ITEM 3. LEGAL PROCEEDINGS
LITIGATION
In July through October 1998, eight lawsuits were filed against the Company and Thomas G. Finck and Peter Rugg, in their capacities as Chairman and Chief Executive Officer and Chief Financial Officer, respectively. Each case was filed on behalf of a putative class of persons and/or entities who purchased the Company's securities between March 30, 1998, and July 17, 1998, inclusive, and seeks recovery of compensatory damages, fees and costs. The cases allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder in connection with disclosures concerning the Company's properties, operations, and value relating to a prospective sale of the Company or of all or a part of its assets. Additionally, one case alleges negligent misrepresentation and seeks recovery of punitive damages. Each lawsuit was filed in the United States District Court for the Eastern District of Texas, Texarkana Division.
On September 21, 1998, a motion for consolidation and for appointment as lead plaintiffs and for approval of selection of lead counsel was filed. With the exception of the request for consolidation, which has been agreed to, the motion is presently pending. Also pending is the Company's motion to dismiss or transfer for improper venue. The consolidated action is styled In re: Triton Energy Limited Securities Litigation. The Company believes it has meritorious defenses to these claims and intends to vigorously defend these actions. No discovery has been taken at this time, however, and the ultimate outcome is not currently predictable. There can be no assurance that the litigation will be resolved in the Company's favor. An adverse result could have a material adverse effect on the Company's financial position or results of operations.
During the quarter ending September 30, 1995, the United States Environmental Protection Agency (the "EPA") and Justice Department advised the Company that one of its domestic oil and gas subsidiaries, as a potentially responsible party for the clean-up of the Monterey Park, California, Superfund site operated by Operating Industries, Inc., could agree to contribute approximately $2.8 million to settle its alleged liability for certain remedial tasks at the site. The offer did not address responsibility for any groundwater remediation. The subsidiary was advised that if it did not accept the settlement offer, it, together with other potentially responsible parties, may be ordered to perform or pay for various remedial tasks. After considering the cost of possible remedial tasks, its legal position relative to potentially responsible parties and insurers, possible legal defenses and other factors, the subsidiary declined to accept the offer.
In October 1997, the EPA advised the Company that the estimated cost of the clean-up of the site would be approximately $217 million to be allocated among the 280 known operators. The subsidiary's share would be approximately $1 million based upon a volumetric allocation, but there can be no assurance that any allocation of liability to the subsidiary would be made on a volumetric basis.
On August 22, 1997, the Company was sued in the Superior Court of the State of California for the County of Los Angeles, by David A. Hite, Nordell International Resources Ltd., and International Veronex Resources, Ltd. The Company and the plaintiffs were adversaries in a 1990 arbitration proceeding in which the interest of Nordell International Resources Ltd. in the Enim oil field in Indonesia was awarded to the Company (subject to a 5% net profits interest for Nordell) and Nordell was ordered to pay the Company nearly $1 million. The arbitration award was followed by a series of legal actions by the parties in which the validity of the award and its enforcement were at issue. As a result of these proceedings, the award was ultimately upheld and enforced.
The current suit alleges that the plaintiffs were damaged in amounts aggregating $13 million primarily because of the Company's prosecution of various claims against the plaintiffs as well as its alleged misrepresentations, infliction of emotional distress, and improper accounting practices. The suit seeks specific performance of the arbitration award, damages for alleged fraud and misrepresentation in accounting for Enim field operating results, an accounting for Nordell's 5% net profit interest, and damages for emotional distress and various other alleged torts. The suit seeks interest, punitive damages and attorneys fees in addition to the alleged actual damages. On September 26, 1997, the Company removed the action to the United States District Court for the Central District of California. On August 31, 1998, the United States District Court for the Central District of California dismissed all claims asserted by the plaintiffs other than claims for malicious prosecution and abuse of the legal process, which the court held could not be subject to a motion to dismiss. A trial date has been set for April 27, 1999. The Company has filed a writ with the 9th Circuit Court of Appeal requesting that the district court be directed to enter an order granting summary judgment in the Company's favor. The Company believes the remaining claims under the suit are without merit and intends vigorously to defend it.
The Company is also subject to litigation that is incidental to its business.
CERTAIN FACTORS
None of the legal matters described above is expected to have a material adverse effect on the Company's consolidated financial position. However, this statement of the Company's expectation is a forward-looking statement that is dependent on certain events and uncertainties that may be outside of the Company's control. Actual results and developments could differ materially from the Company's expectation, for example, due to such uncertainties as jury verdicts, the application of laws to various factual situations, the actions that may or may not be taken by other parties and the availability of insurance. In addition, in certain situations, such as environmental claims, one defendant may be responsible for the liabilities of other parties. Moreover, circumstances could arise under which the Company may elect to settle claims at amounts that exceed the Company's expected liability for such claims in an attempt to avoid costly litigation. Judgments or settlements could, therefore, exceed any reserves.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company during the fourth quarter of the year ended December 31, 1998, to security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ordinary Shares - ----------------
Triton's ordinary shares are listed on the New York Stock Exchange and are traded under the symbol OIL. Set forth below are the high and low closing sales prices of Triton's ordinary shares as reported on the New York Stock Exchange Composite Tape for the periods indicated:
Triton has not declared any cash dividends on its ordinary shares since fiscal 1990. The holders of ordinary shares are entitled to receive such dividends as are declared by the Board of Directors. Under applicable corporate law, the Company may pay dividends or make other distributions to its shareholders in such amounts as appear to the directors to be justified by the profits of the Company or out of the Company's share premium account if the Company has the ability to pay its debts as they come due.
The Company's current intent is to retain earnings for use in the Company's business and the financing of its capital requirements. The payment of any future cash dividends on the ordinary shares is necessarily dependent upon the earnings and financial needs of the Company, along with applicable legal and contractual restrictions. Triton is prohibited from paying cash dividends on the ordinary shares under its credit facilities. In addition, the Shareholders Agreement between the Company and HM4 Triton provides that for so long as HM4 Triton and its affiliates own a certain number of ordinary shares (assuming conversion of all 8% Preference Shares held by HM4 Triton and its affiliates), Triton cannot pay a dividend on the ordinary shares without HM4 Triton's consent. Finally, the terms of the 8% Preference Shares and the 5% Preference Shares prohibit the payment of dividends on the ordinary shares unless full cumulative dividends on all such outstanding preference shares have been paid in full or set aside for payment.
At March 17, 1999, there were 4,212 record holders of the Company's ordinary shares.
Preference Shares - ------------------
As of March 17, 1999, the Company had outstanding 209,639 shares of its 5% Preference Shares and 5,000,000 shares of its 8% Preference Shares. Each 5% Preference Share may be converted into one Triton ordinary share and bears a cash dividend, which has priority over dividends on Triton's ordinary shares, equal to 5% per annum on the redemption price of $34.41 per share, payable semi-annually on March 30 and September 30 of each year. The 5% Preference Shares have priority over Triton ordinary shares upon liquidation, and may be redeemed at Triton's option at any time for cash equal to the redemption price. Any shares of 5% Preference Shares that remain outstanding on March 30, 2004, must be redeemed at the redemption price, either for cash or, at the Company's option, for Triton ordinary shares. See note 13 of Notes to Consolidated Financial Statements.
Each 8% Preference Share may be converted into four Triton ordinary shares and bears an annual dividend equal to 8% on the redemption price of $70 per share, payable for each semi-annual period ending June 30 and December 30, commencing June 30, 1999. At the Company's option, dividends may be paid in cash or by the issuance of additional whole shares of 8% Preference Shares. If a dividend is to be paid in additional shares, the number of additional shares to be issued in payment of the dividend will be determined by dividing the amount of the dividend by $70, with amounts in respect of any fractional shares to be paid in cash. Holders of 8% Preference Shares are entitled to vote with the holders of ordinary shares on all matters submitted to the shareholders of the Company for a vote, with each 8% Preference Share entitling its holder to a number of votes equal to the number of ordinary shares into which it could be converted at that time. The 8% Preference Shares can be redeemed by the Company commencing September 30, 2001, but only if the market value of the ordinary shares meets certain targets at the time of redemption (but if the Company redeems any shares, it must redeem all of the shares). Under the provisions of the Company's Articles of Association, the terms of the 8% Preference Shares can be amended with the approval of the holders of at least two-thirds of the 8% Preference Shares voting separately as a class.
Pursuant to the Shareholders Agreement between the Company and HM4 Triton, in September 1998, the size of the Company's Board of Directors was set at ten, and HM4 Triton exercised its right to designate four out of such ten directors. The Shareholders Agreement provides that, in general, for so long as the entire Board of Directors consists of ten members, HM4 Triton (and its designated transferees, collectively) may designate four nominees for election to the Board (with such number of designees increasing or decreasing proportionately with any change in the total number of members of the Board and with any fractional directorship rounded up to the next whole number). The right of HM4 Triton (and its designated transferees) to designate nominees for election to the Board will be reduced if the number of ordinary shares held by HM4 Triton and its affiliates (assuming conversion of 8% Preference Shares into ordinary shares) represents less than certain specified percentages of the number of ordinary shares (assuming conversion of 8% Preference Shares into ordinary shares) purchased by HM4 Triton pursuant to the Stock Purchase Agreement.
The Shareholders Agreement also provides that, for so long as HM4 Triton and its affiliates continue to hold a certain minimum number of ordinary shares (assuming conversion of 8% Preference Shares into ordinary shares), the Company may not take certain actions without the consent of HM4 Triton, including (i) amending its Articles of Association or the terms of the 8% Preference Shares with respect to the voting powers, rights or preferences of the holders of 8% Preference Shares, (ii) entering into a merger or similar business combination transaction, or effecting a reorganization, recapitalization or other transaction pursuant to which a majority of the outstanding ordinary shares or any 8% Preference Shares are exchanged for securities, cash or other property, (iii) authorizing, creating or modifying the terms of any series of securities that would rank equal to or senior to the 8% Preference Shares, (iv) selling or otherwise disposing of assets comprising in excess of 50% of the market value of the Company, (v) paying dividends on ordinary shares or other shares ranking junior to the 8% Preference Shares, other than regular dividends on the Company's 5% Preference Shares, (vi) incurring or guaranteeing indebtedness (other than certain permitted indebtedness), or issuing preference shares, unless the Company's leverage ratio at the time, after giving pro forma effect to such incurrence or issuance and to the use of the proceeds, is less than 2.5 to 1, (vii) issuing additional shares of 8% Preference Shares, other than in payment of accumulated dividends on the outstanding 8% Preference Shares, (viii) issuing any shares of a class ranking equal or senior to the 8% Preference Shares, (ix) commencing a tender offer or exchange offer for all or any portion of the ordinary shares or (x) decreasing the number of shares designated as 8% Preference Shares. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Requirements" and notes 2, 13 and 20 of Notes to Consolidated Financial Statements.
Shareholder Rights Plan - -------------------------
The Company has adopted a Shareholder Rights Plan pursuant to which preference share rights attach to all ordinary shares at the rate of one right for each ordinary share. Each right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preference Share, par value $.01 per share ("Junior Preference Shares"), of the Company at a price of $120 per one one-thousandth of a share of such Junior Preference Shares, subject to adjustment. Generally, the rights only become distributable 10 days following public announcement that a person has acquired beneficial ownership of 15% or more of Triton's ordinary shares or 10 business days following commencement of a tender offer or exchange offer for 15% or more of the outstanding ordinary shares; provided that, pursuant to the terms of the plan, any acquisition of Triton shares by HM4 Triton or its affiliates, including Hicks Muse, will not result in the distribution of rights unless and until HM4 Triton's ownership of Triton shares is reduced below certain levels. If, among other events, any person becomes the beneficial owner of 15% or more of Triton's ordinary shares (except as provided with respect to HM4 Triton), each right not owned by such person generally becomes the right to purchase such number of ordinary shares of the Company equal to the number obtained by dividing the right's exercise price (currently $120) by 50% of the market price of the ordinary shares on the date of the first occurrence. In addition, if the Company is subsequently merged or certain other extraordinary business transactions are consummated, each right generally becomes a right to purchase such number of shares of common stock of the acquiring person equal to the number obtained by dividing the right's exercise price by 50% of the market price of the common stock on the date of the first occurrence.
Under certain circumstances, the Company's directors may determine that a tender offer or merger is fair to all shareholders and prevent the rights from being exercised. At any time after a person or group acquires 15% or more of the ordinary shares outstanding (other than with respect to HM4 Triton) and prior to the acquisition by such person or group of 50% or more of the outstanding ordinary shares or the occurrence of an event described in the prior paragraph, the Board of Directors of the Company may exchange the rights (other than rights owned by such person or group which will become void), in whole or in part, at an exchange ratio of one ordinary share, or one one-thousandth of a Junior Preference Share, per right (subject to adjustment). The Company has the ability to amend the rights (except the redemption price) in any manner prior to the public announcement that a 15% position has been acquired or a tender offer has been commenced. The Company will be entitled to redeem the rights at $0.01 a right at any time prior to the time that a 15% position has been acquired. The rights will expire on May 22, 2005, unless earlier redeemed by the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial and oil and gas data on a historical basis. The financial information for 1998 does not reflect the issuance by the Company on January 4, 1999, of 3,177,500 8% Preference Shares for proceeds totaling $218.1 million, net of closing costs. Pro forma total assets and shareholders' equity, as adjusted to give effect to the issuance of the 8% Preference Shares, totaled $974.2 million and $441.9 million at December 31, 1998, respectively. See "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN DEVELOPMENTS --------------------
During 1998 and early 1999, several events had a significant impact on the Company and its financial condition and results of operations. These events are discussed in detail in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report, and are summarized below:
- - February 1998 sale of TPC, a wholly owned subsidiary that held the Company's 9.6% equity interest in the Colombian pipeline company, OCENSA, for net proceeds of $97.7 million.
- - Significantly lower prices for crude oil, resulting in writedowns in June 1998 and December 1998, of the carrying amount of evaluated oil and gas properties in Colombia through the application of the full cost ceiling test limitation, totaling approximately $241 million.
- - July 1998 agreements with ARCO providing financing for the development of the Company's gas reserves on Block A-18 of the Malaysia-Thailand Joint Development Area through (1) the sale to ARCO of one-half of the shares of the subsidiary through which the Company owned its 50% share of Block A-18 for net proceeds of $142 million, which was consummated in August 1998, and (2) the agreement of ARCO to pay the future exploration and development costs attributable to Triton's and ARCO's collective interest in Block A-18, up to $377 million or until first production from a gas field.
- - July 1998 announcement of a plan to restructure operations, reduce overhead costs and substantially scale back exploration-related capital expenditures, including the closing of foreign offices in four countries, the elimination of approximately 41% of the workforce and the relinquishment or disposal of several exploration licenses, resulting in writedowns of assets totaling approximately $77 million and special charges totaling approximately $18 million.
- - August 1998 Stock Purchase Agreement with HM4 Triton, an affiliate of Hicks Muse, which provided for the issuance by the Company of 5,000,000 8% Preference Shares for aggregate gross proceeds of $350 million, completed in two stages in September 1998 and January 1999.
LIQUIDITY AND CAPITAL REQUIREMENTS ----------------------------------
HICKS MUSE TRANSACTION
In August 1998, the Company and HM4 Triton entered into the Stock Purchase Agreement that provided for a $350 million equity investment in the Company. The investment was effected in two stages. At the closing of the first stage in September 1998 (the "First Closing"), the Company issued to HM4 Triton 1,822,500 shares of 8% Preference Shares for $70 per share (for proceeds of $116.8 million, net of transaction costs). Pursuant to the Stock Purchase Agreement, the second stage was effected through a rights offering for 3,177,500 shares of 8% Preference Shares at $70 per share, with HM4 Triton being obligated to purchase any shares not subscribed. At the closing of the second stage, which occurred on January 4, 1999 (the "Second Closing"), the Company issued an additional 3,177,500 8% Preference Shares for proceeds totaling $218.1 million, net of closing costs (of which, HM4 Triton purchased 3,114,863 shares).
CASH AND CASH EQUIVALENTS; CASH FLOWS
Proceeds from the First Closing, completed in September 1998, are reflected in the audited financial statements for the year ended December 31, 1998. Proceeds from the Second Closing, completed on January 4, 1999, are reflected only in the unaudited pro forma financial information as of December 31, 1998, presented below and in the Pro Forma Consolidated Balance Sheet as of December 31, 1998, shown on page .
Pro forma cash and cash equivalents and pro forma working capital, as adjusted to give effect to the issuance of the 8% Preference Shares, totaled $237.2 million and $196.6 million at December 31, 1998, respectively. Cash and cash equivalents, on an actual basis, totaled $19.1 million and $13.5 million at December 31, 1998 and 1997, respectively, and working capital deficit was $21.4 million and $115.2 million at December 31, 1998 and 1997, respectively. Current liabilities included deferred income totaling $35.3 million at December 31, 1998 and 1997, related to a forward oil sale consummated in 1995.
The following summary table reflects cash flows of the Company for the years ended December 31, 1998, 1997 and 1996, and on a Pro Forma basis for 1998 (in thousands):
Operating Activities - ------------------------------------------------
Cash flows provided by operating activities for the year ended December 31, 1998, benefited from increased production from the Fields in Colombia. Gross production from the Fields averaged approximately 350,000 BOPD during 1998 compared with 220,000 BOPD and 175,000 BOPD during 1997 and 1996, respectively. The increased production was partially offset by a significantly lower average realized oil price. During 1998, 1997 and 1996, the Company's average realized oil price was $12.31, $17.54 and $19.61, respectively. See "Results of Operations - Oil and Gas Sales" below.
The Company's reported cash flows from operating activities for the year ended December 31, 1997, were reduced by $124.8 million, which was attributable to interest accreted with respect to the Company's Senior Subordinated Discount Notes due November 1, 1997 (the "1997 Notes"), and the 9 3/4 % Senior Subordinated Discount Notes due December 31, 2000 (the "9 3/4% Notes"), through the dates of retirement in the second quarter of 1997.
Investing Activities - ---------------------
The Company's capital expenditures and other capital investments were $180.1 million, $219.2 million and $252.7 million during the years ended December 31, 1998, 1997 and 1996, respectively, primarily for exploration and development of the Fields in Colombia, and for exploration in Block A-18 of the Malaysia-Thailand Joint Development Area in the Gulf of Thailand and in other areas. Proceeds from asset sales were $267 million, $5.9 million and $146.6 million during 1998, 1997 and 1996, respectively. See "Results of Operations" below and note 5 of Notes to Consolidated Financial Statements.
Financing Activities ---------------------
----
On September 30, 1998, the Company issued to HM4 Triton 1,822,500 8% Preference Shares for $70 per share, or total proceeds of $127.6 million (before transaction costs of $10.8 million). Each 8% Preference Share is convertible at any time at the option of the holder into four ordinary shares of the Company (subject to certain antidilution protections). Holders of 8% Preference Shares are entitled to receive, when and if declared by the Board of Directors, cumulative dividends at a rate per annum equal to 8% of the liquidation preference of $70 per share, payable for each semi-annual period ending June 30 and December 30, commencing June 30, 1999. At the Company's option, dividends may be paid in cash or by the issuance of additional whole shares of 8% Preference Shares.
During 1998, the Company borrowed $162.5 million and repaid $360.1 million under revolving lines of credit, notes payable and long-term debt. At December 31, 1998, the Company had two $25 million credit facilities that expire in March 1999 and a $50 million credit facility that expires in May 1999.
- ----
In April 1997, the Company issued $400 million aggregate face value of senior indebtedness to refinance other indebtedness. The senior indebtedness consisted of $200 million face amount of 8 3/4% Senior Notes due April 15, 2002 (the "2002 Notes"), at 99.942% of the principal amount (resulting in $199.9 million aggregate net proceeds) and $200 million face amount of 9 1/4% Senior Notes due April 15, 2005 (the "2005 Notes" and, together with the 2002 Notes, the "Senior Notes"), at 100% of the principal amount for total aggregate net proceeds of $399.9 million before deducting transaction costs of approximately $1 million.
In May and June 1997, the Company offered to purchase all of its outstanding 1997 Notes and 9 3/4% Notes, which resulted in the retirement of the 1997 Notes and substantially all of the 9 3/4% Notes. The remainder of the 9 3/4% Notes were retired in 1998. During the year ended December 31, 1997, the Company borrowed $630 million and repaid $321.5 million under revolving lines of credit, notes payable and long-term debt (including the Senior Notes).
- ----
During the year ended December 31, 1996, the Company borrowed $53.9 million and repaid $70.9 million under revolving lines of credit and long-term debt.
FUTURE CAPITAL NEEDS
For internal planning purposes, the Company's capital spending program for the year ending December 31, 1999, is approximately $117 million, excluding capitalized interest, of which approximately $83 million relates to the Fields and $34 million relates to the Company's exploration activities in other parts of the world. The Company expects to fund its capital expenditures for 1999 with the proceeds from the issuance of the 8% Preference Shares and cash flow from operations. In connection with the sale to ARCO of one-half of the shares through which the Company owned its interest in Block A-18 of the Malaysia-Thailand Joint Development Area in August 1998, ARCO agreed to pay the future exploration and development costs attributable to the Company's and ARCO's collective interest in Block A-18, up to $377 million or until first production from a gas field.
In connection with the issuance of the 8% Preference Shares to HM4 Triton in September 1998, the Company and HM4 Triton entered into the Shareholders Agreement pursuant to which, among other things, HM4 Triton (and its designated transferees, collectively) may designate a certain number of nominees for election to the Board. In addition, the Shareholders Agreement provides that, for so long as HM4 Triton and its affiliates continue to hold a certain minimum number of ordinary shares (assuming conversion of 8% Preference Shares into ordinary shares), the Company may not take certain actions without the consent of HM4 Triton, including (i) amending its Articles of Association or the terms of the 8% Preference Shares with respect to the voting powers, rights or preferences of the holders of 8% Preference Shares, (ii) entering into a merger or similar business combination transaction, or effecting a reorganization, recapitalization or other transaction pursuant to which a majority of the outstanding ordinary shares or any 8% Preference Shares are exchanged for securities, cash or other property, (iii) authorizing, creating or modifying the terms of any series of securities that would rank equal to or senior to the 8% Preference Shares, (iv) selling or otherwise disposing of assets comprising in excess of 50% of the market value of the Company, (v) paying dividends on ordinary shares or other shares ranking junior to the 8% Preference Shares, other than regular dividends on the Company's 5% Preference Shares, (vi) incurring or guaranteeing indebtedness (other than certain permitted indebtedness), or issuing preference shares, unless the Company's leverage ratio at the time, after giving pro forma effect to such incurrence or issuance and to the use of the proceeds, is less than 2.5 to 1, (vii) issuing additional shares of 8% Preference Shares, other than in payment of accumulated dividends on the outstanding 8% Preference Shares, (viii) issuing any shares of a class ranking equal or senior to the 8% Preference Shares, (ix) commencing a tender offer or exchange offer for all or any portion of the ordinary shares or (x) decreasing the number of shares designated as 8% Preference Shares.
As a result of HM4 Triton's ownership of 8% Preference Shares and ordinary shares and the rights conferred upon HM4 Triton and its designees pursuant to the Shareholders Agreement, HM4 Triton has significant influence over the actions of the Company and will be able to influence, and in some cases determine, the outcome of matters submitted for approval of the shareholders. The existence of HM4 Triton as a shareholder of the Company may make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, a majority of the outstanding ordinary shares. A third party would be required to negotiate any such transaction with HM4 Triton, and the interests of HM4 Triton as a shareholder may be different from the interests of the other shareholders of the Company.
In conjunction with the sale of TPC to an unrelated third party (the "Purchaser") in February 1998, the Company entered into a five year equity swap with a creditworthy financial institution (the "Counterparty"). The issuance to HM4 Triton of the 8% Preference Shares resulted in the right of the Counterparty to terminate the equity swap prior to the end of its five year term. In January 1999, the Counterparty exercised its right and designated April 2000 as the termination date of the equity swap. Upon the expiration of the equity swap in April 2000, the Company expects that the Purchaser will sell the TPC shares. Under the terms of the equity swap with the Counterparty, upon any sale by the Purchaser of the TPC shares, the Company will receive from the Counterparty, or pay to the Counterparty, an amount equal to the excess or deficiency, as applicable, of the difference between 97% of the net proceeds from the Purchaser's sale of the TPC shares and the notional amount of $97 million. There can be no assurance that the value the Purchaser may realize in any sale of the TPC shares will equal the value of the shares estimated by the Company for purposes of valuing the equity swap. The Company has no right or obligation to repurchase the TPC shares at any time, but the Company is not prohibited from offering to purchase the shares if the Purchaser offers to sell them. See "- Results of Operations - Other Income and Expenses" below and "Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the Company's directors and nominees for election as directors of the Company is incorporated herein by reference from the Proxy Statement for the 1999 Annual Meeting of Shareholders of the Company (the "Proxy Statement"), specifically the discussion under the heading "Election of Directors." The Company expects that the Proxy Statement will be publicly available and mailed in April 1999. Certain information as to executive officers is included herein under Items 1 and 2, "Business and Properties - Executive Officers." The discussion under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The discussion under "Management Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Security Ownership of Management and Certain Shareholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Management Compensation - Certain Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements: The financial statements filed as part of this report are listed in the "Index to Financial Statements and Schedules" on page hereof.
2. Financial Statement Schedules: The financial statement schedules filed as part of this report are listed in the "Index to Financial Statements and Schedules" on page hereof.
3. Exhibits required to be filed by Item 601 of Regulation S-K. (Where the amount of securities authorized to be issued under any of Triton Energy Limited's and any of its subsidiaries' long-term debt agreements does not exceed 10% of the Company's assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in lieu of filing such as exhibits, the Company hereby agrees to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.)
____________________
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed by the undersigned thereunto duly authorized on the 17th day of March, 1999.
TRITON ENERGY LIMITED
By:/s/ James C. Musselman ------------------------------------- James C. Musselman President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Triton Energy Limited (the "Company") hereby constitutes and appoints James C. Musselman, Robert B. Holland, III, and Bernard Gros-Dubois, or any of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute, and file any and all documents relating to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, including any and all amendments and supplements thereto, with any regulatory authority, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 17th day of March, 1999.
Signatures Title ---------- -----
/s/Bernard Gros-Dubois Vice President ----------------------------- Bernard Gros-Dubois (Principal Accounting and Financial Officer)
/s/Thomas O. Hicks Chairman of the Board - ------------------------------ Thomas O. Hicks
/s/James C. Musselman President and Chief Executive Officer - ------------------------------ James C. Musselman (Principal Executive Officer)
/s/Sheldon R. Erikson Director - ------------------------------ Sheldon R. Erikson
/s/Jack D. Furst Director - ------------------------------ Jack D. Furst
/s/Fitzgerald S. Hudson Director - ------------------------------ Fitzgerald Hudson
Director - ------------------------------ John R. Huff
/s/Michael E. McMahon Director - ------------------------------ Michael E. McMahon
/s/C. Lamar Norsworthy Director - ------------------------------ C. Lamar Norsworthy
/s/C. Richard Vermillion Director - ------------------------ C. Richard Vermillion
/s/J. Otis Winters Director - ------------------------------ J. Otis Winters
TRITON ENERGY LIMITED AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
All other schedules are omitted as the required information is inapplicable or presented in the consolidated financial statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
To the Board of Directors and Shareholders of Triton Energy Limited
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Triton Energy Limited and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP Dallas, Texas February 2, 1999
TRITON ENERGY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying Notes to Consolidated Financial Statements.
TRITON ENERGY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company uses the full cost method to account for its oil- and gas-producing activities. See accompanying Notes to Consolidated Financial Statements.
TRITON ENERGY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
TRITON ENERGY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
TRITON ENERGY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT FOR SHARE, PER SHARE AND PER BARREL DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Triton Energy Limited ("Triton") is an international oil and gas exploration and production company. The term "Company" when used herein means Triton and its subsidiaries and other affiliates through which the Company conducts its business. The Company's principal properties, operations, and oil and gas reserves are located in Colombia and Malaysia-Thailand. The Company is exploring for oil and gas in these areas, as well as in southern Europe, Africa, and the Middle East. All sales are currently derived from oil and gas production in Colombia.
Triton, a Cayman Islands company, was incorporated in 1995 to become the parent holding company of Triton Energy Corporation, a Delaware corporation ("TEC"). On March 25, 1996, the stockholders of TEC approved the merger of a wholly owned subsidiary of Triton with and into TEC (the "Reorganization"). Pursuant to the Reorganization, Triton became the parent holding company of TEC and each share of common stock, par value $1.00, and 5% preferred stock of TEC outstanding on March 25, 1996, was converted into one Triton ordinary share, par value $.01, and one 5% Triton preference share, respectively. The Reorganization has been accounted for as a combination of entities under common control.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Triton and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company also consolidates its proportionate share of assets, liabilities and results of operations for oil and gas ventures. The investment in a previously owned 49.9% affiliate in which the Company exercised significant influence over operating and financial policies was accounted for using the equity method. Investments in less than 20%-owned affiliates are accounted for using the cost method.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
Investments in marketable debt securities are reported at fair value except for those investments that management has the positive intent and the ability to hold to maturity. Investments available-for-sale are classified based on the stated maturity of the securities, and changes in fair value are reported as a separate component of shareholders' equity. Trading investments are classified as current regardless of the stated maturity of the underlying securities, and changes in fair value are reported in other income, net. Investments that will be held to maturity are classified based on the stated maturity of the securities.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for exploration and development of oil and gas reserves, whereby all acquisition, exploration and development costs are capitalized. Individual countries are designated as separate cost centers. All capitalized costs plus the undiscounted estimated future development costs of proved reserves are depleted using the unit-of-production method based on total proved reserves applicable to each country. A gain or loss is recognized on sales of oil and gas properties only when the sale involves significant reserves.
Costs related to acquisition, holding and initial exploration of licenses in countries with no proved reserves are initially capitalized, including internal costs directly identified with acquisition, exploration and development activities. Costs related to production, general overhead or similar activities are expensed. The Company's exploration licenses are periodically assessed for impairment on a country-by-country basis. If the Company's investment in exploration licenses within a country where no proved reserves are assigned is deemed to be impaired, the licenses are written down to estimated recoverable value. If the Company abandons all exploration efforts in a country where no proved reserves are assigned, all acquisition and exploration costs associated with the country are expensed. Due to the unpredictable nature of exploration drilling activities, the amount and timing of impairment expense are difficult to predict with any certainty.
The net capitalized costs of oil and gas properties for each cost center, less related deferred income taxes, cannot exceed the sum of (i) the estimated future net revenues from the properties, discounted at 10%; (ii) unevaluated costs not being amortized; and (iii) the lower of cost or estimated fair value of unproved properties being amortized; less (iv) income tax effects related to differences between the financial statement basis and tax basis of oil and gas properties.
The estimated costs, net of salvage value, of dismantling facilities or projects with limited lives or facilities that are required to be dismantled by contract, regulation or law, and the estimated costs of restoration and reclamation associated with oil and gas operations are included in estimated future development costs as part of the amortizable base.
Support equipment and facilities are depreciated using the unit-of-production method based on total reserves of the field related to the support equipment and facilities. Other property and equipment, which includes furniture and fixtures, vehicles and leasehold improvements, are depreciated principally on a straight-line basis over estimated useful lives ranging from 3 to 20 years.
Repairs and maintenance are expensed as incurred, and renewals and improve-ments are capitalized.
ENVIRONMENTAL MATTERS
Environmental costs are expensed or capitalized depending on their future economic benefit. Costs that relate to an existing condition caused by past operations and have no future economic benefit are expensed. Liabilities for future expenditures of a noncapital nature are recorded when future environmental expenditures and/or remediation is deemed probable, and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
INCOME TAXES
Deferred tax liabilities or assets are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using the enacted tax rates in effect at yearend. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
REVENUE RECOGNITION
Oil and gas revenues are recognized at the point of first measurement after production, which is generally upon delivery into field storage tank/processing facilities or pipelines. Cost reimbursements arising from carried interests granted by the Company are revenues to the extent the reimbursements are contingent upon and derived from production. Obligations arising from net profit interest conveyances are recorded as operating expenses when the obligation is incurred.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the designated functional currency for all of the Company's foreign operations, except for foreign operations of a formerly owned affiliate where the local currency was used as the functional currency. The cumulative translation effects from translating balance sheet accounts from the functional currency into U.S. dollars are included as a separate component of shareholders' equity.
RISK MANAGEMENT
Oil and natural gas sold by the Company are normally priced with reference to a defined benchmark, such as light, sweet crude oil traded on the New York Merchantile Exchange (West Texas Intermediate or "WTI"). Actual prices received vary from the benchmark depending on quality and location differentials. From time to time, it is the Company's policy to use financial market transactions, including swaps, collars and options, with creditworthy counterparties, primarily to reduce risk associated with the pricing of a portion of the oil and natural gas that it sells. The Company may also enter into financial market transactions to benefit from its assessment of the future prices of its production relative to other benchmark prices.
Gains or losses on financial market transactions that qualify for hedge accounting are recognized in oil and gas sales at the time of settlement of the underlying hedged transactions. Premiums paid for financial market contracts are capitalized and amortized as operating expenses over the contract period. Changes in the fair market value of financial market transactions that do not qualify for hedge accounting are reflected as noncash adjustments to other income, net in the period the change occurs. Realized gains or losses on financial market transactions that do not qualify for hedge accounting are recorded in oil and gas sales.
The Company occasionally enters into foreign exchange contracts to reduce risk of unfavorable exchange-rate movements. The gains or losses arising from currency exchange contracts offset foreign exchange gains or losses on the underlying assets or liabilities or are deferred and offset against the carrying value of the firm commitment.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages, but does not require, the adoption of a fair value-based method of accounting for employee stock-based compensation transactions. The Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its stock-based compensation plans. Under Opinion 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant above the amount an employee must pay to acquire the stock.
EARNINGS PER ORDINARY SHARE
Basic earnings (loss) per ordinary share amounts were computed by dividing net earnings (loss) after deduction of dividends on preference shares by the weighted average number of ordinary shares outstanding during the period. Prior to the Company's sale of its investment in Crusader Limited ("Crusader") in July 1996, the Company's proportionate shares owned by Crusader were not considered outstanding for purposes of determining weighted average number of shares outstanding. Diluted earnings (loss) per ordinary share assumes the conversion of all securities that are exercisable or convertible into ordinary shares that would dilute the basic earnings per ordinary share during the period.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 established standards for the reporting and display of comprehensive income and its components, specifically net income and all other changes in shareholders' equity except those resulting from investments by and distributions to shareholders. The Company, which adopted the standard beginning January 1, 1998, has elected to display comprehensive income (or non-owner changes in shareholders' equity) in the Consolidated Statement of Shareholders' Equity. This statement does not have any effect on the Company's results of operations or financial position.
RECENT ACCOUNTING AND DISCLOSURE PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. The Company must adopt SFAS 133 effective January 1, 2000. Based on the Company's outstanding derivatives contracts, the Company believes that the impact of adopting this standard would not have a material adverse effect on the Company's operations or consolidated financial condition. However, no assurances can be given with regard to the level of the Company's derivatives activities at the time SFAS 133 is adopted or the resulting effect on the Company's operations or consolidated financial condition.
THE USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain previously reported financial information has been reclassified to conform to the current period's presentation.
2. PRO FORMA BALANCE SHEET - 8% PREFERENCE SHARES ISSUANCE
In August 1998, the Company and HM4 Triton, L.P. ("HM4 Triton"), an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), entered into a stock purchase agreement (the "Stock Purchase Agreement") that provided for a $350 million equity investment in the Company. The investment was effected in two stages. At the closing of the first stage in September 1998 (the "First Closing"), the Company issued to HM4 Triton 1,822,500 shares of 8% convertible preference shares ("8% Preference Shares") for $70 per share (for proceeds of $116.8 million, net of transaction costs). Pursuant to the Stock Purchase Agreement, the second stage was effected through a rights offering for 3,177,500 shares of 8% Preference Shares at $70 per share, with HM4 Triton being obligated to purchase any shares not subscribed. At the closing of the second stage, which occurred on January 4, 1999 (the "Second Closing"), the Company issued an additional 3,177,500 8% Preference Shares for proceeds totaling $218.1 million, net of closing costs (of which, HM4 Triton purchased 3,114,863 shares).
Proceeds from the First Closing, completed in September 1998, are reflected in the audited financial statements for the year ended December 31, 1998. Proceeds from the Second Closing, completed on January 4, 1999, are only reflected in the unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1998, shown on page .
3. WRITEDOWN OF ASSETS
Writedown of assets is summarized as follows:
In June and December 1998, the carrying amount of the Company's evaluated oil and gas properties in Colombia was written down by $105.4 million ($68.5 million, net of tax) and $135.6 million ($115.9 million, net of tax), respectively, through application of the full cost ceiling limitation as prescribed by the Securities and Exchange Commission ("SEC"), principally as a result of a decline in oil prices. No adjustments were made to the Company's reserves in Colombia as a result of the decline in prices. The SEC ceiling test was calculated using the June 30, and December 31, 1998, WTI oil prices of $14.18 per barrel and $12.05 per barrel, respectively, that, after a differential for Cusiana crude delivered at the port of Covenas in Colombia, resulted in a net price of approximately $13 per barrel and $11 per barrel, respectively. An additional writedown may be required if oil prices fall below the December 31, 1998, level at later quarter end dates.
In conjunction with the plan to restructure operations and scale back exploration-related expenditures, the Company assessed its investments in exploration licenses and determined that certain investments were impaired. As a result, unevaluated oil and gas properties and other assets totaling $77.3 million ($72.6 million, net of tax) were expensed in June 1998. The writedown included $27.2 million and $22.5 million related to exploration activity in Guatemala and China, respectively. The remaining writedowns related to the Company's exploration projects in certain other areas of the world.
During 1998, the Company evaluated the recoverability of its approximate 6.6% investment in a Colombian pipeline company, Oleoducto de Colombia S.A. ("ODC"), which is accounted for under the cost method. Based on an analysis of the future cash flows expected to be received from ODC, the Company expensed the carrying value of its investment totaling $10.3 million.
In 1996, the Company's oil and gas properties and other assets in Argentina were written down $40 million and $3 million, respectively, following a review of technical information that indicated the acreage portfolio did not meet the Company's exploration objectives.
4. SPECIAL CHARGES
In July 1998, the Company commenced a plan to restructure the Company's operations, reduce overhead costs and substantially scale back exploration-related expenditures. The plan contemplated the closing of foreign offices in four countries, the elimination of approximately 105 positions, or 41% of the worldwide workforce, and the relinquishment or other disposal of several exploration licenses. As a result of the restructuring, the Company recognized special charges totaling $18.3 million ($15 million and $3.3 million in the third and fourth quarters, respectively). At December 31, 1998, approximately 105 positions had been eliminated, three foreign offices had closed and eight licenses had been relinquished, sold or their commitments renegotiated. The Company expects to close the remaining office and dispose of six other licenses during 1999.
Of the $18.3 million in special charges, $14.5 million related to the reduction in workforce, and represented the estimated costs for severance, benefit continuation and outplacement costs, which will be paid over a period of up to two years according to the severance formula. During 1998, the Company paid $7.4 million in severance, benefit continuation and outplacement costs. A total of $2.1 million of special charges related to the closing of foreign offices, and represented the estimated costs of terminating office leases and the write-off of related assets. The remaining special charges of $1.7 million primarily related to the write-off of other surplus fixed assets resulting from the reduction in workforce. As of December 31, 1998, no changes had been made to the Company's estimate of the total restructuring expenditures to be incurred. The remaining liability related to restructuring activities was $7.9 million at December 31, 1998.
5. ASSET DISPOSITONS
In December 1998, the Company sold its Bangladesh subsidiary for cash proceeds of $4.5 million and recognized a gain of $4.5 million in gain on sale of oil and gas assets.
In July 1998, the Company and Atlantic Richfield Company ("ARCO") signed an agreement providing financing for the development of the Company's gas reserves on Block A-18 of the Malaysia-Thailand Joint Development Area. Under terms of the agreement, consummated in August 1998, the Company sold to a subsidiary of ARCO for $150 million one-half of the shares of the subsidiary through which the Company owned its 50% share of Block A-18. The Company received net proceeds of $142 million and recorded a gain of $63.2 million in gain on the sale of oil and gas assets.
The agreements also require ARCO to pay the future exploration and development costs attributable to the Company's and ARCO's collective interest in Block A-18, up to $377 million or until first production from a gas field, after which the Company and ARCO would each pay 50% of such costs. Additionally, the agreements require ARCO to pay the Company an additional $65 million each at July 1, 2002, and July 1, 2005, if certain specific development objectives are met by such dates, or $40 million each if the objectives are met within one year thereafter. The agreements provide that the Company will recover its investment in recoverable costs in the project, approximately $101 million, and that ARCO will recover its investment in recoverable costs, on a first-in, first-out basis from the cost-recovery portion of future production.
In February 1998, the Company sold Triton Pipeline Colombia, Inc. ("TPC"), a wholly owned subsidiary that held the Company's 9.6% equity interest in the Colombian pipeline company, Oleoducto Central S. A. ("OCENSA"), to an unrelated third party (the "Purchaser") for $100 million. Net proceeds were approximately $97.7 million after $2.3 million of expenses. The sale resulted in a gain of $50.2 million. TPC's investment in OCENSA, totaling $47.4 million at December 31, 1997, was included in assets held for sale.
In conjunction with the sale of TPC, the Company entered into an equity swap with a creditworthy financial institution (the "Counterparty"). The equity swap has a notional amount of $97 million and requires the Company to make quarterly floating LIBOR-based payments on the notional amount to the Counterparty. In exchange, the Counterparty is required to make payments to the Company equivalent to 97% of the dividends TPC receives in respect of its equity interest in OCENSA. The Company's LIBOR-based payments commenced in March 1998, and OCENSA commenced paying dividends in September 1998. OCENSA's first dividend was attributable to the four month period ending June 1998. During the year ended December 31, 1998, the Company made payments to the Counterparty totaling $5.9 million and received payments from the Counterparty totaling $2.6 million.
The equity swap is carried in the Company's financial statements at fair value during its term, which as amended, will expire April 14, 2000. The value of the equity swap in the Company's financial statements is equal to the estimated fair value of the shares of OCENSA owned by TPC. Because there is no public market for the shares of OCENSA, the Company estimates their value using a discounted cash flow model applied to the distributions expected to be paid in respect of the OCENSA shares. The discount rate applied to the estimated cash flows from the OCENSA shares is based on a combination of current market rates of interest, a credit spread for OCENSA's debt, and a spread to reflect the preferred stock nature of the OCENSA shares. During the year ended December 31, 1998, the Company recorded an expense of $3.3 million in other income, net, related to the net payments made under and the change in the fair market value of the equity swap. Net payments made (or received) under the equity swap, and any fluctuations in the fair value of the equity swap, in future periods, will affect other income in such periods. There can be no assurance that changes in interest rates, or in other factors that affect the value of the OCENSA shares and/or the equity swap, will not have a material adverse effect on the carrying value of the equity swap.
Upon the expiration of the equity swap in April 2000, the Company expects that the Purchaser will sell the TPC shares. Under the terms of the equity swap with the Counterparty, upon any sale by the Purchaser of the TPC shares, the Company will receive from the Counterparty, or pay to the Counterparty, an amount equal to the excess or deficiency, as applicable, of the difference between 97% of the net proceeds from the Purchaser's sale of the TPC shares and the notional amount of $97 million. There can be no assurance that the value the Purchaser may realize in any sale of the TPC shares will equal the value of the shares estimated by the Company for purposes of valuing the equity swap. To the extent that 97% of the Purchaser's sale proceeds exceeds the notional amount, the Company will record a gain, and to the extent 97% of the Purchaser's sale proceeds is less than the notional amount, the Company will record an expense. The Company has no right or obligation to repurchase the TPC shares at any time, but the Company is not prohibited from offering to purchase the shares if the Purchaser offers to sell them.
In June 1997, the Company sold its Argentine subsidiary for cash proceeds of $4.1 million and recognized a gain of $4.1 million in gain on sale of oil and gas assets.
In June and July 1996, the Company sold its 49.9% shareholdings in Crusader for total cash proceeds of $69.6 million in conjunction with a May 1996 take-over bid for the outstanding shares of Crusader. The Company recorded a total gain of $10.4 million in other income, net, and an increase to additional paid-in capital of $20.4 million, representing the Company's proportion of Triton ordinary shares owned by Crusader that were previously treated as Triton owned.
In March 1996, the Company sold its royalty interests in U.S. properties for $23.8 million based on an effective date of January 1, 1996. The Company recorded the resulting gain of $4.1 million in gain on sale of oil and gas assets.
6. FORWARD SALE OF COLOMBIAN OIL PRODUCTION
In May 1995, the Company sold 10.4 million barrels of oil from the Cusiana and Cupiagua fields (the "Fields") in Colombia in a forward oil sale. Under the terms of the sale, the Company received approximately $87 million of the approximately $124 million net proceeds and is entitled to receive substantially all of the remaining proceeds (now held in various interest-bearing reserve accounts) when the Company's Cusiana and Cupiagua fields project becomes self-financing, as defined in the agreement, which is expected in 1999, and when certain other conditions are met. At December 31, 1998, proceeds held in interest-bearing reserve accounts of $31.9 million and $1.1 million have been recorded as current and long-term receivables, respectively. The Company has recorded the net proceeds as deferred income and will recognize such revenue when the barrels of oil are delivered during a five-year period that began in June 1995. Under the terms of the agreement, the Company must deliver to the buyer 58,425 barrels per month through March 1997 and 254,136 barrels per month from April 1997 to March 2000.
7. OTHER RECEIVABLES
Other receivables consisted of the following:
At December 31, 1998, the Company had recorded a receivable from its insurance carriers of $8.4 million associated with claims on previously drilled wells.
8. PROPERTY AND EQUIPMENT
Property and equipment, at cost, are summarized as follows:
In 1998, the carrying amount of the Company's evaluated oil and gas properties was written down by $241 million through application of the full cost ceiling limitation as prescribed by the SEC as a result of the decline in oil prices. Additionally, unevaluated oil and gas properties were written down $73.9 million during 1998 in conjunction with a plan to restructure the Company's operations. See note 3 - Writedown of Assets.
The Company capitalizes interest on qualifying assets, principally unevaluated oil and gas properties and major development projects in progress. Capitalized interest amounted to $23.2 million, $25.8 million and $27.1 million in the years ended December 31, 1998, 1997 and 1996, respectively. The Company capitalized general and administrative expenses related to exploration and development activities of $20.6 million, $32.4 million, and $24.6 million in the years ended December 31, 1998, 1997 and 1996, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are summarized as follows:
10. DEBT
SHORT-TERM BORROWINGS
At December 31, 1998, the Company had outstanding borrowings totaling $5 million under a $25 million unsecured bank revolving credit facility. Borrowings bear interest at various spreads over the Eurodollar rate or, at the option of the Company, at LIBOR or prime. The interest rate on short-term borrowings at December 31, 1998, was 7.75%.
At December 31, 1997, the Company had outstanding borrowings totaling $45 million under two unsecured revolving credit facilities and outstanding borrowings of $9.6 million under a $10 million unsecured demand promissory note with a bank that renews monthly. The weighted average interest rates on short-term borrowings outstanding at December 31, 1997, was 7.3%.
LONG-TERM DEBT
A summary of long-term debt follows:
In April 1997, the Company issued $400 million aggregate face value of senior indebtedness to refinance other indebtedness. The senior indebtedness consisted of $200 million face amount of 8 3/4% Senior Notes due April 15, 2002 (the "2002 Notes"), at 99.942% of the principal amount (resulting in $199.9 million aggregate net proceeds) and $200 million face amount of 9 1/4% Senior Notes due April 15, 2005 (the "2005 Notes" and, together with the 2002 Notes, the "Senior Notes"), at 100% of the principal amount, for total aggregate net proceeds of $399.9 million before deducting transaction costs of approximately $1 million.
Interest on the Senior Notes is payable semi-annually on April 15 and October 15. The Senior Notes are redeemable at any time at the option of the Company, in whole or in part, and contain certain covenants limiting the incurrence of certain liens, sale/leaseback transactions, and mergers and consolidations.
In November 1995, a subsidiary signed an unsecured term credit facility with a bank supported by a guarantee issued by the Export-Import Bank of the United States ("EXIM") for $45 million, which matures in January 2001. Principal and interest payments are due semi-annually on January 15 and July 15 and borrowings bear interest at LIBOR plus .25%, adjusted on a semi-annual basis. At December 31, 1998, the Company had outstanding borrowings of $22.6 million under the facility.
During 1997, the Company signed an unsecured bank revolving credit facility providing for borrowings of up to $50 million that, as amended, matures in May 1999. Borrowings bear interest at various spreads over the Eurodollar rate or, at the Company's option, at LIBOR or prime. At December 31, 1998, the Company had outstanding borrowings of $5 million under the facility.
At December 31, 1997, the Company had outstanding borrowings of $119.9 million and letters of credit for $4.5 million under a $125 million unsecured bank revolving credit facility. The facility was repaid and terminated in 1998.
In May and June 1997, the Company completed a tender offer and consent solicitation with respect to its Senior Subordinated Discount Notes due November 1, 1997 ("1997 Notes") and 9 3/4% Senior Subordinated Discounted Notes due December 15, 2000 ("9 3/4% Notes") that resulted in the retirement of the 1997 Notes and substantially all of the 9 3/4 % Notes. The Company's results of operations included an extraordinary expense of $14.5 million, net of a $7.8 million tax benefit, associated with the extinguishment of the 1997 Notes and the 9 3/4% Notes. The Company's reported cash flows from operating activities for the year ended December 31, 1997, were reduced by $124.8 million, which was attributable to the interest accreted with respect to the 1997 Notes and the 9 3/4 % Notes through the dates of retirement. The remainder of the 9 3/4% Notes were retired in 1998.
During 1996, the Company purchased in the open market $30 million face value of its 1997 Notes and realized an extraordinary expense of $1.2 million, net of a $.6 million tax benefit.
The Company amortizes debt issue costs over the life of the borrowing using the interest method. Amortization related to the Company's debt-issue costs was $2.9 million, $2 million and $3.6 million in the years ended December 31, 1998, 1997 and 1996, respectively. The aggregate maturities of long-term debt for the five years during the period ending December 31, 2003, are as follows: 1999 -- $14 million; 2000 -- $9 million; 2001 -- $4.5 million; 2002 -- $199.9 million; and 2003 -- nil.
11. INCOME TAXES
The components of earnings (loss) from continuing operations before income taxes and extraordinary item were as follows:
Pursuant to the Reorganization in March 1996, Triton, a Cayman Islands company, became the parent holding company of TEC, a Delaware corporation. As a result, the Company's corporate domicile became the Cayman Islands.
The components of the provision for income taxes on continuing operations were as follows:
A reconciliation of the differences between the Company's applicable statutory tax rate and the Company's effective income tax rate follows:
The components of the net deferred tax asset and liability were as follows:
At December 31, 1998, the Company had net operating loss ("NOLs") and depletion carryforwards for U.S. tax purposes of $415.6 million and $20.3 million, respectively. The U.S. NOLs expire from 1999 through 2012 as follows:
At December 31, 1998, the Company's Colombian operations and other foreign operations had NOLs and other credit carryforwards totaling $42.3 million and $31.7 million, respectively. The NOLs expire from 1999 through 2008.
The deferred tax valuation allowance of $93.6 million at December 31, 1998, is primarily attributable to management's assessment of the utilization of NOLs in the U.S., the expectation that other tax credits will expire without being utilized, and certain temporary differences will reverse without a benefit to the Company. The minimum amount of future taxable income necessary to realize the deferred tax asset is approximately $246 million and $42 million in the U.S. and Colombia, respectively. Although there can be no assurance the Company will achieve such levels of income, management believes the deferred tax asset will be realized through increasing income from its operations.
If certain changes in the Company's ownership should occur, there would be an annual limitation on the amount of NOLs that can be utilized. To the extent a change in ownership does occur, the limitation is not expected to materially impact the utilization of such carryforwards.
12. EMPLOYEE BENEFITS
PENSION PLANS
The Company has a defined benefit pension plan covering substantially all employees in the United States. The benefits are based on years of service and the employee's final average monthly compensation. Contributions are intended to provide for benefits attributed to past and future services. The Company also has a Supplemental Executive Retirement Plan ("SERP") that is unfunded and provides supplemental pension benefits to a select group of management and key employees.
The funding status of the plans follows:
A summary of the components of pension expense follows:
The projected benefit obligations at December 31, 1998 and 1997, assume a discount rate of 6.75% and 7.5%, respectively, and a rate of increase in compensation expense of 5%. The expected long-term rate of return on assets is 9% for the defined benefit plan. During 1998, work-force reductions resulted in the recognition of additional prior service cost of $.2 million each for the defined benefit plan and the SERP plan and additional transition obligation of $.4 million for the SERP plan.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1994, the Company amended and restated the employee stock ownership plan to form a 401(k) plan (the "Plan"). The Company recognizes expense based on actual amounts contributed to the Plan.
13. SHAREHOLDERS' EQUITY
5% PREFERENCE SHARES
In connection with the acquisition of the minority interest in Triton Europe in 1994, the Company designated a series of 550,000 preferred shares (522,460 shares issued) as 5% preferred stock, no par value, with a stated value of $34.41 per share. Pursuant to the Reorganization, Triton converted each share of 5% preferred stock into one 5% convertible preference share ("5% Preference Shares"), par value $.01. Each share of the Company's 5% Preference Shares is convertible into one Triton ordinary share and bears a cash dividend, which has priority over dividends on Triton's ordinary shares, equal to 5% per annum on the redemption price of $34.41 per share, payable semi-annually on March 30 and September 30 of each year. The 5% Preference Shares have priority over Triton ordinary shares upon liquidation, and may be redeemed at Triton's option at any time on or after March 30, 1998, for cash equal to the redemption price. Any shares that remain outstanding on March 30, 2004, must be redeemed at the redemption price, either for cash or, at the Company's option, for Triton ordinary shares. At December 31, 1998, 1997 and 1996, 209,639, 218,285 and 247,469 5% Preference Shares were outstanding, respectively.
8% PREFERENCE SHARES
In August 1998, the Company entered into the Stock Purchase Agreement with HM4 Triton. The First Closing, as contemplated by the Stock Purchase Agreement, occurred on September 30, 1998, pursuant to which the Company issued to HM4 Triton 1,822,500 shares of 8% Preference Shares for $70 per share, or total proceeds of $127.6 million (before expenses of $10.8 million). Each 8% Preference Share is convertible at any time at the option of the holder into four ordinary shares of the Company (subject to certain antidilution protections). Holders of 8% Preference Shares are entitled to receive, when and if declared by the Board of Directors, cumulative dividends at a rate per annum equal to 8% of the liquidation preference of $70 per share, payable for each semi-annual period ending June 30 and December 30, commencing June 30, 1999. At the Company's option, dividends may be paid in cash or by the issuance of additional whole shares of 8% Preference Shares. Holders of 8% Preference Shares are entitled to vote with the holders of ordinary shares on all matters submitted to the shareholders of the Company for a vote, with each share of 8% Preference Share entitling its holder to a number of votes equal to the number of ordinary shares into which it could be converted at that time.
ORDINARY SHARES
Changes in issued ordinary shares were as follows:
Changes in ordinary shares held in treasury were as follows:
SHAREHOLDER RIGHTS PLAN
The Company has adopted a Shareholder Rights Plan pursuant to which preference share rights attach to all ordinary shares at the rate of one right for each ordinary share. Each right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preference Share, par value $.01 per share ("Junior Preference Shares"), of the Company at a price of $120 per one one-thousandth of a share of such Junior Preference Shares, subject to adjustment. Generally, the rights only become distributable 10 days following public announcement that a person has acquired beneficial ownership of 15% or more of Triton's ordinary shares or 10 business days following commencement of a tender offer or exchange offer for 15% or more of the outstanding ordinary shares; provided that, pursuant to the terms of the plan, any acquisition of Triton shares by HM4 Triton or its affiliates, including Hicks, Muse, Tate & Furst Incorporated, will not result in the distribution of rights unless and until HM4 Triton's ownership of Triton shares is reduced below certain levels. If, among other events, any person becomes the beneficial owner of 15% or more of Triton's ordinary shares (except as provided with respect to HM4 Triton), each right not owned by such person generally becomes the right to purchase such number of ordinary shares of the Company equal to the number obtained by dividing the right's exercise price (currently $120) by 50% of the market price of the ordinary shares on the date of the first occurrence. In addition, if the Company is subsequently merged or certain other extraordinary business transactions are consummated, each right generally becomes a right to purchase such number of shares of common stock of the acquiring person equal to the number obtained by dividing the right's exercise price by 50% of the market price of the common stock on the date of the first occurrence.
Under certain circumstances, the Company's directors may determine that a tender offer or merger is fair to all shareholders and prevent the rights from being exercised. At any time after a person or group acquires 15% or more of the ordinary shares outstanding (other than with respect to HM4 Triton) and prior to the acquisition by such person or group of 50% or more of the outstanding ordinary shares or the occurrence of an event described in the prior paragraph, the Board of Directors of the Company may exchange the rights (other than rights owned by such person or group which will become void), in whole or in part, at an exchange ratio of one ordinary share, or one one-thousandth of a Junior Preference Share, per right (subject to adjustment). The Company has the ability to amend the rights (except the redemption price) in any manner prior to the public announcement that a 15% position has been acquired or a tender offer has been commenced. The Company will be entitled to redeem the rights at $0.01 a right at any time prior to the time that a 15% position has been acquired. The rights will expire on May 22, 2005, unless earlier redeemed by the Company.
14. STOCK COMPENSATION PLANS
STOCK OPTION PLANS
Options to purchase ordinary shares of the Company may be granted to officers and employees under various stock option plans. The exercise price of each option is equal to or greater than the market price of the Company's ordinary shares on the date of grant. Grants generally become exercisable in 25% cumulative annual increments beginning one year from the date of issuance and generally expire during a period from 5 to 10 years after the date of grant, depending on terms of the grant. In addition, each non-employee director receives an option to purchase 15,000 shares each year. These grants become exercisable at the date of the grant and expire at the end of 10 years. At December 31, 1998 and 1997, shares available for grant were 2,521,133 and 1,040,965, respectively.
A summary of the status of the Company's stock option plans is presented below:
On December 2, 1998, the Compensation Committee approved the grant of new stock options totaling 440,103 shares with an exercise price of $14.50 to substantially all of its employees. Each participating employee was granted options in an amount equal to one-half of any options then held by the employees with an exercise price greater than $30.00 per share and the options with an exercise price greater than $30.00 per share expired.
The following table summarizes information about stock options outstanding at December 31, 1998:
CONVERTIBLE DEBENTURE PLAN
Under the Company's Amended and Restated Convertible Debenture Plan, executive officers of the Company have from time to time purchased from the Company convertible debentures convertible into Ordinary Shares at a conversion price equal to the market value of the Ordinary Shares at the date of purchase. The consideration for the convertible debentures given by each executive officer was a personal promissory note payable to the Company in a principal amount equal to the principal amount of the convertible debentures purchased. In July 1998, the Company agreed with each of its executive officers to exchange the Company's interest in the officer's note for the officer's interest in the convertible debentures. In connection with his severance from the Company, the Company redeemed the convertible debentures held by a former executive officer in accordance with their terms. As a result, all outstanding debentures, totaling $14.2 million, were cancelled.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan that provides for the award of ordinary shares to key officers and employees. Under the terms of the plan, employees can choose each semi-annual period to have up to 15% of their annual gross or base compensation withheld to purchase the Company's ordinary shares. The purchase price of the stock is 85% of the lower of its beginning of period or end of period market price. Under the plan, the Company sold 46,648 shares and 24,961 shares to employees for the years ended December 31, 1998 and 1997, respectively.
FAIR VALUE OF STOCK COMPENSATION
The Company applies Opinion 25 in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans, convertible debenture plan and stock purchase plan. Had the Company elected to recognize compensation expense consistent with the fair value-based methodology in SFAS 123, the Company's net income and earnings per share would have been as follows:
The fair value of each option or debenture granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0%; expected volatility of approximately 40%, 26% and 27%, respectively; risk-free interest rates of approximately 5%, 6% and 6%, respectively; and an expected life of approximately four to seven years.
STOCK APPRECIATION RIGHTS PLAN
The Company has a stock appreciation rights ("SARs") plan which authorizes the granting of SARs to non-employee directors of the Company. Upon exercise, SARs allow the holder to receive the difference between the SARs' exercise price and the fair market value of the ordinary shares covered by SARs on the exercise date and expire at the earlier of 10 years or a date based on the termination of the holder's membership on the board of directors. At December 31, 1998, SARs covering 20,000 ordinary shares, with an exercise price of $8.00 per share, were outstanding.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CREDIT RISK CONCENTRATIONS
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1997, the Company's financial instruments included cash, cash equivalents, short-term receivables, long-term receivables, short-term and long-term debt, and financial market transactions. The fair value of cash, cash equivalents, short-term receivables and short-term debt approximated carrying values because of the short maturities of these instruments. The fair values of the Company's long-term receivables and financial market transactions, based on broker quotes and discounted cash flows, approximated the carrying values. The estimated fair value of long-term debt, based on quoted market prices and market data for similar instruments, was $397 million (carrying value - $428 million) and $596 million (carrying value - $574 million) at December 31, 1998 and 1997, respectively.
RISK MANAGEMENT
Oil and natural gas sold by the Company are normally priced with reference to a defined benchmark, such as light, sweet crude oil traded on the New York Mercantile Exchange (WTI). Actual prices received vary from the benchmark depending on quality and location differentials. From time to time, it is the Company's policy to use financial market transactions, including swaps, collars and options, with creditworthy counterparties primarily to reduce risk associated with the pricing of a portion of the oil and natural gas that it sells. The policy is structured to underpin the Company's planned revenues and results of operations. The Company may also enter into financial market transactions to benefit from its assessment of the future prices of its production relative to other benchmark prices. There can be no assurance that the use of financial market transactions will not result in losses.
During the year ended December 31, 1998, the Company did not have any outstanding financial market transactions to hedge against oil price fluctuations. During the years ended December 31, 1997 and 1996, markets provided the Company the opportunity to realize WTI benchmark oil prices on average $2.35 per barrel and $4.68 per barrel, respectively, above the WTI benchmark oil price the Company set as part of its annual plan for the period. As a result of financial and commodity market transactions settled during the years ended December 31, 1997 and 1996, the Company's risk management program resulted in an average net realization of approximately $.11 per barrel and $1.21 per barrel, respectively, lower than if the Company had not entered into such transactions.
In anticipation of entering into a forward oil sale, in 1995 the Company purchased WTI benchmark call options to retain the ability to benefit from future WTI price increases above a weighted average price of $20.42 per barrel. The volumes and expiration dates on the call options coincide with the volumes and delivery dates of the forward oil sale. During the years ended December 31, 1998, 1997 and 1996, the Company recorded an unrealized gain (loss) of $.4 million, ($9.7 million) and $11 million, respectively, in other income, net related to the change in the fair market value of the call options. Future fluctuations in the fair market value of the call options will continue to affect other income as noncash adjustments.
CONCENTRATION OF CREDIT RISK
Financial instruments that are potentially subject to concentrations of credit risk consist of cash equivalents, receivables and financial market transactions. The Company places its cash equivalents and financial market transactions with high credit-quality financial institutions. The Company believes the risk of incurring losses related to credit risk is remote.
The Company sells its crude oil production from the Fields through an agreement with a third party to approximately 10 to 15 buyers located primarily in the United States. The Company does not believe that the loss of any single customer or a termination of the agreement with the third party would have a long-term material, adverse effect on its operations.
16. OTHER INCOME, NET
Other income, net is summarized as follows:
During 1998 and 1997, the Company sold certain corporate assets for cash proceeds of $20.6 million and $1.8 million, respectively. In 1998 and 1997, the Company recognized foreign exchange gains of $2.1 million and $9.5 million, respectively, primarily noncash adjustments to deferred tax liabilities in Colombia associated with devaluation of the Colombian peso versus the U.S. dollar.
17. EARNINGS PER ORDINARY SHARE
For the year ended December 31, 1998, the computation of diluted net loss per ordinary share was antidilutive, and therefore, the amounts reported for basic and diluted net loss per ordinary share were the same.
The following table reconciles the numerators and denominators of the basic and diluted earnings per ordinary share computation for earnings from continuing operations for the years ended December 31, 1997 and 1996.
At December 31, 1998, 1,822,500 shares of 8% Preference Shares and 209,639 shares of 5% Preference Shares were outstanding. Each 8% Preference Share is convertible any time into four ordinary shares, subject to adjustment in certain events. Each 5% Preference Share is convertible any time into one ordinary share, subject to adjustment in certain events. The 8% Preference Shares and 5% Preference Shares were not included in the computation of diluted earnings per ordinary share because the effect of assuming conversion was antidilutive. The Company issued an additional 3,177,500 8% Preference Shares in January 1999, which will affect diluted earnings per share in future periods. See note 2, Pro Forma Balance Sheet - 8% Preference Share Issuance.
18. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash payments and noncash investing and financing activities follow:
At December 31, 1998, the Company had an accrual of $2.7 million for dividends declared with respect to the 8% Preference Shares, which was paid during 1999.
Cash paid for interest in 1997 included $124.8 million of interest accreted with respect to the 1997 Notes and the 9 3/4% Notes through the dates of retirement. Proceeds from the sale of available-for-sale securities were $2 million and $19.5 million in the years ended December 31, 1997 and 1996, respectively.
19. RELATED PARTY TRANSACTIONS
Pursuant to a financial advisory agreement (the "Financial Advisory Agreement") between Triton and Hicks, Muse & Co. Partners L.P., an affiliate of Hicks Muse ("Hicks Muse Partners"), the Company paid Hicks Muse Partners transaction fees aggregating approximately $9.6 million for services as financial advisor to the Company in connection with the First Closing contemplated by the Stock Purchase Agreement. In accordance with the terms of the Financial Advisory Agreement, the Company has retained Hicks Muse Partners as its exclusive financial advisor in connection with any Sale Transaction (defined below) unless Hicks Muse Partners and the Company agree to retain an additional financial advisor in connection with any particular Sale Transaction. The Financial Advisory Agreement requires the Company to pay a fee to Hicks Muse Partners in connection with any Sale Transaction (unless the Chief Executive Officer of the Company elects not to retain a financial advisor) in an amount equal to the lesser of (i) the amount of fees then charged by first-tier investment banking firms for similar advisory services rendered in similar transactions or (ii) 1.5% of the Transaction Value (as defined in the Financial Advisory Agreement); provided that such fee will be divided equally between Hicks Muse Partners and any additional financial advisor which the Company and Hicks Muse Partners agree will be retained by the Company with respect to any such transaction. A "Sale Transaction" is defined as any merger, sale of securities representing a majority of the combined voting power of the Company, sale of assets of the Company representing more than 50% of the total market value of the assets of the Company and its subsidiaries or other similar transaction. The Company is also required to reimburse Hicks Muse Partners for reasonable disbursements and out-of-pocket expenses of Hicks Muse Partners incurred in connection with its advisory services.
Pursuant to a monitoring agreement (the "Monitoring Agreement") between Triton and Hicks Muse Partners, Hicks Muse Partners will provide financial oversight and monitoring services as requested by the Company and the Company will pay to Hicks Muse Partners an annual fee of $.5 million. In addition, the Company will reimburse Hicks Muse Partners for reasonable disbursements and out-of-pocket expenses incurred by Hicks Muse Partners or its affiliates for the account of the Company or in connection with the performance of its services. During the year ended December 31, 1998, the Company paid Hicks Muse Partners $.1 million under the terms of the Monitoring Agreement.
The Financial Advisory Agreement and the Monitoring Agreement will remain in effect until the earlier of (i) September 30, 2008, or (ii) the date on which HM4 Triton and its affiliates cease to own beneficially, directly or indirectly, at least 5% of the Company's outstanding Ordinary Shares (determined after giving effect to the conversion of all 8% Preference Shares held by HM4 Triton and its affiliates). The Company has agreed to indemnify Hicks Muse Partners with respect to liabilities incurred as a result of Hicks Muse Partners' performance of services for the Company pursuant to the Financial Advisory Agreement and the Monitoring Agreement.
20. CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS
Certain information contained in this report, as well as written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and are subject to the "Safe Harbor" provisions of that section. Forward-looking statements include statements concerning the Company's and management's plans, objectives, goals, strategies and future operations and performance and the assumptions underlying such forward-looking statements. Forward-looking statements may be identified, without limitation, by the use of the words "anticipates," "estimates," "expects," "believes," "intends," "plans" and similar expressions. These statements include information regarding drilling schedules; expected or planned production capacity; the closing of branch offices; future production of the Fields; the negotiation of a gas-sales contract, completion of development and commencement of production in Malaysia-Thailand; the Company's capital budget and future capital requirements; the Company's meeting its future capital needs; future general and administrative expense and the portion to be capitalized; future interest expense and the portion to be capitalized; the Company's realization of its deferred tax asset; the level of future expenditures for environmental costs; the outcome of regulatory and litigation matters; the impact of Year 2000 issues; the estimated fair value of derivative instruments, including the equity swap; and proven oil and gas reserves and discounted future net cash flows therefrom. These statements are based on current expectations and involve a number of risks and uncertainties, including those described in the context of such forward-looking statements, as well as those presented below. Actual results and developments could differ materially from those expressed in or implied by such statements due to these and other factors.
CERTAIN FACTORS RELATING TO THE OIL AND GAS INDUSTRY
The Company's strategy is to focus its exploration activities on what the Company believes are relatively high-potential prospects. No assurance can be given that these prospects contain significant oil and gas reserves or that the Company will be successful in its exploration activities thereon. The Company follows the full cost method of accounting for exploration and development of oil and gas reserves whereby all acquisition, exploration and development costs are capitalized. Costs related to acquisition, holding and initial exploration of licenses in countries with no proved reserves are initially capitalized, including internal costs directly identified with acquisition, exploration and development activities. The Company's exploration licenses are periodically assessed for impairment on a country-by-country basis. If the Company's investment in exploration licenses within a country where no proved reserves are assigned is deemed to be impaired, the licenses are written down to estimated recoverable value. If the Company abandons all exploration efforts in a country where no proved reserves are assigned, all acquisition and exploration costs associated with the country are expensed. The Company's assessments of whether its investment within a country is impaired and whether exploration activities within a country will be abandoned are made from time to time based on its review and assessment of drilling results, seismic data and other information it deems relevant. Due to the unpredictable nature of exploration drilling activities, the amount and timing of impairment expense are difficult to predict with any certainty. Financial information concerning the Company's assets at December 31, 1998, including capitalized costs by geographic area, is set forth in note 22.
The markets for oil and natural gas historically have been volatile and are likely to continue to be volatile in the future. Oil and natural-gas prices have been subject to significant fluctuations during the past several decades in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign government regulations, political conditions in the Middle East and other production areas, the foreign supply of oil and natural gas, the price and availability of alternative fuels, and overall economic conditions. It is impossible to predict future oil and gas price movements with any certainty.
The Company's oil and gas business is also subject to all of the operating risks normally associated with the exploration for and production of oil and gas, including, without limitation, blowouts, cratering, pollution, earthquakes, labor disruptions and fires, each of which could result in substantial losses to the Company due to injury or loss of life and damage to or destruction of oil and gas wells, formations, production facilities or other properties. In accordance with customary industry practices, the Company maintains insurance coverage limiting financial loss resulting from certain of these operating hazards. Losses and liabilities arising from uninsured or underinsured events would reduce revenues and increase costs to the Company. There can be no assurance that any insurance will be adequate to cover losses or liabilities. The Company cannot predict the continued availability of insurance, or its availability at premium levels that justify its purchase.
The Company's oil and gas business is also subject to laws, rules and regulations in the countries where it operates, which generally pertain to production control, taxation, environmental and pricing concerns, and other matters relating to the petroleum industry. Many jurisdictions have at various times imposed limitations on the production of natural gas and oil by restricting the rate of flow for oil and natural-gas wells below their actual capacity. There can be no assurance that present or future regulation will not adversely affect the operations of the Company.
The Company is subject to extensive environmental laws and regulations. These laws regulate the discharge of oil, gas or other materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of such materials at various sites. The Company does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry. Nevertheless, no assurance can be given that environmental laws and regulations will not, in the future, adversely affect the Company's consolidated results of operations, cash flows or financial position. Pollution and similar environmental risks generally are not fully insurable.
CERTAIN FACTORS RELATING TO INTERNATIONAL OPERATIONS
The Company derives substantially all of its consolidated revenues from international operations. Risks inherent in international operations include loss of revenue, property and equipment from such hazards as expropriation, nationalization, war, insurrection and other political risks; trade protection measures; risks of increases in taxes and governmental royalties; and renegotiation of contracts with governmental entities; as well as changes in laws and policies governing operations of other companies. Other risks inherent in international operations are the possibility of realizing economic currency-exchange losses when transactions are completed in currencies other than U.S. dollars and the Company's ability to freely repatriate its earnings under existing exchange control laws. To date, the Company's international operations have not been materially affected by these risks.
CERTAIN FACTORS RELATING TO COLOMBIA
The Company is a participant in significant oil and gas discoveries in the Fields, located approximately 160 kilometers (100 miles) northeast of Bogota, Colombia. Development of reserves in the Fields is ongoing and will require additional drilling. Pipelines connect the major producing fields in Colombia to export facilities and to refineries.
From time to time, guerrilla activity in Colombia has disrupted the operation of oil and gas projects causing increased costs. Such activity increased over the last year, causing delays in the development of the Cupiagua Field. Although the Colombian government, the Company and its partners have taken steps to maintain security and favorable relations with the local population, there can be no assurance that attempts to reduce or prevent guerrilla activity will be successful or that guerrilla activity will not disrupt operations in the future.
Colombia is among several nations whose progress in stemming the production and transit of illegal drugs is subject to annual certification by the President of the United States. The President of the United States has announced that Colombia would be certified. There can be no assurance that, in the future, Colombia will receive certification or a national interest waiver. The consequences of the failure to receive certification or a national interest waiver generally include the following: all bilateral aid, except anti-narcotics and humanitarian aid, would be suspended; the Export-Import Bank of the United States and the Overseas Private Investment Corporation would not approve financing for new projects in Colombia; U.S. representatives at multilateral lending institutions would be required to vote against all loan requests from Colombia, although such votes would not constitute vetoes; and the President of the United States and Congress would retain the right to apply future trade sanctions. Each of these consequences could result in adverse economic consequences in Colombia and could further heighten the political and economic risks associated with the Company's operations in Colombia. Any changes in the holders of significant government offices could have adverse consequences on the Company's relationship with the Colombian national oil company and the Colombian government's ability to control guerrilla activities and could exacerbate the factors relating to foreign operations discussed above.
CERTAIN FACTORS RELATING TO MALAYSIA-THAILAND
The Company is a partner in a significant gas exploration project located in the Gulf of Thailand approximately 450 kilometers northeast of Kuala Lumpur and 750 kilometers south of Bangkok as a contractor under a production-sharing contract covering Block A-18 of the Malaysia-Thailand Joint Development Area. Test results to date indicate that significant gas and oil deposits lie within the block. Development of gas production is in the planning stage, but is expected to take several years and require the drilling of additional wells and the installation of production facilities. Pipelines also will be required to be connected between Block A-18 and ultimate markets. The terms under which any gas produced from the Company's contract area in Malaysia-Thailand is sold may be affected adversely by the present monopoly, gas-purchase and transportation conditions in both Malaysia and Thailand. In connection with the sale to a subsidiary of ARCO of one-half of the shares of the Company's subsidiary that held its interest in Block A-18, ARCO agreed to pay the future exploration and development costs attributable to the Company's and ARCO's collective interest in Block A-18, up to $377 million or until first production from a gas field, after which the Company and ARCO would each pay 50% of such costs. See note 5 - Asset Dispositions.
INFLUENCE OF HICKS MUSE
In connection with the issuance of the 1,822,500 shares of 8% Preference Shares to HM4 Triton in September 1998, the Company and HM4 Triton entered into a shareholders agreement (the "Shareholders Agreement") pursuant to which, among other things, the size of the Company's Board of Directors was set at ten, and HM4 Triton exercised its right to designate four out of such ten directors. The Shareholders Agreement provides that, in general, for so long as the entire Board of Directors consists of ten members, HM4 Triton (and its designated transferees, collectively) may designate four nominees for election to the Board (with such number of designees increasing or decreasing proportionately with any change in the total number of members of the Board and with any fractional directorship rounded up to the next whole number). The right of HM4 Triton (and its designated transferees) to designate nominees for election to the Board will be reduced if the number of ordinary shares held by HM4 Triton and its affiliates (assuming conversion of 8% Preference Shares into ordinary shares) represents less than certain specified percentages of the number of ordinary shares (assuming conversion of 8% Preference Shares into ordinary shares) purchased by HM4 Triton pursuant to the Stock Purchase Agreement.
The Shareholders Agreement provides that, for so long as HM4 Triton and its affiliates continue to hold a certain minimum number of ordinary shares (assuming conversion of 8% Preference Shares into ordinary shares), the Company may not take certain actions without the consent of HM4 Triton, including (i) amending its Articles of Association or the terms of the 8% Preference Shares with respect to the voting powers, rights or preferences of the holders of 8% Preference Shares, (ii) entering into a merger or similar business combination transaction, or effecting a reorganization, recapitalization or other transaction pursuant to which a majority of the outstanding ordinary shares or any 8% Preference Shares are exchanged for securities, cash or other property, (iii) authorizing, creating or modifying the terms of any series of securities that would rank equal to or senior to the 8% Preference Shares, (iv) selling or otherwise disposing of assets comprising in excess of 50% of the market value of the Company, (v) paying dividends on ordinary shares or other shares ranking junior to the 8% Preference Shares, other than regular dividends on the Company's 5% Preference Shares, (vi) incurring or guaranteeing indebtedness (other than certain permitted indebtedness), or issuing preference shares, unless the Company's leverage ratio at the time, after giving pro forma effect to such incurrence or issuance and to the use of the proceeds, is less than 2.5 to 1, (vii) issuing additional shares of 8% Preference Shares, other than in payment of accumulated dividends on the outstanding 8% Preference Shares, (viii) issuing any shares of a class ranking equal or senior to the 8% Preference Shares, (ix) commencing a tender offer or exchange offer for all or any portion of the ordinary shares or (x) decreasing the number of shares designated as 8% Preference Shares.
As a result of HM4 Triton's ownership of 8% Preference Shares and ordinary shares and the rights conferred upon HM4 Triton and its designees pursuant to the Shareholder Agreement, HM4 Triton has significant influence over the actions of the Company and will be able to influence, and in some cases determine, the outcome of matters submitted for approval of the shareholders. The existence of HM4 Triton as a shareholder of the Company may make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, a majority of the outstanding ordinary shares. A third party would be required to negotiate any such transaction with HM4 Triton, and the interests of HM4 Triton as a shareholder may be different from the interests of the other shareholders of the Company.
COMPETITION
The Company encounters strong competition from major oil companies (including government-owned companies), independent operators and other companies for favorable oil and gas concessions, licenses, production-sharing contracts and leases, drilling rights and markets. Additionally, the governments of certain countries where the Company operates may from time to time give preferential treatment to their nationals. The oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers.
MARKETS
Crude oil, natural gas, condensate, and other oil and gas products generally are sold to other oil and gas companies, government agencies and other industries. The availability of ready markets for oil and gas that might be discovered by the Company and the prices obtained for such oil and gas depend on many factors beyond the Company's control, including the extent of local production and imports of oil and gas, the proximity and capacity of pipelines and other transportation facilities, fluctuating demands for oil and gas, the marketing of competitive fuels, and the effects of governmental regulation of oil and gas production and sales. Pipeline facilities do not exist in certain areas of exploration and, therefore, any actual sales of discovered oil or gas might be delayed for extended periods until such facilities are constructed.
LITIGATION
The outcome of litigation and its impact on the Company are difficult to predict due to many uncertainties, such as jury verdicts, the application of laws to various factual situations, the actions that may or may not be taken by other parties and the availability of insurance. In addition, in certain situations, such as environmental claims, one defendant may be responsible, or potentially responsible, for the liabilities of other parties. Moreover, circumstances could arise under which the Company may elect to settle claims at amounts that exceed the Company's expected liability for such claims in order to avoid costly litigation. Judgments or settlements could, therefore, exceed any reserves.
21. COMMITMENTS AND CONTINGENCIES
For internal planning purposes, the Company's capital spending program for the year ending December 31, 1999, is approximately $117 million, excluding capitalized interest, of which approximately $83 million relates to the Fields and $34 million relates to the Company's exploration activities in other parts of the world.
During the normal course of business, the Company is subject to the terms of various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. It is management's belief that such commitments, including the capital requirements in Colombia and other parts of the world discussed above, will be met without any material adverse effect on the Company's operations or consolidated financial condition.
The Company leases office space, other facilities and equipment under various operating leases expiring through 2002. Total rental expense was $2.1 million, $2 million and $2 million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the minimum payments required under terms of the leases are as follows 1999 -- $1.8 million; 2000 -- $1.1 million; 2001 -- $.1 million; and 2002 -- nil.
GUARANTEES
At December 31, 1998, the Company had guaranteed loans of approximately $1.4 million for a Colombian pipeline company in which the Company has an ownership interest. The Company also guaranteed performance of $21.6 million in future exploration expenditures in various countries. These commitments are backed primarily by unsecured letters of credit.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental laws and regulations. These laws regulate the discharge of oil, gas or other materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of such materials at various sites. The Company believes that the level of future expenditures for environmental matters, including clean-up obligations, is impracticable to determine with a precise and reliable degree of accuracy. Management believes that such costs, when finally determined, will not have a material adverse effect on the Company's operations or consolidated financial condition.
LITIGATION
In July through October 1998, eight lawsuits were filed against the Company and Thomas G. Finck and Peter Rugg, in their capacities as Chairman and Chief Executive Officer and Chief Financial Officer, respectively. Each case was filed on behalf of a putative class of persons and/or entities who purchased the Company's securities between March 30, 1998, and July 17, 1998, inclusive, and seeks recovery of compensatory damages, fees and costs. The cases allege violations of securities laws in connection with disclosures concerning the Company's properties, operations, and value relating to a prospective sale of the Company or of all or a part of its assets. Additionally, one case alleges negligent misrepresentation and seeks recovery of punitive damages. On September 21, 1998, a motion for consolidation and for appointment as lead plaintiffs and for approval of selection of lead counsel was filed with respect to the cases. With the exception of the request for consolidation, which has been agreed to, the motion is presently pending. Also, pending is the Company's motion to dismiss or transfer for improper venue.
The Company believes it has meritorious defenses to these claims and intends to vigorously defend these actions. No discovery has been taken at this time, however,and the ultimate outcome is not currently predictable. There can be no assurance that the litigation will be resolved in the Company's favor. An adverse result could have a material adverse effect on the Company's financial position or results of operations.
The Company is subject to certain other litigation matters, none of which are expected to have a material, adverse effect on the Company's operations or consolidated financial condition.
22. GEOGRAPHIC INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 changes the way enterprises report information about operating segments and related disclosures about products and services, geographic areas and major customers. The Company adopted SFAS 131 in 1998. Information for 1997 and 1996 has been restated from the prior year's presentation in order to conform to the 1998 presentation.
Triton's operations are primarily related to crude oil and natural-gas exploration and production. The Company's principle properties, operations and oil and gas reserves are located in Colombia and Malaysia-Thailand. The Company is exploring for oil and gas in these areas, as well as in southern Europe, Africa and the Middle East. All sales are currently derived from oil and gas production in Colombia. Financial information about the Company's operations by geographic area is presented below:
During 1998, the Company sold one-half of the shares of the subsidiary through which the Company owned its 50% share of Block A-18 resulting in a gain of $63.2 million which is included in Malaysia-Thailand sales and other operating revenues and operating profit (loss). See note 5 --Asset Dispositions.
Colombia operating profit (loss) for the year ended December 31, 1998, included an SEC full cost ceiling limitation writedown of $241 million. Additionally, Exploration operating profit (loss) included writedowns of oil and gas properties and other assets in Guatemala ($27.2 million) and China ($22.5 million) for the year ended December 31, 1998. Exploration operating profit (loss) for the year ended December 31, 1996, included a writedown of $43 million for the Company's oil and gas properties and other assets in Argentina. See note 3 - Writedown of Assets.
At December 31, 1998, corporate assets were principally cash and cash equivalents, the U.S. deferred tax asset and other fixed assets. Exploration assets included $43.9 million, $14.9 million, $10.8 million and $10.2 million of capitalized costs in Italy, Greece, Equatorial Guinea and Oman, respectively.
23. SUBSEQUENT EVENT
On January 4, 1999, the Company issued 3,177,500 8% Preference Shares for $70 per share, or total proceeds of $222.4 million (before closing expenses of $4.3 million). See note 2, Pro Forma Balance Sheet - 8% Preference Shares Issuance.
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
Gross profit (loss) is comprised of sales and other operating revenues less operating expenses, depreciation, depletion and amortization, and writedowns pertaining to operating assets.
In the fourth quarter of 1998, the Company recorded a writedown of $115.9 million, net of tax, related to the application of the full cost ceiling limitation as prescribed by the SEC. See note 3 - Writedown of Assets.
25. OIL AND GAS DATA (UNAUDITED)
The following tables provide additional information about the Company's oil and gas exploration and production activities.
RESULTS OF OPERATIONS
The results of operations for oil- and gas-producing activities, considering direct costs only, follow:
Malaysia-Thailand revenues for the year ended December 31, 1998, included a gain of $63.2 million from the sale of one-half of the shares of the subsidiary through which the Company owned its 50% share of Block A-18. Other revenues for the years ended December 31, 1998, 1997, and 1996, included gains of $4.5 million, $4.1 million, and $4.1 million from the sale of the Company's Bangladesh subsidiary, Argentine subsidiary, and royalty interests in U.S. properties, respectively.
Depletion includes depreciation on support equipment and facilities calculated on the unit-of-production method.
COSTS INCURRED AND CAPITALIZED COSTS
The costs incurred in oil and gas acquisition, exploration and development activities and related capitalized costs follow:
A summary of costs excluded from depletion at December 31, 1998, by year incurred follows:
The Company excludes from its depletion computation property acquisition and exploration costs of unevaluated properties and major development projects in progress. The excluded costs include $85.5 million ($65.1 million and $20.4 million classified as evaluated and unevaluated, respectively) for Block A-18 in the Malaysia-Thailand Joint Development Area that will become depletable once production begins, which is estimated to occur between 30-36 months after signing of a gas-sales contract. Additionally, excluded costs include exploration costs of $29.5 million, $12.2 million, $10.8 million, $10 million and $8.1 million in Italy, Greece, Equatorial Guinea, Oman and Madagascar, respectively. At this time, the Company is unable to predict either the timing of the inclusion of these costs and the related oil and gas reserves in its depletion computation or their potential future impact on depletion rates. Drilling or other exploration activities are being conducted in each of these cost centers.
OIL AND GAS RESERVE DATA (OIL RESERVES ARE STATED IN THOUSANDS OF BARRELS AND GAS RESERVES ARE STATED IN MILLIONS OF CUBIC FEET.)
The following tables present the Company's estimates of its proved oil and gas reserves. The estimates for the proved reserves in the Fields in Colombia were prepared by the Company's independent petroleum engineers, DeGolyer and MacNaughton. The estimates for the proved reserves in Malaysia-Thailand and the Liebre Field in Colombia were prepared by the Company's internal petroleum reservoir engineers. The Company emphasizes that reserve estimates are approximate and are expected to change as additional information becomes available. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Accordingly, there can be no assurance that the reserves set forth herein will ultimately be produced, and there can be no assurance that the proved undeveloped reserves will be developed within the periods anticipated. As of December 31, 1998, the Company did not have a contract for the sale of gas to be produced from its interest in the Malaysia-Thailand Joint Development Area. In estimating its reserves attributable to such interest, the Company assumed that production from the interest would be sold at the initial base price for natural gas specified in the Heads of Agreement entered into in April 1998. There can be no assurance that the price to be provided in any gas contract will be equal to the price used in the Company's calculations.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH INFLOWS AND CHANGES THEREIN
The following table presents for the net quantities of proved oil and gas reserves a standardized measure of discounted future net cash inflows discounted at an annual rate of 10%. The future net cash inflows were calculated in accordance with Securities and Exchange Commission guidelines. Future cash inflows were computed by applying year-end prices of oil and gas relating to the Company's proved reserves to the estimated year-end quantities of those reserves. Future price changes were considered only to the extent provided by contractual agreements in existence at year-end.
Future production and development costs were computed by estimating those expenditures expected to occur in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs. The Company emphasizes that the future net cash inflows should not be construed as representative of the fair market value of the Company's proved reserves. The meaningfulness of the estimates is highly dependent upon the accuracy of the assumptions upon which they were based. Actual future cash inflows may vary materially.
In connection with the sale to ARCO of one-half of the shares of the subsidiary through which the Company owned its 50% share of Block A-18, ARCO agreed to pay the Company an additional $65 million each at July 1, 2002, and July 1, 2005, if certain specific development objective are met by such dates, or $40 million each if the objectives are met within one year thereafter. Future cash inflows for Malaysia-Thailand at December 31, 1998, include incentive payments of $65 million each in July 2002 and July 2005. As of December 31, 1998, the Company did not have a contract for the sale of gas to be produced from its interest in the Malaysia-Thailand Joint Development Area. In estimating discounted future net cash inflows attributable to such interest, the Company assumed that production from the interest would be sold at the initial base price for natural gas specified in the Heads of Agreement entered into in April 1998.
Changes in the standardized measure of discounted future net cash inflows follow:
SCHEDULE II
TRITON ENERGY LIMITED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
___________________ Note -- Deductions for the allowance for doubtful receivables in the year ended December 31, 1996, related primarily to disposal of other assets.