Common use of Operating Income Clause in Contracts

Operating Income. (418) ---------- 639,802 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) -------- 397,939 -------- 213,491 Other income (expense): Interest income.......................................... 30,565 19,379 879 Interest expense......................................... (14,487) (10,270) (2,326) Other, net............................................... Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 Income tax expense......................................... Net income................................................. Net income per share: (206,572) ---------- $ 383,659 ========== (151,456) --------- $ 278,605 ========= (66,317) -------- $146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ========== $ 2.66 ========== $ 2.01 ========= $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The accompanying notes are an integral part of the consolidated financial statements. 30 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =========== ====== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Operating activities: Net income.............................................. $ 383,659 $ 278,605 $ 146,388 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes in operating assets and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.

Operating Income. 8,906 ----------- 306,067 ----------- 212,659 10,327 ----------- 284,273 ----------- 174,435 11,143 ----------- 253,923 ----------- 154,287 Non-operating (418income) ---------- 639,802 ---------- 568,999 and expenses: Investment and other income......................... (1,01414,237) --------- 536,220 --------- 419,873 (35,1222,264) -------- 397,939 -------- 213,491 Other income (expense): Interest income.......................................... 30,565 19,379 879 5,105) Interest expense......................................... .................................... 11,764 15,750 14,728 ----------- ----------- ----------- (14,4872,473) 13,486 9,623 ----------- ----------- ----------- Income before minority interest and income taxes...... 215,132 160,949 144,664 Minority interest..................................... (86,225) (10,27065,341) (2,32661,350) Other, net............................................... ----------- ----------- ----------- Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 taxes............................ 128,907 95,608 83,314 Income tax expense......................................... taxes.......................................... 56,719 38,952 33,325 ----------- ----------- ----------- Net income................................................. Net income per share: (206,572) ---------- ............................................ $ 383,659 72,188 $ 56,656 $ 49,989 =========== (151,456) --------- $ 278,605 ========= (66,317) -------- $146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ========== $ 2.66 =========== Earnings per share--basic............................. $ 2.01 3.25 $ 2.54 $ 2.26 ========= $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 =========== -- -------- 124,462 =========== Earnings per share--diluted........................... $ 3.18 $ 2.49 $ 2.20 =========== =========== =========== Average shares outstanding--basic..................... 22,180,112 22,307,476 22,136,410 Average shares outstanding--diluted................... 22,693,016 22,748,595 22,732,129 The accompanying notes are an integral part of the consolidated financial statements. 30 DIAMOND OFFSHORE DRILLINGAFFILIATED MANAGERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CASH FLOWS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, EXCEPT NUMBER OF SHARES--------------------------------- 1999 --------- 2000 --------- 2001 --------- Cash flow from operating activities: Net income................................................ $ 72,188 $ 56,656 $ 49,989 Adjustments to reconcile net income to net cash flow from operating activities: Amortization of intangible assets......................... 22,229 26,409 28,432 Depreciation and other amortization....................... 3,901 4,611 10,031 Deferred income tax provision............................. 14,936 6,561 5,731 FAS 133 transition adjustment............................. -- -- (2,203) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN Reclassification of FAS 133 adjustment to net income...... -- -- 1,958 Changes in assets and liabilities: Decrease (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICITincrease) in investment advisory fees receivable.............................................. (163,262) 182,241 15,143 Decrease (increase) in other current assets............... (1,260) (LOSSES8,639) SHARES AMOUNT December 316,347 Decrease (increase) in non-current other receivables...... (10,779) 5,064 90 Increase (decrease) in accounts payable, 1995............ 50,000,000 $ 500 $ 665,107 $accrued expenses and other liabilities................................... 116,518 (171,44487,073) $(1,26927,742) Increase (decrease) in minority interest.................. 34,648 (32,119) 8,398 -------- -------- -------- Cash flow from operating activities................... 89,119 153,711 96,174 -------- -------- -------- Cash flow used in investing activities: Purchase of fixed assets.................................. (6,050) (6,235) (7,230) Costs of investments, net of cash acquired................ (103,500) (104,438) (335,968) Distributions received from Affiliate equity investment... 550 428 670 Increase in other assets.................................. (486) (699) (1,146) Loans to employees........................................ (3,453) (786) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 -------- -------- -------- Cash flow used in investing activities................ (25,056112,939) (928111,730) (343,674) -------- -------- -------- Cash flow from (used in) financing activities: Borrowings of senior bank debt............................ 155,800 193,500 222,300 Repayments of senior bank debt............................ (171,800) (217,000) (348,300) Repayments of notes payable to related parties............ (22,000) -- -- Net income................. Issuances of debt securities.............................. -- -- -- 278,605 -- -- -- Issuance 427,894 Issuances of common equity securities............................ 101,536 8,412 9,130 Repurchase of stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- ....................................... (6969,322) -- -- -- Dividends to stockholders............. -- -- -- (19,50348,858) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange (9,113) Securities issuance costs................................. (179) (15) (12,644) -------- -------- -------- Cash flow from (used in) financing activities......... 54,035 (63,961) 289,267 Effect of foreign exchange rate changes, net...................... -- -- -- -- changes on cash flow........ (89471) -- -- Loss on investments, net... -- -- -- -- (106287) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 48 Net increase (1,928decrease) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 in cash and cash equivalents........ 30,144 (88,72622,267) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 41,815 Cash and cash equivalents at beginning of year.............. 23,735 53,879 31,612 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 547,783 $(7,998) 3,518,100 $(88,726) ===53,879 $ 31,612 $ 73,427 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................. $ 11,654 $ 17,025 $ 9,727 Income taxes paid......................................... 20,576 52,415 17,732 Supplemental disclosure of non-cash financing activities: Stock issued for Affiliate equity purchases............... -- -- 2,276 Notes issued for Affiliate equity purchases............... -- -- 24,458 Conversion of convertible stock to Common Stock........... 30,992 -- -- Common Stock received for the exercise of stock options... -- 1,027 -- Capital lease obligations for fixed assets................ -- 816 -- The accompanying notes are an integral part of the consolidated financial statements. 36 AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) COMMON SHARES CONVERTIBLE SHARES COMMON STOCK CONVERTIBLE STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS TREASURY SHARES TREASURY SHARES AT COST ---------- ----------- -------- ----------- ---------- -------- ---------- -------- December 31, 1998......... 17,703,617 1,750,942 $177 $ 30,992 $273,413 $ 11,685 (172,000) $ (2,612) Issuance of Common Stock.. 4,000,938 -- 40 -- 101,496 -- -- -- Conversion of Convertible Stock................... 1,750,942 (1,750,942) 18 (30,992) 30,974 -- -- -- Purchase of Common Stock.. -- -- -- -- -- -- (346,900) (9,322) Net income................ -- -- -- -- -- 72,188 -- -- Other comprehensive income.................. -- -- -- -- -- (71) -- -- ---------- ---------- ---- -------- -------- -------- ---------- -------- December 31, 1999......... 23,455,497 -- 235 -- 405,883 83,802 (518,900) (11,934) ---------- ---------- ---- -------- -------- -------- ---------- -------- Issuance of Common Stock.. 63,547 -- -- -- 1,227 -- 328,938 8,266 Purchase of Common Stock.. -- -- -- -- (53) -- (1,287,401) (49,885) Net income................ -- -- -- -- -- 56,656 -- -- Other comprehensive income.................. -- -- -- -- -- (287) -- -- ---------- ---------- ---- -------- -------- -------- ---------- -------- December 31, 2000......... 23,519,044 -- 235 -- 407,057 140,171 (1,477,363) (53,553) ---------- ---------- ---- -------- -------- -------- ---------- -------- Issuance of Common Stock.. -- -- -- -- (1,970) -- 325,622 11,028 Purchase of Common Stock.. -- -- -- -- -- -- (157,100) (9,113) Net income................ -- -- -- -- -- 49,989 -- -- Other comprehensive income.................. -- -- -- -- -- (504) -- -- ---------- ---------- ---- -------- -------- -------- ---------- -------- December 31, 2001......... 23,519,044 -- $235 $ -- $405,087 $189,656 (1,308,841) $(51,638) ========== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING37 AFFILIATED MANAGERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Operating activities: Net income.............................................. $ 383,659 $ 278,605 $ 146,388 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes in operating assets and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore DrillingORGANIZATION AND NATURE OF OPERATIONS Affiliated Managers Group, Inc. ("AMG" or the "Company") was incorporated is an asset management company with equity investments in Delaware on April 13, 1989. Loews Corporation a diverse group of mid-sized investment management firms ("LoewsAffiliates"). AMG's Affiliates provide investment management services, primarily in the United States, to high net worth individuals, mutual funds and institutional clients. Affiliates are either organized as limited partnerships or limited liability companies. AMG has contractual arrangements with many of its Affiliates whereby a percentage of revenue is allocable to fund Affiliate operating expenses, including compensation (the "Operating Allocation"), a Delaware corporation while the remaining portion of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 revenue (the "Common Stock OfferingOwners' Allocation") is allocable to AMG and the other partners or members, generally with a priority to AMG. In certain other cases (such as, for example, The Managers Funds LLC ("Managers")), owns 51.6 percent of the outstanding common stock of the Company (see Note 3)Affiliate is not subject to a revenue sharing arrangement, but instead operates on a profit-based model. The CompanyAs a result, through wholly owned subsidiaries, engages AMG participates fully in any increase or decrease in the worldwide contract drilling revenue or expenses of offshore oil such firms. All material intercompany balances and gas xxxxx transactions have been eliminated. All dollar amounts except per share data in the text and is a leader tables herein are stated in deep water drillingthousands unless otherwise indicated. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillshipCertain reclassifications have been made to prior years' financial statements to conform to the current year's presentation. Principles of Consolidation The ACCOUNTING FOR INVESTMENTS These consolidated financial statements include the accounts of AMG and each Affiliate in which AMG has a controlling interest. In each such instance, AMG is, directly or indirectly, the Company after elimination sole general partner (in the case of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less Affiliates which are considered part limited partnerships) or sole manager member (in the case of Affiliates which are limited liability companies). For Affiliate operations consolidated into these financial statements, the portion of the Company's cash management activities, rather Owners' Allocation allocated to owners other than part AMG is included in minority interest in the Consolidated Statements of its investing activities, are considered cash equivalentsOperations. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in Minority interest on the Consolidated Balance Sheets includes capital and undistributed Owners' Allocation owned by the managers of the consolidated Affiliates. Investments where AMG or an Affiliate does not hold a controlling interest are generally accounted for under the equity method of accounting, and AMG's portion of net income is included in "Accumulated investment and other comprehensive losses" until realizedincome. The Investments in which AMG or the Affiliate owns less than a 20% interest and does not exercise significant influence are accounted for under the cost method. Under the cost method, AMG's portion of debt securities net income is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are not included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method Operations and the cost of equity securities sold is based on the average cost methoddividends are recorded when, and if, declared. Realized gains or losses and declines in valueNevertheless, if any, judged to be other than temporary charges are reported recognized in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations Operations if events or circumstances indicate a permanent impairment of the Company. Inventories are stated at the lower of cost or estimated carrying value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. REVENUE RECOGNITION The Company's nonconsolidated revenue represents advisory fees billed monthly, quarterly and annually by Affiliates for managing the assets of clients. Asset-U.S. income tax liabilities based advisory fees are recognized monthly as services are rendered and are based upon the results of operations a percentage of the various subsidiaries market value of client assets managed. Any fees collected in advance are deferred and foreign branches in those jurisdictions in which they recognized as income over the period earned. Performance-based advisory fees are subject to taxation.recognized when earned based upon either the positive difference 38 AFFILIATED MANAGERS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Operating Income. (418) ---------- 639,802 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) 45 -------- 397,939 43,417 -------- 213,491 23,705 -- ------- 12,348 ------- 3,513 Other income (expense): ) Interest income.......................................... 30,565 19,379 879 ........................................... 532 104 Interest expense......................................... (14,487) (10,270) (2,326) Other, net............................................... Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 Income tax expense......................................... expense and other financing costs................ Net income................................................. Net income per share: .................................................. (206,57210,711) ---------- -------- $ 383,659 ==13,526 ======== (151,4561,478) --------- ------- $ 278,605 2,139 ======= See accompanying notes. DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES (A LIMITED LIABILITY COMPANY) CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCEPTION (SEPTEMBER 30, 1999) TO DECEMBER 31, 1999 (IN THOUSANDS) EL PASO ENERGY DEEPWATER, L.L.C. ANR PIPELINE COMPANY TOTAL -------------- ------------ ------------- Initial capital contributions on September 30, 1999............................................... $ 83,698 $ 53,170 $136,868 Capital contributions................................ 155 -- 155 Distributions........................................ (24,400) (24,400) (48,800) Net income........................................... Balance at December 31, 1999......................... 943 -------- 60,396 1,196 -------- 29,966 2,139 -------- 90,362 Capital contributions................................ 277 -- 277 Distributions........................................ (13,550) (13,550) (27,100) Net income........................................... Balance at December 31, 2000......................... 6,252 -------- $ 53,375 ======== (66,317) 7,274 -------- $146,388 $ 23,690 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: 13,526 -------- $ 2.78 ==77,065 ======== $ 2.66 ========== $ 2.01 ========= $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The See accompanying notes are an integral part of the consolidated financial statementsnotes. 30 DIAMOND OFFSHORE DRILLING76 79 DEEPWATER HOLDINGS, INC. L.L.C. AND SUBSIDIARIES (A LIMITED LIABILITY COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =========== ====== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains 2000 AND THE PERIOD FROM INCEPTION (losses)SEPTEMBER 30, net of tax: Foreign currency translation gain (loss).................. (2911999) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLINGTO DECEMBER 31, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 1999 (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Operating activities: 2000 --------- 1999 -------- Cash flows from operating activities Net income.............................................. ................................................ $ 383,659 13,526 $ 278,605 $ 146,388 2,139 Adjustments to reconcile net income to net cash provided by operating activities: activities Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes in operating assets and liabilities.......................... 18,138 4,112 Working capital changes: Accounts receivable, net............................. (15,719) 6,112 Gas imbalances, net.................................. (26,1535,414) (32,95967) (64,715) Rig inventory and supplies and other Other current assets............................................. ................................. (21,911248) 708 Other noncurrent assets.............................. 1,498 199 Accounts payable..................................... 5,662 (3,3197,060) Gas imbalance cashout................................ (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,9901,962) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.Regulatory reserve................................... 3,944 3,587

Operating Income. (418) 212,916 3,578 ---------- 639,802 135,877 3,578 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) -------- 397,939 -------- 213,491 Other income (expense): 86,679 Interest income.......................................... 30,565 19,379 879 ............................................ (7,385) (4,536) (238) Interest expense......................................... (14,487) (10,270) (2,326) Other, net............................................... ........................................... Income before income tax expense........................... 5,154 taxes................................. 7,605 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 212,696 7,110 ---------- 133,303 3,876 ---------- 83,041 Income tax expense......................................... taxes (Note 5)...................................... Net income................................................. Net income ....................................... Earnings per share: (206,572) 67,048 ---------- $ 383,659 145,648 ========== (151,456) --------- 48,484 ---------- $ 278,605 84,819 ========== (66,317) -------- $146,388 25,572 ---------- $ 57,469 ========== Basic.................................................... Diluted.................................................. Weighted average Common shares outstanding: used in the calculations of earnings per $ 2.78 0.81 ========== $ 2.66 0.78 ========== $ 2.01 0.51 ========== $ 1.93 0.49 ========== $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 0.36 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The accompanying notes are an integral part of the consolidated financial statements. 30 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =0.35 ========== share: Basic.................................................... 179,032 166,754 158,589 Diluted.................................................. ========== 187,448 ========== ========= ======= 174,334 ========== ========== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 164,934 ========== The See accompanying notes are an integral part of the to consolidated financial statements. DIAMOND OFFSHORE DRILLING35 JABIL CIRCUIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE DATA) YEAR ENDED DECEMBER ACCUMULATED COMMON STOCK OTHER ------------------- ADDITIONAL COMPREHENSIVE NET SHARES PAR PAID-IN RETAINED INCOME STOCKHOLDERS' OUTSTANDING VALUE CAPITAL EARNINGS (LOSS) EQUITY ----------- ----- ---------- -------- ------------- ------------- Balance at August 31, 1998 1997 1996 Net 1997..... 157,983,364 $158 $ 79,536 $137,762 $(539) $ 216,917 Exercise of stock options...... 878,004 1 976 -- -- 977 Shares issued under Employee Stock Purchase Plan.......... 303,772 -- 2,320 -- -- 2,320 Tax benefit of options exercised.................... -- -- 7,114 -- -- 7,114 Comprehensive income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains ........... -- -- -- 57,469 321 57,790 ----------- ---- -------- -------- ----- ---------- Balance at August 31, 1998..... 159,165,140 159 89,946 195,231 (losses)218) 285,118 Exercise of stock options...... 1,263,531 1 2,882 -- -- 2,883 Shares issued under Employee Stock Purchase Plan.......... 474,508 1 4,610 -- -- 4,611 Tax benefit of options exercised.................... -- -- 657 -- -- 657 Secondary Public Offering, net of tax: Foreign currency translation gain (loss)expenses.................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 13,800,000 14 198,593 -- -- Total other comprehensive income 198,607 Elimination of duplicate equity resulting from non-conforming fiscal years (lossNote 1)........... (6,070) (1,000) 341 ........ -- -- -- 1,116 -- 1,116 Comprehensive income........................................ ........... -- -- -- 84,819 -- 84,819 ----------- ---- -------- -------- ----- ---------- Balance at August 31, 1999..... 174,703,179 175 296,688 281,166 (218) 577,811 Exercise of stock options...... 2,268,203 2 10,192 -- -- 10,194 Shares issued under employee stock purchase plan.......... 279,303 -- 6,812 -- -- 6,812 Tax benefit of options exercised.................... -- -- 4,294 -- -- 4,294 Public offering, net of expenses..................... 13,000,000 13 525,798 -- -- 525,811 Comprehensive income........... -- -- -- 145,648 (387) 145,261 ----------- ---- -------- -------- ----- ---------- Balance at August 31, 2000..... 190,250,685 $377,589 190 $277,605 843,784 $146,729 426,814 $(605) $1,270,183 =========== ==== ======== ======== ===== ========== The See accompanying notes are an integral part of the to consolidated financial statements. DIAMOND OFFSHORE DRILLING36 JABIL CIRCUIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR YEARS ENDED DECEMBER AUGUST 31, --------------------------------- 2000 1999 1998 1997 1996 Operating --------- --------- --------- Cash flows from operating activities: Net income.............................................. ................................................ $ 383,659 145,648 $ 278,605 84,819 $ 146,388 57,469 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain .......................... 99,337 63,417 42,333 Goodwill write-off..................................... -- 3,578 3,578 Recognition of grant revenue........................... (1,127) (825) (827) Deferred income taxes.................................. 13,769 4,641 (5,269) Loss on sale of assetsproperty............................... (418) (1,014) (35,122) Gain on sale Acquisition related in-process research and development charge............................................... 2,467 -- 2,749 -- 121 6,500 Elimination of investment securities................ (1,116) (1,529) duplicate equity resulting from nonconforming fiscal years........................... -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes 1,116 -- Change in operating assets and liabilities, exclusive of net assets acquired: Accounts receivable.................................. (26,153257,752) (32,959111,324) (64,71524,578) Rig inventory and supplies Inventories.......................................... (255,615) (77,490) 8,956 Prepaid expenses and other current assets............................................. ............ (21,91115,648) (3,31912,606) 2,109 Other assets......................................... 308 (8,050) (2,789) Other assets, non-current............................ (705) 949 (1,7472,676) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes expenses................ 307,316 145,779 14,805 Income taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 ................................. Net cash provided by operating activities....... 547,184 396,368 210,233 Investing ......... Cash flows from investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,4743,287) --------- 35,416 --------- 14,661 --------- 110,465 --------- (281,5721,202) --------- 101,319 --------- Net cash paid for net assets acquired..................... (267,00036,716) Acquisition of drilling rigs and related equipment...... -- (80,99064,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... short-term investments.............. 27,176 -- -- Purchases of investments.................................. -- (167,81827,176) -- Acquisition of property, plant and equipment.............. (333,139) (351,682) 5,200 Net cash used in investing activities........... (391,281168,674) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570111,269) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning sale of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.equipment.............. 6,339 3,135 2,767

Operating Income. 217.3 156.4 138.4 OTHER (418INCOME) ---------- 639,802 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) -------- 397,939 -------- 213,491 Other income (expense): Interest income.......................................... 30,565 19,379 879 EXPENSE Interest expense......................................... , including intercompany interest, net..... 231.2 263.6 214.6 Equity in net losses (14,487income) of affiliates and other...... 238.6 (16.3) (10,2707.6) 469.8 247.3 207.0 LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEMS........................................ (252.5) (2,32690.9) Other(68.6) INCOME TAX BENEFIT............................................ (16.6) (37.4) (25.3) LOSS BEFORE EXTRAORDINARY ITEMS............................... (235.9) (53.5) (43.3) EXTRAORDINARY ITEMS........................................... (2.8) (0.6) NET LOSS...................................................... (238.7) (53.5) (43.9) ACCUMULATED DEFICIT Beginning of year.......................................... (2,127.1) (1,914.3) (1,827.6) Retirement of common stock................................. (17.7) (133.3) (20.4) Cash dividends, net............................................... Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 Income tax expense......................................... Net income................................................. Net income $.0933 per share: share per year.................. (206,57232.4) ---------- $ 383,659 ========== (151,45626.0) --------- $ 278,605 ========= (66,31722.4) -------- End of year................................................ ($146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ========== $ 2.66 ========== $ 2.01 ========= $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The accompanying notes are an integral part of the consolidated financial statements. 30 DIAMOND OFFSHORE DRILLING, INC. 2,415.9)========= ($2,127.1)========= ($1,914.3)========= - 88 - COMCAST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF STOCKHOLDERS' EQUITY REGISTRANT UNCONSOLIDATED (IN THOUSANDS, EXCEPT NUMBER PARENT ONLY) CONDENSED STATEMENT OF SHARESCASH FLOWS (In millions) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT 1997 Year Ended December 31, 1995............ 50,000,000 $ 500 $ 665,107 1996 1995 ERATING ACTIVITIES Net loss................................................... ($238.7) (171,444$53.5) ($(1,26943.9) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changesAdjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................ 7.0 8.9 6.5 Non-cash interest expense, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 ........................... 106.8 136.2 105.5 Equity in net losses (25,056income) of affiliates.............. 275.2 (15.2) (9282.7) -- -- Extraordinary items...................................... 2.8 0.6 Deferred income taxes and other.......................... 88.9 68.4 41.1 242.0 144.8 107.1 Increase in other current assets......................... (Decrease) increase in accrued interest and other current liabilities.............................. (0.2) (79.9) (1.5) 42.8 (1.2) 36.7 Net income................. -- -- -- 278,605 -- -- -- cash provided by operating activities............ 161.9 186.1 142.6 OP FINANCING ACTIVITIES Proceeds from borrowings................................... 800.9 Retirement and repayment of debt .......................... (59.5) (300.9) Issuance of preferred stock................................ 500.0 Issuances (repurchases) of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- ............... 470.2 (894175.9) -- -- Loss on investments(7.1) Dividends.................................................. (34.0) (26.8) (22.4) Other...................................................... 12.7 43.0 52.5 Net cash provided by (used in) financing activities.. 889.4 (159.7) 523.0 INVESTING ACTIVITIES Net transactions with affiliates........................... (1,026.4) 9.5 (641.7) Capital expenditures....................................... (18.6) (20.8) (11.9) Other...................................................... (3.2) (13.0) (15.7) Net cash used in investing activities................ (1,048.2) (24.3) (669.3) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................... 3.1 2.1 (3.7) CASH AND CASH EQUIVALENTS, net... -- -- -- -- (106) -- -- December 31beginning of year.................. 9.7 7.6 11.3 CASH AND CASH EQUIVALENTS, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 end of year........................ $1,393 12.8 $1,302,806 $ 547,783 9.7 $(7,998) 3,518,100 $(88,726) =========== ====== ========== =7.6 ======== ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. - 89 - COMCAST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998 1997 1997, 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Operating activities: Net income.............................................. $ 383,659 $ 278,605 $ 146,388 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes in operating assets and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent In millions) Balance at Beginning Effect of the outstanding common stock QVC Additions Charged to Costs and Deductions from Balance at End of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling Year Acquisition Expenses Reserves(A) of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available Year 1997..................................... $97.1 $ $65.4 $47.5 $115.0 1996..................................... 81.3 65.1 49.3 97.1 1995..................................... 11.3 57.8 51.4 39.2 81.3 Allowance for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting Obsolete Electronic Retailing Inventories 1997..................................... $34.7 $ $37.0 $27.2 $44.5 1996..................................... 28.5 29.7 23.5 34.7 1995..................................... 18.4 28.4 18.3 28.5 Allowance for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.Doubtful Accounts <FN>

Operating Income. (418) ---------- 639,802 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) -------- 397,939 -------- 213,491 396,000 ----------- 19,930,000 261,000 ----------- 15,338,000 200,000 ----------- 12,679,000 Other income (expenseexpenses): Interest income.......................................... 30,565 19,379 879 Interest expense......................................... ..................... (14,4872,367,000) (10,2702,817,000) (2,3263,247,000) OtherInvestment and interest income....... 430,000 ----------- 399,000 ----------- 638,000 ----------- Total other income (expenses), net............................................... ............................... (1,937,000) (2,418,000) (2,609,000) Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 taxes............. 17,993,000 12,920,000 10,070,000 Income tax expense......................................... provision................... 7,227,000 4,859,000 3,982,000 ----------- ----------- ----------- Net income................................................. Net income per share: (206,572) ---------- ........................... $10,766,000 $ 383,659 ========== (151,456) --------- 8,061,000 $ 278,605 ========= (66,317) -------- $146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ========== $ 2.66 ========== $ 2.01 ========= $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The accompanying notes are an integral part of the consolidated financial statements. 30 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) 6,088,000 =========== =========== =========== Basic earnings per share............. $ 1.29 $ 0.94 $ 0.70 =========== =========== =========== Diluted earnings per share........... $ 1.29 $ 0.94 $ 0.70 =========== =========== =========== Weighted average shares outstanding: Basic................................ 8,334,420 8,618,053 8,683,601 Diluted.............................. 8,349,599 8,620,511 8,706,011 The accompanying notes are an integral part of these consolidated financial statements. CHEROKEE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Common Stock Notes ------------------- Additional Receivable Par Paid-in Accumulated from Shares Value Capital Deficit Stockholder Total --------- -------- ---------- ------------ ----------- ------------ Balance at January 31, 1998................... 8,612,657 $173,000 $ -- $(23,806,000) $(2,013,000) $(25,646,000) Exercise of director warrants and employee stock options.......... 92,771 1,000 667,000 -- -- 668,000 Cash dividend distributions.......... -- -- (667,000) (10,210,000) -- (10,877,000) Utilization of pre- bankruptcy NOL carryforwards.......... -- -- -- 9,000 -- 9,000 Interest on note receivable from stockholder............ -- -- -- -- (121,000) (121,000) Net income for the year ended January 30, 1999................... -- -- -- 6,088,000 -- 6,088,000 --------- -------- --------- ------------ ----------- ------------ Balance at January 30, 1999................... 8,705,428 174,000 -- (27,919,000) (2,134,000) (29,879,000) Purchase and retirement of treasury shares..... (233,000) (4,000) (1,903,000) (1,907,000) Cash dividend distributions.......... (2,176,000) (2,176,000) Forgiveness of note receivable from stockholder............ 1,890,000 1,890,000 Interest on note receivable from stockholder............ (121,000) (121,000) Net income for the year ended January 29, 2000................... 8,061,000 8,061,000 --------- -------- --------- ------------ ----------- ------------ Balance at January 29, 2000................... 8,472,428 170,000 -- (23,937,000) (365,000) (24,132,000) Exercise of director warrants and employee stock options.......... 8,277 -- -- 12,000 -- 12,000 Purchase and retirement of treasury shares..... (249,000) (5,000) (2,096,000) (2,101,000) Stock option tax benefit................ -- -- -- 20,000 -- 20,000 Interest on note receivable from stockholder............ (8,000) (8,000) Repayment of note receivable from stockholder............ 373,000 373,000 Net income for the year ended February 3, 2001................... 10,766,000 10,766,000 Balance at February 3, --------- -------- --------- ------------ ----------- ------------ 2001................... 8,231,705 $165,000 $ -- $(15,235,000) $ -- $(15,070,000) ========= ======== ========= ======= ========= =========== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ============ The accompanying notes are an integral part of the these consolidated financial statements. DIAMOND OFFSHORE DRILLING, CHEROKEE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31Year Ended February 3, 1998 1997 1996 Year Ended January 29, Year Ended January 30, 2001 ------------ 2000 ------------ 1999 ------------ Operating activities: activities Net income.............................................. .......................... $ 383,659 10,766,000 $ 278,605 8,061,000 $ 146,388 6,088,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale ..... 46,000 61,000 32,000 Amortization of assets............................... (418) (1,014) (35,122) Gain on sale trademarks........ 396,000 260,000 200,000 Amortization of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) securitization fees............................. 206,000 206,000 206,000 Amortization of debt issuance costs.................. 521 456 2,570 discount..... 2,367,000 2,817,000 3,247,000 Interest income on note receivable from stockholder................. (8,000) (121,000) (121,000) Deferred taxes.................... 1,170,000 2,012,000 3,197,000 Forgiveness of note receivable.... -- 1,890,000 -- Changes in operating current assets and liabilities: Accounts receivable.................................. Receivables..................... (26,1531,052,000) (32,9591,609,000) (64,715885,000) Rig inventory and supplies Inventories..................... -- -- 45,000 Prepaids and other current assets............................................. ......................... (21,9119,000) 1,000 191,000 Accounts payable................ (3,319298,000) 320,000 (2,789365,000) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs Accrued payroll and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, netexpenses....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.909,000 531,000 1,233,000

Operating Income. 480,349 -------- 75,273 171,680 -------- 34,944 -------- 652,029 -------- 110,217 Other Income and Deductions (418net of taxes)............. 2,242 3,837 6,079 Income Before Interest -------- -------- -------- -------- Charges.................... Interest Charges: 77,515 38,781 116,296 Long-term debt............ 26,499 13,424 39,923 Other..................... 7,160 1,224 8,384 Allowance for borrowed funds used during construction (credit).... (933) ---------- 639,802 ---------- 568,999 (1,014390) --------- 536,220 --------- 419,873 (35,1221,323) -------- 397,939 -------- 213,491 Other income (expense): Interest income.......................................... 30,565 19,379 879 Interest expense......................................... (14,487) (10,270) (2,326) Other, net............................................... Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 -------- 212,705 Income tax expense......................................... -------- Total interest charges.. Net income................................................. Net income per share: (206,572) ---------- Income.................. 32,726 -------- 44,789 14,258 -------- 24,523 -------- 46,984 -------- 69,312 Preferred and Preference Dividends.................. 3,355 957 4,312 Earnings Applicable to -------- -------- -------- -------- Common Stock............... Average Common Shares $ 383,659 ========== (151,456) --------- $ 278,605 ========= (66,317) -------- $146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ==41,434 ======== $ 2.66 ==23,566 ======== $ 2.01 ========= $ 1.93 =65,000 ======== Outstanding................ 63,164 61,902 758 125,824 Earnings per Average Common Share Outstanding.......... $ 1.18 ======== 0.66 $ 1.18 ======== 0.38 $ 0.52 Dividends Declared per Common shares............................................ 138,020 138,560 124,462 Dilutive potential common shares......................... Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== Share............... $ 0.515 $ 0.39 $ 0.52 The accompanying notes Notes to Unaudited Pro Forma Combined Financial Information are an integral part of the consolidated financial statementsthis statement and should be read in their entirety. 30 DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS 61 UNAUDITED PRO FORMA COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =========== ====== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. 1995 WESTERN RESOURCES KCPL PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- ----------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues: Electric................. $383,659 1,145,895 $278,605 885,955 $ $146,388 2,031,850 Natural gas.............. 426,176 -- 426,176 ---------- -------- ---- ---------- Total operating revenues............ 1,572,071 885,955 2,458,026 ---------- -------- ---- ---------- Operating Expenses: Fuel..................... 231,419 139,371 370,790 Power purchased.......... 15,739 38,783 54,522 Natural gas purchases.... 263,790 -- 263,790 Operations and maintenance............. 425,920 257,038 682,958 Depreciation and amortization............ 156,915 109,832 266,747 Amortization of phase-in revenues................ 17,545 -- 17,545 Income taxes............. 88,520 77,062 165,582 General taxes............ 96,839 96,821 193,660 ---------- -------- ---- ---------- Total operating expenses............ 1,296,687 718,907 2,015,594 ---------- -------- ---- ---------- Operating Income........... 275,384 167,048 442,432 Other comprehensive gains Income and Deductions (losses), net of taxtaxes)............ 25,907 10,060 35,967 ---------- -------- ---- ---------- Income Before Interest Charges................... 301,291 177,108 478,399 Interest Charges: Foreign currency translation gain Long-term debt........... 95,962 52,184 148,146 Other.................... 27,859 4,301 32,160 Allowance for borrowed funds used during construction (losscredit).................. ... (2914,206) (894) 341 Unrealized holding loss on investments.................... (5,7971,963) (1066,169) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- ---------- -------- ---- ---------- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ interest charges............. 119,615 ---------- 54,522 -------- ---- 174,137 ---------- Net Income................. 181,676 122,586 304,262 Preferred and Preference Dividends................. 13,419 4,011 17,430 ---------- -------- ---- ---------- Earnings Applicable to Common Stock.............. $ 168,257 $377,589 $277,605 $146,729 118,575 $ $ 286,832 ========== ======== ==== ========== Average Common Shares Outstanding............... 62,157 61,902 758 124,817 Earnings per Average Common Share Outstanding......... $ 2.71 $ 1.92 $ 2.30 Dividends Declared per Common Share.............. $ 2.02 $ 1.54 $ 2.04 The accompanying notes Notes to Unaudited Pro Forma Combined Financial Information are an integral part of the consolidated financial statementsthis statement and should be read in their entirety. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS 62 UNAUDITED PRO FORMA COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS) INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 1994 WESTERN RESOURCES KCPL PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- ----------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating activitiesRevenues: Net income.............................................. Electric................. $1,121,781 $868,272 $ 383,659 $ 278,605 $ 146,388 Adjustments to reconcile net income to net cash provided by $1,990,053 Natural gas.............. Total operating activities496,162 ---------- -- -------- ---- 496,162 ---------- revenues............ Operating Expenses: 1,617,943 ---------- 868,272 -------- ---- 2,486,215 ---------- Fuel..................... 234,328 135,106 369,434 Power purchased.......... 15,438 33,929 49,367 Natural gas purchases.... Operations and maintenance............. 312,576 416,577 -- 274,772 312,576 691,349 Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) ............ 151,630 107,463 259,093 Amortization of debt issuance costs.................. 521 456 2,570 Changes phase-in revenues................ 17,544 -- 17,544 Income taxes............. 95,622 70,949 166,571 General taxes............ Total operating assets and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa (Off-Shore) Limited ("Arethusa"). Non-cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.104,682 ---------- 96,362 -------- ---- 201,044 ----------

Operating Income. (418) ---------- 639,802 ---------- 568,999 (1,014) --------- 536,220 --------- 419,873 (35,122) -------- 397,939 -------- 213,491 Other income (expense): -------- 94,972 -------- 44,086 -------- -------- 116,899 -------- 1,976 -------- -------- 71,167 -------- 20,400 -------- Interest income.......................................... 30,565 19,379 879 ....................... 441 325 275 Interest expense......................................... ...................... (14,48725,619) (10,2703,215) (2,3262,767) Other, net............................................... Gain on sale of land.................. 1,329 -- -- Other income.......................... Income (loss) before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 taxes..... 1,123 -------- 212,705 (22,726) -------- 21,360 596 -------- (2,294) -------- (318) 600 -------- (1,892) -------- 18,508 Income tax expense......................................... Net income................................................. expense (note 3)............. Net income (loss)..................... 8,208 -------- 13,152 3,246 -------- (3,564) 6,992 -------- 11,516 Less: Dividends on and accretion of preferred stocks..................... (10,966) (57) -- Net income (loss) available to common -------- -------- -------- shareholders......................... Net income (loss) per common share: (206,572) ---------- $ 383,659 2,186 ======== $ (3,621) ======== $ 11,516 ======== (151,456notes 2 & 16) --------- Basic................................. Diluted............................... Weighted average number of common shares $ 278,605 .58 ======== $ .55 ======== (66,3171.49) -------- $146,388 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: $ 2.78 ==(1.49) ======== $ 2.66 ==.13 ======== $ 2.01 =.12 ======== $ 1.93 ========= $ 1.18 ======== $ 1.18 ======== Common shares............................................ 138,020 138,560 124,462 Dilutive potential and common shares......................... Total weighted average shares share equivalents outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== The : Basic................................. 3,767 9,342 9,348 Diluted............................... 3,975 9,342 9,772 See accompanying notes are an integral part of the to consolidated financial statements. 30 DIAMOND OFFSHORE DRILLING, INC. TUESDAY MORNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERSSHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =========== ====== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Operating activities: Net income.............................................. $ 383,659 $ 278,605 $ 146,388 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... (418) (1,014) (35,122) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes in operating assets and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 Other, net.............................................. (1,301) (335) 365 Net cash provided by operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... (224,474) (281,572) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... (167,818) (351,682) 5,200 Net cash used in investing activities........... (391,281) (705,967) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years Years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Non(In thousands) Junior Perpetual Preferred Common Stock Additional Stock Retained Treasury Stock Total --------------- Paid-cash financing activities for the year ended In ------------- Earnings -------------- Shareholders' Shares Amount Capital Shares Amount (Deficit) Shares Amount Equity ------- ------ ---------- ------ ------ --------- ------ ------- ------------- Balance at December 31, 1996 included 1995................... 12,216 $ 122 $550.7 million for the issuance of 35.8 million shares of common stock and the assumption of stock options for the purchase of 1.0 million shares 18,236 Net income.............. -- -- -- Shares exercised in connection with the merger between the Company and Arethusa Employee Stock Option 382 -- -- -- -- -- 383 (Off-Shore19) Limited -- -- -- -- -- ("Arethusa"). Non-cash investing activities for the year ended 19) ------- --- ------ --------- ---- ------- --------- 18,599 -- -- 58,834 (412) (2,028) 75,528 -- -- -- (3,564) -- -- (3,564) Plan................... 56 1 Treasury shares sold in connection with Stock Purchase Plan.......... -- -- (412) $(2,028) $ 63,648 -- $ -- $ 47,318 -- -- 11,516 -- -- 11,516 Balance at December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, ------- ----- 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa (see Note 2) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.................... 12,272 123 Net loss................ -- -- 77 1 519 -- -- -- -- -- 520 86 1 416 -- -- -- -- -- 417

Operating Income. 92.7 -------- 1,050.1 -------- 122.6 63.7 -------- 1,008.2 -------- 98.2 294.0 -------- 3,250.4 -------- 351.8 199.9 -------- 3,104.5 -------- 285.3 Interest expense, net................................. (41819.7) ---------- 639,802 ---------- 568,999 (1,01411.9) --------- 536,220 --------- 419,873 (35,12256.8) -------- 397,939 -------- 213,491 Other (31.9) Miscellaneous income (expense): Interest income.......................................... 30,565 19,379 879 Interest expense......................................... (14,487) (10,270) (2,326) Other), net............................................... ................... Income before income tax expense........................... 5,154 ---------- 590,231 1,079 --------- 430,061 661 taxes............................ 0.1 -------- 212,705 103.0 -- -------- 86.3 0.8 -------- 295.8 0.9 -------- 254.3 Income tax expense......................................... .................................... Net income................................................. Net income per share............................................ EARNINGS PER SHARE: (206,57238.1) ---------- -------- $ 383,659 ==64.9 ======== (151,45631.9) --------- -------- $ 278,605 =54.4 ======== (66,317109.4) -------- $146,388 $ 186.4 ======== Basic.................................................... Diluted.................................................. Weighted average shares outstanding: (94.1) -------- $ 2.78 ==160.2 ======== Net income Basic............................................ $ 2.66 ==0.74 $ 0.62 $ 2.12 $ 1.79 Diluted.......................................... $ 0.72 $ 0.60 $ 2.07 $ 1.73 Cash dividends declared per common share.............. $ 0.15 $ 0.15 $ 0.45 $ 0.45 Average Common Shares -- Basic........................ 87.9 87.9 87.9 89.5 Average Common Shares -- Diluted...................... 90.0 90.6 90.0 92.5 The accompanying notes to consolidated condensed financial statements are an integral part of the above statements. ITT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE) SEPTEMBER 30,2000 DECEMBER 31, 1999 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents.............................. $ 247.1 $ 181.7 Receivables, net....................................... 866.5 834.7 Inventories, net....................................... 551.7 545.8 Other current assets................................... 75.4 66.1 Total current assets.............................. 1,740.7 1,628.3 Plant, property, and equipment, net......................... 794.6 847.0 Deferred U.S. income taxes.................................. 374.2 373.6 Goodwill, net............................................... 1,279.9 1,206.0 Other assets................................................ 451.2 474.9 Total assets...................................... $4,640.6 ======== $ 2.01 =$4,529.8 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $ 1.93 ========= 371.8 $ 1.18 ======== $ 1.18 ======== 383.1 Accrued expenses....................................... 770.3 753.1 Accrued taxes.......................................... Notes payable and current maturities of long-term 384.4 364.9 debt.................................................. 735.9 609.3 Total current liabilities......................... 2,262.4 2,110.4 Pension and postretirement benefits......................... 361.5 382.1 Long-term debt.............................................. 406.8 478.8 Other liabilities........................................... 455.9 459.4 Total liabilities................................. 3,486.6 3,430.7 Shareholders' Equity: Cumulative Preferred Stock: Authorized 50,000,000 shares, No par value, none issued..................... -- -- Common stock: Authorized 200,000,000 shares............................................ 138,020 138,560 124,462 Dilutive potential common , $1 par value per share Outstanding 87,914,595 shares......................... ............. 87.9 87.9 Retained earnings...................................... 1,255.0 1,113.8 Accumulated other comprehensive income (loss): Unrealized (loss) on investment securities........ (0.9) (0.7) Cumulative translation adjustments................ (188.0) (101.9) Total weighted average shares outstanding........ 9,876 ---------- 147,896 ========== 8,929 --------- 147,489 ========= -- -------- 124,462 ======== shareholders' equity................... 1,154.0 1,099.1 Total liabilities and shareholders' equity... $4,640.6======== $4,529.8======== The accompanying notes to consolidated condensed financial statements are an integral part of the consolidated financial statementsabove balance sheets. 30 DIAMOND OFFSHORE DRILLINGITT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ACCUMULATED RETAINED OTHER COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE TREASURY STOCK --------------------- PAID-IN (ACCUMULATED GAINS -------------------- SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) SHARES AMOUNT December 31, 1995............ 50,000,000 $ 500 $ 665,107 $(171,444) $(1,269) -- $ -- Net income................. -- -- -- 146,388 -- -- -- Merger with Arethusa....... 17,893,344 179 550,507 -- -- -- -- Stock options exercised.... 460,065 5 4,418 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- 341 -- -- December 31, 1996............ 68,353,409 684 1,220,032 (25,056) (928) -- -- Net income................. -- -- -- 278,605 -- -- -- Issuance of common stock... 1,250,000 12 82,270 -- -- -- -- Two-for-one stock split.... 69,649,474 696 -- (696) -- -- -- Dividends to stockholders............. -- -- -- (19,503) -- -- -- Stock options exercised.... 57,065 1 410 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (894) -- -- Loss on investments, net... -- -- -- -- (106) -- -- December 31, 1997............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- Net income................. -- -- -- 383,659 -- -- -- Treasury stock purchases... -- -- -- -- -- 3,518,100 (88,726) Dividends to stockholders............. -- -- -- (69,226) -- -- -- Stock options exercised.... 23,687 -- 94 -- -- -- -- Exchange rate changes, net...................... -- -- -- -- (291) -- -- Loss on investments, net... -- -- -- -- (5,779) -- -- December 31, 1998............ 139,333,635 $1,393 $1,302,806 $ 547,783 $(7,998) 3,518,100 $(88,726) =========== ====== ========== ========= ======= ========= ======== TOTAL STOCKHOLDERS' EQUITY December 31, 1995............ $ 492,894 Net income 146,388 Merger with Arethusa 550,686 Stock options exercised.... 4,423 Exchange rate changes, net...................... 341 December 31, 1996 1,194,732 Net income 278,605 Issuance of common stock... 82,282 Two-for-one stock split.... -- Dividends to stockholders (19,503) Stock options exercised.... 411 Exchange rate changes, net...................... (894) Loss on investments, net... (106) December 31, 1997 1,535,527 Net income 383,659 Treasury stock purchases (88,726) Dividends to stockholders (69,226) Stock options exercised.... 94 Exchange rate changes, net...................... (291) Loss on investments, net... (5,779) December 31, 1998 $1,755,258 ========== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 1997 1996 Net income.................................................. $383,659 $278,605 $146,388 Other comprehensive gains (losses), net of tax: Foreign currency translation gain (loss).................. (291) (894) 341 Unrealized holding loss on investments.................... (5,797) (106) -- Reclassification adjustment for losses included in net income................................................. 18 -- -- Total other comprehensive income (loss)........... (6,070) (1,000) 341 Comprehensive income........................................ $377,589 $277,605 $146,729 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDSMILLIONS) YEAR (UNAUDITED) NINE MONTHS ENDED DECEMBER 31SEPTEMBER 30, 1998 1997 1996 Operating activities: ----------------- 2000 1999 ------- ------- OPERATING ACTIVITIES Net income.............................................. .................................................. $ 383,659 186.4 $ 278,605 $ 146,388 160.2 Adjustments to reconcile net income to net cash provided by operating activitiesNet income: Depreciation and amortization........................ 130,271 108,335 75,767 Gain on sale of assets............................... Depreciation........................................... 113.8 111.1 Amortization........................................... 37.0 25.1 Payments made for restructuring............................. (41818.5) (1,01441.7) Change in receivables, inventories, accounts payable, and accrued expenses.......................................... (59.9) (35,12294.3) Gain on sale of investment securities................ (1,116) (1,529) -- Deferred tax provision............................... 61,403 34,650 17,278 Accretion of discount on investment securities....... (14,568) (10,505) (159) Amortization of debt issuance costs.................. 521 456 2,570 Changes Change in operating assets accrued and liabilities: Accounts receivable.................................. (26,153) (32,959) (64,715) Rig inventory and supplies and other current assets............................................. (21,911) (3,319) (2,789) Other assets, non-current............................ (705) 949 (1,747) Accounts payable and accrued liabilities............. 40,534 15,256 22,155 Taxes payable........................................ (3,867) 3,893 46,149 Other liabilities, non-current....................... 835 3,885 4,093 deferred taxes........................ 3.7 34.4 Other, net.............................................. .................................................. (1,30123.4) (3352.6) 365 ------- ------- Net cash provided by -- operating activities....... 547,184 396,368 210,233 Investing activities: Cash acquired in the merger with Arethusa............... -- -- 20,883 Capital expenditures.................................... ....................... 239.1 192.2 INVESTING ACTIVITIES ------- ------- Additions to plant, property, and equipment................. (224,47495.5) (281,572138.6) (267,000) Acquisition of drilling rigs and related equipment...... -- (80,990) -- Proceeds from the sale of assets............................ 1,011 8,277 40,589 Net change in marketable securities..................... 43.7 71.3 Acquisitions................................................ (167,818122.8) (351,682232.6) 5,200 Other, net.................................................. (2.4) 5.8 ------- ------- Net cash used in -- investing activities........... ....................... (391,281177.0) (705,967294.1) (200,328) Financing activities: Reacquisition of common stock........................... (88,726) -- -- Payment of dividends.................................... (69,226) (19,503) -- Issuance of common stock................................ -- 82,282 -- Debt (repayments) borrowings, net....................... -- (73,000) 5,523 Issuance of convertible subordinated notes.............. -- 400,000 -- Debt issuance costs..................................... -- (6,062) (2,570) Proceeds from stock options exercised................... 289 660 5,016 Net cash (used in) provided by financing activities.................................... (157,663) 384,377 7,969 Net change in cash and cash equivalents................... (1,760) 74,778 17,874 Cash and cash equivalents, beginning of year 102,958 28,180 10,306 Cash and cash equivalents, end of year.................. $ 101,198========= $ 102,958========= $ 28,180========= The accompanying notes are an integral part of the consolidated financial statements. DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Diamond Offshore Drilling, Inc. (the "Company") was incorporated in Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation of which the Company had been a wholly owned subsidiary prior to the initial public offering in October 1995 (the "Common Stock Offering"), owns 51.6 percent of the outstanding common stock of the Company (see Note 3). The Company, through wholly owned subsidiaries, engages in the worldwide contract drilling of offshore oil and gas xxxxx and is a leader in deep water drilling. The fleet is comprised of 30 semisubmersible rigs, 15 xxxx-up rigs, and one drillship. Principles of Consolidation The consolidated financial statements include the accounts of the Company after elimination of significant intercompany transactions and balances. Cash and Cash Equivalents FINANCING ACTIVITIES ------- ------- Short-term, highly liquid investments that have an original maturity of three months or less which are considered part of the Company's cash management activities, rather than part of its investing activities, are considered cash equivalents. Marketable Securities The Company's investments are classified as available for sale and stated at fair value under the terms of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, any unrealized gains and losses, net of taxes, are reported in the Consolidated Balance Sheets in "Accumulated other comprehensive losses" until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in the Consolidated Statements of Income in "Interest income." The cost of debt securities sold is based on the specific identification method and the cost of equity securities sold is based on the average cost method. Realized gains or losses and declines in value, if any, judged to be other than temporary are reported in the Consolidated Statements of Income in "Other income (expense)." Supplementary Cash Flow Information Cash payments made for interest on long-term debt, including commitment fees, during the years ended December 31, 1998, 1997 and 1996 were $15.0 million, $8.7 million and $3.5 million, respectively. Cash payments made for income taxes during the years ended December 31, 1998, 1997, and 1996 were $151.3 million, $112.1 million, and $3.9 million, respectively. Nonnet........................................ 72.0 210.3 Long-cash financing activities for the year ended December 31, 1996 included $550.7 million for the issuance of 35.8 million shares term debt repaid....................................... (21.2) (70.6) Long-term debt issued....................................... 0.1 1.4 Repurchase of common stock and the assumption of stock options for the purchase of 1.0 million shares in connection with the merger between the Company and Arethusa stock.................................. (Off-Shore28.8) Limited ("Arethusa"). Non-394.3) Dividends paid.............................................. (39.6) (42.4) Other, net.................................................. 18.8 26.7 ------- ------- Net cash investing activities for the year ended December 31, 1996 included $532.9 million of net assets acquired in the merger with Arethusa -- financing activities....................... 1.3 (see Note 2). Rig Inventory and Supplies Inventories primarily consist of replacement parts and supplies held for use in the operations of the Company. Inventories are stated at the lower of cost or estimated value. 34 Drilling and Other Property and Equipment Drilling and other property and equipment is carried at cost. Maintenance and repairs are charged to income currently while replacements and betterments are capitalized. Costs incurred for major rig upgrades are accumulated in construction work in progress, with no depreciation recorded on the additions, until the month the upgrade is completed and the rig is placed in service. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in the results of operations. Depreciation is provided on the straight-line method over the remaining estimated useful lives from the date the asset is placed in service. The Company believes that certain offshore drilling rigs, due to their upgrade and design capabilities and their maintenance history, have an operating life in excess of their depreciable life as originally assigned. For this reason, a change in accounting estimate, effective January 1, 1996, increased the estimated useful lives for certain classes of offshore drilling rigs. As compared to the original estimate of useful lives, the effect of such change reduced depreciation expense and increased net income for the year ended December 31, 1996 by approximately $8.5 million and $5.5 million 268.9) ------- ------- EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS.......... ($0.04 per share), respectively. The estimated useful lives of the Company's offshore drilling rigs, after the change in estimate, range from 10 to 25 years. Other property and equipment is estimated to have useful lives ranging from 3 to 10 years. Capitalized Interest Interest cost for construction and upgrade of qualifying assets is capitalized. During the years ended December 31, 1998, 1997, and 1996, the Company incurred interest cost, including amortization of debt issuance costs, of $15.5 million, $14.7 million, and $6.3 million, respectively. Interest cost capitalized during 1998, 1997, and 1996 was $1.0 million, $4.4 million, and $4.0 million, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill Goodwill from the merger with Arethusa 14.3) (see Note 214.4) is amortized on a straight-line basis over 20 years. Amortization charged to operating expense during the years ended December 31, 1998, 1997, and 1996 totaled $6.5 million, $6.6 million, and $4.5 million, respectively. Debt Issuance Costs Debt issuance costs are included in the Consolidated Balance Sheets in "Other assets" and are amortized over the term of the related debt. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Except for selective dividends, the Company's practice prior to 1997 was to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no additional U.S. taxes were provided on earnings of these non-U.S. subsidiaries. However, beginning in 1997, the Company changed its practice and intends to repatriate its post-1996 earnings in the foreseeable future. As a result, beginning January 1, 1997, the Company has accrued U.S. taxes on all its post-1996 undistributed non-U.S. earnings. The Company's non-U.S. income tax liabilities are based upon the results of operations of the various subsidiaries and foreign branches in those jurisdictions in which they are subject to taxation.NET CASH -- DISCONTINUED OPERATIONS......................... 16.3 (276.8) ------- -------