantially
the same terms as those under the Revolving Credit Agreement, including an
interest coverage ratio that could limit the Company's ability to pay
dividends in the future.
Letters of Credit--The Company had letters of credit outstanding at
December 31, 1999 totaling $124.2 million, including a letter of credit
relating to the legal dispute with Kvaerner Installasjon a.s valued at $27.5
million. See Note 10 to the Company's combined financial statements. The
remaining amount guarantees various insurance, rig construction and contract
bidding activities.
Shelf Registration
The Company has an effective $450 million shelf registration statement on
Form S-3 for the proposed offering from time to time of senior or subordinated
debt securities, preference shares, ordinary shares and warrants to purchase
debt securities, preference shares, ordinary shares or other securities.
Acquisitions and Dispositions
In December 1999, Transocean Sedco Forex issued 109,419,166 ordinary shares
to Schlumberger shareholders in the merger, and issued an additional 145,102
ordinary shares that were sold on the market for cash paid in lieu of
fractional shares.
In February 2000, the Company sold its coiled tubing drilling services
business, Transocean Petroleum Technology, to Schlumberger. The net proceeds
from the sale were approximately $25 million and no gain or loss was
recognized on the sale. The Company's interests in its Transocean-Nabors
Drilling Technology LLC and Deep Vision LLC joint ventures were excluded from
the sale. The proceeds from the sale were used to repay debt and for general
corporate purposes.
The Company, from time to time, reviews possible acquisitions of businesses
and drilling units, and may in the future make significant capital commitments
for such purposes. Any such acquisition could involve the payment by the
Company of a substantial amount of cash and the issuance of a substantial
number of ordinary shares. 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 ordinary shares or a combination thereof.
26
Derivative Instruments
The Company, from time to time, may enter into a variety of derivative
financial instruments in connection with the management of its exposure to
fluctuations in foreign exchange rates and interest rates. The Company does
not enter into derivative transactions for speculative purposes; however, for
accounting purposes certain transactions may not meet the criteria for hedge
accounting.
Gains and losses on foreign exchange derivative instruments, which qualify
as accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments, which do not qualify as hedges for accounting purposes, are
recognized currently based on the change in market value of the derivative
instruments. At December 31, 1999, the Company did not have any foreign
exchange derivative instruments not qualifying as hedges.
The Company, from time to time, may use interest rate swap agreements to
effectively convert a portion of its floating rate debt to a fixed rate basis,
reducing the impact of interest rate changes on future income. Interest rate
swaps are designated as a hedge of underlying future interest payments. The
interest rate differential to be received or paid on the swaps is recognized
over the lives of the swaps as an adjustment to interest expense. The interest
rate swap agreements were recorded at fair value as part of the merger. See
"--Liquidity and Capital Resources--Debt--Secured Loan Agreement" and
"Quantitative and Qualitative Disclosures About Market Risk--Interest Rate
Risk."
Sources of Liquidity
The Company believes that its cash and cash equivalents, cash generated
from operations, borrowings available under its Revolving Credit Agreement and
access to other financing sources will be adequate to meet its anticipated
short-term and long-term liquidity requirements, including scheduled debt
repayments and capital expenditures for new rig construction and upgrade
projects.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB 133 to delay the required effective
date for adoption of SFAS No. 133 to fiscal years beginning after June 15,
2000. Because of the Company's limited use of derivatives to manage its
exposure to fluctuations in foreign exchange rates and interest rates,
management does not anticipate that the adoption of the new statement will
have a significant effect on the results of operations or the financial
position of the Company. The Company will adopt SFAS No. 133 as of January 1,
2001.
Year 2000 Issue
Previously we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in our operations or information technology systems
and believe we successfully responded to the Year 2000 date change. The cost
of our Year 2000 program was approximately $4 million, including an allocation
from Schlumberger of less than $1 million. We are not aware of any material
problems resulting from Year 2000 issues, whether with our rigs, our internal
systems, or the products and services of third parties. We will continue to
monitor our rig systems, critical computer applications and our suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matter
that may arise is addressed promptly.
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
27
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements to the effect that the Company or management
"anticipates," "believes," "budgets," "estimates," "expects," "forecasts,"
"intends," "plans," "predicts," or "projects" a particular result or course of
events, or that such result or course of events "could," "might," "may" or
"should" occur, and similar expressions, are also intended to identify
forward-looking statements. Forward-looking statements in this annual report
include, but are not limited to, statements involving expected capital
expenditures, results and effects of legal proceedings, liabilities for tax
issues, integration of Transocean Offshore Inc. and Sedco Forex, the timing
and cost of completion of capital projects, 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 and
development, exploration success by producers, oil and gas prices, demand for
oil and gas rigs, competition and market conditions in the contract drilling
industry, our ability to successfully integrate the operations of Transocean
Offshore Inc. and Sedco Forex, delays or cost overruns on construction
projects and possible cancellation of drilling contracts as a result of
delays, work stoppages by shipyard workers where our newbuilds are being
constructed, our ability to enter into and the terms of future contracts, the
availability of qualified personnel, labor relations and the outcome of
negotiations with unions representing workers, operating hazards, political
and other uncertainties inherent in non-U.S. operations (including exchange
and currency fluctuations), the impact of governmental laws and regulations,
the adequacy of sources of liquidity, the effect of litigation and
contingencies and other factors discussed in this annual report and in the
Company's other filings with the Securities and Exchange Commission ("SEC"),
which are available free of charge on the SEC's website at www.sec.gov. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
indicated. You should not place undue reliance on forward-looking statements.
Each forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
ITEM 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, 1999. Prior to the merger, Sedco Forex
believed its exposure to interest rate risk was not material since its long-
term debt obligations consisted solely of fixed rate indebtedness or related
party variable debt that was repaid in connection with the merger. For debt
obligations, the table presents 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, 1999, 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,
1999.
As of December 31, 1999:
Expected Maturity Date
------------------------------------------------------- Fair Value
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
----- ----- ------ ------ ------ ---------- ------ ----------
(In millions, except interest rate percentages)
Long-term debt
Fixed Rate(a).......... $21.4 $22.6 $ 24.0 $ 18.8 $ 19.1 $300.0 $405.9 $393.2
Average interest
rate................ 7.5% 7.5% 7.5% 7.4% 7.2% 7.8% 7.7%
Variable Rate.......... $57.2 $43.8 $376.4 $194.6 $198.2 -- $870.2 $870.2
Average interest
rate................ 6.1% 6.1% 6.7% 6.8% 6.8% -- 6.7%
- --------
(a) Reflects payment of face value of debt and not fair market value of
debt as assumed in the merger of Transocean Offshore Inc. and Sedco Forex.
For interest rate swaps, the table presents notional amounts and weighted-
average interest rates by contractual maturity dates as of December 31, 1999.
These interest rate swaps are those entered into by
28
Transocean Offshore Inc. as Sedco Forex did not have any interest rate swaps
prior to the merger. 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, 1999.
As of December 31, 1999:
Expected Maturity Date
---------------------------------------------------- Fair Value
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
----- ----- ----- ----- ----- ---------- ------ ----------
(In millions, except interest rate percentages)
Interest Rate Swaps
Pay fixed/receive
variable.............. $57.2 $43.8 $41.4 $44.6 $48.2 -- $235.2 $(2.2)
Average pay rate..... 6.9% 6.9% 6.9% 6.9% 6.9% -- 6.9%
Average receive
rate................ 5.7% 5.7% 5.7% 5.7% 5.7% -- 5.7%
In January 2000 in connection with the repayment of amounts outstanding
under the Secured Loan Agreement, the Company amended the interest rate swaps
to reduce the notional amount to $208.5 million. See "--Liquidity and Capital
Resources--Debt--Secured Loan Agreement."
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, 1999 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 Sedco Forex Inc.
We have audited the accompanying consolidated balance sheet of Transocean
Sedco Forex Inc. and Subsidiaries as of December 31, 1999, and the related
combined statements of operations, equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Transocean
Sedco Forex Inc. and Subsidiaries at December 31, 1999, and the combined
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Houston, Texas
January 31, 2000
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Schlumberger Limited
In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of equity and of cash flows present fairly, in
all material respects, the financial position of Transocean Sedco Forex Inc.
(previously Sedco Forex Holdings Limited) at December 31, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of Sedco Forex Holdings Limited's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
August 6, 1999
31
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------
1999 1998 1997
-------- ---------- --------
(In thousands, except per
share data)
Operating Revenues........ $648,236 $1,090,523 $891,334
-------- ---------- --------
Costs and Expenses
Operating and
maintenance............ 450,756 562,565 466,269
Depreciation............ 131,933 124,707 110,780
General and
administrative......... 16,703 25,986 15,664
-------- ---------- --------
599,392 713,258 592,713
-------- ---------- --------
Operating Income.......... 48,844 377,265 298,621
-------- ---------- --------
Other Income (Expense),
Net
Equity in earnings of
joint ventures......... 5,610 5,389 4,946
Interest income......... 5,433 3,361 3,296
Interest expense, net of
amounts capitalized.... (10,250) (12,950) (19,639)
Other, net.............. (830) 956 5,235
-------- ---------- --------
(37) (3,244) (6,162)
-------- ---------- --------
Income Before Income
Taxes.................... 48,807 374,021 292,459
Income Taxes.............. (9,296) 32,443 32,004
-------- ---------- --------
Net Income................ $ 58,103 $ 341,578 $260,455
======== ========== ========
Unaudited Pro Forma
Earnings Per Share
Basic................... $ 0.53 $ 3.12 $ 2.38
-------- ---------- --------
Diluted................. $ 0.53 $ 3.12 $ 2.38
-------- ---------- --------
Unaudited Pro Forma Shares
Outstanding
Basic................... 109,564 109,564 109,564
Diluted................. 109,636 109,636 109,636
See accompanying notes.
32
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
December 31,
---------------------
1999 1998
ASSETS ---------- ----------
(In thousands,
except per share
data)
Cash and Cash Equivalents................................ $ 165,673 $ 174,481
Accounts Receivable
Trade.................................................. 220,066 183,165
Other.................................................. 57,286 51,016
Receivables from Related Parties......................... 15,276 52,620
Materials and Supplies................................... 77,058 45,976
Deferred Income Taxes.................................... 12,562 --
Other Current Assets..................................... 10,945 7,435
---------- ----------
Total Current Assets................................. 558,866 514,693
---------- ----------
Property and Equipment................................... 5,498,116 1,954,961
Less Accumulated Depreciation............................ 1,153,614 1,039,538
---------- ----------
Property and Equipment, net............................ 4,344,502 915,423
---------- ----------
Goodwill, net............................................ 1,067,594 --
Investments in and Advances to Joint Ventures............ 101,892 24,865
Deferred Income Taxes.................................... -- 17,938
Other Assets............................................. 67,316 --
---------- ----------
Total Assets......................................... $6,140,170 $1,472,919
========== ==========
LIABILITIES AND EQUITY
Accounts Payable......................................... $ 129,248 $ 87,425
Accrued Income Taxes..................................... 111,853 41,058
Current Portion of Long-Term Debt........................ 78,584 14,348
Payables to Related Parties.............................. 15,290 32,960
Deferred Gain on Sale of Rigs............................ 26,167 26,000
Other Current Liabilities................................ 167,379 96,193
---------- ----------
Total Current Liabilities............................ 528,521 297,984
---------- ----------
Long-Term Debt........................................... 1,187,578 86,100
Related Party Debt....................................... -- 407,402
Deferred Income Taxes.................................... 383,991 --
Deferred Gain on Sale of Rigs............................ 69,779 97,000
Other Long-Term Liabilities.............................. 60,162 20,051
---------- ----------
Total Long-Term Liabilities.......................... 1,701,510 610,553
---------- ----------
Commitments and Contingencies
Preference Shares, $0.10 par value; 50,000,000 shares
authorized, none issued and outstanding................. --
Ordinary Shares, $0.01 par value; 300,000,000 shares
authorized, 210,119,501 shares issued and outstanding... 2,101
Additional Paid-in Capital............................... 3,908,038
---------- ----------
Total Equity......................................... 3,910,139 564,382
---------- ----------
Total Liabilities and Equity......................... $6,140,170 $1,472,919
========== ==========
See accompanying notes.
33
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF EQUITY
Ordinary
Shares Additional
-------------- Paid-in Pre-Merger Total
Shares Amount Capital Equity Equity
------- ------ ---------- ---------- ----------
(In thousands)
Balance at December 31, 1996.. $461,586 $ 461,586
Net income.................. 260,455 260,455
Dividends paid.............. (71,195) (71,195)
Advances to related parties
and other.................. (287,952) (287,952)
------- ------ ---------- -------- ----------
Balance at December 31, 1997.. 362,894 362,894
------- ------ ---------- -------- ----------
Net income.................. 341,578 341,578
Advances to related parties
and other.................. (140,090) (140,090)
------- ------ ---------- -------- ----------
Balance at December 31, 1998.. 564,382 564,382
------- ------ ---------- -------- ----------
Net income.................. 58,103 58,103
Advances from related
parties and other.......... 299,578 299,578
Merger with Transocean
Offshore Inc............... 210,120 $2,101 $3,908,038 (922,063) 2,988,076
------- ------ ---------- -------- ----------
Balance at December 31, 1999.. 210,120 $2,101 $3,908,038 $ -- $3,910,139
======= ====== ========== ======== ==========
See accompanying notes.
34
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Cash Flows from Operating Activities
Net income.................................. $ 58,103 $ 341,578 $ 260,455
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation.............................. 131,933 124,707 110,780
Amortization of deferred gain on sale of
rigs..................................... (26,167) (26,000) (8,667)
1999 and 1998 charges..................... 29,409 23,350 --
Deferred income taxes..................... (24,253) (16,039) 501
Equity in earnings of joint ventures...... (5,610) (5,389) (4,946)
Other, net................................ 1,101 -- --
Changes in operating assets and liabilities,
net of effects from the merger with
Transocean Offshore Inc.
Accounts receivable....................... 100,547 (18,297) (41,319)
Accounts payable and accrued liabilities.. (22,505) 27,703 146
Receivables/payables with related parties,
net...................................... 19,460 1,201 (8,761)
Income taxes receivable/payable, net...... (21,504) 15,062 6,788
Other assets and liabilities, net......... 123 5,538 3,507
--------- --------- ---------
Net cash provided by operating activities... 240,637 473,414 318,484
--------- --------- ---------
Cash Flows from Investing Activities
Capital expenditures........................ (537,029) (424,749) (187,411)
Cash acquired in merger with Transocean
Offshore Inc............................... 439,780 -- --
Net proceeds from sale of drilling rigs..... -- -- 174,000
Other, net.................................. 7,096 3,205 (5,842)
--------- --------- ---------
Net cash used in investing activities....... (90,153) (421,544) (19,253)
--------- --------- ---------
Cash Flows from Financing Activities
Advances and other (to) from related
parties.................................... 265,523 (140,090) (287,952)
Proceeds from issuance of related party
debt....................................... 371,720 250,080 40,000
Payments of principal of related party
debt....................................... (779,122) (22,063) (45,118)
Dividends paid.............................. -- -- (71,195)
Proceeds from issuance of long-term debt.... -- -- 120,060
Payments of principal of long-term debt..... (15,303) (59,406) (13,369)
Other, net.................................. (2,110) (1,027) (11,277)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. (159,292) 27,494 (268,851)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................. (8,808) 79,364 30,380
--------- --------- ---------
Cash and Cash Equivalents at Beginning of
Period....................................... 174,481 95,117 64,737
--------- --------- ---------
Cash and Cash Equivalents at End of Period.... $ 165,673 $ 174,481 $ 95,117
========= ========= =========
See accompanying notes.
35
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1--Principles of Combination
Transocean Sedco Forex Inc. (together with its majority owned subsidiaries
and predecessors, "the Company," unless the context requires otherwise) is a
leading international provider of deepwater and harsh environment contract
drilling services for oil and gas wells. The Company owns, has partial
ownership interests in, operates or has under construction 73 mobile offshore
drilling units. The Company's active fleet consists of twelve high-
specification semisubmersibles, thirty-one second- and third-generation
semisubmersibles, one Discoverer Enterprise-class drillship, four other
drillships, sixteen jackup rigs and three tenders. The Company has under
construction two Discoverer Enterprise-class drillships, three Sedco Express-
class semisubmersibles and one independent-leg cantilevered jackup. In
addition, the fleet includes one multipurpose service jackup, six swamp barges
and two land drilling rigs. The Company contracts these drilling rigs, related
equipment and work crews primarily on a dayrate basis to drill offshore wells.
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco
Forex Holdings Limited ("Sedco Forex") was completed. Sedco Forex was the
offshore contract drilling service business of Schlumberger Limited
("Schlumberger") and was spun-off immediately prior to the merger transaction.
As a result of the merger, Sedco Forex became a wholly owned subsidiary of
"Transocean Offshore Inc." which changed its name to Transocean Sedco Forex
Inc. The merger was accounted for as a purchase, with Sedco Forex as the
acquiror for accounting purposes.
The balance sheet as of December 31, 1999 represents the consolidated
position of the merged company. The results of operations and cash flows for
the periods presented in these combined financial statements, and the balance
sheet for the period prior to the merger, reflect the results and financial
position of Sedco Forex and not that of historical Transocean Offshore Inc.
Intercompany transactions and accounts have been eliminated. The equity method
of accounting is used for investments in joint ventures owned 50 percent or
less.
The combined financial statements for the period prior to the merger
represent the offshore contract drilling service business of Schlumberger,
which comprised certain businesses, operations, assets and liabilities of
Sedco Forex and its subsidiaries and of Schlumberger and its subsidiaries, as
defined in the distribution agreement (see Note 3). Although Sedco Forex was
not a separate public company prior to the merger, the combined financial
statements are presented as if Sedco Forex had existed as an entity separate
from its parent, Schlumberger. The combined financial statements include the
historical assets, liabilities, revenues and expenses that were directly
related to the offshore contract drilling service business of Schlumberger
during the periods presented and have been prepared using Schlumberger's
historical bases in the assets and liabilities and the historical results of
operations of Sedco Forex.
Certain Schlumberger corporate expenses, including centralized research and
engineering, legal, accounting, employee benefits, real estate, insurance,
information technology services, treasury and other corporate and
infrastructure costs, although not directly attributable to Sedco Forex's
operations, have been allocated to Sedco Forex on bases that Schlumberger and
Sedco Forex considered to be a reasonable reflection of the utilization of
services provided or the benefit received by Sedco Forex (see Note 16).
However, the financial information included herein may not reflect the
combined financial position, operating results, changes in equity and cash
flows of Sedco Forex had Sedco Forex been a separate, stand-alone entity
during the periods presented.
Because Sedco Forex was historically not operated as a separate, stand-
alone entity, and in many cases Sedco Forex's results were included in the
combined financial statements of Schlumberger on a divisional basis, there are
no separate meaningful historical equity accounts for Sedco Forex prior to the
merger. Changes in equity prior to the merger represent Schlumberger's
contribution of its net investment in Sedco Forex after giving effect to the
net earnings of Sedco Forex, dividends paid, plus net cash transfers to and
from Schlumberger and other transfers from Schlumberger.
36
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Certain assets and liabilities included in the financial statements for
periods prior to the merger, primarily associated with employee benefits,
income taxes, and balances due to or from Schlumberger companies other than
Sedco Forex, were retained by Schlumberger in accordance with the distribution
agreement (see Note 3).
Note 2--Summary of Significant Accounting Policies
Accounting Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the U. S. 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.
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,
Eurodollar time deposits, certificates of deposit and commercial paper. The
Company may also 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 are stated at cost less
accumulated depreciation, which is provided for by charges to income over the
estimated useful lives of the assets by the straight-line method. Expenditures
for renewals, replacements, and improvements are capitalized. Maintenance and
repairs are charged to operating expenses as incurred. Upon sale or other
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount, less proceeds from disposal,
is charged or credited to income.
Estimated useful lives of rigs range from 10 to 25 years, buildings and
improvements from 10 to 30 years and machinery and equipment from 4 to 12
years. From time to time, major improvements are performed on the rigs which
extend their useful lives. These improvements are amortized over 10 to 15
years.
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 based on the nature of the offshore drilling
industry, long-lived drilling equipment and the long-standing relationships
with core customers.
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. For property and equipment, the
determination of recoverability is made based upon the estimated undiscounted
future net cash flows of the related asset. For goodwill, the determination of
recoverability is made based upon a comparison of the Company's net book value
to the value indicated by the market price of its equity securities.
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
37
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
expenses exceed fees received, the net costs are deferred and amortized over
the appropriate periods of benefit, generally the term of the contract.
Profits on mobilizations 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 deferred and
amortized over the period until the next survey.
Capitalized Interest--Interest costs for the construction and upgrade of
qualifying assets are capitalized. Capitalized interest costs on construction
work in progress were $27.2 million and $8.7 million for the years ended
December 31, 1999 and 1998, respectively (none during 1997).
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
amounted to $1.0 million and $5.2 million for the years ended December 31,
1998 and 1997, respectively. Net foreign currency gains were less than $0.1
million in 1999.
Income Taxes--Sedco Forex's operating results historically have been
included in Schlumberger's consolidated U.S. and state income tax returns and
in tax returns of Schlumberger's foreign subsidiaries. The provision for
income taxes in the combined financial statements has been determined on a
separate return basis.
Taxes on income are computed in accordance with the tax rules and
regulations of the taxing authorities where the income is earned. The income
tax rates imposed by these taxing authorities vary substantially. Taxable
income may differ from pre-tax income for financial accounting purposes.
Deferred tax assets and liabilities are usually recognized for the expected
tax consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
Stock-Based Compensation--In accordance with the provisions of the
Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation,
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 employee stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expense is recognized (see Note 11).
Comprehensive Income--Comprehensive income is reported in accordance with
FASB's Reporting Comprehensive Income, SFAS No. 130. There were no significant
items of comprehensive income for the three years ended December 31, 1999.
New Accounting Pronouncements--In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. In June 1999,
the FASB issued SFAS No. 137, Accounting for
38
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB 133 to delay the required effective date for adoption of SFAS No. 133
to fiscal years beginning after June 15, 2000. Because of the Company's
limited use of derivatives to manage its exposure to fluctuations in foreign
exchange rates and interest rates, management does not anticipate that the
adoption of the new statement will have a significant effect on the results of
operations or the financial position of the Company. The Company will adopt
SFAS No. 133 as of January 1, 2001.
Reclassifications--Certain reclassifications have been made to prior period
amounts to conform with the current year presentation.
Note 3--Distribution, Spin-off and Merger
Pursuant to the Distribution Agreement dated July 12, 1999 between
Schlumberger and Sedco Forex, Schlumberger separated and consolidated its
offshore contract drilling service business under Sedco Forex. In December
1999 Schlumberger made a capital contribution of $226.7 million to Sedco Forex
to adjust Sedco Forex's level of indebtedness and cash balances to those
required by the terms of the Distribution Agreement.
In accordance with the Distribution Agreement, certain Sedco Forex assets
and liabilities, primarily associated with employee benefits, income taxes and
balances due to or from Schlumberger companies other than Sedco Forex were
retained by Schlumberger. The net liabilities retained totaled $30.9 million
and were treated as a capital contribution by Schlumberger.
On December 30, 1999, Schlumberger completed the spin-off of Sedco Forex to
the Schlumberger shareholders by issuing one share of Sedco Forex capital
stock for each share of Schlumberger common stock owned.
On December 31, 1999, the merger of Transocean Offshore Inc. and Sedco
Forex Holdings Limited was completed. Under the terms of the Agreement and
Plan of Merger dated July 12, 1999 among Schlumberger, Sedco Forex, Transocean
Offshore Inc. and Transocean SF Limited, a wholly owned Transocean Offshore
Inc. subsidiary, Transocean SF Limited merged with and into Sedco Forex, and
Schlumberger shareholders exchanged all of the Sedco Forex shares distributed
by Schlumberger for 109,564,268 ordinary shares of the Company, of which
145,102 ordinary shares were sold on the market for cash paid in lieu of
fractional shares.
The merger was accounted for as a purchase, with Sedco Forex as the
acquiror for accounting purposes. The purchase price of $2.99 billion is
comprised of the calculated market capitalization of Transocean Offshore Inc.
of $2.94 billion and the estimated fair value of Transocean Offshore Inc.
stock options at the time of the merger of $0.05 billion. The market
capitalization of Transocean Offshore Inc. was calculated using the average
closing price of Transocean Offshore Inc. ordinary shares over the seven-day
period commencing three days before July 12, 1999, the date the merger was
announced.
The purchase price included, at estimated fair value, current assets of
$638 million, drilling and other property and equipment of $3,029 million,
other assets of $136 million and the assumption of current liabilities of $299
million, other net long-term liabilities of $278 million and long-term debt of
$1,119 million. In addition, a deferred tax liability of $188 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 was $1,068 million,
which has been accounted for as goodwill.
39
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma combined operating results of Sedco Forex and
Transocean Offshore Inc. for the years ended December 31, 1999 and 1998,
assuming the acquisition had been made as of January 1, 1998, are summarized
as follows:
Year ended December
31,
---------------------
1999 1998
---------- ----------
(In thousands, except
per share data)
Operating revenues..................................... $1,579,058 $2,180,135
Operating income....................................... 291,147 789,531
Net income............................................. 237,898 654,866
Earnings per share:
Basic................................................ $ 1.13 $ 3.12
Diluted.............................................. 1.13 3.11
The pro forma information includes adjustments for additional depreciation
based on the fair market value of the drilling and other property and
equipment acquired, the amortization of goodwill arising from the transaction,
decreased interest expense for related party debt replaced by borrowings under
the Term Loan Agreement (see Note 5) and related adjustments for income taxes.
The pro forma information is not necessarily indicative of the results of
operations had the transaction been effected on the assumed date or the
results of operations for any future periods.
Note 4--Upgrade and Expansion of Drilling Fleet
Capital expenditures, including capitalized interest, totaled $537 million
during the year ended December 31, 1999 and include $132 million, $138 million
and $151 million spent on the construction of the Sedco Express, Sedco Energy
and Cajun Express, respectively. Capital expenditures also included $60
million on the construction of the Trident 20 during 1999.
At December 31, 1999, three Sedco Express-class semisubmersibles, the
Trident 20 and two Discoverer Enterprise-class drillships were under
construction.
Note 5--Debt
Debt is comprised of the following:
December 31,
-------------------
1999 1998
---------- --------
(In thousands)
Term Loan Agreement..................................... $ 400,000 $ --
Secured Loan Agreement.................................. 235,174 --
Revolving Credit Agreement.............................. 235,000 --
8.00% Debentures, at fair value......................... 197,774 --
7.45% Notes, at fair value.............................. 93,916
Secured Rig Financing................................... 85,145 100,448
6.90% Notes Payable, at fair value...................... 19,153 --
---------- --------
Total Debt............................................ 1,266,162 100,448
Less Current Maturities................................. 78,584 14,348
---------- --------
Total Long-Term Debt.................................. $1,187,578 $ 86,100
========== ========
40
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Term Loan Agreement--The Company is a party to a $400 million unsecured
five-year term loan agreement with a group of banks led by SunTrust Bank,
Atlanta, as agent, dated as of December 16, 1999 (the "Term Loan Agreement").
Amounts outstanding under the Term Loan Agreement bear interest, at the
Company's option, at a base rate or LIBOR plus a margin (0.55 percent per
annum at December 31, 1999) that varies depending on the Company's public
senior unsecured debt rating. No principal amortization is required for the
first two years, and the Company may prepay some or all of the debt at any
time without premium or penalty. The Term Loan Agreement requires compliance
with various restrictive covenants and provisions customary for an agreement
of this nature including an interest coverage ratio that could limit the
Company's ability to pay dividends in the future. The carrying value of the
term loan approximates fair value.
Secured Loan Agreement--The Company is a party to a $235.2 million secured
five-year term loan agreement with a group of banks led by ABN AMRO Bank, NV,
as agent, dated as of December 22, 1999 (the "Secured Loan Agreement"). At
December 31, 1999, the loan was secured by the Discoverer Enterprise and
Transocean Amirante. The Company may prepay some or all of the debt at any
time without premium or penalty. Approximately 92 percent of the amounts
outstanding under the Secured Loan Agreement bear interest at a commercial
paper rate plus a margin (0.31 percent per annum at December 31, 1999) while
the remaining 8 percent of the amounts outstanding bear interest at LIBOR plus
a margin (0.65 percent per annum at December 31, 1999). The floating rates
under the Secured Loan Agreement have been converted to a fixed rate of 6.9
percent per annum by the interest rate swap agreement (see Note 6). The
Secured Loan Agreement contains covenants and provisions customary for a
secured agreement of this nature. The carrying value of the secured loan
approximates fair value.
In January 2000, the Company agreed to cancel the remaining 14 months of a
contract with BP Amoco for its semisubmersible rig, the Transocean Amirante,
for a cash settlement of $25 million. The cash received was used to repay
borrowings under the Secured Loan Agreement relating to the Transocean
Amirante and the security interest in the rig was released by the banks. The
interest rate swap agreement was also amended to reflect the reduced amounts
subject to the swap.
Revolving Credit Agreement--The Company is a party to a $540 million
revolving credit agreement with a group of banks led by ABN AMRO Bank, NV, as
agent, (the "Revolving Credit Agreement"). Borrowings under the Revolving
Credit Agreement bear interest, at the option of the Company, at a base rate
or LIBOR plus a margin (0.20 percent per annum at January 31, 2000) that
varies depending on the Company's funded debt to total capital ratio or its
public senior unsecured debt rating. The Revolving Credit Agreement requires
compliance with various restrictive covenants and provisions customary for an
agreement of this nature including an interest coverage ratio that could limit
the Company's ability to pay dividends in the future. The Revolving Credit
Agreement has a maturity date of July 30, 2002. The carrying amount of the
borrowings under the Revolving Credit Agreement approximates fair value. As of
December 31, 1999, $305 million was available for additional borrowings under
the Revolving Credit Agreement.
Public Debt Offering--The Company has outstanding $300 million aggregate
principal amount of senior, unsecured debt securities originally issued in a
public offering. The securities consist of $100 million aggregate principal
amount of 7.45 percent notes due April 15, 2027 (the "Notes") and $200 million
aggregate principal amount of 8.00 percent debentures due April 15, 2027 (the
"Debentures"). Holders of the 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. The indenture and
41
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
supplemental indenture relating to the Notes and the Debentures place
limitations on the Company's ability to incur indebtedness secured by certain
liens, engage in certain sale/leaseback transactions and engage in certain
merger, consolidation or reorganization transactions. The Notes and Debentures
were recorded at fair value as part of the merger.
Secured Rig Financing--The Company has outstanding $85.1 million of debt
secured by the Trident IX and the Trident 16 (the "Secured Rig Financing").
Payments under these financing agreements included an interest component of
7.95 percent for the Trident IX and 7.20 percent for the Trident 16. The
Trident IX facility expires in April 2003 while the Trident 16 facility expires
in September 2004. The financing arrangements provide for a call right on the
part of the Company to repay the financing prior to expiration of their
scheduled terms and in some circumstances a put right on the part of the banks
to require the Company to repay the financings. Under either circumstance, the
Company would retain ownership of the rigs. The estimated fair value of the
Secured Rig Financing at December 31, 1999 was $82.4 million based on the
estimated yield to maturity as of December 31, 1999.
Notes Payable--The Company has outstanding a $20.8 million aggregate
principal amount of unsecured 6.90 percent notes due February 15, 2004
originally issued in a private placement. The note purchase agreement
underlying the notes requires compliance with various restrictive covenants and
provisions customary for an agreement of this nature and on substantially the
same terms as those under the Revolving Credit Agreement, including an interest
coverage ratio that could limit the Company's ability to pay dividends in the
future. The notes payable were recorded at fair value as part of the merger.
Expected maturity of the Company's debt is as follows:
Years ended December 31,
------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------- ------- -------- -------- -------- ---------- ----------
(In thousands)
Term Loan Agreement..... $ -- $ -- $100,000 $150,000 $150,000 $ -- $ 400,000
Secured Loan Agreement.. 57,159 43,831 41,431 44,601 48,152 -- 235,174
Revolving Credit
Agreement.............. -- -- 235,000 -- -- -- 235,000
8.00% Debentures, at
fair value............. -- -- -- -- -- 197,774 197,774
7.45% Notes, at fair
value.................. -- -- -- -- -- 93,916 93,916
Secured Rig Financing... 16,810 18,001 19,381 14,212 16,741 -- 85,145
6.90% Notes Payable, at
fair value............. 4,615 4,615 4,615 4,615 693 -- 19,153
------- ------- -------- -------- -------- -------- ----------
Total Debt............. $78,584 $66,447 $400,427 $213,428 $215,586 $291,690 $1,266,162
======= ======= ======== ======== ======== ======== ==========
Letters of Credit--The Company had letters of credit outstanding at
December 31, 1999 totaling $124.2 million, including a letter of credit
relating to the legal dispute with Kvaerner Installasjon a.s valued at $27.5
million (see Note 10). The remaining amount guarantees various insurance, rig
construction and contract bidding activities .
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
42
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998, 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. As of December
31, 1999 and 1998, the Company had no foreign exchange derivative instruments
not qualifying as accounting hedges.
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
interest rate swap agreements were recorded at fair value as part of the
merger.
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.
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 various countries (see
Note 14). The Company maintains an allowance for uncollectible accounts
receivable based upon expected collectibility. This allowance was
approximately $27.1 million and $0.8 million at December 31, 1999 and 1998,
respectively. 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 22
percent of its employees working under collective bargaining agreements at
December 31, 1999, most of whom were working in Norway and Nigeria. Of these
represented employees, a majority are working under agreements that are
subject to salary negotiation in 2000.
43
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 7--Other Current Liabilities
Other current liabilities are comprised of the following:
December 31,
----------------
1999 1998
-------- -------
(In thousands)
Accrued Payroll and Employee Benefits...................... $ 55,542 $66,421
Contract Disputes and Legal Claims......................... 50,454 10,000
Deferred Revenue........................................... 17,763 --
Accrued Taxes, Other than Income........................... 13,433 13,565
Accrued Interest........................................... 10,056 --
Other...................................................... 20,131 6,207
-------- -------
$167,379 $96,193
======== =======
Note 8--Supplemental Cash Flow Information
Non-cash financing activities for the year ended December 31, 1999 included
$2.99 billion related to the ordinary shares held by Transocean Offshore Inc.
shareholders at the time of the merger. Also included was $34.1 million of
non-cash increases in equity advances from Schlumberger relating to balances
retained under the Distribution Agreement (see Note 3). Non-cash investing
activities for the year ended December 31, 1999 included $2.55 billion of net
assets acquired in the merger.
Cash payments for interest were $39.8 million, $21.4 million and $19.2
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Cash payments for income taxes, net, were $35.3 million, $30.0 million and
$26.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Note 9--Income Taxes
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted and income is earned. There is no
expected relationship between the provision for or benefit from income taxes
and income or loss before income taxes because each country has taxation
regimes which vary not only with respect to nominal rate, but also due to the
availability of deductions, credits and other benefits. Variations also arise
because income earned in and subject to tax by any particular country or
countries fluctuates from year to year. Sedco Forex, a British Virgin Islands
company, is not subject to income tax in that jurisdiction. The effective tax
rate for the years ended December 31, 1999, 1998 and 1997 was (19.0) percent,
8.7 percent and 10.9 percent, respectively.
The components of the provision for income taxes are as follows:
Years ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(In thousands)
Current provision............................... $ 14,957 $ 48,482 $31,503
Deferred provision (benefit).................... (24,253) (16,039) 501
-------- -------- -------
Income Taxes.................................... $( 9,296) $ 32,443 $32,004
======== ======== =======
44
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Significant components of deferred tax assets and liabilities as of
December 31, 1999 and 1998 are as follows:
December 31,
------------------
1999 1998
--------- -------
(In thousands)
Deferred Tax Assets--Current
Accrued personnel taxes.................................. $ 1,204 $ --
Accrued workers' compensation insurance.................. 422 --
Other accruals........................................... 8,877 --
Retirement and benefit plan accruals..................... 2,831 --
Insurance accruals....................................... 420 --
Other.................................................... 929 --
--------- -------
Total Current Deferred Tax Assets...................... 14,683 --
--------- -------
Deferred Tax Liabilities--Current
Deferred drydock......................................... (2,121) --
--------- -------
Total Current Deferred Tax Liabilities................. (2,121) --
--------- -------
Net Current Deferred Tax Assets ....................... $ 12,562 $ --
========= =======
Deferred Tax Assets--Noncurrent
Net operating loss carry forward......................... $ 28,205 $14,549
Retirement and benefit plan accruals..................... 5,218 3,129
Other accruals........................................... 13,574 226
Deferred income and other................................ 171 34
--------- -------
Total Noncurrent Deferred Tax Assets................... 47,168 17,938
--------- -------
Deferred Tax Liabilities--Noncurrent
Depreciation and amortization............................ (358,705) --
Deferred gains........................................... (39,774) --
Investment in subsidiaries............................... (27,213) --
Other.................................................... (5,467) --
--------- -------
Total Noncurrent Deferred Tax Liabilities.............. (431,159) --
--------- -------
Net Noncurrent Deferred Tax Assets (Liabilities)....... $(383,991) $17,938
========= =======
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. In the fourth quarter of 1998,
the Company released the valuation allowance related to its UK tax loss
carryforwards. These carryforwards, which the Company believes will be fully
utilized, are available to the Company indefinitely. Prior to 1998, the
Company had recorded a 100 percent valuation allowance on these tax loss
carryforwards.
Transocean Sedco Forex Inc., a Cayman Islands company, is not subject to
income taxes in the Cayman Islands. As of December 31, 1999, there is no
Cayman Islands income or profits tax, withholding tax, capital gains tax,
capital transfer tax, estate duty or inheritance tax payable by a Cayman
Islands company or its shareholders. The Company has obtained an assurance
from the Cayman Islands government under the Tax Concessions Law (1995
Revision) that, in the event that any legislation is enacted in the Cayman
Islands imposing tax computed on profits or income, or computed on any capital
assets, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, such tax shall not, until June 1, 2019, be applicable to the
Company or to any of its operations or to the shares, debentures or other
obligations of the Company. Therefore, under present law there will be no
Cayman Islands tax consequences affecting distributions.
45
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The Company's income tax returns are subject to review and examination in
the various jurisdictions in which the Company operates. Certain 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 business, financial position or results of operations.
In connection with the distribution of Sedco Forex to the Schlumberger
shareholders, Sedco Forex and Schlumberger entered into a Tax Separation
Agreement. In accordance with the terms of the Tax Separation Agreement,
Schlumberger agreed to indemnify Sedco Forex for any tax liabilities incurred
directly in connection with the preparation of Sedco Forex for this
distribution. In addition, Schlumberger agreed to indemnify Sedco Forex for
tax liabilities associated with Sedco Forex operations conducted through
Schlumberger entities prior to the merger and any tax liabilities associated
with Sedco Forex assets retained by Schlumberger.
Transocean Offshore Inc. was included in the consolidated federal income
tax returns filed by a former parent, Sonat Inc. ("Sonat") during all periods
in which Sonat's ownership was greater than or equal to 80 percent
("Affiliation Years"). Transocean Offshore Inc. and Sonat entered into a Tax
Sharing Agreement providing for the manner of determining payments with
respect to federal income tax liabilities and benefits arising in the
Affiliation Years. Under the Tax Sharing Agreement, Transocean Offshore Inc.
will pay to Sonat an amount equal to Transocean Offshore Inc.'s share of the
Sonat consolidated federal income tax liability, generally determined on a
separate return basis. In addition, Sonat will pay Transocean Offshore Inc.
for utilization by Sonat of deductions, losses and credits which are
attributable to Transocean Offshore Inc. and in excess of that which would be
utilized on a separate return basis. Transocean Offshore Inc. has been
notified that the IRS will commence an examination of the last Affiliation
Year, the short taxable year ended June 4, 1993.
Note 10--Commitments and Contingencies
Leases--The Company has operating lease commitments expiring at various
dates, principally for real estate, office space, office equipment and rig
bareboat charters. In addition to rental payments, some leases provide that
the Company pay a pro rata share of operating costs applicable to the leased
property. At December 31, 1999, future minimum payments for noncancellable
operating leases are as follows:
(In thousands)
2000....................................................... $29,575
2001....................................................... 23,262
2002....................................................... 1,997
2003....................................................... 1,924
2004....................................................... 1,661
Thereafter................................................. 13,151
-------
Total.................................................... $71,570
=======
Rental expense for all operating leases, including leases with terms of
less than one year, was $37 million, $56 million and $30 million for the years
ended December 31, 1999, 1998 and 1997, 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, 1999, the Company had firm commitments related
to rig construction (see Note 4) totaling $242.3 million.
Legal Proceedings--During 1997, Kvaerner Installasjon a.s ("Kvaerner") in
Norway performed modification and refurbishment work on a high specification
semisubmersible drilling rig, the Transocean
46
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Leader. The amount owed with respect to such work is in dispute. A letter of
credit valued at approximately $27.5 million as of December 31, 1999 has been
posted 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
judgment for approximately $33 million plus interest. The Company vigorously
denies the material allegations of Kvaerner's petition and expects a trial
date to be set in the fourth quarter of 2000. Although the Company cannot
predict with certainty the outcome of the dispute at this time, the Company
does not expect the liability, if any, resulting from this matter to have a
material adverse effect on its business or financial position.
In 1990 and 1991, two of the Company's subsidiaries were served with
various assessments collectively valued at approximately $7.4 million from the
municipality of Rio de Janeiro, Brazil to collect a municipal tax on services.
The Company believes that neither subsidiary is liable for the taxes and has
contested the assessments in the Brazilian administrative and court systems.
The proceeding with respect to a June 1991 assessment, which was valued at
approximately $6.3 million, is now pending before the Brazil Supreme Court.
The lower courts and the superior court of appeals have rejected the Company's
arguments. An August 1990 assessment also had an unfavorable ruling at the
first and second court levels and is being submitted to the Brazil Supreme
Court. The Company is awaiting a ruling from the Taxpayer's Council as to an
October 1990 assessment. 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 municipal tax payments required to be paid by the Company. The Company
does not expect the liability, if any, resulting from these assessments to
have a material adverse effect on the Company's business or financial
position.
Global Marine Drilling Company ("Global Marine") initiated an arbitration
proceeding in London in December 1997 against a subsidiary of Sedco Forex.
Global Marine alleges a claim for approximately $85 million (plus interest and
costs) for an alleged late return of a chartered rig and for breach of
maintenance obligations under the charter. In February 1998, the tribunal held
that the charter expired January 20, 1998, plus time for physical delivery.
The rig was not redelivered until May 1998 and, accordingly, the Company will
probably be required to pay some dayrate for the period from January 1998
until redelivery. The amount of any damages has not been set and hearings on
various issues are set for later this year. The Company disputes Global
Marine's allegations and is vigorously defending the case. The arrestment
previously placed on the rig, Sovereign Explorer, in connection with the
proceedings has been lifted. Although the Company cannot predict with
certainty the outcome of the dispute at this time, the Company does not expect
that the ultimate liability, if any, resulting from the matter will have a
material adverse effect on its business or financial position.
RIGCO North America, LLC ("RIGCO"), a subsidiary of Tatham Offshore Inc.,
filed a lawsuit in Texas state court in July 1999 asserting various claims in
connection with shipyard and rig management contracts for two rigs managed on
behalf of RIGCO. As a result of the merger, Sedco Forex assumed liability for
these claims. RIGCO alleges breach of contract, negligence and fraud and
claims damages of approximately $51 million, plus exemplary damages,
attorney's fees and other unspecified damages. In August 1999, RIGCO filed for
voluntary bankruptcy protection in the U.S. federal bankruptcy court sitting
in Texas. As part of the bankruptcy proceedings, RIGCO filed a preference
action in September 1999. RIGCO seeks to avoid alleged transfers of
approximately $4.2 million and to have those funds returned to the RIGCO
bankruptcy estate. The Company disputes the allegations and is vigorously
defending the case. Although the Company cannot predict with certainty the
outcome of the dispute at this time, the Company does not expect that the
liability, if any, resulting from the matter will have a material adverse
effect on its business or financial position.
The Indian Customs Department, Mumbai, filed a "show cause notice" against
a subsidiary of Sedco Forex and various third parties on July 8, 1999. The
show cause notice alleges that the original entry into India and
47
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
other subsequent movements of the Trident 2 jackup rig operated by the
subsidiary constituted imports and exports for which proper customs procedures
were not followed and that customs duties should have been paid, and seeks
payment of customs duties, with interest and penalties, and confiscation of
the rig. In connection with these allegations, the customs authorities
confiscated the rig, which confiscation was stayed by application to the High
Court, Mumbai, until one month following the order of the Customs Department
in respect of the show cause notice. In January 2000, the Customs Department
issued an order in respect of the show cause notice, directing the Company to
pay approximately a $3.5 million redemption fee for the rig in lieu of
confiscation and approximately $1.5 million in penalties in addition to the
amount of customs duties owed, which were unspecified in the order. The
Company disputes the ruling and is vigorously defending the case. In February
2000, the Company filed an appeal with the Customs, Excise, Gold (Exchange),
Appellate Tribunal (CEGAT) and an application with the High Court in Mumbai to
have the confiscation of the rig stayed pending the outcome of the appeal. The
Company does not expect that the ultimate liability, if any, resulting from
the matter will have a material adverse effect on its business or financial
position.
In January 2000, an anchor from one of the Company's drilling rigs was
accidentally released as a result of an anchor winch failure while the rig was
under tow to a drilling location in the U.S. Gulf of Mexico. The incident
resulted in the release of hydrocarbons from the damaged section of the
pipeline, damage to offshore facilities, including a crude oil pipeline, and
the shutdown of the pipeline and affected production platforms. All
appropriate governmental authorities were notified, and the Company cooperated
fully with the operator and relevant authorities in support of the remediation
efforts. Following the incident, the operator of the pipeline and certain
other joint owners and affected producers have notified the Company that they
consider the Company liable for the resulting damages. The Company expects
that existing insurance will substantially cover any potential liability
associated with this matter.
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 business or financial position of
the Company.
Note 11--Stock-Based Compensation Plans
Prior to the spin-off, key employees of Sedco Forex were granted stock
options at various dates under the Schlumberger stock option plans. For all of
the stock options granted under such plans, the exercise price of each option
equaled the market price of Schlumberger stock on the date of grant; each
option's maximum term was ten years, and they generally vested in 20 percent
increments over five years. Fully vested options held by Sedco Forex employees
at the date of the spin-off will lapse in accordance with their provisions.
Non-vested options were terminated and fully vested stock options to purchase
ordinary shares of Transocean Sedco Forex Inc. were granted under a new plan
(the "SF Plan"). Certain Sedco Forex employees did not join the Company;
therefore, their options remained unchanged under the Schlumberger stock
option plans.
Incentive Plan--The Company has an incentive plan for key employees and
outside directors (the "Incentive Plan"). Under the Incentive Plan, awards can
be granted in the form of stock options, restricted stock, stock appreciation
rights ("SARs") and cash performance awards. Under the Incentive Plan, the
Company is authorized to grant up to (i) 12.9 million ordinary shares to
employees; (ii) 400,000 ordinary shares to outside directors; and (iii)
250,000 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. On December 31, 1999, all
unvested stock options and SARs and all unvested restricted shares granted
after April 1996 became fully vested as a result of the merger. At December
31, 1999, there were 8.6 million total shares available for future grants.
48
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table summarizes option activities:
Weighted-
Number of Average
Shares Exercise
Under Option Price
------------ ---------
Schlumberger Options
Outstanding at December 31, 1996...................... 720,400 $33.18
Granted............................................... 167,000 81.51
Exercised............................................. (89,080) 30.43
--------- ------
Outstanding at December 31, 1997...................... 798,320 43.60
Granted............................................... 14,500 78.38
Exercised............................................. (49,900) 30.31
--------- ------
Outstanding at December 31, 1998...................... 762,920 45.13
Granted............................................... 121,250 56.83
Exercised............................................. (216,616) 33.38
Unvested options terminated........................... (282,000) 61.23
Options retained by Schlumberger...................... (385,554) 48.56
--------- ------
-- --
========= ======
Transocean Sedco Forex Inc. Options
Options outstanding at time of merger................. 2,747,773 25.04
Options issued under the SF Plan...................... 491,645 34.09
Options issued under the Incentive Plan............... 20,000 33.69
--------- ------
Outstanding at December 31, 1999...................... 3,259,418 $26.46
========= ======
Exercisable at December 31, 1997...................... 367,220 $31.28
Exercisable at December 31, 1998...................... 444,220 $35.80
Exercisable at December 31, 1999...................... 3,239,418 $26.41
The following table summarizes information about stock options outstanding
at December 31, 1999:
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--$19.17 4.69 years 570,645 $ 9.99 570,645 $ 9.99
$23.44--$34.63 7.96 years 2,115,914 $25.98 2,095,914 $25.90
$36.94--$56.31 8.11 years 572,859 $44.64 572,859 $44.64
On December 31, 1999, there were 135,057 restricted shares and 86,585 stock
appreciation rights outstanding under the Incentive Plan.
Stock Purchase Plan--The Company provides a stock purchase plan (the "Stock
Purchase Plan") for certain full-time employees. 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 ordinary shares. The purchase price of the stock is 85 percent
of the lower of its beginning-of-year or end-of-year market price. Up to
750,000 ordinary shares are reserved for issuance pursuant to the Plan.
49
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
As discussed in Note 2, APB 25 and related interpretations are applied in
accounting for stock-based compensation plans. If compensation expense for
stock options granted under Schlumberger stock option plans was recognized
using the alternative fair value method of accounting under SFAS No. 123, net
income and unaudited pro forma earnings per share would have been reduced to
the pro forma amounts indicated below:
Years ended December 31,
-------------------------
1999 1998 1997
------- -------- --------
(In thousands)
Net Income:
As Reported..................................... $58,103 $341,578 $260,455
Pro Forma....................................... 56,274 339,537 259,244
Unaudited Pro Forma Earnings Per Share:
Basic
As Reported..................................... $ 0.53 $ 3.12 $ 2.38
SFAS 123 Pro Forma.............................. 0.51 3.10 2.37
Diluted
As Reported..................................... $ 0.53 $ 3.12 $ 2.38
SFAS 123 Pro Forma.............................. 0.51 3.10 2.36
The above pro forma information is not indicative of future pro forma
results. The fair value of each option grant under the Schlumberger stock
option plans is estimated on the date of grant using the multiple option
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend
yields of 0.75 percent; expected volatility of 26-27 percent, 21-25 percent
and 21 percent; risk free interest rates of 4.86-5.22 percent, 4.35-5.62
percent and 5.80-6.77 percent; and expected lives of 5.60 years, 5.02 and 5.09
years. The weighted-average fair value of options granted was $18.31, $23.18
and $24.04 for the years ended December 31, 1999, 1998 and 1997, respectively.
Note 12--Retirement Plans and Other Postemployment Benefits
Qualified Defined Benefit Pension Plans--Prior to the spin-off of Sedco
Forex, Schlumberger sponsored several defined benefit pension plans that
covered substantially all U.S. employees (the "Sedco Forex Plans"). Pursuant
to the distribution agreement (see Note 3), Schlumberger and the Company
entered into an employee matters agreement concerning personnel and employee
benefit matters. Pursuant to this agreement, Schlumberger retained the
benefit-related liabilities of former Sedco Forex employees under the Sedco
Forex Plans. The benefits under these plans are based on years of service and
compensation on a career-average pay basis. These plans are substantially
fully funded with trustees in respect to past and current service. Charges to
expense were based upon costs computed by independent actuaries. The funding
policy is to contribute annually amounts that are allowable for U.S. federal
income tax purposes. These contributions are intended to provide for benefits
earned to date and those expected to be earned in the future.
50
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The change in benefit obligation, fair value of plan assets and funded
status for the Sedco Forex Plans for the year ended December 31, 1998 is shown
in the table below. These changes are not presented for the year ended
December 31, 1999 because Schlumberger retained the benefit obligation and
plan assets related to the Sedco Forex Plans.
Pension Benefits
----------------
December 31,
1998
----------------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year..................... $6,297
Service cost................................................ 396
Interest cost............................................... 460
Actuarial losses............................................ 467
Benefits paid............................................... (277)
------
Benefit obligation at end of year......................... 7,343
------
Change in plan assets
Fair value of plan assets at beginning of year.............. 6,336
Actual return on plan assets................................ 1,049
Company contributions....................................... 315
Benefits paid............................................... (277)
------
Fair value of plan assets at end of year.................. 7,423
------
Funded status............................................... 80
Unrecognized net transition asset........................... (17)
Unrecognized net actuarial gain............................. (366)
Unrecognized prior service cost............................. 402
------
Prepaid pension cost........................................ $ 99
======
Pension Benefits
------------------
As of
December 31,
------------
Weighted-average assumptions of the Sedco Forex Plans 1999 1998
----------------------------------------------------- -------- --------
Discount rate........................................... 7.75% 7.5%
Expected return on plan assets.......................... 9.0% 9.0%
Rate of compensation increase........................... 4.5% 4.5%
Net pension cost for the Sedco Forex Plans included the following
components:
Pension Benefits
-------------------
Years ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
(In thousands)
Components of Net Periodic Benefit Cost
Service cost............................................ $ 689 $ 396 $ 243
Interest cost........................................... 548 460 416
Expected return on plan assets.......................... (575) (485) (392)
Amortization of transition asset........................ (6) (6) (6)
Amortization of prior service cost...................... 44 43 40
Early retirement charge................................. 134 -- --
----- ----- -----
Benefit cost.......................................... $ 834 $ 408 $ 301
===== ===== =====
51
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pursuant to the employee matters agreement, Schlumberger will continue to
maintain various non-U.S. defined benefit and defined contribution plans.
Expenses for these funds were immaterial for each of the three years ended
December 31, 1999.
The Company provides a qualified defined benefit pension plan (the
"Retirement Plan"), which covers substantially all U.S. employees of the
Company. The Company also maintains a plan (the "Supplemental Benefit Plan")
which provides certain eligible employees with benefits in excess of those
allowed under the Retirement Plan (together, the "U.S. Plans"). Annual
retirement benefits under the U.S. Plans are based on a combination of
participants' years of service and compensation. The amount of funding to the
Retirement Plan is determined on a year-to-year basis, with amounts consistent
with minimum and maximum funding requirements established by various
governmental bodies. The Supplemental Benefit Plan is not funded.
In addition, the Company provides several defined benefit plans, primarily
group pension schemes with life insurance companies covering non-U.S.
employees (the "non-U.S. Plans"). Benefits are based on compensation once
eligibility is reached. Certain of the pension schemes are financed in part by
contributions from employees. Employer contributions are determined primarily
by the respective life insurance companies based upon plan terms. 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 U.S. Plans and the non-U.S.
Plans comprise the pension benefits provided by the Company (together, the
"TSF Plans").
The aggregate benefit obligation, fair value of plan assets and funded
status of the TSF Plans were $129.1 million, $135.4 million and $6.3 million,
respectively, at December 31, 1999.
The aggregate projected benefit obligation and fair value of plan assets
for the TSF Plans with projected benefit obligations in excess of plan assets
were $42.2 million and $11.7 million, respectively, at December 31, 1999.
The aggregate accumulated benefit obligation and fair value of plan assets
for the TSF Plans with accumulated benefit obligations in excess of plan
assets were $16.2 million and $5.4 million, respectively, at December 31,
1999.
Postretirement Benefits Other Than Pensions--Prior to the spin-off, Sedco
Forex provided certain health care benefits to former employees who have
retired under the Sedco Forex Plans (the "Sedco Forex Other Benefit Plan").
52
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The change in benefit obligation for the Sedco Forex Other Benefit Plan for
the year ended December 31, 1998 is shown in the table below. This change is
not presented for the year ended December 31, 1999 because Schlumberger
retained the postretirement benefit obligation for retirees and fully eligible
participants of the plan, which amounted to approximately $4 million at
December 31, 1999.
Other Benefits
--------------
December 31,
1998
--------------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year....................... $4,056
Service cost.................................................. 136
Interest cost................................................. 295
Actuarial losses.............................................. 283
Benefits paid................................................. (232)
------
Benefit obligation at end of year............................. 4,538
------
Unrecognized net actuarial gain............................... 972
Unrecognized prior service cost............................... 68
------
Postretirement benefit liability............................ $5,578
======
Other Benefits
----------------
As of
December 31,
----------------
Weighted-average assumptions of the Sedco Forex Other
Benefit Plans 1999 1998
----------------------------------------------------- ------- -------
Discount rate............................................ 7.75% 7.5%
For measurement purposes, the rate of increase in the per capita costs of
covered health care benefits was assumed to be 6.7 percent in 1999.
Net cost for the Sedco Forex Other Benefit Plan included the following
components:
Other Benefits
----------------
Years ended
December 31,
----------------
1999 1998 1997
---- ---- ----
(In thousands)
Components of Net Periodic Benefit Cost
Service cost............................................... $207 $136 $ 80
Interest cost.............................................. 346 295 291
Amortization of prior service cost......................... (4) (4) (4)
Amortization of unrecognized net gain...................... (41) (61) (67)
---- ---- ----
$508 $366 $300
==== ==== ====
The Company maintains plans that provide for non-contractual limited health
care and life insurance benefits to U.S. office employees and certain other
U.S. field employees when they retire (the "TSF Other Benefit Plans").
The aggregate accumulated benefit obligation, fair value of plan assets and
funded status of the TSF Other Benefit Plans were $8.7 million, $0.6 million
and $(8.1) million at December 31, 1999.
53
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Defined Contribution Plans--The Company provides a defined contribution
pension and savings plan covering senior non-U.S. 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. In addition, the Company sponsors a U.S. defined contribution savings
plan. It covers certain employees and limits Company contributions to no more
than 4.5 percent of each covered employee's salary, based on the employee's
contribution. The Company also sponsors various other defined contribution
plans worldwide.
Deferred Compensation Plan--The Company provides a Deferred Compensation
Plan (the "Plan"). The Plan's primary purpose is to provide tax-advantageous
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 percent of base salary, 100 percent of any future performance
awards, 100 percent of any special payments and 100 percent 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.
Note 13--Investments in and Advances to Joint Ventures
The Company has a 25 percent interest in Sea Wolf Drilling Limited ("Sea
Wolf"). In September 1997, Sedco Forex sold two semisubmersible rigs, the
Drillstar and the Sedco Explorer, to Sea Wolf. The rigs are operated by the
Company under bareboat charters. The sale resulted in a deferred gain of $157
million which is being amortized to operating and maintenance expense over the
six year life of the bareboat charter.
The Company also has a 50 percent interest in Overseas Drilling Limited
("ODL"), which owns the drillship Joides Resolution. The drillship is
contracted to perform drilling and coring operations in deep waters worldwide
for the purpose of scientific research. The Company manages and operates the
vessel on behalf of ODL.
The Company has a 24.89 percent interest in Arcade Drilling as ("Arcade"),
a Norwegian offshore drilling company. Arcade owns two high specification
semisubmersible rigs, the Henry Goodrich and the Paul B. Loyd, Jr. The
investment in Arcade was recorded at fair value as part of the merger.
Note 14--Segments, Geographical Analysis and Major Customers
The Company operates in one industry segment, offshore contract drilling
services. For the years ended December 31, 1999, 1998 and 1997, the Royal
Dutch Shell Group accounted for approximately 16.2 percent, 19.2 percent, and
24.1 percent, respectively, of total revenue. The loss of this or other
significant customers could have a material adverse effect on the Company's
results of operations.
54
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Revenues and long-lived assets by country are as follows:
Years ended December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
Operating Revenues
United Kingdom............................... $ 124,918 $ 344,061 $312,141
Indonesia.................................... 88,158 124,904 104,229
Nigeria...................................... 69,326 118,935 97,140
Australia.................................... 62,347 91,108 78,184
Brazil....................................... 60,607 79,780 40,980
Angola....................................... 53,107 75,529 73,781
Rest of the World............................ 189,773 256,206 184,879
---------- ---------- --------
Total Operating Revenues..................... $ 648,236 $1,090,523 $891,334
========== ========== ========
Long-Lived Assets
United States................................ $1,372,224 $ 37,658 $ 31,735
Norway....................................... 705,122 -- --
United Kingdom............................... 630,086 148,808 147,936
France....................................... 492,400 225,000 --
Brazil....................................... 386,568 84,126 100,174
Angola....................................... 25,740 51,552 62,687
Congo........................................ 35,519 59,785 73,616
Thailand..................................... 3,055 3,318 73,951
Goodwill(a).................................. 1,067,594 -- --
Other........................................ 862,996 347,979 162,175
---------- ---------- --------
Total Long-Lived Assets...................... $5,581,304 $ 958,226 $652,274
========== ========== ========
- --------
(a)Goodwill resulting from the merger has not been allocated to individual
countries.
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 Company's international operations are subject to certain political and
other uncertainties, 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
certain areas in which operations are conducted.
Note 15--1999 and 1998 Charges
Operating and maintenance expense for the years ended December 31, 1999 and
1998 included charges totaling $42.0 million and $23.4 million, respectively.
Reduced exploration and development activity by customers, resulting from a
period of low oil prices from late 1997 through early 1999 and industry
consolidation over the same time period, resulted in a slowdown in the
offshore drilling industry during 1998 and 1999. As a result of this slowdown
approximately 1000 operating personnel were determined to be redundant, and
charges associated with termination and severance benefits of $13.2 million
and $3.6 million were recognized during 1999 and 1998, respectively.
Substantially all of these employees have been terminated and severance and
termination costs have been paid as of December 31, 1999. Provisions for
potential legal claims of $28.8 million and $10.0 million were recognized
during 1999 and 1998, respectively (see Note 10). Asset impairment charges of
$9.8 million were recognized in 1998 related to assets retired from the active
fleet.
55
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Note 16--Related Party Transactions
In certain countries prior to the merger, Sedco Forex participated in
Schlumberger's centralized treasury and cash processes. In these countries,
cash was managed either through zero balance accounts or an interest-bearing
offsetting mechanism. Cash disbursements for operations, acquisitions and
other investments were funded as needed from Schlumberger.
Certain Schlumberger corporate expenses, including centralized research and
engineering, legal, accounting, employee benefits, real estate, insurance,
information technology services, treasury and other corporate and
infrastructure costs have been allocated to Sedco Forex on bases that
Schlumberger and Sedco Forex considered to be a reasonable reflection of the
utilization of services provided or the benefit received by Sedco Forex. The
allocation methods include relative revenues, headcount, square footage,
transaction processing costs, adjusted operating expenses and others. These
allocations resulted in charges being recorded in the combined statements of
operations, as follows:
Years Ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
(In thousands)
Operating and maintenance.......................... $ 56,184 $78,350 $44,539
General and administrative......................... 7,978 9,433 4,416
-------- ------- -------
$ 64,162 $87,783 $48,955
======== ======= =======
On December 31, 1999, the Company repaid indebtedness to Schlumberger in
the aggregate amount of $303.6 million with the proceeds from the $400 million
unsecured five-year term loan (see Note 5). At December 31, 1998, Sedco Forex
had long-term debt due to Schlumberger of $407 million. These loans bore
interest at rates based on fifty basis points over LIBOR and were used to
finance both Sedco Forex's existing fleet of rigs and ongoing major
construction projects. Interest expense on related party indebtedness
aggregated $26 million, $11 million and $10 million for 1999, 1998 and 1997,
respectively.
The related party receivables and payables balances included in the
combined balance sheets represent amounts arising from transactions entered
into by the Company to settle outstanding customer and trade receivables and
payables with other Schlumberger entities.
Note 17--Unaudited Pro Forma Earnings Per Share
Sedco Forex did not have a separate capital structure prior to the spin-off
from Schlumberger and merger with Transocean Offshore Inc. Accordingly,
historical earnings per share has not been presented (see Note 1). Unaudited
pro forma earnings per share for each period presented was calculated using
the Transocean Sedco Forex shares issued pursuant to the merger agreement and
the dilutive effect of Transocean Sedco Forex stock options granted under the
SF Plan (see Note 11), as applicable.
56
TRANSOCEAN SEDCO FOREX INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the numerator and denominator used for the
computation of basic and diluted pro forma earnings per share is as follows:
Years ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
Net income for basic and diluted
earnings per share..................... $ 58,103 $ 341,578 $ 260,455
------------ ------------ ------------
Pro forma shares for basic earnings per
share.................................. 109,564 109,564 109,564
Effect of dilutive securities:
Employee stock options................ 72 72 72
------------ ------------ ------------
Adjusted pro forma shares and assumed
conversions for diluted earnings
per share.............................. 109,636 109,636 109,636
============ ============ ============
Unaudited pro forma basic earnings per
share.................................. $ 0.53 $ 3.12 $ 2.38
------------ ------------ ------------
Unaudited pro forma diluted earnings per
share.................................. $ 0.53 $ 3.12 $ 2.38
------------ ------------ ------------
Note 18--Quarterly Results (Unaudited)
Shown below are selected unaudited quarterly data:
Quarter
---------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
(In thousands, except per share data)
1999
Operating Revenues.................. $ 189,158 $ 162,432 $ 165,250 $ 131,396
Operating Income(a)................. 7,767 32,402 29,293 (20,618)
Net Income(a)....................... 11,336 27,358 31,804 (12,395)
Unaudited Pro Forma Earnings Per
Share(a)(c)
Basic............................. $ 0.10 $ 0.25 $ 0.29 $ (0.11)
Diluted........................... 0.10 0.25 0.29 (0.11)
Unaudited Pro Forma Shares
Outstanding(c)
Basic............................. 109,564 109,564 109,564 109,564
Diluted........................... 109,636 109,636 109,636 109,636
1998
Operating Revenues.................. $ 257,935 $ 276,453 $ 290,093 $ 266,042
Operating Income(b)................. 83,442 104,490 104,780 84,553
Net Income(b)....................... 67,264 91,001 92,199 91,114
Unaudited Pro Forma Earnings Per
Share(b)(c)
Basic............................. $ 0.61 $ 0.83 $ 0.84 $ 0.83
Diluted........................... 0.61 0.83 0.84 0.83
Unaudited Pro Forma Shares
Outstanding(c)
Basic............................. 109,564 109,564 109,564 109,564
Diluted........................... 109,636 109,636 109,636 109,636
- --------
(a) First quarter 1999 included charges totaling $42.0 million ($32.5 million
after taxes) for severance costs and provisions for potential legal
claims. Fourth quarter 1999 included charges totaling $13.4 million for
provisions for doubtful accounts receivable in West Africa and contract
penalties.
(b) Third quarter 1998 included charges totaling $13.4 million after taxes for
severance costs and asset impairments. Fourth quarter 1998 included a $7.0
million after tax provision for a potential legal claim.
(c) Unaudited pro forma earnings per share calculated using the Transocean
Sedco Forex shares and options issued pursuant to the merger agreement.
57
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 2000 annual
general meeting of shareholders, 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, 1999. 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
Report of Independent Accountants...................................... 31
Combined Statements of Operations...................................... 32
Combined Balance Sheets................................................ 33
Combined Statements of Equity.......................................... 34
Combined Statements of Cash Flows...................................... 35
Notes to Combined Financial Statements................................. 36
Financial statements of 50 percent or less owned joint ventures are not
presented herein because such joint ventures do not meet the significance
test.
58
(2) Financial Statement Schedules
Transocean Sedco Forex and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
Additions
---------------------------------
Balance at Charged to Other
Beginning Charged to Costs Accounts-- Deductions-- Balance at
of Period and Expenses Describe Describe End of Period
---------- ---------------- ---------------- ------------ -------------
(In thousands)
Year Ended December 31,
1997
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. 1,137 605 80(3) 1,662
Allowance for obsolete
materials and
supplies............. 9,348 193 315(4) 9,226
Year Ended December 31,
1998
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. 1,662 2,216 3,049(3) 829
Allowance for obsolete
materials and
supplies............. 9,226 1,962 994(4) 10,194
Year Ended December 31,
1999
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable.. 829 13,839 12,564(1) 123(3) 27,109
Allowance for obsolete
materials and
supplies............. 10,194 1,795 12,582(2) 1,439(4) 23,132
- --------
(1) Amount includes $10,464 relating to the allowance for doubtful accounts
receivable assumed in the merger with Transocean Offshore Inc. and $2,100
in receivable reserves reclassifications.
(2) Amount includes $12,582 relating to the allowance for obsolete materials
and supplies assumed in the merger with Transocean Offshore Inc.
(3) Uncollectible accounts receivable written off, net of recoveries.
(4) Obsolete materials and supplies written off, net of scrap.
Other 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.
59
REPORT OF INDEPENDENT ACCOUNTANTS ON THE
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Schlumberger Limited
Our audits of the combined financial statements referred to in our report
dated August 6, 1999 appearing in the 1999 Annual Report to Shareholders of
Transocean Sedco Forex Inc. (which report and combined financial statements
are incorporated by reference in this Annual Report on Form 10-K) also
included an audit of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein, as of and
for the two years ended December 31, 1998, when read in conjunction with the
related combined financial statements.
PricewaterhouseCoopers LLP
New York, New York
August 6, 1999
60
(3) Exhibits
The following exhibits are filed in connection with this Report:
Number Description
------ -----------
2.1 Agreement and Plan of Merger dated as of July 12, 1999 among
Schlumberger Limited, Sedco Forex Holdings Limited, Transocean Offshore
Inc. and Transocean SF Limited (incorporated by reference to Annex A to
the Joint Proxy Statement/Prospectus dated October 27, 1999 included in
the Company's Registration Statement on Form S-4 (Registration No. 333-
89727))
2.2 Distribution Agreement dated as of July 12, 1999 between Schlumberger
Limited and Sedco Forex Holdings Limited (incorporated by reference to
Annex B to the Joint Proxy Statement/Prospectus dated October 27, 1999
included in the Company's Registration Statement on Form S-4
(Registration No. 333-89727))
2.3 Agreement and Plan of Merger and Conversion dated as of March 12, 1999
between Transocean Offshore Inc. and Transocean Offshore (Texas) Inc.
(incorporated by reference to Exhibit 2.1 to the Registration Statement
on Form S-4 of Transocean Offshore (Texas) Inc. filed on April 8, 1999
(Registration No. 333-75899))
3.1 Memorandum of Association of Transocean Sedco Forex Inc., as amended
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-K
dated January 12, 2000)
3.2 Articles of Association of Transocean Sedco Forex Inc., as amended
(incorporated by reference to Exhibit 4.2 to the Company's Form 8-K
dated January 12, 2000)
4.1 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 (incorporated by reference to Exhibit 10-
(1) to the Company's Form 10-Q for the quarter ending June 30, 1996)
4.2 First Amendment to Credit Agreement dated as of April 24, 1997
(incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q
for the quarter ending March 31, 1997)
4.3 Second Amendment to Credit Agreement dated as of December 19, 1997
(incorporated by reference to Exhibit 4.4 to the Company's Form 10-K
for the year ending December 31, 1997)
4.4 Third Amendment to Credit Agreement dated May 22, 1998 (incorporated by
reference to Exhibit 4.9 to the Company's Form 10-Q for the quarter
ending June 30, 1998)
+4.5 Secured Loan Agreement dated as of December 21, 1999 among Transocean
Enterprise Inc., the Liquidity Providers party thereto and ABN AMRO
Bank, as Agent and Enhancer
+4.6 Credit Agreement dated as of December 16, 1999 among Transocean
Offshore Inc., the Lenders party thereto, and SunTrust Bank, Atlanta,
as Agent
4.7 Indenture dated as of April 15, 1997 between the Company and Texas
Commerce Bank National Association, as trustee (incorporated by
reference to 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 (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K dated April 29,
1997)
4.9 Second Supplemental Indenture dated as of May 14, 1999 between the
Company and Chase Bank of Texas, National Association, as trustee
(incorporated by reference to Exhibit 4.5 to the Company's Post-
Effective Amendment No. 1 to Registration Statement on Form S-3
(Registration No. 333-59001-99))
4.10 Form of Note (incorporated by reference to Exhibit 4.3 to the Company's
Form 8-K dated April 29, 1997)
61
Number Description
------ -----------
4.11 Form of Debenture (incorporated by reference to 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 (incorporated by reference to 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.
(incorporated by reference to 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
(incorporated by reference to 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 (incorporated by reference
to Exhibit 10-(9) to the Company's Registration Statement on Form S-1
(Registration No. 33-60992) dated April 13, 1993)
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 (incorporated by reference to Exhibit
10-(8) to the Company's Form 10-K for the year ending December 31,
1995)
*10.6 Employee Stock Purchase Plan, as amended and restated effective
January 1, 2000 (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-8 (Registration No.
333-94551) filed January 12, 2000)
+*10.7 Long-Term Incentive Plan of Transocean Sedco Forex Inc., as amended
and restated effective January 1, 2000
*10.9 Form of Employment Agreement dated May 14, 1999 between J. Michael
Talbert, W. Dennis Heagney, Robert L. Long, Jon C. Cole, Donald R.
Ray, Eric B. Brown, Barbara S. Koucouthakis and Alan A. Broussard,
individually, and the Company (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ending June 30, 1999)
+*10.10 Deferred Compensation Plan of Transocean Offshore Inc., as amended and
restated effective January 1, 2000
10.12 Employment Matters Agreement dated as of December 13, 1999 among
Schlumberger Limited, Sedco Forex Holdings Limited and Transocean
Offshore Inc. (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration No. 333-
94551) filed January 12, 2000)
*10.13 Sedco Forex Employees Option Plan of Transocean Sedco Forex Inc.
effective December 31, 1999 (incorporated by reference to Exhibit 4.5
to the Company's Registration Statement on Form S-8 (Registration No.
333-94569) filed January 12, 2000)
+21 Subsidiaries of the Company
+23.1 Consent of Ernst & Young LLP
+23.2 Consent of PricewaterhouseCoopers 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.
62
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 combined basis. The
Company agrees to furnish a copy of each such instrument to the Commission upon
request.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999 the Company filed a Current
Report on Form 8-K on November 9, 1999. Items 5 and 7 were reported and the
following financial statements were filed: Unaudited Condensed Pro Forma
Combined Financial Statements for Transocean Sedco Forex Inc. and Sedco Forex
Holdings Limited Combined Financial Statements.
63
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 20, 2000.
TRANSOCEAN SEDCO FOREX INC.
/s/ Robert L. Long
By: _________________________________
Robert L. Long
Executive 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 20, 2000.
Signature Title
--------- -----
/s/ Victor E. Grijalva Chairman of the Board of Directors
______________________________________
Victor E. Grijalva
/s/ J. Michael Talbert President, Chief Executive Officer
______________________________________ and Director (Principal Executive
J. Michael Talbert Officer)
/s/ Robert L. Long Executive Vice President and Chief
______________________________________ Financial Officer
Robert L. Long (Principal Financial Officer)
/s/ Ricardo Rosa Vice President and Controller
______________________________________ (Principal Accounting Officer)
Ricardo Rosa
* Director
______________________________________
Richard D. Kinder
* Director
______________________________________
Ronald L. Kuehn, Jr.
* Director
______________________________________
Arthur Lindenauer
* Director
______________________________________
Martin B. McNamara
* Director
______________________________________
Roberto Monti
* Director
______________________________________
Alain Roger
* Director
_____________________________________
Kristian Siem
* Director
_____________________________________
Ian C. Strachan
/s/ William E. Turcotte
*By______________________________
William E. Turcotte
(Attorney-in-Fact)
64