1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] - For the Fiscal Year Ended March 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] - For the Transition Period From ____________________ to ____________________. Commission file number 1-6311 TIDEWATER INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its Charter) Delaware 72-0487776 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1440 Canal Street, New Orleans, Louisiana 70112 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code (504) 568-1010 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: <TABLE> <CAPTION> Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- <S> <C> Common Stock, par value $0.10 New York Stock Exchange, Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange, Pacific Stock Exchange </TABLE> 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 the filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
2 As of April 25, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2,573,767,478. 60,341,642 shares of Tidewater Inc. common stock $0.10 par value per share were outstanding on April 25, 1997. Registrant has no other class of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of Stockholders are incorporated into Part III of this report. TABLE OF CONTENTS PART I <TABLE> <CAPTION> Page Item Number - ---- ------ <S> <C> <C> 1 & 2. Business and Properties . . . . . . . . . . . . . . . . . . . . . . 3 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 7 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 8 4A. Executive Officers of the Registrant . . . . . . . . . . . . . . . . 8 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 8 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . 10 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 18 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . 18 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . 19 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 19 12. Security Ownership of Certain Beneficial Owners and Management . . . 19 13. Certain Relationships and Related Transactions . . . . . . . . . . . 19 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . 19 </TABLE> -2-
3 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES GENERAL Tidewater Inc. (the "company") was incorporated in Delaware in 1956. The company's principal executive offices are located at 1440 Canal Street, New Orleans, Louisiana 70112, and its telephone number is (504) 568-1010. Unless otherwise required by the context, the term "company" as used herein refers to Tidewater Inc. and its consolidated subsidiaries. The company's two principal divisions are Tidewater Marine and Tidewater Compression. Tidewater Marine provides support services to the international offshore petroleum industry. Tidewater Compression provides natural gas compression equipment and services, primarily to the energy industry. Information concerning revenues, operating profits and assets for each of the company's divisions and the geographic distribution of its operations is set forth in Item 7 of this report. FORWARD LOOKING INFORMATION In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that certain statements set forth in Items 1 and 7 and elsewhere in this report, which provide other than historical information and which are forward looking, involve risks and uncertainties that may impact the company's actual results of operations. The company faces many risks and uncertainties, many of which are beyond the control of the company, including fluctuations in oil and gas prices; changes in capital spending by customers in the energy industry for exploration, development and production; unsettled political conditions, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency controls and environmental and labor laws. Other risk factors are discussed elsewhere in this Form 10-K. Readers should consider all of these risk factors, as well as other information contained in this report. TIDEWATER MARINE Tidewater Marine is the world's largest provider of offshore supply vessels and marine support services. With a fleet of approximately 600 vessels, Tidewater Marine operates, and has a leading market share, in most of the world's significant oil and gas exploration and production markets. Tidewater Marine provides services supporting all phases of offshore exploration, development and production, including: towing of and anchor-handling of mobile drilling rigs and equipment; transporting supplies and personnel necessary to sustain drilling, workover and production activities; and supporting pipelaying and other offshore construction activities. The company's fleet is deployed in the major offshore oil and gas areas of the world. The principal areas of the company's operations include the U.S. Gulf of Mexico, areas offshore Australia, Brazil, Egypt, India, Indonesia, Malaysia, Mexico, Trinidad, Venezuela and West Africa and in the North Sea and the Persian Gulf. The company conducts its operations through wholly-owned subsidiaries and joint ventures. For information concerning revenues derived from domestic and international marine operations, see "Marine Division" in Item 7 of this report. Marine Services Equipment. The company's vessels regularly and routinely move from one operating area to another, often to and from offshore operating areas of different continents. Tables -3-
4 comparing the average number of vessels in the company's marine fleet by class and geographic distribution appear under "Marine Division" in Item 7 of this report. The company's largest class of vessels consists of towing-supply and supply vessels that are chartered to customers for use in transporting supplies and equipment from shore bases to offshore drilling rigs, platforms and other installations. In addition, vessels of the towing-supply class are equipped for and are capable of towing drilling rigs and other marine equipment and setting anchors for positioning and mooring drilling rigs. The company's other classes of vessels include crew and utility vessels that are chartered to customers for use in transporting supplies and personnel from shore bases to offshore drilling rigs, platforms and other installations, and offshore tugs that tow floating drilling rigs, dock tankers, tow barges, assist pipelaying and construction barges and are used in a variety of other commercial towing operations, including towing barges carrying a variety of bulk cargoes and containerized cargo. The company's vessels also include inshore tugs and both inshore and offshore barges, production, line-handling and various special purpose vessels. Inshore tugs, which are operated principally within inland waters, tow drilling rigs to and from their locations, and tow barges carrying equipment and materials for use principally in inland water drilling and production operations. Barges are either used in conjunction with company tugs or are chartered to others. Information concerning the average age of the company's Marine vessel fleet is set forth in Item 7 of this report. On March 20, 1997 the company agreed to purchase for approximately $535 million O.I.L. Ltd. O.I.L. Ltd. is a subsidiary of Ocean Group plc, of the United Kingdom, and owns a fleet of approximately 100 vessels, principally composed of towing-supply and supply vessels operating in most major offshore oil and gas exploration areas other than the United States. Final determination of the purchase price is subject to certain conditions to be satisfied at closing. The acquisition will be accounted for using the purchase method and will be financed under a $600 million credit facility. The purchase agreement calls for the closing to be no later than May 30, 1997, unless extended by both parties. In March 1996 the company acquired a fleet of 61 vessels owned and operated by Hornbeck Offshore Services, Inc. ("Hornbeck") and it also acquired Hornbeck's 49.9% interest in 29 safety/standby vessels operating in the North Sea. In fiscal 1997 the company acquired for $12.4 million cash the remaining equity interests in 22 of the 29 safety/standby vessels previously owned by certain North Sea joint-venture companies. Information concerning these acquisitions appears in Note 2 of Notes to Consolidated Financial Statements included in this report. In addition, in fiscal 1997 the company acquired eight used vessels, consisting of four towing-supply and supply vessels, two offshore tugs and two crewboats. Contributions of Main Classes of Vessels. Of the company's revenues from marine vessel equipment operations, the following percentages were contributed by the main classes of vessels: <TABLE> <CAPTION> Year Ended March 31, - --------------------------------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Towing-supply/Supply . . . . . . . . . . . . . . . . . . . . . . . . . 70.2% 72.8% 70.9% Offshore Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3% 16.6% 17.0% Crew/Utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5% 7.8% 8.6% Safety/Standby . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3% -- -- Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7% 2.8% 3.5% - --------------------------------------------------------------------------------------------------------- </TABLE> -4-
5 Shipyards. Quality Shipyards, Inc., a wholly-owned subsidiary of the company, operates two shipyards in Houma, Louisiana, which construct, modify, repair and drydock vessels. Approximately 76% of the shipyards' business for the year ended March 31, 1997 related to repairs, modifications and drydockings of the company's vessels. Risks of Operation and Insurance. The operation of any marine equipment involves an inherent risk of catastrophic marine disaster, adverse weather conditions, mechanical failure, collisions, property losses to the vessel and business interruption due to political action in countries other than the United States. Any such event may result in a reduction in revenues or increased costs. The company's vessels are insured for their estimated market value against damage or loss, including war and pollution risks. The company also carries workers' compensation, maritime employer's liability, general liability (including third party pollution) and other insurance customary in the industry. The company's international marine equipment operations are subject to the usual risks inherent in doing business in countries other than the United States. Such risks include political changes, possible vessel seizure, company nationalization or other governmental actions, currency restrictions and revaluations, and import/export restrictions, all of which are beyond the control of the company. Although it is impossible to predict the likelihood of such occurrences or their effect on the company, the company believes these risks to be within acceptable limits and, in view of the mobile nature of the company's principal revenue producing assets, does not consider them to constitute a factor materially adverse to the conduct of its international marine equipment operations as a whole. Industry Conditions, Competition and Customers. Tidewater Marine's operations are materially dependent upon the levels of activity in offshore oil and natural gas exploration, development and production throughout the world. Such activity levels are affected both by short-term and long-term trends in world oil and natural gas prices. In recent years, oil and natural gas prices and, therefore, the level of offshore drilling and exploration activity, have been extremely volatile. A discussion of current market conditions appears under "Business Overview" in Item 7 of this report. The principal competitive factors for the offshore vessel service industry are suitability and availability of equipment, price and quality of service. The company has numerous competitors in virtually all areas in which it operates. Certain customers of the company own and operate vessels to service certain of their offshore activities. Tidewater Marine's diverse, mobile asset base and geographic distribution allow it to respond quickly to market conditions and provide a broad range of vessel services to its customers throughout the world. Management believes that the company has a significant competitive advantage because of the size, diversity and geographic distribution of its fleet, the company's financial condition and economies of scale. Although one customer accounted for 11% and the five largest customers accounted for approximately 30% of its marine revenues during the year ended March 31, 1997, the company does not consider its marine operations dependent on any single customer. Government Regulations. The company's vessels are subject to various statutes and regulations governing their operation and maintenance. Under the Merchant Marine Act of 1936 and the Shipping Act, 1916, the company would lose the privilege of engaging in U.S. coastwise trades if more than 25% of the company's outstanding stock was owned by non-U.S. citizens. The company has a dual stock certificate system to prevent non-U.S. citizens from owning more than 25% of its common stock. In addition, the company's charter permits the company certain remedies with respect to any transfer or purported transfer of shares of the company's common stock that would result in the ownership by non-U.S. citizens of more than 24% of its common stock. -5-
6 Based on information supplied to the company by its transfer agent, approximately 3% of the company's outstanding common stock was owned by non-U.S. citizens as of March 31, 1997. At March 31, 1997, 204 vessels wholly owned by the company were registered under flags other than the United States. In addition, all of the company's 47 joint venture owned vessels were registered under non-U.S. flags at March 31, 1997. The laws of the United States provide that once a vessel is registered under a flag other than the United States, it cannot thereafter engage in U.S. coastwise trade. Therefore, the company's non-U.S. flag vessels must continue to be operated abroad, and if the company were not able to secure charters abroad for them, and work would otherwise have been available for them in the United States, its operations would be adversely affected. All of the company's offshore vessels are subject to international safety and classification standards. U.S. flag towing-supply and supply vessels are required to undergo periodic inspections and to be recertified under drydock examination at least twice every five years. Non-U.S. flag vessels are also subject to various similar regulations. TIDEWATER COMPRESSION Tidewater Compression provides natural gas and air compression equipment and services to the energy industry, primarily in the United States. Gas Compression Rentals. The company rents natural gas compressors to oil and gas producers and processors. With a fleet of approximately 2,800 compressors, Tidewater Compression operates one of the largest rental fleets of gas compressors in the United States. The compressors are used primarily to boost the pressure of natural gas from the wellhead into gas gathering systems, into nearby gas processing plants, or into high pressure pipelines. Gas compression equipment and services offered by the company also are used in the production of coalbed methane and in enhanced recovery projects such as fire-flooding, gas lift, or gas injection, with the objective of increasing the amount of oil or condensate that can be recovered from a reservoir. Customers often rent compressors rather than purchase them because the required compressor horsepower and stage configuration can change several times in the lifetime of a project. The primary market served is natural gas production activities in the United States, although the company has modest operations in Australia, Argentina, Venezuela and Canada. A table setting forth utilization, rental rates and fleet size of the Tidewater Compression natural gas compressor rental fleet appears in "Compression Division" in Item 7 of this report. Equipment and Parts Sales. Tidewater Compression's Tide Air & Gas division sells natural gas and air compressor packages and other related equipment to domestic and international engineering contractors, oil and gas producers and to manufacturers and other concerns. The equipment consists of skid mounted compressors designed to meet complex specifications for specialized applications. The gas compression equipment is used to facilitate the production, transportation and storage of natural gas as well as boosting fuel gas pressure for electrical power generation. The air compression equipment is used to operate machinery, for instrumentation and in manufacturing processes. The company's compression operations include an engineering and fabrication facility at which the company designs and constructs natural gas and air compression packages. Distributorships. The company holds distributorships for various manufacturers of natural gas and air compressors, related equipment and a wide range of accessories. These manufacturers are the source for equipment and accessories sold by the company. Industry Conditions. In addition to well age and natural gas consumption, a structural shift in U.S. onshore oil and gas industry operations is affecting demand for natural gas compression package rentals. Many of the major oil companies have directed their focus toward international operations and away from -6-
7 domestic onshore natural gas reserves. Accordingly, these companies recently have been selling their domestic onshore natural gas reserves and minimizing staff in domestic operations. As a result, demand for rental packages of natural gas compressors is expected to increase as buyers of natural gas reserves or producers with reduced staffs are less likely to own and operate natural gas compressor packages and more likely to rent natural gas compressor packages to meet their natural gas compression needs. Competition and Customers. The compression equipment market is highly competitive, with the principal competitive factors being price, quality of service and availability. The company competes with a large number of companies in each area in which it operates. Although one customer accounted for 7.5% and the five largest customers accounted for approximately 21% of its compression revenues during the year ended March 31, 1997, the company does not consider itself dependent on any one customer. International Operations. While most of Tidewater Compression's operations are domestic, the company sells and rents natural gas compressor packages and parts in Canada and rents natural gas compressors in Australia, Argentina and Venezuela. The Tide Air & Gas division's natural gas and air compression packages are sold to customers worldwide. SEASONALITY Tidewater Marine generally has its highest utilization rates in the warmer temperature months when the weather is more favorable for offshore exploration, development and construction work. Tidewater Compression generally has its best results in the winter months when natural gas is in greater demand. However, business volume for both Tidewater Marine and Tidewater Compression is more dependent on oil and gas prices and the global supply and demand conditions for the company's services than any seasonal variation. ENVIRONMENTAL COMPLIANCE Compliance with existing governmental regulations which has been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, nor is expected to have, a material effect on the company. EMPLOYEES As of March 31, 1997, the company had approximately 8,400 employees. The company considers relations with employees to be satisfactory. The company is not a party to any union contract in the United States but through several subsidiaries is a party to union agreements covering local nationals in several countries other than the United States. ITEM 3. LEGAL PROCEEDINGS The company is not a party to any litigation which, in the opinion of management, is likely to have a material adverse effect on the company's financial position or results of operations. However, the company is currently involved in litigation concerning certain income tax issues and labor law disputes which management believes, when resolved, will not have a material adverse impact on the company's financial position or results of its ongoing operations. Please refer to Item 7 and Note 10 of Notes to Consolidated Financial Statements for further discussion of these matters. -7-
8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT <TABLE> <CAPTION> Name Age Position ---- --- -------- <S> <C> <C> William C. O'Malley . . . . . . 60 Chairman, President and Chief Executive Officer since October, 1994. Chairman of the Board from 1987 to 1994 and Chief Executive Officer from 1990 to 1994 of Sonat Offshore Drilling, Inc. Employed 1994. Richard M. Currence . . . . . . 58 Executive Vice President since 1992. Ken C. Tamblyn . . . . . . . . . 53 Executive Vice President since 1992. Cliffe F. Laborde . . . . . . . 45 Senior Vice President and General Counsel since 1992. Stephen A. Snider . . . . . . . 49 Senior Vice President since 1991. </TABLE> There are no family relationships between the officers of the company. The company's officers are elected annually by the Board of Directors and serve for one-year terms or until their successors are elected. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The company's common stock is traded on the New York Stock Exchange and the Pacific Stock Exchange under the symbol TDW. At March 31, 1997, there were approximately 2,270 record holders of the company's common stock, based upon the record holder list maintained by the company's stock transfer agent. The following table sets forth the high and low closing sale prices of the company's common stock as reported on the New York Stock Exchange Composite Tape and the amount of cash dividends per share declared on Tidewater common stock for the periods indicated. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- Fiscal Year Quarter High Low Dividend - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1997 First $ 44-5/8 $ 36-1/4 $0.125 Second 50 32-3/4 0.15 Third 47-1/4 36-1/2 0.15 Fourth 52-1/2 41 0.15 1996 First $26-1/4 $19-3/4 $0.10 Second 29-1/2 23-1/4 0.125 Third 31-5/8 24-5/8 0.125 Fourth 39-3/8 29-3/8 0.125 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> -8-
9 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth a summary of selected financial data for each of the last five fiscal years. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the company included in this report. <TABLE> <CAPTION> Years Ended March 31 (in thousands, except ratio and per share amounts) 1997(7) 1996(6) 1995(5) 1994 1993 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Marine operations $ 690,426 532,202 501,118 513,892 431,874 Compression operations 112,584 111,245 83,490 55,471 62,099 - ---------------------------------------------------------------------------------------------------------------- $ 803,010 643,447 584,608 569,363 493,973 ================================================================================================================ Earnings from continuing operations $ 146,011 76,177 51,187 44,660 27,890 Discontinued operations (1) -- -- -- -- 3,099 Extraordinary loss on early debt retirement (2) -- -- -- (12,250) -- Accounting change (3) -- -- -- -- (6,640) - ---------------------------------------------------------------------------------------------------------------- Net earnings $ 146,011 76,177 51,187 32,410 24,349 ================================================================================================================ Per common share: Earnings from continuing operations $ 2.34 1.23 .83 .73 .48 Discontinued operations (1) -- -- -- -- .05 Extraordinary loss on early debt retirement (2) -- -- -- (.20) -- Accounting change (3) -- -- -- -- (.11) - ---------------------------------------------------------------------------------------------------------------- Net earnings $ 2.34 1.23 .83 .53 .42 ================================================================================================================ Total assets $1,039,000 978,200 1,045,658 929,324 910,341 ================================================================================================================ Long-term debt $ -- -- 121,023 7,833 110,381 ================================================================================================================ Working capital $ 173,978 123,256 114,440 197,113 208,006 ================================================================================================================ Current ratio 2.84 2.44 2.05 2.44 3.08 ================================================================================================================ Cash dividends declared per common share (4) $ .575 .475 .40 .30 .325 ================================================================================================================ </TABLE> (1) In fiscal 1993 the company disposed of its interest in a container shipping business acquired in fiscal 1992 through the merger with Zapata Gulf Marine Corporation. (2) Fiscal 1994 charge results from the early retirement of notes and debentures totaling $103,800,000. (3) Fiscal 1993 charge results from the adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." (4) As a result of the timing of the fiscal 1994 Board of Directors meetings, only three quarterly dividends of $.10 per common share each were declared during fiscal 1994. (5) See Note 10 of Notes to Consolidated Financial Statements for further information concerning a $5.9 million pre-tax charge to earnings for the cost of a restructuring program and a pre-tax charge of $2.5 million for reserves to cover losses due to the potential insolvency of certain of the Company's insurers. (6) See Notes 2 and 7 of Notes to Consolidated Financial Statements for further information concerning pre-tax merger expenses of $9.6 million and a $3.0 million pre-tax charge for curtailment of the company's pension plan. (7) See Note 10 of Notes to Consolidated Financial Statements for further information concerning a $2.8 million pre-tax charge to earnings due to one of the company's insurers filing for liquidation. -9-
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company provides services and equipment to the energy industry through its Marine and Compression divisions. Company revenues, net earnings and cash flows from operations are dependent upon activity levels of the Marine vessel fleet and the Compression natural gas rental fleet. Activity levels for the Marine vessel fleet and the Compression natural gas rental fleet are ultimately dependent upon oil and natural gas prices which, in turn, are determined by the supply/demand relationship for oil and natural gas. The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and related disclosures. BUSINESS OVERVIEW On March 20, 1997 the company agreed to purchase, for approximately $535 million, O.I.L. Ltd. O.I.L. Ltd is a subsidiary of Ocean Group plc, of the United Kingdom, and owns a fleet of approximately 100 vessels principally composed of towing-supply and supply vessels operating in most major offshore oil and gas exploration areas other than the United States. Final determination of the purchase price is subject to certain conditions to be satisfied at closing. The acquisition will be accounted for using the purchase method and will be financed under a $600 million credit facility. The purchase agreement calls for the closing to be no later than May 30, 1997, unless extended by both parties. During fiscal 1997's first quarter the company purchased for $12.4 million in cash the remaining equity interests in 22 of 29 safety/standby vessels previously owned by joint-venture companies in the North Sea. The acquisition of these safety/standby vessels in the North Sea was accounted for using the purchase method. In March 1996 the company expanded its domestic marine operations when it merged with Hornbeck Offshore Services, Inc. (Hornbeck). Hornbeck's fleet consisted of 61 towing-supply and supply vessels operating in the U.S. Gulf of Mexico and a 49.9% interest in 29 safety/standby vessels operating in the North Sea. The merger was accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements and the related disclosures and the selected financial data for fiscal 1996 and prior years were restated to include the accounts and the results of operations of Hornbeck. After-tax merger costs of $7.8 million, or $.12 per common share, reduced fiscal 1996 net earnings and consisted of legal, accounting and investment banking fees, payments under severance and employment agreements, and a provision for certain other costs related to the merger. Better market conditions for the services provided by the company's marine division in the U.S. Gulf of Mexico and in certain international locations pushed operating performance above prior year levels as fiscal 1997 net earnings rose 92% above fiscal 1996's amount. The growth in fiscal 1997 net earnings was after allowing for unusual items in both fiscal 1997 and fiscal 1996. Fiscal 1997 net earnings included an after-tax charge of $1.9 million, or $.03 per common share, to establish reserves for losses resulting from one of the company's insurers filing for liquidation. Fiscal 1996 net earnings included an after-tax charge of $9.8 million, or $.15 per common share, for $7.8 million of merger costs discussed above and $2.0 million for the curtailment of the company's pension plan. Future operating results should be positively affected as domestically, market conditions for the services provided by the company's Marine and Compression divisions remain favorable and a larger and more diversified international-based Marine vessel fleet will improve the company's ability to satisfy customer demands. MARINE DIVISION The Marine division provides a diverse range of services and equipment to the offshore energy industry. Fleet size, utilization and vessel day rates primarily determine the amount of revenues and -10-
11 operating profit because operating costs and depreciation do not change proportionally with changes in revenues. Operating costs consist primarily of crew costs, repair and maintenance, insurance, fuel, lube oil and supplies. Fleet size and utilization are the major factors which affect crew costs. The timing and amount of repair and maintenance costs are influenced by vessel age and scheduled drydockings to satisfy safety and inspection requirements mandated by regulatory agencies. Whenever possible, vessel drydockings are done during seasonally slow periods to minimize any impact on vessel operations and are only done if economically justified, given the vessel's age and physical condition. The following tables compare revenues, operating expenses (excluding general and administrative expenses and depreciation expense) and operating margins of the Marine division's owned and operated vessel fleet for the years ended March 31: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues (A): United States $ 338,823 241,436 222,784 International 322,401 264,744 246,967 - ----------------------------------------------------------------------------------------------------- 661,224 506,180 469,751 - ----------------------------------------------------------------------------------------------------- Operating expenses: Crew costs 176,406 145,018 139,058 Repair and maintenance 96,815 84,567 69,669 Insurance 32,817 33,999 36,040 Fuel, lube oil and supplies 31,875 24,422 21,645 Other 23,582 19,909 18,640 - ----------------------------------------------------------------------------------------------------- 361,495 307,915 285,052 - ----------------------------------------------------------------------------------------------------- Operating margins $ 299,729 198,265 184,699 ===================================================================================================== Operating margin percentages 45.3% 39.2% 39.3% ===================================================================================================== Percentage rise(drop) in operating costs compared to prior year 17.4% 8.0% (4.3%) ===================================================================================================== </TABLE> (A) For fiscal 1997, fiscal 1996 and fiscal 1995 one Marine customer accounted for 11%, 12% and 12%, respectively, of Marine revenues. The substantial growth in fiscal 1997 operating margins above the prior year level was the result of higher utilization of the worldwide fleet, a larger international-based fleet and significantly higher day rates for the domestic-based fleet partially offset by higher operating expenses. Higher utilization of the worldwide fleet in fiscal 1997 is attributable to greater demand for offshore marine services. A larger international-based fleet is the result of the fiscal 1997 first quarter purchase of the remaining 50.1% equity interest in several safety/standby vessels previously operated by joint-venture companies in the North Sea. Significantly higher day rates for the domestic-based fleet is the result of a much more favorable supply/demand relationship for offshore marine services in the U.S. Gulf of Mexico. Fiscal 1997 operating expenses rose above fiscal 1996's amount due to the expansion of the North Sea fleet, increased costs associated with attracting, training and retaining vessel personnel, higher activity for the domestic- based offshore towing fleet, and a greater number of vessel drydockings. Fiscal 1996 operating margins rose above the prior year level due to higher utilization and average day rates for the worldwide vessel fleet. Fiscal 1996's operating margins were adversely impacted by a significant increase in the amount of repair and maintenance expense which primarily affected the domestic-based vessel fleet. Approximately 68% of the increase in repair and maintenance expense in -11-
12 fiscal 1996 is attributable to a change in estimated useful lives of marine vessels, whereby costs which would have been capitalized under the previous life estimates were expensed. Revenues, operating expenses (excluding general and administrative expense and depreciation expense) and operating margins of brokered vessels, shipyard and other activities for the years ended March 31 were: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues $ 29,202 26,022 31,367 Operating expenses 24,161 20,391 26,897 - ------------------------------------------------------------------------------------------------------- Operating margins $ 5,041 5,631 4,470 ======================================================================================================= </TABLE> Marine division operating profit for the years ended March 31 consists of the following: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Owned and operated vessels: United States $ 120,275 46,839 41,427 International 82,591 60,291 24,947 - --------------------------------------------------------------------------------------------------------- 202,866 107,130 66,374 Gains from asset sales 5,352 6,930 13,098 Brokered vessels, shipyard and other 4,186 4,849 4,211 - --------------------------------------------------------------------------------------------------------- Operating profit $ 212,404 118,909 83,683 ========================================================================================================= </TABLE> Identifiable assets and depreciation expense for the years ended March 31 were: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Identifiable assets: United States $ 376,380 349,554 356,593 International (A) 334,005 269,704 314,532 - ------------------------------------------------------------------------------------------------------- 710,385 619,258 671,125 Investments in and advances to unconsolidated 20,556 35,861 38,378 - ------------------------------------------------------------------------------------------------------- $ 730,941 655,119 709,503 ======================================================================================================= Depreciation expense (B) $ 55,569 54,961 77,003 ======================================================================================================= </TABLE> (A) Marine equipment operations are conducted worldwide with assets that are highly mobile. Revenues and identifiable assets attributable to these operations in any one country are not "significant" as that term is defined by Statement of Financial Accounting Standards No. 14. Further, most identifiable assets in each country are comprised of offshore service vessels, which regularly and routinely move from one operating area to another, often to and from offshore operating areas of different continents. Equity in net assets of non-U.S. subsidiaries is $211,450,000, $148,045,000 and $164,175,000 at March 31, 1997, 1996 and 1995, respectively. Other international identifiable assets include accounts receivable and other balances denominated in currencies other than the U.S. dollar which aggregate approximately $6,652,000, $8,520,000 and $7,062,000 at March 31, 1997, 1996 and 1995, respectively. These amounts are subject to the usual risks of fluctuating exchange rates and government-imposed exchange controls. (B) See Note 1 of Notes to Consolidated Financial Statements for a discussion of depreciation policy changes effective in fiscal 1996. Marine fleet utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Utilization of the domestic-based fleet, which operates in U.S. waters, is primarily influenced by offshore activity related to the exploration, development and production of natural gas in the U.S. Gulf of Mexico; whereas, utilization of the international-based fleet, which operates in waters other than the United States, is primarily influenced by offshore activity related to the exploration, development and production of oil. The following two sets of tables compare day-based Marine fleet utilization percentages and average day rates by vessel class and in total for each of the quarters in the years ended March 31: -12-
13 UTILIZATION: <TABLE> <CAPTION> 1997 First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Domestic-based fleet: - -------------------- Towing-supply/Supply 91.3% 90.2 90.0 93.3 91.2 Crew/Utility 90.9 94.1 88.6 86.7 90.1 Offshore Tugs 62.4 67.0 62.9 63.9 64.1 Other 48.8 61.9 50.2 45.1 51.3 Total 83.6% 85.1 82.4 84.0 83.7 International-based fleet: - ------------------------- Towing-supply/Supply 87.5% 88.1 90.9 92.1 89.7 Crew/Utility 90.5 85.4 80.9 83.6 84.9 Offshore Tugs 75.4 70.3 79.3 85.9 77.6 Safety/Standby 84.4 78.2 83.9 80.1 80.8 Other 76.2 74.4 84.4 82.0 79.0 Total 84.0% 82.1 86.4 87.8 85.1 Worldwide fleet: - --------------- Towing-supply/Supply 89.2% 89.1 90.5 92.7 90.4 Crew/Utility 90.7 90.1 85.0 85.2 87.7 Offshore Tugs 69.7 68.8 71.8 75.9 71.5 Safety/Standby 84.4 78.2 83.9 80.1 80.8 Other 69.7 71.7 75.9 72.1 72.3 Total 83.8% 83.3 84.7 86.2 84.5 ============================================================================================================ 1996 First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------ Domestic-based fleet: - -------------------- Towing-supply/Supply 86.8% 85.6 89.9 91.1 88.3 Crew/Utility 81.7 79.5 83.7 80.1 81.2 Offshore Tugs 47.9 64.8 67.5 58.4 59.5 Other 44.9 64.8 51.3 43.3 50.9 Total 77.0% 79.9 83.1 81.0 80.2 International-based fleet: - ------------------------- Towing-supply/Supply 86.7% 87.9 85.6 85.3 86.4 Crew/Utility 86.6 85.0 81.5 86.6 84.9 Offshore Tugs 72.2 71.2 77.4 76.1 74.4 Other 37.3 48.3 56.8 77.5 54.7 Total 76.1% 78.2 79.1 82.6 79.0 Worldwide fleet: - --------------- Towing-supply/Supply 86.8% 86.9 87.6 87.9 87.3 Crew/Utility 83.6 81.7 82.8 82.8 82.7 Offshore Tugs 60.6 68.4 73.4 69.0 67.9 Other 38.9 51.6 55.7 69.9 53.9 Total 76.5% 79.0 80.9 81.9 79.6 ============================================================================================================ 1995 First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------ Domestic-based fleet: Towing-supply/Supply 81.0% 80.1 85.1 87.2 83.4 Crew/Utility 90.3 92.9 89.0 85.0 89.3 Offshore Tugs 66.0 63.9 58.5 40.5 57.5 Other 51.6 50.9 58.9 26.2 47.2 Total 78.6% 77.8 79.3 75.2 77.7 International-based fleet: - ------------------------- Towing-supply/Supply 82.2% 81.7 78.2 81.4 80.8 Crew/Utility 73.5 74.5 81.9 85.1 78.5 Offshore Tugs 80.4 71.3 72.7 80.8 76.4 Other 55.7 42.0 43.0 44.0 46.4 Total 75.9% 72.2 71.5 75.5 73.8 Worldwide fleet: - --------------- Towing-supply/Supply 81.6% 81.0 81.2 84.1 82.0 Crew/Utility 82.6 84.9 86.0 85.1 84.6 Offshore Tugs 73.5 67.5 65.4 61.2 66.9 Other 55.0 43.8 46.3 40.2 46.5 Total 77.0% 74.7 75.0 75.4 75.5 ============================================================================================================ </TABLE> -13-
14 AVERAGE DAY RATES: <TABLE> <CAPTION> 1997 First Second Third Fourth Year - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Domestic-based fleet: - -------------------- Towing-supply/Supply $4,278 5,049 5,842 6,382 5,401 Crew/Utility 1,424 1,512 1,664 1,800 1,594 Offshore Tugs 4,994 5,355 5,651 6,355 5,592 Other 3,158 3,050 3,505 3,224 3,231 Total $3,773 4,317 4,948 5,470 4,630 International-based fleet: - ------------------------- Towing-supply/Supply $3,695 3,838 3,965 4,116 3,903 Crew/Utility 1,728 1,735 1,916 1,958 1,834 Offshore Tugs 2,708 2,916 3,290 3,299 3,063 Safety/Standby 5,194 4,907 5,290 5,906 5,331 Other 719 662 705 812 722 Total $2,939 3,144 3,296 3,475 3,218 Worldwide fleet: - --------------- Towing-supply/Supply $3,965 4,387 4,833 5,177 4,596 Crew/Utility 1,562 1,610 1,776 1,875 1,703 Offshore Tugs 3,602 3,971 4,237 4,468 4,079 Safety/Standby 5,194 4,907 5,290 5,906 5,331 Other 1,123 1,109 1,168 1,213 1,152 Total $3,298 3,639 3,988 4,310 3,814 =========================================================================================================== 1996 First Second Third Fourth Year - ----------------------------------------------------------------------------------------------------------- Domestic-based fleet: - -------------------- Towing-supply/Supply $3,351 3,495 3,610 3,880 3,585 Crew/Utility 1,343 1,354 1,344 1,357 1,349 Offshore Tugs 5,220 4,584 4,909 5,162 4,943 Other 3,118 2,868 3,155 2,762 2,970 Total $3,115 3,178 3,309 3,492 3,273 International-based fleet: - ------------------------- Towing-supply/Supply $3,644 3,670 3,651 3,713 3,670 Crew/Utility 1,884 1,767 1,646 1,712 1,752 Offshore Tugs 2,635 2,705 2,710 2,906 2,746 Other 726 727 674 631 680 Total $3,025 2,987 2,909 2,895 2,952 Worldwide fleet: - --------------- Towing-supply/Supply $3,507 3,590 3,632 3,791 3,630 Crew/Utility 1,567 1,526 1,470 1,514 1,519 Offshore Tugs 3,609 3,498 3,538 3,674 3,578 Other 1,298 1,265 1,138 923 1,130 Total $3,067 3,075 3,090 3,153 3,097 =========================================================================================================== 1995 First Second Third Fourth Year - ----------------------------------------------------------------------------------------------------------- Domestic-based fleet: - -------------------- Towing-supply/Supply $3,710 3,364 3,270 3,466 3,451 Crew/Utility 1,270 1,251 1,294 1,288 1,276 Offshore Tugs 4,126 4,487 5,013 4,935 4,601 Other 2,917 2,970 2,884 3,839 3,045 Total $3,190 3,019 3,042 3,116 3,091 International-based fleet: - ------------------------- Towing-supply/Supply $3,606 3,616 3,556 3,494 3,569 Crew/Utility 1,752 1,752 1,716 1,675 1,723 Offshore Tugs 2,765 2,416 2,432 2,702 2,591 Other 701 789 896 1,479 932 Total $2,843 2,917 2,852 2,916 2,882 Worldwide fleet: - --------------- Towing-supply/Supply $3,652 3,506 3,424 3,480 3,516 Crew/Utility 1,467 1,441 1,462 1,451 1,455 Offshore Tugs 3,352 3,421 3,617 3,422 3,451 Other 1,071 1,313 1,420 1,808 1,363 Total $2,996 2,964 2,942 3,006 2,977 =========================================================================================================== </TABLE> -14-
15 Additional investment in the vessel fleet for fiscal 1997, fiscal 1996 and fiscal 1995 totaled $40.0 million, $41.0 million and $100.0 million, respectively. In fiscal 1997, eight used vessels were acquired for $18.7 million consisting of four towing-supply/supply vessels, two offshore tugs and two crewboats. In fiscal 1996, 28 used vessels were acquired for $28.7 million and consisted of eight towing-supply/supply vessels, eight offshore tugs, 11 crewboats and a utility vessel. Fiscal 1995 vessel additions consisted of 23 supply vessels, two offshore tugs and a crewboat for $64.3 million. Nineteen and ten of the vessels acquired in fiscal 1996 and fiscal 1995, respectively, were previously operated by the company under various long-term lease agreements. The remainder of additions to the vessel fleet of $21.3 million, $12.3 million and $35.7 million for fiscal 1997, fiscal 1996 and fiscal 1995, respectively, were for modifications to the existing vessel fleet. In fiscal 1997's first quarter the remaining 50.1% equity interest in 22 of 29 safety/standby vessels, previously operated by joint-venture companies in the North Sea, was acquired and increased the size of the international-based fleet. In fiscal 1996 and fiscal 1995 these vessels were classified as joint- venture owned. The average age of the owned and operated vessel fleet is approximately 19 years. The following table compares the average number of vessels by class and geographic distribution during the years ended March 31: <TABLE> <CAPTION> 1997 1996 1995 - ----------------------------------------------------------------------------------- <S> <C> <C> <C> Domestic-based fleet: Towing-supply/supply 140 147 142 Crew/utility 42 51 51 Offshore tugs 43 41 47 Other 15 13 14 - ----------------------------------------------------------------------------------- Total 240 252 254 - ----------------------------------------------------------------------------------- International-based fleet: Towing-supply/supply 166 171 175 Crew/utility 37 35 39 Offshore tugs 52 54 47 Safety/standby (A) 22 - - Other 46 50 57 - ----------------------------------------------------------------------------------- Total 323 310 318 - ----------------------------------------------------------------------------------- Owned or chartered vessel included in marine revenues 563 562 572 Vessels withdrawn from service 21 18 18 Joint-venture owned vessels (A) 52 74 72 - ----------------------------------------------------------------------------------- Total 636 654 662 =================================================================================== Worldwide fleet: Towing-supply/supply 349 355 355 Crew/utility 89 95 96 Offshore tugs 101 98 98 Safety/standby 23 29 29 Other 74 77 84 - ----------------------------------------------------------------------------------- Total 636 654 662 =================================================================================== </TABLE> (A) Change in number of vessels is the result of the company's acquisition of the remaining 50.1% interest in a North Sea joint venture effective June 1, 1996. The drop in the average size of the worldwide fleet from fiscal 1996 to fiscal 1997 is the result of the return of previously leased vessels to their owners and the disposition of obsolete vessels. -15-
16 COMPRESSION DIVISION The Compression division provides natural gas compression services and equipment for a variety of applications primarily in the energy industry. Rental revenues are determined, for the most part, by utilization and fleet size. Utilization is affected by natural gas storage levels and by the number and age of producing oil and natural gas wells which, in turn, are dependent upon the price levels of oil and natural gas. Quality of service, availability and rental rates for equipment are also major factors which affect utilization. Operating expenses are generally consistent from year-to-year and usually vary in the short-term due to fluctuations in the amount of repair and maintenance expense. Long-term growth in operating expenses will occur primarily as a result of increased fleet size and general inflationary factors. Compression division operating profit is primarily determined by operating margins from rental gas compression operations. The following tables compare revenues, operating expenses (excluding general and administrative expense and depreciation expense), operating margins and related statistics for natural gas compression operations for the years ended March 31: <TABLE> <CAPTION> (in thousands, except statistics) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues: Rentals $ 72,695 72,765 49,235 Repair, service and other 3,297 6,161 6,335 - ------------------------------------------------------------------------------------------------------- 75,992 78,926 55,570 - ------------------------------------------------------------------------------------------------------- Operating expenses: Wages and benefits 11,832 11,654 8,702 Repairs and maintenance 14,132 13,348 8,124 Other 7,850 8,189 5,165 - ------------------------------------------------------------------------------------------------------- 33,814 33,191 21,991 - ------------------------------------------------------------------------------------------------------- Operating margins $ 42,178 45,735 33,579 ======================================================================================================= Operating margin percentages 55.5% 57.9% 60.4% ======================================================================================================= Horsepower based statistics: Utilization 77% 74% 82% Average monthly rental rate $ 16.67 17.45 17.41 Average fleet size 469,186 470,444 286,352 Actual fleet size at March 31 473,973 473,282 479,740 ======================================================================================================= </TABLE> Increased competition for natural gas compression services during fiscal 1997 depressed rental rates below the fiscal 1996 level and outweighed the positive effect of higher utilization thus adversely affecting fiscal 1997 operating margins. Fiscal 1997 operating margins were also negatively affected as repair and maintenance costs climbed above the fiscal 1996 level as a result of a greater number of compressor overhauls partly caused by the higher utilization level. Fiscal 1996 revenues and operating margins rose above prior year levels as a result of a full year's impact of the expansion of the natural gas compressor rental fleet which occurred in the third quarter of fiscal 1995. The Compression division also designs, fabricates and installs engineered compressor systems and sells related parts and equipment. The following table compares revenues, costs of sales and gross profit margins for equipment and parts sales for the years ended March 31: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenues $ 36,592 32,319 27,920 Costs of sales 30,339 26,345 23,895 - ------------------------------------------------------------------------------------------------------ Gross profit margins $ 6,253 5,974 4,025 ====================================================================================================== Gross profit margin percentages 17.1% 18.5% 14.4% ====================================================================================================== </TABLE> Fluctuations in the level of equipment and parts sales are due to the timing of sales of engineered products. Fluctuations in gross profit margin percentages are the result of competitive market forces. -16-
17 Costs of sales consist primarily of wages and benefits and material costs associated with the design, fabrication and installation of packaged compressor systems. Additional investment in the natural gas compression rental fleet for fiscal 1997, fiscal 1996 and fiscal 1995 totaled $ 17.9 million, $5.1 million and $255.4 million, respectively. Additions for fiscal 1995 include the acquisitions of the natural gas compression assets of Halliburton Company for $205 million and the assets of Brazos Gas Compressing Company for $35 million. The remainder of additions for fiscal 1995 and the additions for fiscal 1996 and 1997 were for modifications to the existing natural gas compressor rental fleet and for the construction of additional natural gas compressors. During the first quarter of fiscal 1997 the Compression division disposed of all of its air rental equipment which generated proceeds of $3.5 million and a gain of $.5 million. The remainder of gains from the sale of equipment for fiscal 1997 and gains from the sale of equipment for fiscal 1996 and fiscal 1995 were $.7 million, $.4 million and $1.1 million, respectively. Identifiable assets and depreciation expense for the years ended March 31 were: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Identifiable assets $ 258,007 275,454 308,339 ======================================================================================================== Depreciation expense $ 26,336 27,069 15,472 ======================================================================================================== </TABLE> The increase in depreciation expense from fiscal 1995 to fiscal 1996 is the result of a full year's impact of the Halliburton and Brazos acquisitions. CORPORATE Earnings before income taxes for the company consists of the following items for the years ended March 31: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Marine operating profit $ 212,404 118,909 83,683 Compression operating profit 12,394 14,565 14,436 Other income 6,788 5,436 5,589 Other expense (2,800) (12,600) (8,350) Corporate expenses (11,235) (9,541) (10,285) Interest expense (1,017) (5,882) (5,608) - ------------------------------------------------------------------------------------------------------- Earnings before income taxes $ 216,534 110,887 79,465 ======================================================================================================= </TABLE> Other expense for fiscal 1997 is a charge to establish reserves for losses resulting from one of the company's insurers filing for liquidation. Fiscal 1996 other expense consisted of $9.6 million of costs resulting from the merger with Hornbeck Offshore Services, Inc. and a $3.0 million charge as a result of the removal of Marine fleet and Compression field service personnel from the company's defined benefit pension plan. On April 1, 1996 these Marine and Compression employees, along with all new employees of the company who are eligible for pension plan membership, were enrolled in a new defined contribution retirement plan. Fiscal 1995 other expense consisted of a $2.5 million charge for insurance losses as a result of the potential insolvency of certain of the company's insurers and a $5.9 million charge for the costs of restructuring the company's corporate headquarters and worldwide marine operations which was designed to reduce costs and improve operating efficiencies. Corporate identifiable assets and depreciation expense for the years ended March 31 were: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Identifiable assets $ 50,052 47,627 27,816 ======================================================================================================== Depreciation expense $ 367 400 390 ======================================================================================================== </TABLE> -17-
18 Consolidated general and administrative expenses for the years ended March 31 consists of the following components: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Personnel $ 38,512 34,463 38,298 Office and property 11,364 9,929 10,149 Sales and marketing 4,336 3,407 4,201 Professional services 5,307 4,545 3,683 Other 5,336 7,004 7,588 - ------------------------------------------------------------------------------------------------- $ 64,855 59,348 63,919 ================================================================================================= </TABLE> Fiscal 1997 principal payments of $58.0 million on long-term debt were primarily for the prepayment of the debt assumed in connection with the purchase of the remaining equity interests in certain North Sea joint-venture companies. Lower interest and other debt costs in fiscal 1997 compared with the prior year resulted from the fiscal 1996 fourth quarter prepayment of debt assumed in connection with the merger with Hornbeck Offshore Services, Inc. During the third quarter of fiscal 1997 the Board of Directors authorized a share repurchase program whereby the company could purchase in the open market or through privately negotiated transactions up to $200 million of company common stock through March 31, 1998. The company expended $84.8 million on the purchase of 1,788,100 shares at an average cost, including broker commissions and fees, of $47.42 per share during fiscal 1997. All shares purchased have been canceled. The Internal Revenue Service has notified the company of proposed deficiencies aggregating approximately $17.5 million of additional income taxes resulting from audits of the company's income tax returns for the years ended March 31, 1993, 1994 and 1995. The company is the defendant to several alleged labor-law pay violations claimed by certain current and former employees in various areas of the world where its marine vessel operations are conducted. While the amount, if any, of such claims for which the company ultimately may be held liable is not presently determinable, if the claimants and all similarly situated employees and former employees who might file claims were successful, the aggregate amount of the company's liability, based on available information, could approximate $15 million. The company is in the process of defending against these claims and assessments and, in management's opinion, the ultimate outcome of these matters will not have a material adverse effect on the company's financial position or the results of its ongoing operations. CURRENCY FLUCTUATIONS AND INFLATION Because of its significant international operations, the company is exposed to currency fluctuations and exchange risk. To minimize the financial impact of these items the company attempts to contract a majority of its services in United States dollars. Day-to-day operating costs are generally affected by inflation. However, because the energy services industry requires specialized goods and services, general economic inflationary trends may not affect the company's operating costs. The major impact on operating costs is the level of offshore exploration, development and production spending by energy exploration and production companies. As this spending increases, prices of goods and services used by the energy industry and the energy services industry will increase. Future improvements in vessel day rates and natural gas compressor rental rates may shield the company from the inflationary effects on operating costs. ENVIRONMENTAL MATTERS During the ordinary course of business the company's operations are subject to a wide variety of environmental laws and regulations. The company attempts to comply with these laws and regulations in order to avoid costly accidents and related environmental damage. Compliance with existing governmental regulations which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, nor is expected to have, a material effect on the company. -18-
19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included in Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors of the company is incorporated by reference from the company's definitive proxy statement to be filed on or before July 29, 1997. For information regarding executive officers of the company, see Item 4A of this report. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the proxy statement described in Item 10 of this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the proxy statement described in Item 10 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from the proxy statement described in Item 10 of this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Financial Statements and Schedules The Consolidated Financial Statements and Schedule of the company listed on the accompanying Index to Financial Statements and Schedule (see page F-1) are filed as part of this report. B. Reports on Form 8-K None. -19-
20 C. Exhibits The index below describes each exhibit filed as a part of this report. Exhibits not incorporated by reference to a prior filing are designated by an asterisk; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. 3(a) - Restated Certificate of Incorporation of Tidewater Inc. (filed with the Commission as Exhibit 3(a) to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1993). 3(b) - Tidewater Inc. Bylaws (filed with the Commission as Exhibit 3(b) to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1993). 4(a) - Restated Rights Agreement dated as of September 19, 1996 between Tidewater Inc. and The First National Bank of Boston (filed with the Commission as Exhibit 4 to the company's current report on Form 8-K dated September 19, 1996). *10(a) - $600,000,000 Revolving Credit and Term Loan Agreement dated March 19, 1997. 10(b) - Tidewater Inc. 1975 Incentive Program Stock Option Plan, as amended in 1990 (filed with the Commission as Exhibit 10(c) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1991). 10(c) - Tidewater Inc. 1992 Stock Option and Restricted Stock Plan (filed with the Commission as Exhibit 10(f) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(d) - Tidewater Inc. Amended and Restated Supplemental Executive Retirement Plan (filed with the Commission as Exhibit 10(g) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(e) - Tidewater Inc. Amended and Restated Employees' Supplemental Savings Plan (filed with the Commission as Exhibit 10(h) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(f) - Supplemental Health Plan for Executive Officers of Tidewater Inc. (filed with the Commission as Exhibit 10(i) to a Registration Statement on September 12, 1989, Registration No. 33-31016). 10(g) - Tidewater Inc. Deferred Compensation Plan for Directors (filed with the Commission as Exhibit 10(h) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1994). 10(h) - Tidewater Inc. Retirement Plan for Directors as adopted on March 22, 1990 (filed with the Commission as Exhibit 10(k) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1990). 10(i) - Employment and Consulting Agreement dated as of March 31, 1993 between Tidewater Inc. and John P. Laborde as amended (filed with the Commission as Exhibit 10(l) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(j) - Consulting Agreement dated as of March 13, 1996 between Tidewater Inc. and Larry D. Hornbeck. *10(k) - Change in Control Agreement dated September 30, 1996 between Tidewater Inc. and William C. O'Malley. *10(l) - Form of Change in Control Agreement entered into as of September 30, 1996 with four executive officers. -20-
21 *10(m) - Tidewater Inc. 1996 Annual Incentive Plan. 10(n) - Employment Agreement dated June 13, 1994 between Tidewater Inc. and William C. O'Malley (filed with the Commission as Exhibit 10 to the company's report on Form 8-K for June 13, 1994). *10(o) - Agreement dated March 20, 1997 for the Acquisition of the share capital of the O.I.L. group of companies. *11 - Earnings per share Computation Information. *21 - Subsidiaries of the company. *24 - Consent of Independent Accountants. *27 - Financial Data Schedule. Certain instruments respecting long-term debt of Tidewater have been omitted pursuant to Regulation S-K, Item 601. Tidewater hereby agrees to furnish a copy of any such instrument to the Commission upon request. -21-
22 SIGNATURES OF REGISTRANT 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 May 1, 1997. TIDEWATER INC. (Registrant) By: /s/ William C. O'Malley ---------------------------------------- William C. O'Malley Chairman of the Board of Directors, President, and Chief Executive Officer By: /s/ Ken C. Tamblyn ---------------------------------------- Ken C. Tamblyn Executive Vice President and Chief Financial Officer SIGNATURES OF DIRECTORS Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 1, 1997. /s/ Robert H. Boh /s/ Larry D. Hornbeck - -------------------------------- --------------------------------- Robert H. Boh Larry D. Hornbeck /s/ Donald T. Bollinger /s/ Paul W. Murrill - -------------------------------- --------------------------------- Donald T. Bollinger Paul W. Murrill /s/ Arthur R. Carlson /s/ William C. O'Malley - -------------------------------- --------------------------------- Arthur R. Carlson William C. O'Malley /s/ Hugh J. Kelly /s/ Lester Pollack - -------------------------------- --------------------------------- Hugh J. Kelly Lester Pollack /s/ John P. Laborde /s/ J. Hugh Roff, Jr. - -------------------------------- --------------------------------- John P. Laborde J. Hugh Roff, Jr. -22-
23 TIDEWATER INC. ANNUAL REPORT ON FORM 10-K ITEMS 8, 14(A), AND 14(D) INDEX TO FINANCIAL STATEMENTS AND SCHEDULE <TABLE> <CAPTION> FINANCIAL STATEMENTS Page ---- <S> <C> 1. Independent Auditors' Report F-2 2. Consolidated Balance Sheets, March 31, 1997 and 1996 F-3 3. Consolidated Statements of Earnings, three years ended March 31, 1997 F-4 4. Consolidated Statements of Stockholders' Equity, three years ended March 31, 1997 F-5 5. Consolidated Statements of Cash Flows, three years ended March 31, 1997 F-6 6. Notes to Consolidated Financial Statements F-7 </TABLE> FINANCIAL STATEMENT SCHEDULE II. Tidewater Inc. and Subsidiaries Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes. F-1
24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Tidewater Inc.: We have audited the accompanying consolidated financial statements of Tidewater Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tidewater Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP New Orleans, Louisiana April 30, 1997 F-2
25 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- March 31, 1997 and 1996 (in thousands) <TABLE> <CAPTION> ASSETS 1997 1996 - ----------------------------------------------------------------------------------------------- <S> <C> <C> Current assets: Cash, including temporary cash investments $ 41,114 28,768 Trade and other receivables, less allowance for doubtful accounts of $10,648 in 1997 and $8,376 in 1996 187,612 144,472 Inventories 36,016 31,346 Other current assets 3,984 4,350 - ----------------------------------------------------------------------------------------------- Total current assets 268,726 208,936 - ----------------------------------------------------------------------------------------------- Investments in, at equity, and advances to unconsolidated companies 20,556 35,861 Properties and equipment: Marine equipment 1,265,633 1,210,876 Compression equipment 322,512 324,069 Other 39,826 41,240 - ----------------------------------------------------------------------------------------------- 1,627,971 1,576,185 Less accumulated depreciation 946,880 916,412 - ----------------------------------------------------------------------------------------------- Net properties and equipment 681,091 659,773 Other assets 68,627 73,630 - ----------------------------------------------------------------------------------------------- $1,039,000 978,200 =============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------- Current liabilities: Current maturities of long-term debt -- 2,934 Accounts payable and accrued expenses 81,500 71,902 Accrued property and liability losses 13,248 10,844 - ----------------------------------------------------------------------------------------------- Total current liabilities 94,748 85,680 - ----------------------------------------------------------------------------------------------- Deferred income taxes 95,595 76,579 Accrued property and liability losses 32,146 34,206 Other liabilities and deferred credits 46,847 42,985 Stockholders' equity: Common stock, par value $.10, issued 60,334,889 shares in 1997 and 61,882,695 shares in 1996 6,033 6,188 Additional paid-in capital 341,415 421,655 Retained earnings 433,347 322,736 - ----------------------------------------------------------------------------------------------- 780,795 750,579 Less: Cumulative foreign currency translation adjustment 10,676 10,771 Deferred compensation - restricted stock 455 1,058 - ----------------------------------------------------------------------------------------------- Total stockholders' equity 769,664 738,750 Commitments and other matters - ----------------------------------------------------------------------------------------------- $1,039,000 978,200 =============================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-3
26 CONSOLIDATED STATEMENTS OF EARNINGS Years Ended March 31, 1997, 1996 and 1995 (in thousands, except share and per share data) <TABLE> <CAPTION> 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenues: Marine operations $ 690,426 532,202 501,118 Compression operations 112,584 111,245 83,490 - ------------------------------------------------------------------------------------------------------ 803,010 643,447 584,608 - ------------------------------------------------------------------------------------------------------ Costs and expenses: Marine operations 385,656 328,306 311,949 Compression operations 64,153 59,536 45,886 Depreciation 82,272 82,430 92,865 General and administrative 64,855 59,348 63,919 - ------------------------------------------------------------------------------------------------------ 596,936 529,620 514,619 - ------------------------------------------------------------------------------------------------------ 206,074 113,827 69,989 Other income (expenses): Foreign exchange loss (397) (479) (611) Gain on sales of assets 6,443 7,264 14,207 Equity in net earnings of unconsolidated companies 4,901 5,901 4,555 Minority interests (1,311) (1,385) (1,488) Interest and miscellaneous income 4,641 4,241 6,920 Other expense (2,800) (12,600) (8,499) Interest and other debt costs (1,017) (5,882) (5,608) - ------------------------------------------------------------------------------------------------------ 10,460 (2,940) 9,476 - ------------------------------------------------------------------------------------------------------ Earnings before income taxes 216,534 110,887 79,465 Income taxes 70,523 34,710 28,278 - ------------------------------------------------------------------------------------------------------ Net earnings $ 146,011 76,177 51,187 ====================================================================================================== Primary and fully-diluted net earnings per common share $ 2.34 1.23 .83 ====================================================================================================== Weighted average common shares and equivalents 62,280,281 62,160,978 61,858,894 ====================================================================================================== Cash dividends declared per common share $ .575 .475 .40 ====================================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-4
27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Years Ended March 31, 1997, 1996 and 1995 (in thousands) <TABLE> <CAPTION> Cumulative foreign Deferred Additional currency compensation- Common paid-in Retained translation restricted stock capital earnings adjustment stock Total - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> 1997 - -------------------------------------------------------------------------------- Amount at March 31, 1996 $ 6,188 421,655 322,736 (10,771) (1,058) 738,750 Net earnings -- -- 146,011 -- -- 146,011 Exercise of stock options 23 4,368 -- -- -- 4,391 Cash dividends declared -- -- (35,400) -- -- (35,400) Stock repurchases (178) (84,608) -- -- -- (84,786) Other -- -- -- 95 603 698 - --------------------------------------------------------------------------------------------------- Amount at March 31, 1997 $ 6,033 341,415 433,347 (10,676) (455) 769,664 =================================================================================================== 1996 - -------------------------------------------------------------------------------- Amount at March 31, 1995 $ 6,155 418,941 271,452 (10,745) (1,544) 684,259 Net earnings -- -- 76,177 -- -- 76,177 Exercise of stock options 33 2,950 -- -- -- 2,983 Cash dividends declared -- -- (25,327) -- -- (25,327) Other -- (236) 434 (26) 486 658 - --------------------------------------------------------------------------------------------------- Amount at March 31, 1996 $ 6,188 421,655 322,736 (10,771) (1,058) 738,750 =================================================================================================== 1995 Amount at March 31, 1994 $ 6,102 416,559 241,520 (11,032) -- 653,149 Net earnings -- -- 51,187 -- -- 51,187 Issuance of restricted stock 7 1,629 -- -- (1,636) -- Exercise of stock options 12 876 -- -- -- 888 Cash dividends declared -- -- (21,255) -- -- (21,255) Other 34 (123) -- 287 92 290 - --------------------------------------------------------------------------------------------------- Amount at March 31, 1995 $ 6,155 418,941 271,452 (10,745) (1,544) 684,259 =================================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-5
28 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- (in thousands) <TABLE> <CAPTION> 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net earnings $ 146,011 76,177 51,187 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 82,272 82,430 92,865 Provision for deferred income taxes 19,016 16,233 6,523 Gain on sales of assets (6,443) (7,264) (14,207) Equity in net earnings of unconsolidated companies (4,901) (5,901) (4,555) Minority interests 1,311 1,385 1,488 Compensation expense - restricted stock 603 595 92 Decrease (increase) in trade and other receivables (35,821) 11,780 (183) Decrease (increase) in inventories (4,398) 4,572 4,977 Decrease (increase) in other current assets 366 20 (944) Increase (decrease) in accounts payable/accrued expenses 3,712 (11,676) 9,462 Increase (decrease) in accrued property/liability losses 2,404 (689) 3,776 Other, net 1,332 6,548 5,001 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 205,464 174,210 155,482 - ----------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of assets 22,737 18,044 26,510 Additions to properties and equipment (58,002) (46,116) (354,725) Sale of marketable securities -- -- 27,310 Acquisition of joint-venture interests, net of cash received (3,435) -- -- Investments in unconsolidated companies, net of dividends received 5,151 9,102 (3,059) Investment from minority interests, net of dividends paid (755) (1,064) 3,550 Other -- (592) (863) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (34,304) (20,626) (301,277) - ----------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Common stock purchased (84,786) -- -- Principal payments on long-term debt (58,019) (145,395) (96,272) Proceeds from the issuance of long-term debt 15,000 13,400 173,000 Proceeds from issuance of common stock 4,391 4,212 742 Cash dividends (35,400) (25,327) (21,255) Other -- 40 (947) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (158,814) (153,070) 55,268 - ----------------------------------------------------------------------------------------------------------------- Net increase in cash for Hornbeck Offshore Services, Inc. for the quarter ended March 31, 1995 (Note 2) -- 4,980 -- Net increase (decrease) in cash, including temporary cash investments 12,346 514 (90,527) - ----------------------------------------------------------------------------------------------------------------- Cash, including temporary cash investments at beginning of year 28,768 23,274 113,801 - ----------------------------------------------------------------------------------------------------------------- Cash, including temporary cash investments at end of year $ 41,114 28,768 23,274 ================================================================================================================= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 702 5,944 5,377 Income taxes $ 56,249 27,721 23,078 ================================================================================================================= Supplemental noncash investing activity: Joint-venture interests acquired: Fair value of assets acquired $ 51,305 -- -- Fair value of liabilities assumed (47,870) -- -- - ----------------------------------------------------------------------------------------------------------------- Net cash payment $ 3,435 ================================================================================================================= </TABLE> See accompanying Notes to Consolidated Financial Statements F-6
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- March 31, 1997, 1996 and 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The company provides services and equipment to the offshore energy industry through its marine and compression divisions. The marine division owns and operates the world's largest fleet of offshore service vessels and the compression division owns and operates one of the largest rental fleets of natural gas compressors in the United States. Activity levels for the marine vessel fleet and compression rental fleet are ultimately dependent upon oil and natural gas prices which, in turn, are determined by the supply/demand relationship for oil and natural gas. USE OF ESTIMATES In preparing the company's financial statements management makes informed estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results may differ from these estimates. BASIS OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Tidewater Inc. and its subsidiaries. Significant intercompany balances and transactions are eliminated in consolidation. INVENTORIES Inventories are stated at average cost for operating supplies and at the lower of cost (FIFO) or market (net realizable value) for merchandise held for resale. PROPERTIES AND EQUIPMENT Properties and equipment are carried at cost. Depreciation for financial reporting purposes is computed primarily on the straight-line basis beginning with the first charter/rental, with salvage values of 5%-10% for marine equipment and 30% for compression equipment, using estimated useful lives of: <TABLE> <CAPTION> Years - ------------------------------------------------------------------------------ <S> <C> Marine equipment (from date of construction) 15 - 25 Compression equipment 8 - 12 Other properties and equipment 3 - 30 </TABLE> Used equipment is depreciated in accordance with the above schedule; however, no life less than six years is used for marine equipment regardless of the date constructed. Maintenance and repairs are charged to operations as incurred during the asset's original estimated useful life. Major repair costs incurred after the original estimated useful life that also have the effect of extending the useful life of the asset are capitalized and amortized over three years. Major modifications to equipment are capitalized and amortized over the remaining life of the equipment. In fiscal 1996 the estimated useful lives of the company's marine vessels were increased from 10-20 years to 15-25 years. The increase in useful lives was made in order to provide a better matching of revenues and depreciation expense over a vessel's economic useful life. This change in accounting estimate lowered fiscal 1996 depreciation expense by approximately $25.2 million. Concurrent with this change approximately $10.2 million of repair and maintenance costs that would have been capitalized in fiscal 1996 had the previous estimated useful lives been used, was expensed. The change increased fiscal 1996 net earnings by $10.0 million, or $.16 per common share. On April 1, 1996 the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption had no impact on the company's results of operations or financial position. F-7
30 ACCRUED PROPERTY AND LIABILITY LOSSES The company's insurance subsidiary establishes case based reserves for estimates of reported losses on direct business written, estimates received from ceding reinsurers, and reserves based on past experience of unreported losses. Such losses principally relate to the company's marine operations and are included as a component of costs of marine operations in the Consolidated Statements of Earnings. The liability for such losses and the related reimbursement receivable from reinsurance companies are classified in the Consolidated Balance Sheet into current and noncurrent amounts based upon estimates of when the liabilities will be settled and when the receivables will be collected. PENSION AND OTHER POSTRETIREMENT BENEFITS Pension costs are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 87 and are funded as required by law. Prior service costs are amortized on the straight-line basis over the average remaining service period of employees expected to receive pension benefits. Postretirement benefits other than pensions are accounted for in accordance with Statement of Financial Accounting Standards No. 106. The estimated cost of postretirement benefits other than pensions are accrued during the employees' active service period. Postemployment and postretirement benefits other than pensions are funded as claims are submitted. INCOME TAXES Income taxes are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS PER SHARE Primary earnings per share are computed based on the weighted average number of shares and dilutive equivalent shares of common stock (stock options and restricted stock grants) outstanding during each year using the treasury stock method. FOREIGN CURRENCY TRANSLATION The functional currency for certain non-U.S. subsidiaries and unconsolidated companies is the applicable local currency. The translation of the applicable local currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using weighted average exchange rates during the period. The gains and losses resulting from the balance sheet account translations, net of deferred income taxes, are included in stockholders' equity. Some transactions of the company and its subsidiaries are made in currencies different from their own. Gains and losses from these transactions are included in the Consolidated Statements of Earnings as they occur and relate primarily to the revenue generating and purchasing activities in Brazil, Venezuela, Mexico, United Kingdom, Singapore, Trinidad and Nigeria. CASH FLOWS For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with original maturities of approximately three months or less are considered to be cash equivalents. Some items of compression equipment are acquired and placed in inventories for subsequent sale or rent to others. Acquisitions of these assets are considered operating activities in the Consolidated Statements of Cash Flows, although they later may be transferred to the compression equipment rental fleet. F-8
31 STOCK COMPENSATION On April 1, 1996 the company elected to continue to use the intrinsic value method of accounting for stock-based compensation prescribed by Accounting Principles Board (APB) Opinion No. 25 and, accordingly, adopted the disclosure provisions of SFAS No. 123 "Accounting for Stock-based Compensation." NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128 is effective for annual and interim periods ending after December 15, 1997. SFAS No. 129 is effective for fiscal years ending after December 15, 1997. Management does not believe that these pronouncements will have a material impact on its fiscal 1998 consolidated financial statements. (2) BUSINESS COMBINATIONS On March 20, 1997 the company agreed to purchase, for approximately $535 million, O.I.L. Ltd. O.I.L. Ltd is a subsidiary of Ocean Group plc, of the United Kingdom, and owns a fleet of approximately 100 vessels principally composed of towing-supply and supply vessels operating in most major offshore oil and gas exploration areas other than the United States. Final determination of the purchase price is subject to certain conditions to be satisfied at closing. The acquisition will be accounted for using the purchase method and will be financed under a $600 million credit facility. The purchase agreement calls for the closing to be no later than May 30, 1997, unless extended by both parties. On May 31, 1996 the company acquired for $12.4 million cash the remaining 50.1% equity interest in 22 of 29 safety/standby vessels previously owned and operated by joint-venture companies in the North Sea. The acquisition was accounted for by the purchase method and accordingly, the fair value of the assets acquired and liabilities assumed and results of operations have been included in the condensed consolidated financial statements effective June 1, 1996. Unaudited pro forma results of operations assuming the acquisition had taken place on April 1, 1995 would not be materially different than actual results. F-9
32 On March 13, 1996 Tidewater Inc. issued 8,475,214 shares of its common stock in exchange for all of the outstanding common stock of Hornbeck Offshore Services, Inc. (Hornbeck). Hornbeck owned and operated a fleet of 61 marine service vessels operating in the U.S. Gulf of Mexico and had a 49.9% interest in 29 safety/standby vessels operating in the North Sea. This business combination has been accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Hornbeck. Operating results prior to the combination of the separate companies and the combined amounts presented in the consolidated financial statements are summarized below: <TABLE> <CAPTION> (in thousands of dollars) Nine Months Ended Year Ended December 31, March 31, 1995 1995 - -------------------------------------------------------------------------------------------------------------- (unaudited) <S> <C> <C> Revenues: Tidewater $435,939 538,774 Hornbeck 46,341 45,834 - -------------------------------------------------------------------------------------------------------------- Combined $482,280 584,608 ============================================================================================================== Net earnings: Tidewater $ 59,262 42,628 Hornbeck 4,783 8,559 - -------------------------------------------------------------------------------------------------------------- Combined $ 64,045 51,187 ============================================================================================================== </TABLE> Adjustments to conform Hornbeck's accounting policies to those of Tidewater and to apply pooling-of-interests accounting reduced (increased) net earnings of the combined entity for the above periods by $2,359,000 and ($536,000), respectively. The adjustments to conform accounting policies relate to Hornbeck's capitalizing and amortizing the cost of vessel drydockings and major overhauls rather than expensing such costs as incurred. Prior to the combination Hornbeck's fiscal year end was December 31. Tidewater's fiscal year end is March 31. In applying pooling-of-interests accounting, the March 31, 1995 Tidewater statement of earnings was combined with the Hornbeck statement of earnings for the year ended December 31, 1994. Unaudited amounts for the nine-month period ended December 31, 1995 include results of each entity for the nine-month period ended December 31, 1995. Retained earnings of the combined entities were adjusted by $434,000 as of the beginning of Tidewater's fiscal 1996 year to include the unaudited net earnings of Hornbeck, including adjustments to conform accounting policies to those of Tidewater, for the period January 1, 1995 to March 31, 1995. During this period Hornbeck's revenues were $12,671,000. Additionally, the consolidated statement of cash flows for the year ended March 31, 1996 was adjusted by $4,980,000 to reflect the net increase in cash of Hornbeck for the three months ended March 31, 1995. Merger expenses of $9.6 million include legal, investment banking and accounting fees related to the business combination. Also included in merger expenses are payments under severance and employment agreements and a provision for certain other related costs. Merger expenses are classified as other expense in the Consolidated Statements of Earnings. In fiscal 1995 the company purchased for $35 million in cash the assets of Brazos Gas Compressing Company, a subsidiary of Mitchell Energy & Development Corporation, and the natural gas compression assets of Halliburton Company using $55 million of available cash and borrowings of $150 million. The costs of these acquisitions were allocated under the purchase method of accounting based on the fair value of the assets acquired. In connection with the purchase of the natural gas compression assets of Halliburton Company, goodwill of approximately $25 million was recorded as other assets in the Consolidated Balance Sheet and is being amortized in equal charges to earnings over a 15-year period. The results of Brazos' and Halliburton's operations have been consolidated with the company's effective October 1, 1994, and December 1, 1994, respectively. Unaudited pro forma combined results of operations of the company and of Brazos and Halliburton, including appropriate purchase accounting F-10
33 adjustments for the year ended March 31, 1995 as though the acquisition had taken place on April 1, 1994, are as follows: <TABLE> <CAPTION> (in thousands, except per share data) 1995 - -------------------------------------------------------------------------------- <S> <C> Revenues $625,777 ================================================================================ Earnings before extraordinary item 44,381 ================================================================================ Net earnings 44,381 ================================================================================ Primary and fully diluted earnings per common share .72 ================================================================================ </TABLE> (3) INVENTORIES A summary of inventories at March 31 follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - -------------------------------------------------------------------------------- <S> <C> <C> Marine operating supplies $28,171 23,428 Compression supplies and merchandise held for sale 7,845 7,918 - -------------------------------------------------------------------------------- $36,016 31,346 ================================================================================ </TABLE> (4) UNCONSOLIDATED COMPANIES Investments in, at equity, and advances to unconsolidated marine joint-venture companies at March 31 were as follows: <TABLE> <CAPTION> Percentage (in thousands) ownership 1997 1996 - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> Ravensworth Investments Ltd. (United Kingdom) 50% $ -- 14,505 National Marine Service (Abu Dhabi-UAE) 40% 12,107 11,557 Tidewater Port Jackson (Australia) 50% 3,789 4,682 Provident Marine, Ltd. (Mexico) 50% 1,841 2,126 Lamnalco (UAE) 50% 1,434 1,613 Others 20%-50% 1,385 1,378 - ----------------------------------------------------------------------------------------- $ 20,556 35,861 ========================================================================================= </TABLE> The aggregate amount of undistributed earnings of all unconsolidated joint-venture companies included in consolidated stockholders' equity at March 31, 1997 is approximately $12,902,000. (5) INCOME TAXES Earnings before income taxes derived from United States and international operations for the years ended March 31 are as follows: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- <S> <C> <C> <C> United States $127,402 43,854 54,738 International 89,132 67,033 24,727 - -------------------------------------------------------------------------------- $216,534 110,887 79,465 ================================================================================ </TABLE> F-11
34 Income tax expense for the years ended March 31 consists of the following: <TABLE> <CAPTION> (in thousands) U.S. ----------------- Federal State International Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1997 - -------------------------------------------------------------------------------- Current $ 39,362 404 11,741 51,507 Deferred 19,016 -- -- 19,016 - -------------------------------------------------------------------------------- $ 58,378 404 11,741 70,523 ================================================================================ 1996 - -------------------------------------------------------------------------------- Current $ 8,877 (629) 10,229 18,477 Deferred 16,233 -- -- 16,233 - -------------------------------------------------------------------------------- $ 25,110 (629) 10,229 34,710 ================================================================================ 1995 - -------------------------------------------------------------------------------- Current $ 13,977 797 6,981 21,755 Deferred 6,523 -- -- 6,523 - -------------------------------------------------------------------------------- $ 20,500 797 6,981 28,278 ================================================================================ </TABLE> The actual income tax expense for the years ended March 31, 1997, 1996 and 1995 differs from the amounts computed by applying the U.S. federal tax rate of 35% to pre-tax earnings as a result of the following: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Computed "expected" tax expense $ 75,787 38,810 27,813 Increase (reduction) resulting from: Foreign (earnings) losses not includable in U.S. tax return (1,547) 482 (2,803) Foreign taxes not creditable against U.S. taxes -- -- 1,039 Foreign tax credits not previously recognized (1,303) (7,440) -- Utilization of net operating loss carryforwards (386) (2,181) -- Expenses which are not deductible for tax purposes 129 1,496 177 Other, net (2,157) 3,543 2,052 - -------------------------------------------------------------------------------------------------- $ 70,523 34,710 28,278 ================================================================================================== </TABLE> The significant components of deferred income tax expense for the years ended March 31 are as follows: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------- <S> <C> <C> <C> Deferred income tax expense (exclusive of the effects of other components listed below) $10,527 7,478 218 Investment, foreign and minimum tax credits 8,489 8,755 6,305 - -------------------------------------------------------------------------------------- $19,016 16,233 6,523 ====================================================================================== </TABLE> F-12
35 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred tax assets: Financial provisions not deducted for tax purposes $ 19,605 15,755 Unrepatriated foreign earnings 3,267 9,233 Foreign net operating loss carryforwards 1,915 5,079 Foreign tax credit carryforwards 3,851 3,851 Alternative minimum tax credit carryforwards -- 1,968 Other 259 1,068 - -------------------------------------------------------------------------------------------------------- Gross deferred tax assets 28,897 36,954 Less valuation allowance 1,915 5,079 - -------------------------------------------------------------------------------------------------------- 26,982 31,875 - -------------------------------------------------------------------------------------------------------- Deferred tax liabilities - depreciation differences on properties and equipment (122,577) (108,454) - -------------------------------------------------------------------------------------------------------- Net deferred tax liability $ (95,595) (76,579) ======================================================================================================== </TABLE> The net changes in the valuation allowance for the years ended March 31, 1997 and 1996 were decreases of $3,164,000 and $2,108,000, respectively. These changes were made due to the realization of certain international net operating loss carryforwards. The remaining balance of the deferred tax assets are expected to be realized through future operating results and the reversal of taxable temporary differences. The company has not recognized a deferred tax liability of approximately $31,500,000 for the undistributed earnings of certain non-U.S. subsidiaries that arose in prior years because the company currently does not expect those unremitted earnings to reverse and become taxable to the company in the foreseeable future. A deferred tax liability will be recognized when the company expects that it will realize those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of investments. As of March 31, 1997, the undistributed earnings of these subsidiaries were approximately $90,000,000. (6) LONG-TERM DEBT At March 31, 1997 the company had no long-term debt. Outstanding long-term debt at March 31, 1996 of $2,934,000, all classified as current, consisted of outstanding debt assumed in connection with the merger with Hornbeck Offshore Services, Inc. on March 13, 1996. The company's revolving credit and term loan agreement (the "agreement") consists of a $200 million revolving credit facility and a $400 million acquisition term loan. The acquisition term loan is for financing the future acquisition of O.I.L. Ltd. Borrowings will bear interest, at the company's option, at prime or Federal Funds rates plus .5% or Eurodollar rates plus margins from .5% to 1% based on the company's debt to capitalization ratio. The revolving credit commitment of $200 million expires on April 30, 1999, at which time the then outstanding balance will convert to a term loan repayable in 16 quarterly installments beginning July 31, 1999. Borrowings under the acquisition term loan are payable in 28 quarterly installments beginning September 30, 1997 and ending June 30, 2004. All of the borrowings under the agreement are unsecured and the company pays an annual fee of .25% on the unused portion of the revolving credit facility. Under the terms of the agreement, the company has agreed to limitations on future levels of investments and aggregate indebtedness, a minimum level of tangible net worth and maintenance of certain debt to capitalization ratios. The agreement also prohibits the company from encumbering its assets, other than assets already encumbered at March 19, 1997 for the benefit of others. F-13
36 (7) BENEFIT PLANS Upon meeting various citizenship, age and service requirements, employees are eligible to participate in a defined contribution savings plan. The plan held 510,772 shares and 522,216 shares of the company's common stock at March 31, 1997 and 1996, respectively. Amounts charged to expense for the plan for 1997, 1996 and 1995 were $1,694,000, $1,035,000, and $951,000, respectively. A defined benefit pension plan covers certain U.S. citizen employees and employees who are permanent residents of the United States. Benefits are based on years of service and employee compensation. The company also has a supplemental retirement plan (Supplemental Plan) that provides pension benefits to certain employees in excess of those allowed under the company's tax qualified pension plan. Certain benefits programs are maintained in several other countries which provide retirement income for covered employees. Net periodic pension cost for the U.S. defined benefit pension plan and the Supplemental Plan for 1997, 1996 and 1995 include the following components: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------- <S> <C> <C> <C> Service cost-benefit earned during the period $ 844 1,843 1,962 Interest cost on projected benefit obligation 2,258 2,208 1,954 Actual return on assets (3,170) (4,700) 503 Net amortization and deferral 1,591 3,530 (1,463) - ------------------------------------------------------------------------------------- Net periodic pension cost $ 1,523 2,881 2,956 ===================================================================================== Assumptions used in the accounting are: Discount rates 7.5% 7.5% 8.5% Rates of annual increase in compensation levels 5.2% 5.2% 5.0% Expected long-term rate of return on assets 9.5% 9.5% 9.5% ===================================================================================== </TABLE> The following table sets forth the assets and liabilities of the U.S. defined benefit pension plan and the Supplemental Retirement Plan and the amount of the net pension liability in the Consolidated Balance Sheets at March 31: <TABLE> <CAPTION> (in thousands) U.S. Defined Benefit Supplemental Pension Plan Retirement Plan -------------------- ------------------ 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Actuarial present value of vested benefit obligation $28,431 27,606 2,759 2,423 ================================================================================================================ Accumulated benefit obligation $28,715 27,831 2,932 2,467 ================================================================================================================ Projected benefit obligation $31,463 30,698 3,982 3,192 Plan assets at fair value, primarily bonds and common stock 29,847 23,935 -- -- - ---------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 1,616 6,763 3,982 3,192 Unrecognized net transitional obligation amortized over 15 years (87) (112) -- -- Unrecognized actuarial gain (loss) 680 (1,856) (1,672) (1,272) Unrecognized prior service cost (364) (425) (296) (394) Adjustment required to recognize minimum liability -- -- 918 941 - ---------------------------------------------------------------------------------------------------------------- Net accrued pension liability $ 1,845 4,370 2,932 2,467 ================================================================================================================ </TABLE> During the fourth quarter of fiscal 1996 the company recorded as other expense a $3.0 million charge as a result of the removal of Marine fleet and Compression field service personnel from the company's U.S. defined benefit pension plan. Beginning April 1, 1996 these Marine and Compression employees, along with all new employees of the company who are eligible for pension plan membership, were enrolled in a new defined contribution retirement plan. Company contributions in cash to the plan are based on employee compensation, as defined by the plan, and are subject to certain vesting requirements. The costs of the plan for fiscal 1997 was $2,309,000. F-14
37 Qualified retired employees currently are covered by a program which provides limited health care and life insurance benefits. Costs of the program are based on actuarially determined amounts and are accrued over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these benefits. Net periodic postretirement health care and life insurance costs for 1997, 1996 and 1995 include the following components: <TABLE> <CAPTION> (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> Service cost - benefit earned during the period $ 928 743 924 Interest cost on accumulated postretirement benefit obligation 874 798 732 Other amortization and deferral (207) (296) (129) - ---------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 1,595 1,245 1,527 ============================================================================================== </TABLE> The unfunded actuarially-determined liabilities for postretirement benefits at March 31 are as follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------ <S> <C> <C> Actuarial present value of accumulated postretirement benefit obligation: Current retirees $ 5,110 4,390 Current employees eligible for benefits 1,274 1,039 Current employees not yet eligible for benefits 8,175 6,431 - ------------------------------------------------------------------------------------------------ Total accumulated postretirement benefit obligation 14,559 11,860 Unrecognized prior service cost (197) 1,382 Unrecognized net gain 1,798 2,069 - ------------------------------------------------------------------------------------------------ Accrued postretirement benefit cost $ 16,160 15,311 ================================================================================================ </TABLE> The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation will be 9% in 1998, gradually declining to 5.5% in the year 2005 and thereafter. A 1% change in the assumed health care cost trend rates for each year would change the accumulated postretirement benefit obligation by approximately $2,235,000 at March 31, 1997 and change the cost for the year ended March 31, 1997 by $329,000. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1997 and 1996. (8) OTHER ASSETS, OTHER LIABILITIES AND DEFERRED CREDITS A summary of other assets at March 31 follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - -------------------------------------------------------------------------------- <S> <C> <C> Recoverable insurance losses $32,146 34,206 Goodwill 21,357 23,068 Assets held for sale 5,852 7,155 Other 9,272 9,201 - -------------------------------------------------------------------------------- $68,627 73,630 ================================================================================ </TABLE> A summary of other liabilities and deferred credits at March 31 follows: <TABLE> <CAPTION> (in thousands) 1997 1996 - -------------------------------------------------------------------------------- <S> <C> <C> Postretirement benefit liability $16,160 15,311 Pension liability 4,777 3,837 Minority interests in net assets of subsidiaries 7,864 6,991 Noncurrent international and domestic taxes 6,957 6,957 Other 11,089 9,889 - -------------------------------------------------------------------------------- $46,847 42,985 ================================================================================ </TABLE> F-15
38 (9) CAPITAL STOCK Under the company's stock option and restricted stock plans, the Compensation Committee of the Board of Directors has authority to grant stock options and restricted shares of the company's stock to officers and other key employees. At March 31, 1997, 2,271,040 shares of common stock are reserved for issuance under the plans of which 332,528 shares are available for future grants. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options have ten year terms and most of the outstanding options vest and become exercisable in ratable installments over a three-year period from the grant date. The per share weighted-average fair values of stock options granted during fiscal years 1997 and 1996 were $15.46 and $13.38, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: <TABLE> <CAPTION> 1997 1996 - ----------------------------------------------------------------------------------- <S> <C> <C> Risk-free interest rate 6.4% 6.2% Expected dividend yield 1.25% 1.25% Expected stock price volatility 32.57% 31.75% Expected stock option life 5 years 5 years =================================================================================== </TABLE> The company applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the company's net earnings would have been reduced to the pro forma amounts as follows: <TABLE> <CAPTION> 1997 1996 - ---------------------------------------------------------------------------------- <S> <C> <C> Net earnings (in thousands): As reported $ 146,011 76,177 Pro forma 145,032 76,115 Primary and fully-diluted earnings per common share: As reported $ 2.34 1.23 Pro forma 2.33 1.22 ================================================================================== </TABLE> Pro forma net earnings and earnings per common share reflect only options granted during fiscal years 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options' vesting period of three years and compensation cost for options granted prior to April 1, 1995 is not considered. Stock option activity during 1997, 1996 and 1995 was as follows: <TABLE> <CAPTION> Weighted-average Number Exercise Price of Shares - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Balance at March 31, 1994 $ 13.73 895,736 Granted 21.58 901,875 Exercised 10.12 (131,783) Expired or cancelled 17.66 (72,530) - ----------------------------------------------------------------------------------------------------------- Balance at March 31, 1995 18.29 1,593,298 Granted 38.61 284,000 Exercised 12.67 (182,967) Expired or cancelled 18.12 (27,826) - ----------------------------------------------------------------------------------------------------------- Balance at March 31, 1996 22.38 1,666,505 Granted 43.49 520,000 Exercised 15.36 (269,177) Expired or cancelled 19.14 (4,225) - ----------------------------------------------------------------------------------------------------------- Balance at March 31, 1997 $ 29.11 1,913,103 =========================================================================================================== </TABLE> F-16
39 The 1,913,103 options outstanding at March 31, 1997 fall into three general exercise-price ranges as follows: <TABLE> <CAPTION> Exercise Price Range - ------------------------------------------------------------------------------------------------------------- $4.75 - $13.25 $15.00 - $25.13 $35.75-$43.63 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Options outstanding at March 31, 1997 154,475 962,628 796,000 Weighted average exercise price $12.00 $21.25 $41.93 Weighted average remaining contractual life 3.4 years 7.4 years 9.6 years Options exercisable at March 31, 1997 154,475 685,114 100,990 Weighted average exercise price of options exercisable at March 31, 1997 $12.00 $21.12 $38.71 ============================================================================================================= </TABLE> At March 31, 1997, 1996 and 1995, the number of options exercisable under the stock option plans was 940,579, 771,125 and 531,403, respectively; and the weighted average exercise price of those options was $21.51, $17.43 and $13.82, respectively. The restricted stock plan permits the grant of company shares restricted as to transferability and subject to a substantial risk of forfeiture. The vesting restrictions and period during which the transferability restrictions are applicable are determined on a case-by-case basis. During the restricted period, the restricted shares may not be transferred or encumbered but the recipient has the right to vote and receive dividends on the restricted shares. At March 31, 1997, contingent awards totalling 25,409 restricted company shares were outstanding, to be issued in conjunction with and as a result of the exercise of certain stock options. All restrictions are removed from the restricted shares six months after issuance. In accordance with an employment agreement with the company's chairman of the board, 70,000 shares of restricted common stock of the company were granted to him on October 20, 1994. These restricted shares vest at varying intervals when the average sales price of the common stock reaches certain predetermined levels. During the years ended March 31, 1997 and 1996, 25,000 shares in each year vested due to the attainment of the first and second average sales price levels applicable to those shares. The fair market value of the stock at the time of the grant was classified in stockholders' equity as deferred compensation-restricted stock and is being amortized by equal monthly charges to earnings over approximately seven years, adjusted for vestings during the seven year period. During the third quarter of fiscal 1997 the Board of Directors authorized a share repurchase program whereby the company could purchase in the open market or through privately negotiated transactions up to $200 million of company common stock through March 31, 1998. The company expended $84.8 million on the purchase of 1,788,100 common shares at an average cost, including broker commissions and fees, of $47.42 per share during 1997. All shares purchased have been canceled. At March 31, 1997 and 1996, 3,000,000 shares of no par value preferred stock were authorized and unissued. Under a Shareholder Rights Plan, one preferred stock purchase right has been distributed as a dividend for each outstanding common share. Each right entitles the holder to purchase, under certain conditions, one one-hundredth of a share of Series A Participating Preferred Stock at an exercise price of $160, subject to adjustment. The rights will not be exercisable unless a person (as defined in the plan) acquires beneficial ownership of 15% or more of the outstanding common shares, or a person commences a tender offer or exchange offer, which upon its consummation such person would beneficially own 15% or more of the outstanding common shares. The Board of Directors is authorized in certain circumstances to lower the beneficial ownership percentage to not less than 10%. If after the rights become exercisable a person becomes the beneficial owner of 15% or more of the outstanding common shares (except pursuant to an offer for all shares approved by the Board of Directors), each holder (other than the acquirer) will be entitled to receive, upon exercise, common shares having a market value of twice the exercise price. In addition, if the company is involved in a merger (other than a merger which follows an offer for all shares approved by the Board of Directors), major sale F-17
40 of assets or other business combination after a person becomes the beneficial owner of 15% or more of the outstanding common shares, each holder of a right (other than the acquirer) will be entitled to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercise price. The rights may be redeemed for $.01 per right at any time prior to ten days following the acquisition by a person of 15% or more of the outstanding common shares. The rights expire on November 1, 2006. (10) COMMITMENTS AND OTHER MATTERS An employment agreement exists with the company's chairman of the board, president and chief executive officer whereby he will serve in such capacity through December 31, 1997. The terms of the employment agreement provide for an annual base salary and certain other benefits. Compensation continuation agreements exist with all other officers of Tidewater Inc. whereby each receives compensation and benefits in the event that their employment is terminated following certain events relating to a change in control of the company. The maximum amount of compensation that could be paid under the agreements, based on present salary levels, is approximately $ 7.8 million. The amount that could be paid for certain benefits is not presently determinable. During the fourth quarter of fiscal 1997 and the third quarter of fiscal 1995, the company recorded as other expense charges of $2.8 million ($1.9 million after tax, or $.03 per common share) and $2.5 million ($1.6 million after tax, or $.02 per common share), respectively, to establish reserves for losses resulting from one of the company's insurers filing for liquidation and for reserves to cover losses due to the potential insolvency of certain of the company's insurers. During the fourth quarter of fiscal 1995, the company recorded as other expense $5.9 million ($3.7 million after tax, or $.06 per common share) for the cost of a restructuring program of its corporate headquarters and worldwide marine operations which was designed to reduce costs and improve operating efficiencies. Substantially all of the costs associated with the restructuring program were paid before March 31, 1995. The restructuring resulted in the elimination of approximately 150 positions, realignment of duties and responsibilities and streamlining of administrative functions. The charge reflects the costs associated with staff reductions, relocations and related transition expenses. The Internal Revenue Service has notified the company of proposed deficiencies aggregating approximately $17.5 million of additional income taxes resulting from audits of the company's income tax returns for the years ended March 31, 1993, 1994 and 1995. The company is the defendant to several alleged labor-law pay violations claimed by certain current and former employees in various areas of the world where its marine vessel operations are conducted. While the amount, if any, of such claims for which the company ultimately may be held liable is not presently determinable, if the claimants and all similarly situated employees and former employees who might file claims were successful, the aggregate amount of the company's liability, based on available information, could approximate $15 million. The company is in the process of defending against these claims and assessments and, in management's opinion, the ultimate outcome of these matters will not have a material adverse effect on the company's financial position or the results of its ongoing operations. Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on the company's financial position or results of its ongoing operations. (11) DIVISIONS AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS The company operates principally in two divisions. Tidewater Marine provides support services to the offshore energy industry, and Tidewater Compression provides the energy industry with engineered products and services used primarily in oil and gas production, enhanced recovery, natural gas F-18
41 transmission and natural gas processing. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for disclosures of additions to properties and equipment, identifiable assets, revenues, operating profit and depreciation for each division. (12) SUPPLEMENTARY INFORMATION--QUARTERLY FINANCIAL DATA (UNAUDITED) Years Ended March 31, 1997 and 1996 (in thousands, except per share data) <TABLE> <CAPTION> 1997 First Second Third Fourth - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues: Marine operations $146,639 167,691 184,133 191,963 Compression operations 29,255 26,181 28,296 28,852 - ----------------------------------------------------------------------------------------------- $175,894 193,872 212,429 220,815 =============================================================================================== Operating profit: Marine operations $ 34,045 46,338 62,312 69,709 Compression operations 3,539 2,748 3,270 2,837 - ----------------------------------------------------------------------------------------------- $ 37,584 49,086 65,582 72,546 =============================================================================================== Net earnings $ 24,370 32,952 43,170 45,519 =============================================================================================== Primary and fully diluted earnings per common share $ .39 .53 .68 .74 =============================================================================================== 1996 Revenues: Marine operations $128,054 132,726 135,891 135,531 Compression operations 27,039 28,034 30,536 25,636 - ----------------------------------------------------------------------------------------------- $155,093 160,760 166,427 161,167 =============================================================================================== Operating profit: Marine operations $ 25,807 31,483 33,489 28,130 Compression operations 4,077 3,990 4,359 2,139 - ----------------------------------------------------------------------------------------------- $ 29,884 35,473 37,848 30,269 =============================================================================================== Net earnings $ 17,427 22,431 24,187 12,132 =============================================================================================== Primary and fully diluted earnings per common share $ .28 .36 .39 .20 =============================================================================================== </TABLE> Operating profit consists of revenues less operating costs and expenses, depreciation, general and administrative expenses and other income and expenses of the Marine and Compression divisions. See Notes 1, 2, 7 and 10 for detailed information regarding transactions which affect fiscal 1997 and 1996 quarterly amounts. F-19
42 SCHEDULE II TIDEWATER INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997, 1996, AND 1995 (IN THOUSANDS) <TABLE> <CAPTION> Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance Balance at at Beginning Additions End of Description of period at Cost Deductions Period ----------- --------- ----------- ----------- -------- <S> <C> <C> <C> <C> 1997 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts $ 8,376 3,268 996 (A) 10,648 ========== ======== ======= ======= Deducted in balance sheet from other assets: Amortization of goodwill, prepaid rent and debt issuance costs $ 4,510 1,704 --- 6,214 ========== ======== ======= ======= 1996 Deducted in balance sheet from trade accounts receivables: Allowance for doubtful accounts $ 9,636 121 1,381 (A) 8,376 ========== ======== ======= ======= Deducted in balance sheet from other assets: Amortization of goodwill and debt issuance costs $ 2,136 2,374 --- 4,510 ========== ======== ======= ======= 1995 Deducted in balance sheet from trade accounts receivables: Allowance for doubtful accounts $ 6,842 3,877 1,083 (A) 9,636 ========== ======== ======= ======= Deducted in balance sheet from other assets: Amortization of goodwill and debt issuance costs $ 940 1,196 --- 2,136 ========== ======== ======= ======= </TABLE> (A) Accounts receivable amounts considered uncollectible and removed from accounts receivable by reducing allowance for doubtful accounts. F-20
43 TIDEWATER INC. EXHIBITS FOR THE ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED MARCH 31, 1997
44 EXHIBIT INDEX The index below describes each exhibit filed as a part of this report. Exhibits not incorporated by reference to a prior filing are designated by an asterisk; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. 3(a) - Restated Certificate of Incorporation of Tidewater Inc. (filed with the Commission as Exhibit 3(a) to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1993). 3(b) - Tidewater Inc. Bylaws (filed with the Commission as Exhibit 3(b) to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1993). 4(a) - Restated Rights Agreement dated as of September 19, 1996 between Tidewater Inc. and The First National Bank of Boston (filed with the Commission as Exhibit 4 to the company's current report on Form 8-K dated September 19, 1996). *10(a) - $600,000,000 Revolving Credit and Term Loan Agreement dated March 19, 1997. 10(b) - Tidewater Inc. 1975 Incentive Program Stock Option Plan, as amended in 1990 (filed with the Commission as Exhibit 10(c) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1991). 10(c) - Tidewater Inc. 1992 Stock Option and Restricted Stock Plan (filed with the Commission as Exhibit 10(f) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(d) - Tidewater Inc. Amended and Restated Supplemental Executive Retirement Plan (filed with the Commission as Exhibit 10(g) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(e) - Tidewater Inc. Amended and Restated Employees' Supplemental Savings Plan (filed with the Commission as Exhibit 10(h) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(f) - Supplemental Health Plan for Executive Officers of Tidewater Inc. (filed with the Commission as Exhibit 10(i) to a Registration Statement on September 12, 1989, Registration No. 33-31016). 10(g) - Tidewater Inc. Deferred Compensation Plan for Directors (filed with the Commission as Exhibit 10(h) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1994). 10(h) - Tidewater Inc. Retirement Plan for Directors as adopted on March 22, 1990 (filed with the Commission as Exhibit 10(k) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1990). 10(i) - Employment and Consulting Agreement dated as of March 31, 1993 between Tidewater Inc. and John P. Laborde as amended (filed with the Commission as Exhibit 10(l) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1993). 10(j) - Consulting Agreement dated as of March 13, 1996 between Tidewater Inc. and Larry D. Hornbeck. *10(k) - Change in Control Agreement dated September 30, 1996 between Tidewater Inc. and William C. O'Malley. *10(l) - Form of Change in Control Agreement entered into as of September 30, 1996 with four executive officers.
45 *10(m) - Tidewater Inc. 1996 Annual Incentive Plan. 10(n) - Employment Agreement dated June 13, 1994 between Tidewater Inc. and William C. O'Malley (filed with the Commission as Exhibit 10 to the company's report on Form 8-K for June 13, 1994). *10(o) - Agreement dated March 20, 1997 for the Acquisition of the share capital of the O.I.L. group of companies. *11 - Earnings per share Computation Information. *21 - Subsidiaries of the company. *24 - Consent of Independent Accountants. *27 - Financial Data Schedule. Certain instruments respecting long-term debt of Tidewater have been omitted pursuant to Regulation S-K, Item 601. Tidewater hereby agrees to furnish a copy of any such instrument to the Commission upon request.