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 - For the Fiscal Year Ended March 31, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the Transition Period From ____________________ to ____________________. Commission file number 1-6311 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.) 601 Poydras Street, New Orleans, Louisiana 70130 ------------------------------------------------------------- (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: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $0.10 New York Stock Exchange, Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange, Pacific Stock Exchange 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]
As of April 22, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1,444,000,000. Excluded from the calculation of market value are 4,985,860 shares held by the Registrant's grantor stock ownership trust. 55,580,997 shares of Tidewater Inc. common stock $0.10 par value per share were outstanding on April 22, 1999. Excluded from the calculation of shares outstanding at April 22, 1999 are 4,985,860 shares held by the Registrant's grantor stock ownership trust. Registrant has no other class of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of Stockholders are incorporated into Part III of this report. TABLE OF CONTENTS Part I Page Item Number - ---- ------ 1 & 2. Business and Properties............................................. 3 3. Legal Proceedings................................................... 6 4. Submission of Matters to a Vote of Security Holders................. 6 4A. Executive Officers of the Registrant................................ 7 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................... 7 6. Selected Financial Data............................................. 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 9 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 17 8. Financial Statements and Supplementary Data......................... 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................... 17 PART III 10. Directors and Executive Officers of the Registrant.................. 18 11. Executive Compensation.............................................. 18 12. Security Ownership of Certain Beneficial Owners and Management...... 18 13. Certain Relationships and Related Transactions...................... 18 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 18 -2-
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 601 Poydras Street, New Orleans, Louisiana 70130, 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 provides services and equipment to the offshore energy industry through the operation of the world's largest fleet of offshore service vessels. On February 20, 1998 the company completed the all cash sale of its compression division for approximately $348 million. Please refer to Note 2 of Notes to Consolidated Financial Statements for further discussion of the sale of Compression operations. On May 16, 1997 the company acquired all of the shares of O.I.L. Ltd. (O.I.L.). The total cost of the acquisition of $626 million, which includes $65.6 million of deferred income tax liability, was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. Prior to the purchase O.I.L. was principally engaged in the business of operating approximately 100 marine vessels, primarily platform supply and anchor handling towing-supply vessels, in several offshore oil and gas exploration areas outside of the United States. On June 30, 1997 the company acquired the remaining 50% equity interest in nine towing-supply and supply vessels previously owned and operated by joint-venture companies in Australia. Approximate cost of the acquisition of $30 million was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. Please refer to Note 3 of Notes to Consolidated Financial Statements for further discussion of the purchases of O.I.L. Ltd. and the Australian equity interest. 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. MARINE OPERATIONS The company is the world's largest provider of offshore supply vessels and marine support services serving the energy industry. With a fleet of approximately 685 vessels, the company operates, and has a leading market share, in most of the world's significant oil and gas exploration and production markets and 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. -3-
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. Information concerning revenues and operating profit derived from domestic and international marine operations and domestic and international marine identifiable assets for each of the fiscal years ended March 31 are summarized below: (in thousands) - -------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------- Revenues: Vessel operations: United States $ 296,161 463,914 338,823 International 614,887 537,737 322,401 Other marine operations 57,944 58,510 29,202 - -------------------------------------------------------------- $ 968,992 1,060,161 690,426 ============================================================== Operating profit: Vessel operations: United States $ 96,376 225,599 120,275 International 171,213 141,133 82,591 Other marine operations 12,526 10,663 4,186 Gain on sales of assets 2,949 16,592 5,352 - -------------------------------------------------------------- $ 283,064 393,987 212,404 ============================================================== Identifiable assets: United States $ 315,509 380,043 376,380 International 990,062 1,064,681 354,561 - -------------------------------------------------------------- Total marine assets $1,305,571 1,444,724 730,941 ============================================================== Please refer to Item 7 of this report and Note 11 of Notes to Consolidated Financial Statements for further discussion of revenues, operating profit and identifiable assets. Marine Vessel Operations. 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 comparing the average size of the company's marine fleet by class and geographic distribution for the last three fiscal years are included 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 major classes of vessels include crew and utility vessels that are chartered to customers for use in transporting small quantities of supplies and personnel from shore bases to offshore drilling rigs, platforms and other installations; 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; and safety/standby vessels which provide fire fighting and rescue services. The company's vessels also include inshore tugs; inshore barges; offshore barges; and production, line-handling and various other 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 waters for drilling and production operations. Barges are either used in conjunction with company tugs or are chartered to others. -4-
Contributions of Main Classes of Vessels. Revenues from vessel operations were derived from the main classes of vessels in the following percentages: Year Ended March 31, - ------------------------------------------------ 1999 1998 1997 ---- ---- ---- Towing-supply/Supply... 73.3% 75.7% 70.2% Offshore Tugs.......... 12.7% 11.9% 15.3% Crew/Utility........... 6.9% 6.3% 6.5% Safety/Standby......... 5.7% 4.6% 5.3% Other.................. 1.4% 1.5% 2.7% - ------------------------------------------------ Shipyards. Quality Shipyards, Inc., a wholly-owned subsidiary of the company, operates two shipyards in Houma, Louisiana, which construct, modify and repair vessels. Approximately 48% of the shipyards' business for the year ended March 31, 1999 related to repairs and modifications of the company's vessels. Risks of Operation and Insurance. The operation of any marine vessel 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 vessel 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 vessel operations as a whole. Industry Conditions, Competition and Customers. The company'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. Fiscal year 1999 company activity has been significantly affected by the downturn in activity and spending in the oil industry resulting from the drop in the price of oil which began in the Fall of 1997. 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. The company's diverse, mobile asset base and geographic distribution allow it to respond to changes in 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 vessel fleet, the company's financial condition and economies of scale. Although one customer accounted for 8% and the five largest customers accounted for approximately 24% of its revenues during the year ended March 31, 1999, the company does not consider its operations dependent on any single customer. -5-
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 trade 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. Based on information supplied to the company by its transfer agent, approximately 3.9% of the company's outstanding common stock was owned by non-U.S. citizens as of March 31, 1999. The company's vessels are subject to various statutes and regulations governing their operation. 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. Of the total 685 vessels owned or operated by the company at March 31, 1999, 379 were registered under flags other than the United States and 306 were registered under the U.S. flag. 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 similar regulations. SEASONALITY The company's vessel fleet generally has its highest utilization rates in the warmer temperature months when the weather is more favorable for offshore exploration, development and construction work. However, business volume for the company is more dependent on oil and natural 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 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 adverse effect on the company. EMPLOYEES As of March 31, 1999, the company had approximately 8,100 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. Please refer to Item 7 and Note 10 of Notes to Consolidated Financial Statements for further discussion of these matters. 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 1999. -6-
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- William C. O'Malley....... 62 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....... 60 Executive Vice President since 1992. Ken C. Tamblyn............ 55 Executive Vice President since 1992. Cliffe F. Laborde......... 47 Senior Vice President and General Counsel since 1992. There are no family relationships between the directors or executive officers of the company except that Cliffe F. Laborde, senior vice president and general counsel, is the son of John P. Laborde, a director 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, 1999, there were approximately 2,356 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. - -------------------------------------------------------- Fiscal Year Quarter High Low Dividend - -------------------------------------------------------- 1999 First $44.375 $31.875 $.15 Second 33.813 20.750 .15 Third 30.188 17.563 .15 Fourth 26.563 18.688 .15 1998 First $48.875 $35.875 $.15 Second 60.250 44.000 .15 Third 70.500 47.250 .15 Fourth 55.188 40.000 .15 - -------------------------------------------------------- -7-
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) 1999 1998(2) 1997(2) 1996 1995 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Vessel revenues $ 911,048 1,001,651 661,224 506,180 469,751 Other marine revenues 57,944 58,510 29,202 26,022 31,367 - -------------------------------------------------------------------------------------------------------------------- $ 968,992 1,060,161 690,426 532,202 501,118 ==================================================================================================================== Earnings from continuing operations $ 210,719 243,038 138,235 69,503 44,868 Earnings from discontinued operations --- 10,723 7,776 6,674 6,319 Gain on sale of discontinued operations --- 61,738 --- --- --- - -------------------------------------------------------------------------------------------------------------------- Net earnings $ 210,719 315,499 146,011 76,177 51,187 ==================================================================================================================== Per common share(1): Earnings from continuing operations $ 3.68 3.99 2.23 1.12 .73 Earnings from discontinued operations --- .18 .12 .11 .10 Gain on sale of discontinued operations --- 1.01 --- --- --- - -------------------------------------------------------------------------------------------------------------------- Net earnings $ 3.68 5.18 2.35 1.23 .83 ==================================================================================================================== Total assets $1,394,458 1,492,839 1,061,280 974,410 926,276 ==================================================================================================================== Long-term debt $ --- 25,000 --- --- 20,802 ==================================================================================================================== Working capital $ 198,532 114,907 159,607 106,904 107,849 ==================================================================================================================== Current ratio 3.41 1.56 2.77 2.31 2.20 ==================================================================================================================== Cash dividends declared per common share $ .60 .60 .575 .475 .40 ==================================================================================================================== </TABLE> (1) All per share amounts were computed on a diluted basis. (2) See Notes 2 and 3 of Notes to Consolidated Financial Statements for information regarding business dispositions and business combinations during fiscal years 1998 and 1997. -8-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company provides services and equipment to the international offshore energy industry through the operation of a diversified fleet of marine service vessels. Revenues, net earnings and cash flows from operations are dependent upon the activity level of the vessel fleet which is 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 During the quarter ended June 30, 1997 the company acquired all of the shares of O.I.L. Ltd. (O.I.L.). The total cost of the acquisition of $626 million, which includes $65.6 million of deferred income tax liability, was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. Prior to the purchase O.I.L. was principally engaged in the business of operating approximately 100 marine vessels, primarily platform supply and anchor handling towing-supply vessels, in several offshore oil and gas exploration areas outside of the United States. Goodwill of approximately $355 million was recorded in the Consolidated Balance Sheet and is being amortized over 40 years. To finance the O.I.L. acquisition $500 million of debt was incurred pursuant to a $600 million revolving credit and term loan agreement with several banks and consisted of a $400 million term loan and $100 million borrowed under the $200 million revolving credit facility of the agreement. At March 31, 1998 all debt borrowed to finance the O.I.L. acquisition had been repaid and the $400 million term loan facility canceled. On June 30, 1997 the company acquired the remaining 50% equity interest in nine towing-supply and supply vessels previously owned and operated by joint- venture companies in Australia for a cash payment of $13.2 million and issuance of debt totaling $14.0 million. The debt was discounted to yield interest at 7% and has been repaid in full as of March 31, 1999. The total estimated cost of the acquisition of $30 million was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. Goodwill of approximately $12 million was recorded in the Consolidated Balance Sheet and is being amortized over 40 years. On February 20, 1998 the company completed the sale of its compression division. In consideration of the sale, the company received cash of approximately $348 million. During fiscal 1997 the company purchased 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 of these vessels was accounted for using the purchase method. The prolonged drop in oil prices over the past year and a half has resulted in cutbacks in drilling programs adversely affecting U.S.-based vessels throughout fiscal year 1999 and has recently begun weakening international activity. Toward the latter part of fiscal 1998 U.S.-based vessel utilization and day rates were the highest in company history led by the towing- supply/supply vessels which were experiencing 90% utilization and average day rates close to $8,000 per day. As fiscal 1999 began, oil prices were falling due primarily to worldwide oil surpluses. Cutbacks in customer drilling programs resulted, quickly affecting the U.S. Gulf of Mexico vessel market as the duration of vessel contracts in this region normally range from one to three months. U.S.-based vessel revenues for the current fiscal year have declined approximately 36% as compared to the prior fiscal year. As of March 31, 1999, the towing-supply/supply vessels operating in the Gulf of Mexico are experiencing approximately 50% utilization and average day rates of approximately $3,100 per day. This softening in domestic activity is likely to continue for some time with the decline in the -9-
number of working drilling rigs. In addition the expected delivery of a number of newly-constructed supply vessels to various industry competitors may create an even further imbalance and/or delay a recovery in the Gulf of Mexico supply vessel market thereby putting continued downward pressure on vessel utilization and day rates. International activity was not affected as dramatically during fiscal year 1999 due primarily to the long-term nature of international vessel contracts. Utilization and day rates for international-based vessels at March 31, 1998 averaged approximately 84% and $5,100 per day, respectively. At March 31, 1999 average utilization and day rates for international-based vessels have declined to 77% and $4,800 per day, respectively. International vessel revenues for fiscal 1999 increased 14% over fiscal 1998 due to higher average day rates for fiscal 1999. However, with continued weakness in oil prices, curtailments of customer projects will likely result in lower demand for internationally-based vessels throughout fiscal 2000. In response to the industry downturn the following actions have been taken. During the fourth quarter of fiscal 1999, the company began stacking and removing from the active fleet those vessels that cannot find gainful employment. Drydockings associated with the stacked vessels have been deferred. Reductions in crew personnel were made and may continue throughout fiscal year 2000 as necessary. Due to the oil industry downturn and having stacked and removed several vessels from the active fleet during the fourth quarter, the company conducted a review of the recoverability of the values of certain vessels. In March 1999, the company recorded a write-down of $7.8 million to reduce the carrying value of certain vessels. Earnings from continuing operations fell 22% below the preceding fiscal year's amount after eliminating the effects of unusual items in both fiscal 1999 and fiscal 1998. Fiscal 1999 earnings from continuing operations included the following unusual items: a $5.1 million, or $.09 per common share, after-tax write-down on certain vessels as previously discussed; and a $30 million, or $.52 per common share, reduction in income tax expense. The reduction in income tax expense consisted of a $2 million reduction of deferred income taxes resulting from the lowering of United Kingdom corporate income tax rates and a $28 million realization of foreign tax credits not previously recognized resulting from a tax planning strategy of selling certain vessels from one taxing jurisdiction to another through intercompany sales. The result of such sales was to pay foreign taxes which are fully creditable on a current basis against U.S. income taxes and the release of previously accrued deferred foreign tax credits. Fiscal 1998 earnings from continuing operations included the following unusual items: a $5.3 million, or $.09 per common share, after-tax provision for possible litigation expenses; a $.8 million, or $.01 per common share, after-tax gain from the settlement of obligations resulting from the fiscal 1996 curtailment of the company's pension plan; and a $7.3 million, or $.12 per common share, reduction in income tax expense. The reduction in income tax expense consisted of a $4 million reduction of deferred income taxes resulting from the lowering of United Kingdom corporate income tax rates and a $3.3 million reduction in a previously established liability for contested U.S. income tax issues. -10-
MARINE OPERATIONS Offshore service vessels provide a diverse range of services and equipment to the energy industry. Fleet size, utilization and vessel day rates primarily determine the amount of revenues and operating profit because operating costs and depreciation do not change proportionally when revenue changes. Operating costs primarily consist 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 table compares revenues and operating expenses (excluding general and administrative expenses and depreciation expense) for the company's vessel fleet for the years ended March 31. Vessel revenues and operating costs relate to vessels owned and operated by the company, while other marine services relate to third-party activities of the company's shipyards, brokered vessels and other miscellaneous marine-related activities. (in thousands) 1999 1998 1997 - ------------------------------------------------------------------- Revenues (A): Vessel revenues: United States $296,161 463,914 338,823 International 614,887 537,737 322,401 - ------------------------------------------------------------------- 911,048 1,001,651 661,224 Other marine revenues 57,944 58,510 29,202 - ------------------------------------------------------------------- Total revenues $968,992 1,060,161 690,426 =================================================================== Operating costs: Vessel operating costs: Crew costs $262,014 245,515 176,406 Repair and maintenance 132,109 140,515 96,815 Insurance 24,216 31,076 32,817 Fuel, lube and supplies 35,228 36,133 31,875 Other 38,833 32,804 23,582 - ------------------------------------------------------------------- 492,400 486,043 361,495 Costs of other marine revenues 44,672 47,065 24,161 - ------------------------------------------------------------------- Total operating costs $537,072 533,108 385,656 =================================================================== (A) For fiscal 1999, fiscal 1998 and fiscal 1997 one Marine customer accounted for 8%, 11% and 11%, respectively, of revenues. Marine operating profit and other components of earnings from continuing operations before income taxes for the years ended March 31 consists of the following: (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------- Vessel activity: United States $ 96,376 225,599 120,275 International 171,213 141,133 82,591 - ------------------------------------------------------------------------- 267,589 366,732 202,866 Gain on sales of assets 2,949 16,592 5,352 Other marine services 12,526 10,663 4,186 - ------------------------------------------------------------------------- Operating profit 283,064 393,987 212,404 - ------------------------------------------------------------------------- Other income 8,439 7,079 6,705 Other expense --- (6,847) (2,800) Corporate expenses (12,317) (13,074) (11,235) Interest and other debt costs (2,445) (24,677) (1,000) - ------------------------------------------------------------------------- Earnings from continuing operations before income taxes $276,741 356,468 204,074 ========================================================================= Operating profit for fiscal year 1999 decreased as compared with the prior year due to a decline in utilization and average day rates for U.S.-based vessels, a decrease in the number of U.S.-based vessels and lower gains on asset sales. These decreases were somewhat offset by an increase in average day rates for international-based vessels. The number of U.S.-based vessels decreased primarily because of vessels being withdrawn from active service along with some movement of vessels to international locations. Utilization and average day rates for U.S.-based vessels declined for the current fiscal year as the result of reductions in customer drilling programs consequently decreasing U.S.-based vessel operating profit by approximately 57%. Better market conditions in certain international locations throughout most of the current -11-
fiscal year resulted in higher average day rates for international-based vessels for the current fiscal year as compared to the preceding fiscal year. While the average day rates for international-based vessels in the current fiscal year have exceeded prior year day rates, utilization and day rates for both the U.S. and international-based fleets have declined steadily throughout fiscal year 1999 as a result of the oil industry downturn. The U.S.-based fleet incurred the most dramatic reduction. Included in gain on sales of assets is a fourth quarter write-down of $7.8 million to reduce the carrying value of certain vessels. The write-down resulted from a review of the recoverability of the values of certain vessels. The review was performed due to industry conditions and having stacked and withdrawn from the active fleet several vessels at March 31, 1999. As a result of the uncertainty of certain customers to make payment of vessel charter hire, the company has deferred the recognition of approximately $9.7 million of billings as of March 31, 1999, which would otherwise have been recognized as revenue in fiscal 1999. The company will recognize the amounts as revenue when the uncertainty has been reduced. The significant growth in fiscal 1998 operating profit compared with the preceding fiscal year resulted from higher average day rates for the worldwide vessel fleet, a larger international-based vessel fleet and higher gains from assets sales, partially offset by higher operating costs. Higher average day rates for the worldwide vessel fleet resulted from a more favorable supply/demand relationship for company services both in the U.S. Gulf of Mexico and internationally. Higher fiscal 1998 operating costs resulted from the expansion of the international-based vessel fleet through the purchase of the O.I.L. and Australian vessels, increased costs associated with attracting, training and retaining qualified vessel personnel and a greater number of vessel drydockings. Higher gains on asset sales in fiscal 1998 resulted from the disposal of several vessels, most of which had previously been withdrawn from active service due to obsolescence and prohibitive repair costs. Fiscal 1998 other expense of $6.8 million consists of an $8 million provision for litigation costs resulting from certain alleged labor-law pay violations in various areas of the world where marine vessel operations are conducted, and a $1.2 million gain from the settlement of obligations resulting from the fiscal 1996 curtailment of the company's pension plan. At March 31, 1999 $7.5 million has been paid in settlements relating to these alleged labor- law pay violations. Other expense of $2.8 million for fiscal 1997 is a charge for possible losses resulting from one of the company's insurers filing for liquidation. Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by the demand created through the level of offshore exploration, development and production spending by energy companies relative to the supply of offshore service vessels. Suitability of equipment and the degree of service provided also influence vessel day rates. The following tables compare day-based utilization percentages and average day rates by vessel class and in total for each of the quarters in the years ended March 31: -12-
UTILIZATION: - ----------- 1999 First Second Third Fourth Year - ----------------------------------------------------------------------- Domestic-based fleet: Towing-supply/Supply 85.4% 73.2 74.1 60.1 73.4 Crew/Utility 88.8 86.5 79.8 84.1 85.0 Offshore Tugs 61.1 55.8 50.7 38.1 51.7 Other 45.7 48.2 49.7 35.2 44.8 Total 79.9% 71.0 69.6 58.3 70.0 International-based fleet: Towing-supply/Supply 86.3% 84.0 81.0 79.2 82.6 Crew/Utility 80.2 88.0 89.3 89.6 86.8 Offshore Tugs 76.1 71.7 74.9 70.1 73.2 Safety/Standby 80.7 84.6 78.6 75.2 79.9 Other 67.9 69.8 69.2 72.1 69.7 Total 82.2% 81.8 80.2 78.5 80.7 Worldwide fleet: Towing-supply/Supply 85.9% 80.0 78.4 72.2 79.2 Crew/Utility 83.6 87.5 85.9 87.7 86.1 Offshore Tugs 69.6 65.2 64.8 56.8 64.2 Safety/Standby 80.7 84.6 78.6 75.2 79.9 Other 62.7 64.4 64.6 63.5 63.8 Total 81.4% 78.0 76.5 71.5 76.9 ======================================================================= 1998 First Second Third Fourth Year - ----------------------------------------------------------------------- Domestic-based fleet: Towing-supply/Supply 91.0% 91.1 91.8 91.9 91.5 Crew/Utility 90.9 88.9 92.1 90.7 90.7 Offshore Tugs 63.1 64.3 61.8 53.1 60.6 Other 59.5 60.5 53.3 40.6 54.1 Total 84.8% 84.8 85.0 83.0 84.4 International-based fleet: Towing-supply/Supply 89.4% 88.0 88.9 88.3 88.6 Crew/Utility 82.4 80.9 80.7 90.2 83.4 Offshore Tugs 83.1 80.3 79.7 76.6 80.0 Safety/Standby 78.1 71.3 65.6 70.1 71.0 Other 83.0 78.1 67.2 68.2 74.4 Total 86.0% 83.9 82.9 83.8 84.1 Worldwide fleet: Towing-supply/Supply 90.1% 89.2 90.1 89.7 89.8 Crew/Utility 86.1 84.2 85.4 90.4 86.5 Offshore Tugs 74.7 73.6 71.9 66.3 71.7 Safety/Standby 78.1 71.3 65.6 70.1 71.0 Other 77.7 73.9 63.9 62.4 69.8 Total 85.5% 84.2 83.7 83.5 84.2 ======================================================================= 1997 First Second Third Fourth Year - ----------------------------------------------------------------------- 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 ======================================================================= -13-
AVERAGE DAY RATES: - ----------------- 1999 First Second Third Fourth Year - ------------------------------------------------------------------------ Domestic-based fleet: Towing-supply/Supply $7,709 6,331 4,545 4,043 5,844 Crew/Utility 2,280 2,121 2,021 2,014 2,121 Offshore Tugs 7,649 7,543 7,643 7,311 7,561 Other 3,449 3,053 2,073 2,006 2,674 Total $6,658 5,631 4,450 3,968 5,315 International-based fleet: Towing-supply/Supply $6,523 6,643 6,562 6,229 6,495 Crew/Utility 2,447 2,406 2,428 2,399 2,419 Offshore Tugs 4,273 4,141 4,303 4,411 4,280 Safety/standby 6,541 6,351 6,201 6,014 6,291 Other 876 918 891 1,250 973 Total $5,330 5,320 5,225 5,024 5,223 Worldwide fleet: Towing-supply/Supply $6,975 6,536 5,860 5,555 6,269 Crew/Utility 2,376 2,303 2,293 2,270 2,311 Offshore Tugs 5,558 5,341 5,396 5,218 5,388 Safety/standby 6,541 6,351 6,201 6,014 6,291 Other 1,313 1,317 1,104 1,347 1,253 Total $5,806 5,420 4,980 4,725 5,253 ========================================================================= 1998 First Second Third Fourth Year - ------------------------------------------------------------------------- Domestic-based fleet: Towing-supply/Supply $6,986 7,532 7,853 7,877 7,566 Crew/Utility 1,976 2,142 2,216 2,219 2,138 Offshore Tugs 6,443 6,558 6,617 8,465 6,960 Other 2,626 2,757 3,167 3,611 2,959 Total $5,876 6,308 6,569 6,837 6,395 International-based fleet: Towing-supply/Supply $4,806 5,440 5,655 6,069 5,515 Crew/Utility 1,982 2,190 2,213 2,375 2,194 Offshore Tugs 3,413 3,494 3,752 4,160 3,691 Safety/Standby 6,002 6,138 6,087 6,229 6,116 Other 873 935 953 938 921 Total $3,909 4,438 4,653 4,976 4,501 Worldwide fleet: Towing-supply/Supply $5,750 6,267 6,539 6,798 6,351 Crew/Utility 1,979 2,169 2,215 2,306 2,169 Offshore Tugs 4,492 4,621 4,832 5,667 4,878 Safety/Standby 6,002 6,138 6,087 6,229 6,116 Other 1,173 1,291 1,387 1,299 1,280 Total $4,677 5,127 5,380 5,670 5,216 ========================================================================= 1997 First Second Third Fourth Year - ------------------------------------------------------------------------- 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 ========================================================================= -14-
The average age of the company's owned or chartered 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 and the actual March 31, 1999 vessel count: <TABLE> <CAPTION> Actual Vessel Average Number Count at of Vessels During March 31, Year Ended March 31, - ---------------------------------------------------------------------------------------------- 1999 1999 1998 1997 - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Domestic-based fleet: Towing-supply/supply 132 137 146 140 Crew/utility 27 32 39 42 Offshore tugs 37 39 40 43 Other 10 10 10 15 - ---------------------------------------------------------------------------------------------- Total 206 218 235 240 - ---------------------------------------------------------------------------------------------- International-based fleet: Towing-supply/supply 225 231 218 166 Crew/utility 50 55 53 37 Offshore tugs 51 53 53 52 Safety/standby 25 28 29 22 Other 33 33 35 46 - ---------------------------------------------------------------------------------------------- Total 384 400 388 323 - ---------------------------------------------------------------------------------------------- Owned or chartered vessels included in marine revenues 590 618 623 563 Vessels withdrawn from active service 49 29 17 21 Joint-venture and other 46 48 56 52 - ---------------------------------------------------------------------------------------------- Total 685 695 696 636 - ---------------------------------------------------------------------------------------------- </TABLE> From fiscal 1997 to fiscal 1998 the net increase in the average number of vessels is the result of the addition of O.I.L. vessels. Consolidated general and administrative expenses for the years ended March 31 consists of the following components: (In thousands) 1999 1998 1997 - --------------------------------------------------- Personnel $44,666 43,797 32,515 Office and property 13,193 13,726 10,260 Sales and marketing 5,405 5,213 3,496 Professional service 5,587 5,065 4,548 Other 4,617 5,125 3,031 - --------------------------------------------------- $73,468 72,926 53,850 =================================================== Higher fiscal 1998 general and administrative expenses are the result of the O.I.L. and Australian acquisitions and higher costs associated with incentive pay plans. LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS The company's current ratio, level of working capital and amount of cash flows from continuing operations for any year are directly related to fleet activity and vessel day rates. Fleet activity and vessel day rates are ultimately determined by the supply/demand relationship for oil and natural gas. Variations from year-to-year in these items are primarily the result of market conditions. Cash from ongoing operations in combination with available lines of credit provide the company, in management's opinion, with adequate resources to satisfy financing requirements. At March 31, 1999, all of the company's $200 million revolving line of credit was available for future financing needs. Continued payment of dividends, currently $.15 per quarter per common share, is subject to declaration by the Board of Directors. Excluding the sale of compression operations and the O.I.L. and Australian acquisitions, investing activities in fiscal year 1998 used cash of approximately $45 million. Proceeds from sales of assets were higher in fiscal year 1998 versus fiscal years 1999 and 1997 due to a greater number of vessels being sold in that year. Additions to properties and equipment were higher in fiscal year 1998 versus fiscal years 1999 and 1997 as a result of a greater number of vessel acquisitions and capitalized vessel repairs and modifications during that year. -15-
Fiscal year 1999 financing activities used $175 million of cash which included $105 million prepayment on the credit facility and repayment of $6.5 million of debt incurred from the Australian acquisitions. In addition $80 million was borrowed primarily for income tax payments of which approximately $68 million related to the sale of the compression division. The company purchased 3,950,000 shares of common stock during fiscal year 1999 at an aggregate cost of $109.3 million including broker commissions and fees. Fiscal 1998 financing activities included scheduled principal payments on long-term debt of $34.1 million, $477.4 million of prepayments on the credit facility, and the repayment of $14.8 million of debt assumed from the O.I.L. and Australian acquisitions. The company purchased 1,481,000 shares of common stock during the quarter ended March 31, 1998 at an aggregate cost of $65.2 million. During fiscal year 1997, the company purchased 1,788,100 shares of common stock at an aggregate cost of $84.8 million. YEAR 2000 The Year 2000 (Y2K) issue is the result of computer programs written using two digits rather than four to define the applicable year. In response to the Y2K issue, the company began a program in fiscal 1997 designed to identify, assess and address significant Y2K issues in its information technology (IT) systems and non-IT systems. As of March 31, 1999, the company believes that it is on schedule to successfully implement any required systems and equipment modifications that might be necessary to make the company's critical systems Y2K compliant before December 31, 1999. The company's critical IT systems are comprised primarily of the company's mainframe computer and the software programs used on the mainframe, including general ledger accounting and financial reporting software programs and related application modules, personnel and payroll systems, and an insurance claims and accounting system. The assessment of the company's IT systems found that some of the IT systems were not Y2K compliant. Approximately 90% of the changes necessary to make these systems Y2K compliant have been completed, with the remaining changes expected to be completed by mid-1999. Because many of the company's computer systems have been upgraded or replaced in recent years as part of the company's ongoing upgrade program, specific Y2K compliance costs have been insignificant to date (believed to be less than $100,000). Remaining compliance costs related to the IT systems are also expected to be insignificant (probably less than $100,000) because the company will continue to utilize existing personnel resources to assist in the implementation of its Y2K compliance initiative. Non-IT systems are comprised primarily of computer-controlled equipment and electronic devices, including equipment with embedded microprocessors that are used to operate equipment on the company's vessels. Telephone systems and other office-based electronic equipment systems are also being considered in the assessment of non-IT systems. The company has substantially completed the process of identifying the components that are likely to have a Y2K problem and is in the process of communicating with the appropriate vendors to assess what, if any, changes are necessary to make the component Y2K compliant. The company believes that this assessment will be completed well in advance of December 31, 1999 and does not expect the costs of any required modifications or upgrades to be material with respect to the company's results of operations and financial position. The company has contacted its key vendors and financial services providers to assess their progress with their own Y2K issues and to anticipate potential risks associated with those third parties. Although there is currently no indication that these parties will not achieve their Y2K compliance plans, there can be no guarantee that the systems of other companies with whom the company transacts business will be timely converted. Additionally, there can be no guarantee that the company will not experience Y2K problems. Despite efforts to address all significant Y2K issues in advance, the company could potentially experience disruptions to some aspects of its activities or operations, including, but not limited to, delays in payments to the company from customers or payments by the company to suppliers and disruptions in shipments of equipment and supplies required to operate the company's vessels. Based upon the company's current assessment of its IT systems and non-IT systems and based upon communications to date with vendors, the company has not determined a need to develop a -16-
contingency plan for Y2K issues. The company will continue to monitor its decision on contingency planning and such a plan will be developed if and when it is considered necessary to do so. NEW ACCOUNTING PRONOUNCEMENTS During fiscal 1999 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal years beginning after June 15, 1999. The company does not anticipate that the adoption of the new statement will have a material financial impact. 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 increases in vessel day 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At March 31, 1999 the company had no debt or derivative financial instruments outstanding. The company is exposed to foreign currency fluctuations and exchange risks but attempts to minimize the financial impact of these items by contracting the majority of its services in United States dollars. In addition, the company attempts to maintain a balance in its foreign currency assets and liabilities in order to minimize its exposure to foreign currency fluctuations. 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 -17-
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, 1999. 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 The company filed a current report on Form 8-K dated January 29, 1999 to disclose that the company had established a Grantor Trust Stock Ownership Program. 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 1 to Form 8-A on September 30, 1996). -18-
*10(a) - $200,000,000 Revolving Credit and Term Loan Agreement dated February 18, 1999. 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) - Change in Control Agreement dated September 30, 1996 between Tidewater Inc. and William C. O'Malley (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, 1997). 10(j) - Form of Change in Control Agreement entered into as of September 30, 1996 with three executive officers (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, 1997). 10(k) - Tidewater Inc. 1996 Annual Incentive Plan (filed with the Commission as Exhibit 10(m) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1997). 10(l) - Employment Agreement dated September 25, 1997 between Tidewater Inc. and William C. O'Malley (filed with the Commission as Exhibit 10 to the company's report on Form 10-Q for the quarter ended September 30, 1997). 10(m) - Tidewater Inc. 1997 Stock Incentive Plan filed with the Commission as Exhibit 10(o) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1998. *21 - Subsidiaries of the Company. *23 - Consents of Independent Auditors. *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. -19-
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 April 29, 1999. 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, Chief Financial Officer and Principal Accounting 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 April 29, 1999. /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. /s/ Donald G. Russell --------------------------- Donald G. Russell -20-
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> <C> Reports of Independent Auditors F-2 Consolidated Balance Sheets, March 31, 1999 and 1998 F-4 Consolidated Statements of Earnings, three years ended March 31, 1999 F-5 Consolidated Statements of Stockholders' Equity, three years ended March 31, 1999 F-6 Consolidated Statements of Cash Flows, three years ended March 31, 1999 F-7 Notes to Consolidated Financial Statements F-8 FINANCIAL STATEMENT SCHEDULE II. Tidewater Inc. and Subsidiaries Valuation and Qualifying Accounts F-22 </TABLE> 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
REPORTS OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Tidewater Inc. We have audited the accompanying consolidated balance sheets of Tidewater Inc. as of March 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the accompanying Index to Financial Statements and Schedule for the years ended March 31, 1999 and 1998. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements and schedule of Tidewater Inc. for the year ended March 31, 1997, were audited by other auditors whose report dated April 30, 1997, expressed an unqualified opinion on those statements and schedule. 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 1999 and 1998 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tidewater Inc. at March 31, 1999 and 1998 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP New Orleans, Louisiana April 27, 1999 F-2
The Board of Directors and Shareholders Tidewater Inc. We have audited the consolidated statements of earnings, stockholders' equity, and cash flows of Tidewater Inc. for the year ended March 31, 1997. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the year ended March 31, 1997, 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Tidewater Inc.'s operations and their cash flows for the year 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 LLP New Orleans, Louisiana April 30, 1997 F-3
<TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------- March 31, 1999 and 1998 (in thousands) <S> <C> <C> ASSETS 1999 1998 - ---------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 10,422 24,977 Trade and other receivables, less allowance for doubtful accounts of $11,125 in 1999 and $14,078 in 1998 238,002 258,517 Marine operating supplies 27,971 31,498 Other current assets 4,483 4,122 - ---------------------------------------------------------------------------------------------- Total current assets 280,878 319,114 - ---------------------------------------------------------------------------------------------- Investments in, at equity, and advances to unconsolidated companies 17,307 21,825 Properties and equipment: Vessels and related equipment 1,505,441 1,534,948 Other properties and equipment 42,744 33,887 - ---------------------------------------------------------------------------------------------- 1,548,185 1,568,835 Less accumulated depreciation 910,005 863,209 - ---------------------------------------------------------------------------------------------- Net properties and equipment 638,180 705,626 - ---------------------------------------------------------------------------------------------- Goodwill, net of accumulated amortization of $17,172 in 1999 and $8,002 in 1998 347,176 356,394 Other assets 110,917 89,880 - ---------------------------------------------------------------------------------------------- $1,394,458 1,492,839 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------- Current liabilities: Current maturities of long-term debt --- 6,466 Accounts payable and accrued expenses 71,256 105,914 Accrued property and liability losses 6,605 12,156 Income taxes 4,485 79,671 - ---------------------------------------------------------------------------------------------- Total current liabilities 82,346 204,207 - ---------------------------------------------------------------------------------------------- Deferred income taxes 128,826 158,540 Long-term debt --- 25,000 Accrued property and liability losses 66,052 57,289 Other liabilities and deferred credits 49,527 49,027 Stockholders' equity 1,067,707 998,776 Commitments and contingencies - ---------------------------------------------------------------------------------------------- $1,394,458 1,492,839 ============================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-4
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF EARNINGS - ---------------------------------------------------------------------------------------------------- Years Ended March 31, 1999, 1998 and 1997 (in thousands, except share and per share data) <S> <C> <C> <C> 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Revenues: Vessel revenues $ 911,048 1,001,651 661,224 Other marine revenues 57,944 58,510 29,202 - ---------------------------------------------------------------------------------------------------- 968,992 1,060,161 690,426 - ---------------------------------------------------------------------------------------------------- Costs and expenses: Vessel operating costs 492,400 486,043 361,495 Costs of other marine revenues 44,672 47,065 24,161 Depreciation and amortization 94,783 91,410 55,937 General and administrative 73,468 72,926 53,850 - ---------------------------------------------------------------------------------------------------- 705,323 697,444 495,443 - ---------------------------------------------------------------------------------------------------- 263,669 362,717 194,983 Other income (expenses): Foreign exchange loss (12) (635) (382) Gain on sales of assets 2,949 16,531 5,320 Equity in net earnings of unconsolidated companies 7,505 6,381 4,901 Minority interests (1,601) (1,258) (1,311) Interest and miscellaneous income 6,676 4,256 4,363 Other expense --- (6,847) (2,800) Interest and other debt costs (2,445) (24,677) (1,000) - ---------------------------------------------------------------------------------------------------- 13,072 (6,249) 9,091 - ---------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 276,741 356,468 204,074 Income taxes 66,022 113,430 65,839 - ---------------------------------------------------------------------------------------------------- Earnings from continuing operations 210,719 243,038 138,235 Earnings from discontinued Compression operations --- 10,723 7,776 Gain on sale of discontinued Compression operations --- 61,738 --- - ---------------------------------------------------------------------------------------------------- Net earnings $ 210,719 315,499 146,011 ==================================================================================================== Earnings per common share: Earnings from continuing operations $ 3.68 4.01 2.24 Earnings from discontinued Compression operations --- .18 .13 Gain on sale of discontinued Compression operations --- 1.02 --- - ---------------------------------------------------------------------------------------------------- Earnings per common share $ 3.68 5.21 2.37 ==================================================================================================== Diluted earnings per common share: Earnings from continuing operations $ 3.68 3.99 2.23 Earnings from discontinued Compression operations --- .18 .12 Gain on sale of discontinued Compression operations --- 1.01 --- - ---------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 3.68 5.18 2.35 ==================================================================================================== Weighted average common shares outstanding 57,189,946 60,552,315 61,606,144 Incremental common shares from stock options 78,579 341,329 438,188 - ---------------------------------------------------------------------------------------------------- Adjusted weighted average common shares 57,268,525 60,893,644 62,044,332 ==================================================================================================== Cash dividends declared per common share $ .60 .60 .575 ==================================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1999, 1998 and 1997 (in thousands) <TABLE> <CAPTION> Accumulated Grantor foreign Deferred Trust Stock Additional currency compensation- Ownership Common paid-in Retained translation restricted Program stock capital earnings adjustment stock (GSOP) Total - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance 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) Common stock purchased (178) (84,608) --- --- --- --- (84,786) Other --- --- --- 95 603 --- 698 - ------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1997 6,033 341,415 433,347 (10,676) (455) --- 769,664 Net earnings --- --- 315,499 --- --- --- 315,499 Issuance of restricted stock 9 4,492 --- --- (4,501) --- --- Exercise of stock options 54 14,280 --- --- --- --- 14,334 Cash dividends declared --- --- (36,383) --- --- --- (36,383) Common stock purchased (148) (65,034) --- --- --- --- (65,182) Other --- --- --- 94 750 --- 844 - ------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1998 5,948 295,153 712,463 (10,582) (4,206) --- 998,776 Net earnings --- --- 210,719 --- --- --- 210,719 Exercise of stock options 4 788 --- --- --- --- 792 Cash dividends declared --- --- (34,394) --- --- --- (34,394) Common stock purchased (395) (108,917) --- --- --- --- (109,312) Establishment of GSOP 500 106,688 --- --- --- (107,188) --- Issuance of common shares --- (27) --- --- --- 304 277 Other --- (127) --- --- 976 --- 849 - ------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1999 $ 6,057 293,558 888,788 (10,582) (3,230) (106,884) 1,067,707 ======================================================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-6
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, 1999, 1998 and 1997 (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Operating activities: Earnings from continuing operations $ 210,719 243,038 138,235 Adjustments to reconcile earnings from continuing operations to net cash provided by continuing operating activities: Depreciation and amortization 94,783 91,410 55,937 Provision for deferred income taxes (29,910) (1,604) 12,117 Gain on sales of assets (2,949) (16,531) (5,320) Equity in earnings of unconsolidated companies, less dividends (2,512) (2,330) 250 Minority interests, less dividends 918 (1,050) 556 Compensation expense - restricted stocck 976 750 603 Changes in assets and liabilities, net: Trade and other receivables 19,558 (34,879) (36,129) Marine operating supplies 3,527 (1,720) (4,471) Other current assets (204) 1,897 (236) Accounts payable and accrued expenses (39,822) 28,095 2,579 Accrued property and liability losses (5,792) (1,092) 2,404 Other, net 5,072 5,994 1,396 - --------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 254,364 311,978 167,921 Net cash provided by discontinued operating activities --- 34,108 42,025 - --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 254,364 346,086 209,946 - --------------------------------------------------------------------------------------------------- Investing activities: Proceeds from sales of assets 21,396 41,944 22,737 Proceeds from sale of Compression operations (68,442) 340,001 --- Additions to properties and equipment (48,283) (82,501) (58,002) Acquisitions, net of cash acquired --- (581,099) (3,435) Other 950 (4,853) --- - --------------------------------------------------------------------------------------------------- Net cash used in investing activities (94,379) (286,508) (38,700) - --------------------------------------------------------------------------------------------------- Financing activities: Common stock purchased (109,312) (65,182) (84,786) Principal payments on long-term debt (111,466) (526,281) (58,019) Debt borrowings 80,000 544,035 15,000 Proceeds from issuance of common stock 632 8,044 4,391 Cash dividends (34,394) (36,383) (35,400) - --------------------------------------------------------------------------------------------------- Net cash used in financing activities (174,540) (75,767) (158,814) - --------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (14,555) (16,189) 12,432 Cash and cash equivalents at beginning of year 24,977 41,166 28,734 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 10,422 24,977 41,166 =================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 2,360 23,937 702 Income taxes $ 203,354 111,427 56,249 =================================================================================================== Supplemental noncash investing activity: Acquisitions: Fair value of assets acquired $ --- 693,672 51,305 Fair value of liabilities assumed --- (112,573) (47,870) - --------------------------------------------------------------------------------------------------- Net cash payment $ --- 581,099 3,435 =================================================================================================== </TABLE> See accompanying Notes to Consolidated Financial Statements. F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- March 31, 1999, 1998 and 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The company provides services and equipment to the offshore energy industry through the operation of the world's largest fleet of offshore service vessels. Revenues, net earnings and cash flows from operations are dependent upon the activity level for the vessel fleet which is 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 judgements that affect the amounts reported in the financial statements and related disclosures. Actual results may differ from these estimates. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Tidewater Inc. and its subsidiaries. Significant intercompany balances and transactions are eliminated in consolidation. 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, with salvage values of 5%-10% for marine equipment, using estimated useful lives of: Years - -------------------------------------------------------------------------------- Marine equipment (from date of construction) 15 - 25 Other properties and equipment 3 - 30 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. GOODWILL Goodwill primarily relates to the O.I.L. acquisition made during fiscal 1998 and is being amortized over 40 years. Management periodically reviews goodwill to access recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. IMPAIRMENT OF LONG-LIVED ASSETS Impairment losses are recorded on long-lived assets used in operations or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by these assets or through their sale are less than the assets' carrying amount. In March 1999 the company recorded a charge to earnings of $7.8 million, included in gain on sales of assets, to reduce the carrying amount of certain vessels. The write-down of these vessels was determined based on internally developed valuations. F-8
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 (SFAS) No. 87 and are funded to at least meet the minimum funding requirements 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 SFAS No. 106. The estimated cost of postretirement benefits other than pensions are accrued during the employees' active service period. The company has adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," which standardizes the disclosures for pensions and other postretirement benefit plans and requires additional information to be disclosed related to changes in benefit obligations and the fair value of plan assets. Information for prior years has been included. INCOME TAXES Income taxes are accounted for in accordance with the provisions of SFAS No. 109. 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 Earnings per share are computed in accordance with SFAS No. 128. SFAS No. 128 requires the reporting of both earnings per share and diluted earnings per share. The calculation of earnings per share excludes any dilutive effect of stock options, while diluted earnings per share includes the dilutive effect of stock options. Per share amounts disclosed in these Notes to Consolidated Financial Statements are on a diluted basis. FOREIGN CURRENCY TRANSLATION Assets and liabilities of international operations, other than international operations in highly inflationary economies, are translated into U.S. dollars 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. Adjustments resulting from the balance sheet account translations, net of deferred income taxes, are included in stockholders' equity as foreign currency translation adjustments. CASH EQUIVALENTS The company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. REVENUE RECOGNITION Marine services are generally contracted for on a rate per day of service basis; therefore, marine vessel revenues are recognized on a daily basis throughout the contract period. F-9
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the company to concentrations of credit risk consist principally of trade and other receivables. These receivables are with a variety of domestic, international and national energy companies and also include reinsurance companies for recoverable insurance losses. The company manages its exposure to risk through ongoing credit evaluations of its customers and generally does not require collateral. The company maintains an allowance for doubtful accounts for potential losses and does not believe it is exposed to concentrations of credit risk that are likely to have a material adverse impact on the company's financial position or results of operations. STOCK-BASED COMPENSATION The company uses the intrinsic value method of accounting for stock-based compensation prescribed by Accounting Principles Board Opinion No. 25 and, accordingly, adopted the disclosure provisions of SFAS No. 123. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires companies to display comprehensive income and its components as part of the basic financial statements. All comprehensive income amounts other than net earnings in fiscal years 1999, 1998 and 1997 were de minimis. NEW ACCOUNTING PRONOUNCEMENTS During fiscal 1999 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for all fiscal years beginning after June 15, 1999. The company does not anticipate that the adoption of the new statement will have a material financial impact. (2) BUSINESS DISPOSITION On February 20, 1998 the company completed the sale of its compression division. The compression division provided natural gas and air compression equipment and services, principally to the energy industry. In consideration of the sale the company received cash of approximately $348 million. Accordingly, the company's consolidated financial statements for all periods have been reclassified to report separately financial position, results of operations, and operating cash flows from continuing operations and the discontinued compression operation. Results of operations of the compression division are set forth below: <TABLE> <CAPTION> (in thousands) Eleven Months Ended Twelve Months Ended February 20, 1998 March 31, 1997 ------------------- ------------------- <S> <C> <C> Revenues $94,438 112,584 Operating costs 46,679 64,153 Depreciation and amortization 23,462 26,335 General and administration 8,615 11,005 - ------------------------------------------------------------------------------------ 15,682 11,091 Other income 1,275 1,369 - ------------------------------------------------------------------------------------ Earnings before income taxes 16,957 12,460 Income taxes 6,234 4,684 - ------------------------------------------------------------------------------------ Earnings from discontinued operations $10,723 7,776 ==================================================================================== </TABLE> The gain from the sale of Compression operations of $98.0 million, less applicable income taxes of $36.3 million, is net of legal, accounting and investment banking fees, severance and other costs associated with the sale. F-10
(3) BUSINESS COMBINATIONS On May 16, 1997 the company acquired all of the shares of O.I.L. Ltd. (O.I.L.). The total cost of the acquisition of $626 million, which includes $65.6 million of deferred income tax liability, was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. Prior to the purchase O.I.L. was principally engaged in the business of operating approximately 100 marine vessels, primarily platform supply and anchor handling towing-supply vessels, in several offshore oil and gas exploration areas outside of the United States. The results of O.I.L.'s operations have been consolidated with the company's effective May 16, 1997. Pro forma combined results of continuing operations of the company and of O.I.L. including appropriate purchase accounting adjustments for the year ended March 31, 1998 as though the acquisition had taken place on April 1, 1997 were not significantly different than actual results. To finance the O.I.L. acquisition, $500 million of debt was incurred pursuant to a $600 million Revolving Credit and Term Loan agreement with several banks and consisted of a $400 million term loan and $100 million borrowed under the $200 million revolving credit facility of the agreement. At March 31, 1998 all debt borrowed to finance the O.I.L. acquisition had been repaid and the $400 million term loan facility canceled. On June 30, 1997 the company acquired the remaining 50% equity interest in nine towing-supply and supply vessels previously owned and operated by joint- venture companies in Australia for a cash payment of $13.2 million and issuance of debt totaling $14.0 million. The debt was discounted to yield interest at 7% and has been repaid in full as of March 31, 1999. The total estimated cost of the acquisition of $30 million was allocated under the purchase method of accounting based on the fair value of the assets acquired and liabilities assumed, plus amounts for professional fees, severance and other transaction costs and the related deferred tax effect of the acquisition. On May 31, 1996 the company purchased 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. (4) UNCONSOLIDATED COMPANIES Investments in, at equity, and advances to unconsolidated marine joint- venture companies at March 31 were as follows: Percentage (in thousands) ownership 1999 1998 - --------------------------------------------------------------------------- National Marine Service (Abu Dhabi-UAE) 40% $12,847 12,317 Others 20%-50% 4,460 9,508 - --------------------------------------------------------------------------- $17,307 21,825 =========================================================================== The aggregate amount of undistributed earnings of all unconsolidated joint- venture companies included in consolidated stockholders' equity at March 31, 1999 is approximately $19.2 million. (5) INCOME TAXES Earnings from continuing operations before income taxes derived from United States and international operations for the years ended March 31 are as follows: (in thousands) 1999 1998 1997 - ------------------------------------------------ United States $ 96,421 192,788 114,942 International 180,320 163,680 89,132 - ------------------------------------------------ $276,741 356,468 204,074 ================================================ F-11
Income tax expense attributable to earnings from continuing operations for the years ended March 31 consists of the following: (in thousands) U.S. ------- Federal State International Total - --------------------------------------------------------- 1999 - --------------------------------------------------------- Current $ (386) 8,333 87,985 95,932 Deferred 5,710 --- (35,620) (29,910) - --------------------------------------------------------- $ 5,324 8,333 52,365 66,022 ========================================================= 1998 - --------------------------------------------------------- Current $96,336 1,083 17,615 115,034 Deferred (1,604) --- --- (1,604) - --------------------------------------------------------- $94,732 1,083 17,615 113,430 ========================================================= 1997 - --------------------------------------------------------- Current $41,628 562 11,532 53,722 Deferred 12,117 --- --- 12,117 - --------------------------------------------------------- $53,745 562 11,532 65,839 ========================================================= The actual income tax expense attributable to earnings from continuing operations for the years ended March 31, 1999, 1998 and 1997 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: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Computed "expected" tax expense $ 96,859 124,764 71,426 Increase (reduction) resulting from: Effect of United Kingdom tax rate change (2,000) (4,000) --- Overaccrual of income tax expense in prior years --- (3,300) --- Foreign tax credits not previously recognized (35,620) --- (1,303) Utilization of net operating loss carryforwards (792) (620) (386) Expenses which are not deductible for tax purposes 833 611 45 State taxes 5,416 704 365 Other, net 1,326 (4,729) (4,308) - ------------------------------------------------------------------------------- $ 66,022 113,430 65,839 =============================================================================== During the fourth quarter of the year ended March 31, 1999 approximately $28 million of foreign tax credits not previously recognized were realized as the result of a tax planning strategy of selling certain vessels from one taxing jurisdiction to another through intercompany sales. The result of such sales was to pay foreign taxes which are fully creditable on a current basis against U.S. income taxes and to accelerate the release of previously accrued deferred foreign tax credits. The reversal of taxes overaccrued in prior years for the year ended March 31, 1998 is the result of the company's settlement of open income tax audits with the Internal Revenue Service for fiscal years 1993, 1994 and 1995. The significant components of deferred income tax expense for the years ended March 31 are as follows: <TABLE> <CAPTION> (in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Deferred income tax expense (benefit) (exclusive of the effects of other components listed below) $ 12,719 2,396 3,628 Investment, foreign and minimum tax credits (5,009) --- 8,489 Foreign tax credits not previously recognized (35,620) --- --- Effect of United Kingdom tax rate charges (2,000) (4,000) --- - ---------------------------------------------------------------------------------------------------- $(29,910) (1,604) 12,117 ==================================================================================================== </TABLE> F-12
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1999 and 1998 are as follows: (in thousands) 1999 1998 - ------------------------------------------------------------------------------ Deferred tax assets: Financial provisions not deducted for tax purposes $ 11,243 16,520 Foreign net operating loss carryforwards 9,043 13,887 Tax credit carryforwards 8,860 3,851 Other 3,088 234 - ------------------------------------------------------------------------------ Gross deferred tax assets 32,234 34,492 Less valuation allowance (14,302) (16,756) - ------------------------------------------------------------------------------ Net deferred tax assets 17,932 17,736 - ------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation and amortization (119,668) (155,339) Other (9,158) (3,201) - ------------------------------------------------------------------------------ Gross deferred tax liabilities (128,826) (158,540) - ------------------------------------------------------------------------------ Net deferred tax liabilities $(110,894) (140,804) ============================================================================== The net changes in the valuation allowance for the years ended March 31, 1999 and 1998 were a decrease of $2.5 million and an increase of $14.8 million, respectively. The valuation allowance is the result of a doubt over the ultimate realization of benefits from certain foreign net operating losses. The remaining balance of the deferred tax assets is 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 $31.5 million 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, 1999, the undistributed earnings of these subsidiaries were approximately $90 million. (6) LONG-TERM DEBT At March 31, 1999, the company has a $200 million revolving credit facility with a group of banks and at that date there were no borrowings outstanding under the facility. Borrowings bear interest, at the company's option, at prime or Federal Funds rates plus .5% or Eurodollar rates plus margins from .5% to .75% based on the company's funded debt to total capitalization ratio. The revolving credit commitment expires on April 30, 2001, at which time the then outstanding balance will convert to a term loan payable in 16 quarterly installments beginning July 31, 2001. All of the borrowings under the agreement are unsecured and the company pays an annual fee of .25% on the unused portion of the facility. Under the terms of the agreement, the company has agreed to limitations on future levels of investments and aggregate indebtedness, and maintenance of certain debt to capitalization ratios and also debt to earnings ratios. The agreement also prohibits the company from encumbering its assets for the benefit of others. (7) BENEFIT PLANS Upon meeting various citizenship, age and service requirements, employees are eligible to participate in a defined contribution savings plan and can contribute from 2% to 15% of their base salary to an employee benefit trust. The company matches with company common stock 50% of the employee's contribution to the plan up to a maximum of 6% of the employee's base salary. The plan held 429,835 shares and 487,571 F-13
shares of the company's common stock at March 31, 1999 and 1998, respectively. Amounts charged to expense for the plan for 1999, 1998 and 1997 were $1.8 million, $1.8 million and $1.7 million, 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's policy is to fund the plan based upon minimum funding requirements of the Employee Retirement Income Security Act of 1974. 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. 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. This plan is not funded. The company has adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," which revises the required disclosures about pension and other postretirement benefit plans. Changes in plan assets and obligations during the years ended March 31, 1999 and 1998 and the funded status of the U.S. defined benefit pension plan and the supplemental plan (referred to collectively as "Pension Benefits") and the postretirement health care and life insurance plan (referred to as "Other Benefits") at March 31, 1999 and 1998 were as follows: <TABLE> <CAPTION> (in thousands) Pension Benefits Other Benefits ---------------- -------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $29,636 35,445 13,082 14,559 Service cost 848 987 1,068 1,255 Interest cost 2,189 2,230 961 1,132 Participant contributions --- --- 223 261 Plan amendments --- 1,147 --- 721 Curtailments --- (1,121) --- (1,781) Settlements --- (8,319) --- --- Benefits paid (1,034) (950) (628) (409) Actuarial (gain) loss 3,159 217 820 (2,656) - -------------------------------------------------------------------------------------------- Benefit obligation at end of year $34,798 29,636 15,526 13,082 - -------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $28,772 29,847 --- --- Actual return 1,290 7,202 --- --- Employer contributions 74 992 405 148 Participant contributions --- --- 223 261 Benefits paid (1,034) (950) (628) (409) Settlements --- (8,319) --- --- - -------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $29,102 28,772 --- --- - -------------------------------------------------------------------------------------------- Funded (unfunded) status (5,696) (864) (15,526) (13,082) Unrecognized actuarial (gain) loss 2,083 (2,538) (3,395) (4,454) Unrecognized prior service cost 908 1,206 880 914 - -------------------------------------------------------------------------------------------- Net accrued benefit cost $(2,705) (2,196) (18,041) (16,622) ============================================================================================ NET ACCRUED BENEFIT COST CONSISTS OF: Prepaid benefit cost $ 1,536 807 --- --- Accrued benefit liability (6,762) (4,902) (18,041) (16,622) Intangible asset 2,521 1,899 --- --- - -------------------------------------------------------------------------------------------- Net accrued benefit cost $(2,705) (2,196) (18,041) (16,622) ============================================================================================ </TABLE> For pension plans with benefit obligations in excess of plan assets, the projected benefit obligation at March 31, 1999 and 1998 was $9.6 million and $6.6 million, respectively. The accumulated benefit obligation F-14
for pension plans with benefit obligations in excess of plan assets was $6.8 million and $4.9 million at March 31, 1999 and 1998, respectively. Net periodic pension cost for the U.S. defined benefit pension plan and the supplemental plan for 1999, 1998 and 1997 include the following components: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------- Service cost $ 848 987 844 Interest cost 2,189 2,230 2,258 Expected return on plan assets (2,693) (2,465) (1,875) Amortization of prior service cost 269 279 158 Recognized actuarial (gain) loss (29) 120 138 - ------------------------------------------------------------------- Net periodic pension cost $ 584 1,151 1,523 =================================================================== Net periodic postretirement health care and life insurance costs for 1999, 1998 and 1997 include the following components: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------- Service cost $1,068 1,255 928 Interest cost 961 1,132 874 Other amortization and deferral (205) (28) (207) - ------------------------------------------------------------------- Net periodic postretirement benefit cost $1,824 2,359 1,595 =================================================================== Assumptions used in actuarial calculations were as follows: 1999 1998 1997 - ---------------------------------------------------------------------------- Discount rate 7.0% 7.5% 7.5% Expected long-term rate of return on assets 9.5% 9.5% 9.5% Rates of annual increase in compensation levels 4.0% 5.0% 5.2% ============================================================================ The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation will be 6.5% in 2000, gradually declining to 4% in the year 2005 and thereafter. A 1% increase in the assumed health care cost trend rates for each year would increase the accumulated postretirement benefit obligation by approximately $2.2 million at March 31, 1999 and increase the cost for the year ended March 31, 1999 by $.3 million. A 1% decrease in the assumed health care cost trend rates for each year would decrease the accumulated postretirement benefit obligation by approximately $1.8 million at March 31, 1999 and decrease the cost for the year ended March 31, 1999 by $.3 million. During the fourth quarter of fiscal 1996 the company recorded as other expense an estimated curtailment charge of $3 million as a result of the removal of fleet personnel from the company's U.S. defined benefit pension plan. During the third quarter of fiscal 1998, the obligations related to the curtailment of the plan were settled and a gain on settlement of $1.2 million was recorded as other income. Beginning April 1, 1996 those employees removed from this defined benefit pension plan, along with all new employees of the company who are eligible for pension plan membership, were enrolled in a new defined contribution retirement plan. This plan is noncontributory by the employee, but the company contributes in cash 3% of an eligible employee's compensation to an employee benefit trust. The cost of the plan for fiscal 1999, 1998 and 1997 was $1.7 million, $2.7 million and $2.3 million, respectively. Fiscal 1999 cost of the plan has been reduced by $.9 million of forfeitures due to employee severances. During the fourth quarter of fiscal 1998, as a result of the sale of the company's compression division, the company recorded as part of the gain on sale of discontinued compression operations a pre-tax curtailment gain of $2.4 million resulting from the removal of all compression personnel from the U.S. defined benefit pension plan, the supplemental plan and the post-retirement health care and life insurance plan. F-15
(8) OTHER ASSETS, OTHER LIABILITIES AND DEFERRED CREDITS A summary of other assets at March 31 follows: (in thousands) 1999 1998 - ------------------------------------------------------------------- Recoverable insurance losses $ 66,052 57,289 Assets held for sale 14,589 4,086 Deferred income tax assets 17,932 17,736 Other 12,344 10,769 - ------------------------------------------------------------------- $110,917 89,880 =================================================================== A summary of other liabilities and deferred credits at March 31 follows: (in thousands) 1999 1998 - ------------------------------------------------------------------- Postretirement benefits liability $ 18,041 16,622 Pension liability 5,226 4,095 Minority interests in net assets of subsidiaries 4,665 7,481 Deferred vessel income 10,264 6,071 Provision for litigation and claims costs 427 7,889 Other 10,904 6,869 - ------------------------------------------------------------------- $ 49,527 49,027 =================================================================== (9) CAPITAL STOCK The company has 125 million shares of $.10 par value common stock authorized. At March 31, 1999 and 1998, 60,566,857 shares and 59,482,769 shares were issued, respectively. At March 31, 1999, 4,985,860 shares were held by the Grantor Trust Stock Ownership Program, which are not included in common shares outstanding for earnings per share calculations. At March 31, 1999 and 1998, three million shares of no par value preferred stock were authorized and unissued. 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, 1999, 4,349,483 shares of common stock are reserved for issuance under the plans of which 1,329,800 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 outstanding stock options have ten- year terms and most of the outstanding options vest and become exercisable in equal installments over a three-year period from the grant date. The per share weighted-average fair values of stock options granted during fiscal years 1999, 1998 and 1997 were $8.37, $17.69 and $15.46, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 1997 - ------------------------------------------------------------------- Risk-free interest rate 5.15% 5.75% 6.40% Expected dividend yield 2.50% 1.25% 1.25% Expected stock price volatility 42.79% 34.93% 32.57% Expected stock option life 5 years 5 years 5 years =================================================================== 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 F-16
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: 1999 1998 1997 - -------------------------------------------------------------------- Net earnings (in thousands): As reported $210,719 315,499 146,011 Pro forma $204,778 312,215 145,032 Earnings per common share: As reported $ 3.68 5.21 2.37 Pro forma $ 3.58 5.16 2.35 Diluted earnings per common share: As reported $ 3.68 5.18 2.35 Pro forma $ 3.58 5.13 2.34 ==================================================================== Pro forma net earnings and diluted earnings per common share reflect only options granted during fiscal years 1999, 1998 and 1997. 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 1999, 1998 and 1997 was as follows: Weighted-average Number Exercise Price of Shares - ------------------------------------------------------------------------ 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 Granted 49.19 762,000 Exercised 20.97 (620,054) Expired or cancelled 41.60 (94,984) - ------------------------------------------------------------------------ Balance at March 31, 1998 38.89 1,960,065 Granted 23.18 1,121,000 Exercised 19.78 (33,061) Expired or cancelled 42.04 (38,998) - ------------------------------------------------------------------------ Balance at March 31, 1999 $ 33.21 3,009,006 ======================================================================== The 3,009,006 options outstanding at March 31, 1999 fall into three general exercise-price ranges as follows: <TABLE> <CAPTION> Exercise Price Range - ---------------------------------------------------------------------------------------------------------------- $10.00 - $19.63 $20.13 - $25.13 $35.75-$59.00 <S> <C> <C> <C> - ---------------------------------------------------------------------------------------------------------------- Options outstanding at March 31, 1999 207,348 1,363,630 1,438,028 Weighted average exercise price $17.35 $22.83 $45.33 Weighted average remaining contractual life 4.3 years 8.9 years 8.4 years Options exercisable at March 31, 1999 207,348 307,630 787,675 Weighted average exercise price of options exercisable at March 31, 1999 $17.35 $23.10 $43.42 ================================================================================================================ </TABLE> At March 31, 1999, 1998 and 1997, the number of options exercisable under the stock option plans was 1,302,653, 865,383 and 940,579, respectively; and the weighted average exercise price of those options was $34.47, $28.47 and $21.51, respectively. During fiscal years 1998 and 1999, 37,200 shares of restricted common stock of the company were granted to certain key employees. These restricted shares vest and become freely transferable over a four-year period provided the employee remains employed by the company during the vesting period. 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. The fair market value of the stock at the time of the grants totaled approximately $1.6 million and was classified in stockholders' equity as deferred compensation F-17
- - restricted stock. The deferred amount is being amortized by equal monthly charges to earnings over the four-year vesting period. In accordance with a June 13, 1994 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. The restricted stock agreement contained provisions for vesting of the shares at varying intervals when the average market price of the common stock reaches certain predetermined levels. By March 31, 1998, the total 70,000 shares had vested due to the attainment of the price levels applicable to those shares and the total deferred amount of $1.6 million had been charged to earnings. In accordance with a new employment agreement with the company's chairman of the board entered into on September 25, 1997, 50,000 shares of restricted common stock were granted on that date. These restricted shares also vest at varying intervals when the average market price of the common stock reaches certain predetermined levels. The fair market value of the stock at the time of grant totaling approximately $3 million was deferred and is being amortized by equal monthly charges to earnings over five years. The company's Board of Directors has authorized three separate share repurchase programs during fiscal years 1999, 1998 and 1997 whereby the company could purchase shares of company common stock in the open market or through privately negotiated transactions. Stock repurchase activity during fiscal years 1999, 1998 and 1997 was as follows: <TABLE> <CAPTION> 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Number of shares repurchased 3,950,000 1,481,000 1,788,100 Total cost, including broker commissions and fees (in thousands) $ 109,300 65,200 84,800 Average cost per share $ 27.67 44.02 47.42 </TABLE> A share repurchase program, authorized in March 1999, allows the company to purchase up to $50 million of company common stock through March 31, 2000. No shares had been purchased under this program as of March 31, 1999. On January 29, 1999 the company established a Grantor Trust Stock Ownership Program in connection with which the company entered into a trust agreement with a bank providing for the establishment of the related trust (the "trust"). The trust is designed to acquire, hold and distribute shares of the common stock of the company to provide for the payment of benefits and compensation under the company's employee benefit plans, including its stock option plans and 401(k) plan. The trust will not increase or alter the amount of benefits or compensation that will be paid under these plans. On January 29, 1999 the company sold at market value 5,000,000 shares (the "acquired shares") of common stock to the trust for $107,187,500, or $21.4375 per share. In payment for the acquired shares, the trust paid $500,000 in cash and issued a promissory note payable to the company for the remaining balance. Acquired shares will be released to satisfy the company's obligations to pay benefits under company benefit plans as the promissory note is paid down or forgiven. For financial reporting purposes the trust is consolidated with the company. Any dividend transactions between the company and the trust are eliminated. Acquired shares held by the trust remain valued at the market price at the date of purchase and are shown as a reduction to stockholders' equity in the company's consolidated balance sheet. The difference between the trust share value and the fair market value on the date shares are released from the trust is included in additional paid-in capital. Common stock held in the trust is not considered outstanding in the computation of earnings per share. The trust held 4,985,860 shares of common stock at March 31, 1999. The trustee will vote or tender shares held by the trust in accordance with the confidential instructions of participants in the company's stock option plans and 401(k) plan. 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 F-18
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 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 CONTINGENCIES An employment agreement exists with the company's chairman of the board whereby he will serve in such capacity as well as president and chief executive officer through September 19, 2000. 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 cash compensation that could be paid under the agreements, based on present salary levels, is approximately $10.7 million. During fiscal 1997 the Internal Revenue Service (IRS) 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. During the fourth quarter of fiscal 1998 the company and the IRS settled all outstanding issues regarding these audits with no additional taxes due. As a result of the settlement, the company reduced previously provided for income taxes in the amount of $3.3 million. 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. During the second quarter of fiscal 1998, the company provided $8 million for the possible adverse outcome of these labor-law matters. Pursuant to a court-approved settlement, as of March 31, 1999 the company has paid $7.5 million in settlements relating to certain of these alleged labor-law pay violations. In management's opinion, the amount of the company's liability in excess of amounts provided in the financial statements for these labor-law matters, if any, will not have a material adverse effect on the company's financial position or the results of its ongoing operations. During the fourth quarter of fiscal 1997 the company recorded as other expense a charge of $2.8 million ($1.9 million after tax, or $.03 per common share) to establish a provision for loss resulting from one of the company's insurers filing for liquidation. 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. F-19
(11) SEGMENT AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS The company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." With the sale of the company's Compression business as explained in Note 2, the company operates in only one business segment. The following table provides a comparison of revenues, operating profit, identifiable assets, and depreciation and amortization and additions to properties and equipment for the years ended March 31. Vessel revenues and operating costs relate to vessels owned and operated by the company while other marine services relate to the activities of the company's shipyards, brokered vessels and other miscellaneous marine-related businesses. <TABLE> <CAPTION> (in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Marine revenues (A): Vessel revenues: United States $ 296,161 463,914 338,823 International (B) 614,887 537,737 322,401 - ---------------------------------------------------------------------------------------------------------------- 911,048 1,001,651 661,224 Other marine services 57,944 58,510 29,202 - ---------------------------------------------------------------------------------------------------------------- $ 968,992 1,060,161 690,426 ================================================================================================================ Marine operating profit: Vessel activity: United States $ 96,376 225,599 120,275 International 171,213 141,133 82,591 - ---------------------------------------------------------------------------------------------------------------- 267,589 366,732 202,866 Gains on sales of assets 2,949 16,592 5,352 Other marine services 12,526 10,663 4,186 - ---------------------------------------------------------------------------------------------------------------- 283,064 393,987 212,404 Other income 8,439 7,079 6,705 Other expense --- (6,847) (2,800) Corporate expenses (12,317) (13,074) (11,235) Interest and other debt costs (2,445) (24,677) (1,000) - ---------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes $ 276,741 356,468 204,074 ================================================================================================================ Identifiable assets: Marine: United States $ 317,411 379,118 376,380 International (B) 970,853 1,043,781 334,005 - ---------------------------------------------------------------------------------------------------------------- 1,288,264 1,422,899 710,385 Investments in and advances to unconsolidated Marine companies 17,307 21,825 20,556 - ---------------------------------------------------------------------------------------------------------------- 1,305,571 1,444,724 730,941 Net assets of discontinued Compression operations --- --- 253,305 General corporate 88,887 48,115 77,034 - ---------------------------------------------------------------------------------------------------------------- $1,394,458 1,492,839 1,061,280 ================================================================================================================ Depreciation and amortization: Marine equipment depreciation $ 84,823 83,002 55,569 General corporate depreciation 790 406 368 Goodwill amortization 9,170 8,002 --- - ---------------------------------------------------------------------------------------------------------------- $ 94,783 91,410 55,937 ================================================================================================================ Additions to properties and equipment: Marine equipment operations $ 40,959 62,555 40,003 Discontinued Compression operations --- 17,597 17,949 General corporate 7,324 2,349 50 - ---------------------------------------------------------------------------------------------------------------- $ 48,283 82,501 58,002 ================================================================================================================ </TABLE> (A) One marine customer accounted for 8%, 11% and 11% of revenues for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. (B) Marine support services are conducted worldwide with assets that are highly mobile. Revenues are principally derived from offshore service vessels, which regularly and routinely move from one operating area to another, often to and from offshore operating areas in different continents. Because of this asset mobility, revenues and long-lived assets attributable to the company's international marine operations in any one country are not "material" as that term is defined by SFAS No. 131. Equity in net assets of non-U.S. subsidiaries is $674.5 million, $795.1 million and $211.5 million at March 31, 1999, 1998 and 1997, respectively. Other international identifiable assets include accounts receivable and other balances denominated in currencies other than the U.S. dollar which aggregate approximately $12.9 million, $19.1 million and $6.7 million at March 31, 1999, 1998 and 1997, respectively. These amounts are subject to the usual risks of fluctuating exchange rates and government-imposed exchange controls. F-20
(12) SUPPLEMENTARY INFORMATION--QUARTERLY FINANCIAL DATA (UNAUDITED) Years Ended March 31, 1999 and 1998 (in thousands, except per share data) 1999 First Second Third Fourth - ------------------------------------------------------------------------------- Marine revenues $284,877 254,235 232,984 196,896 =============================================================================== Marine operating profit $ 97,584 84,201 62,767 38,512 =============================================================================== Net earnings $ 62,772 56,678 39,780 51,489 =============================================================================== Earnings per share $ 1.06 .98 .71 .93 =============================================================================== Diluted earnings per share $ 1.05 .98 .71 .93 =============================================================================== 1998 First Second Third Fourth - ------------------------------------------------------------------------------- Marine revenues $230,440 270,413 280,697 278,611 =============================================================================== Marine operating profit $ 78,774 104,382 115,638 95,193 =============================================================================== Earnings from continuing operations $ 48,136 61,053 70,298 63,551 Earnings from discontinued Compression operations 2,625 3,276 3,661 1,161 Gain on sale of discontinued Compression operations --- --- --- 61,738 - ------------------------------------------------------------------------------- Net earnings $ 50,761 64,329 73,959 126,450 =============================================================================== Earnings per share: Continuing operations $ 0.80 1.01 1.15 1.05 Discontinued Compression operations 0.04 0.05 0.06 .02 Gain on sale of discontinued Compression operations --- --- --- 1.02 - ------------------------------------------------------------------------------- Net earnings $ 0.84 1.06 1.21 2.09 =============================================================================== Diluted earnings per share: Continuing operations $ 0.80 1.01 1.15 1.05 Discontinued Compression operations 0.04 0.05 0.06 .02 Gain on sale of discontinued Compression operations --- --- --- 1.01 - ------------------------------------------------------------------------------- Net earnings $ 0.84 1.06 1.21 2.08 =============================================================================== Operating profit consists of revenues less operating costs and expenses, depreciation, general and administrative expenses and other income and expenses of the Marine division. See Notes 1, 2, 3, 5, 7 and 10 for detailed information regarding transactions which affect fiscal 1999 and 1998 quarterly amounts. Fiscal year 1999 company activity has been significantly affected by the downturn in activity and spending in the oil industry resulting from the drop in the price of oil which began in the Fall of 1997. A discussion of current market conditions appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the company's 1999 annual report. F-21
SCHEDULE II TIDEWATER INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1999, 1998, AND 1997 (IN THOUSANDS) 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 ----------- --------- ------- ---------- ------ 1999 Deducted in balance sheet from trade accounts receivables: Allowance for doubtful accounts $14,078 685 3,638 (A) 11,125 ======= ====== ===== ====== Deducted in balance sheet from other assets: Amortization of goodwill, prepaid rent and debt issuance costs $12,219 10,092 --- 22,311 ======= ====== ===== ====== 1998 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts $10,330 3,992 244 (A) 14,078 ======= ====== ===== ====== Deducted in balance sheet from other assets: Amortization of goodwill, prepaid rent and debt issuance costs $ 3,028 9,191 --- 12,219 ======= ====== ===== ====== 1997 Deducted in balance sheet from trade accounts receivables: Allowance for doubtful accounts $ 7,866 3,148 684 (A) 10,330 ======= ====== ===== ====== Deducted in balance sheet from other assets: Amortization of prepaid rent and debt issuance costs $ 2,292 736 --- 3,028 ======= ====== ===== ====== (A) Accounts receivable amounts considered uncollectible and removed from accounts receivable by reducing allowance for doubtful accounts. F-22
TIDEWATER INC. EXHIBITS FOR THE ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED MARCH 31, 1999
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 1 to Form 8-A on September 30, 1996). *10(a) - $200,000,000 Revolving Credit and Term Loan Agreement dated February 18, 1999. 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) - Change in Control Agreement dated September 30, 1996 between Tidewater Inc. and William C. O'Malley (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, 1997). 10(j) - Form of Change in Control Agreement entered into as of September 30, 1996 with three executive officers (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, 1997).
10(k) - Tidewater Inc. 1996 Annual Incentive Plan (filed with the Commission as Exhibit 10(m) to the company annual report on Form 10-K for the fiscal year ended March 31, 1997). 10(l) - Employment Agreement dated September 25, 1997 between Tidewater Inc. and William C. O'Malley (filed with the Commission as Exhibit 10 to the company's report on Form 10-Q for the quarter ended September 30, 1997). 10(m) - Tidewater Inc. 1997 Stock Incentive Plan filed with the Commission as Exhibit 10(o) to the company's annual report on Form 10-K for the fiscal year ended March 31, 1998. *21 - Subsidiaries of the Company. *23 - Consents of Independent Auditors. *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.