SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 1, 1998
R&B FALCON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-13729 _ 76-0544217
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
901 Threadneedle, Houston, TX 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 496-5000
Item 2. Acquisition of Assets
Effective December 1, 1998, R&B Falcon Corporation ("R&B Falcon") acquired
all of the outstanding stock of Cliffs Drilling Company ("Cliffs Drilling")
in exchange for approximately 27.1 million shares of R&B Falcon common
stock valued at approximately $385.2 million. This valuation is based upon
a price of $14.2125 per share of R&B Falcon common stock, which was the
average closing price per share of R&B Falcon's common stock for ten
trading days during the period in which the principal terms of the merger
were agreed upon and the merger was announced. The acquisition was
effected pursuant to an Agreement and Plan of Merger dated August 21, 1998,
whereby each share of Cliffs Drilling common stock was converted into 1.7
shares of R&B Falcon common stock and cash in lieu of fractional shares.
The acquisition of Cliffs Drilling will be recorded using the purchase
method of accounting.
Cliffs Drilling is an international offshore contract drilling company
which provides daywork and turnkey drilling services, mobile offshore
production units and well engineering and management services. Cliffs
Drilling's assets at the time of the acquisition consisted primarily of 16
jack-up rigs, three self-contained platform rigs, four mobile offshore
production units and 11 land rigs. We intend to continue using these assets
in the same business as was previously conducted by Cliffs Drilling.
Item 7. Financial Statements and Exhibits
(a) Financial Statements
The financial statements of Cliffs Drilling for the periods specified in
Rule 3-05 (b) of Regulation S-X, as previously filed with the Securities
and Exchange Commission as part of Cliffs Drilling's Annual Report on
Form 10-K for the year ended December 31, 1997, and Quarterly Report on
Form 10-Q for the period ended September 30, 1998, are attached hereto
and filed herewith as Exhibits 99.1 and 99.2 and are incorporated herein
by reference.
(b) Pro Forma Financial Information
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The combined unaudited pro forma condensed financial statements set
forth below as of September 30, 1998, for the year ended December 31,
1997 and for the nine months ended September 30, 1998 were derived from
R&B Falcon's historical financial statements and from the historical
financial statements of Cliffs Drilling. The combined unaudited pro forma
condensed statements of operations are presented as if the acquisition
of Cliffs Drilling and certain other acquisition and financing
transactions were consummated at the beginning of the period. The
combined unaudited pro forma condensed balance sheet is presented as if
the acquisition of Cliffs Drilling and certain other acquisition and
financing transactions were consummated at September 30, 1998. The
combined unaudited pro forma condensed financial statements do not
reflect any anticipated cost savings which may be realized by R&B Falcon
after consummation of the acquisition of Cliffs Drilling.
The combined unaudited pro forma condensed financial statements do not
purport to represent what the combined results of operations actually
would have been if the acquisition of Cliffs Drilling had occurred as of
the date indicated or will be for any future periods. The combined
unaudited pro forma condensed financial statements should be read in
conjunction with the audited consolidated financial statements included
in the Annual Report filed on Form 10-K for the year ended December 31,
1997 and the Quarterly Report filed on Form 10-Q for the quarter ended
September 30, 1998, and the audited consolidated financial statements
and unaudited interim consolidated financial statements of Cliffs
Drilling included in this Form 8-K/A as Exhibits 99.1 and 99.2.
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Combined Unaudited Pro Forma Condensed Balance Sheet
As of September 30, 1998
(in millions)
Historical Pro Forma
------------------- --------------------
Cliffs
R&B Falcon Drilling Adjustments Combined
---------- -------- ----------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67.7 $ 37.3 $ (14.2)a $ 90.8
Short-term investments 82.0 82.0
Accounts receivable 230.8 63.9 294.7
Inventories 28.4 11.5 39.9
Drilling contracts in progress 11.6 11.6
Other current assets 19.0 9.7 28.7
--------- ------- ------- ---------
Total current assets 427.9 134.0 (14.2) 547.7
--------- ------- ------- ---------
PROPERTY AND EQUIPMENT:
Drilling and related equipment 2,612.8 513.2 (7.4) 3,118.6
Other assets 177.9 18.7 196.6
--------- ------- ------- ---------
Total property and equipment 2,790.7 531.9 (7.4) 3,315.2
Accumulated depreciation (490.3) (121.9) 104.6 (507.6)
--------- ------- ------- ---------
Net property and equipment 2,300.4 410.0 97.2 b 2,807.6
--------- ------- ------- ---------
DEFERRED CHARGES AND OTHER ASSETS 37.9 6.3 80.0 c 124.2
--------- ------- ------- ---------
TOTAL ASSETS $ 2,766.2 $ 550.3 $ 163.0 $ 3,479.5
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations $ 113.6 $ - $ - $ 113.6
Long-term obligations due
within one year 24.0 24.0
Accounts payable 47.4 27.2 74.6
Accrued expenses 161.3 34.8 196.1
--------- ------- ------- ---------
Total current liabilities 346.3 62.0 408.3
LONG-TERM OBLIGATIONS 1,374.6 203.1 1,577.7
OTHER NON-CURRENT LIABILITIES 37.6 1.5 39.1
DEFERRED INCOME TAXES 103.7 21.1 34.0 b 158.8
NET LIABILITIES OF DISCONTINUED
OPERATIONS 1.3 1.3
--------- ------- ------- ---------
Total liabilities 1,863.5 287.7 34.0 2,185.2
--------- ------- ------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 59.7 59.7
--------- ------- ------- ---------
STOCKHOLDERS' EQUITY:
Common stock 1.7 .2 .1 d 2.0
Capital in excess of par 658.1 182.9 208.4 d 1,049.4
Retained earnings 184.0 84.3 (84.3)d 184.0
Other (.8) (4.8) 4.8 d (.8)
--------- ------- ------- ---------
Total stockholders' equity 843.0 262.6 129.0 1,234.6
--------- ------- ------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,766.2 $ 550.3 $ 163.0 $ 3,479.5
========= ======= ======= =========
See Notes to Combined Unaudited Pro Forma Condensed Balance Sheet as of
September 30, 1998
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
NOTES TO COMBINED UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 1998
The following is a summary of the significant assumptions and
adjustments included in the combined unaudited pro forma condensed balance
sheet as of September 30, 1998:
a) Cash and Cash Equivalents - Other costs related to the merger as
shown below (in millions):
Description Amount
----------- ------
Investment advisors . . . . . . . . . . . $ 5.4
Executive waiver and release payments . . 7.4
Printing, legal and accounting fees . . . 1.4
------
Total other cash costs. . . . . . . . $ 14.2
======
In addition, we expect that upon completion of the acquisition of
Cliffs Drilling, approximately $1.5 million of the aggregate executive
waiver and release payments, representing that portion of the payments not
directly attributable to the waiver and release of quantifiable benefits
due such executive officers under existing contractual obligation, will be
expensed.
b) Net Property and Equipment and Deferred Income Taxes - In
accordance with Accounting Principles Board Opinion No. 16, Business
Combinations, using the purchase method of accounting, the values of the
acquired assets were adjusted to their estimated fair value. This resulted
in an increase to net property and equipment of $97.2 million.
Additionally, in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, a corresponding increase of
$34.0 million was recorded in deferred income taxes.
c) Deferred Charges and Other Assets - The excess of the investment
in the net assets of Cliffs Drilling results in excess cost over net assets
acquired of $80.0 million. Included in the cost of the acquisition are the
cash costs described in note a) above.
d) Stockholders' Equity - The following table shows the effects of
issuing approximately 27.1 million new shares of R&B Falcon Corporation at
a per share price of $14.2125, a value of approximately $6.2 million
assigned to the conversion of existing options of Cliffs Drilling into R&B
Falcon options determined consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation and the
elimination of the current equity of Cliffs Drilling (in millions):
R&B Falcon Cliffs
Shares and Drilling Net Pro
Options Equity Forma
Issued Eliminated Adjustment
------- ---------- ----------
Common stock, par value $.01 per share $ .3 $ (.2) $ .1
Capital in excess of par 391.3 (182.9) 208.4
Retained earnings - (84.3) (84.3)
Other - 4.8 4.8
------- ------- -------
Total stockholders' equity $ 391.6 $(262.6) $ 129.0
======= ======= =======
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Combined Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1997
(in millions, except per share amounts)
Historical Pro Forma
-------------------- --------------------
Cliffs
R&B Falcon Drilling Adjustments Combined
---------- -------- ----------- --------
OPERATING REVENUES $ 942.1 $ 263.6 $ 21.6 $ 1,227.3
------- ------- ------- ---------
COSTS AND EXPENSES:
Operating expenses 447.6 145.2 13.4 606.2
Depreciation 82.9 20.4 16.2 119.5
General and administrative 51.9 8.7 60.6
Merger expenses 66.4 66.4
------- ------- ------- ---------
Total costs and expenses 648.8 174.3 29.6 852.7
------- ------- ------- ---------
OPERATING INCOME 293.3 89.3 (8.0) 374.6
------- ------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (46.3) (17.8) 3.3 (60.8)
Interest income 5.8 1.9 7.7
Other, net (2.7) (1.6) (4.3)
------- ------- ------- ---------
Total other income (expense) (43.2) (17.5) 3.3 (57.4)
------- ------- ------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 250.1 71.8 (4.7) 317.2
Income tax expense 84.7 25.1 (.9) 108.9
------- ------- ------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 165.4 46.7 (3.8) 208.3
------- ------- ------- ---------
Minority Interest 9.4 9.4
------- ------- ------- ---------
INCOME FROM CONTINUING
OPERATIONS $ 156.0 $ 46.7 $ (3.8) $ 198.9
======= ======= ======= =========
INCOME FROM CONTINUING
OPERATIONS PER SHARE:
Basic $ .95 $ 3.06 $ 1.04
======= ======= =========
Diluted $ .94 $ 3.01 $ 1.03
======= ======= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 164.1 15.2 11.3 190.6
======= ======= ======= =========
Diluted 166.2 15.5 11.6 193.3
======= ======= ======= =========
Reclassification of Cliffs Drilling
Statement of Operations:
Operating Expenses as reported $ 148.2
Less Gain on Disposition of Assets (3.2)
Plus Exchange Rate (Gain)/Loss .2
-------
Operating Expenses Reclassified $ 145.2
=======
See Schedule of Adjustments to Combined Unaudited Pro Forma Condensed
Statement of Operations.
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Combined Unaudited Pro Forma Condensed Statement of Operations
For the Nine Months Ended September 30, 1998
(in millions, except per share amounts)
Historical Pro Forma
-------------------- ---------------------
Cliffs
R&B Falcon Drilling Adjustments Combined
---------- -------- ----------- ---------
OPERATING REVENUES $ 803.9 $ 269.5 $ - $ 1,073.4
------- ------- ------- ---------
COSTS AND EXPENSES:
Operating expenses 470.4 158.7 629.1
Depreciation 68.1 21.2 6.2 95.5
General and administrative 44.6 8.7 53.3
Merger expenses (1.0) (1.0)
------- ------- ------- ---------
Total costs and expenses 582.1 188.6 6.2 776.9
------- ------- ------- ---------
OPERATING INCOME 221.8 80.9 (6.2) 296.5
------- ------- ------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (43.0) (15.2) 1.7 (56.5)
Interest income 7.0 1.5 8.5
Other, net (.1) (.4) (.5)
------- ------- ------- ---------
Total other income (expense) (36.1) (14.1) 1.7 (48.5)
------- ------- ------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 185.7 66.8 (4.5) 248.0
Income tax expense 67.8 23.4 (1.0) 90.2
------- ------- ------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 117.9 43.4 (3.5) 157.8
------- ------- ------- ---------
Minority Interest 8.2 8.2
------- ------- ------- ---------
INCOME FROM CONTINUING
OPERATIONS $ 109.7 $ 43.4 $ (3.5) $ 149.6
======= ======= ======= =========
INCOME FROM CONTINUING
OPERATIONS PER SHARE:
Basic $ .66 $ 2.73 $ .78
======= ======= =========
Diluted $ .66 $ 2.71 $ .77
======= ======= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 165.2 15.9 11.1 192.2
------- ------- ------- ---------
Diluted 166.4 16.0 11.2 193.6
------- ------- ------- ---------
Reclassification of Cliffs
Drilling Statement of Operations:
Operating Expenses as reported $ 157.3
Less Gain on Disposition of Assets (.2)
Plus Exchange Rate (Gain)/Loss 1.6
-------
Operating Expenses Reclassified $ 158.7
=======
See Schedule of Adjustments to Combined Unaudited Pro Forma Condensed
Statement of Operations.
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Schedule of Adjustments to Combined Unaudited Pro Forma Condensed Statement
of Operations
(in millions, except per share amounts)
Weighted
Average
Income Common Shares
Operating Operating Interest tax -------------
revenues expenses Depreciation expense expense Basic Diluted
-------- -------- ------------ ------- ------- ----- -------
For the Year Ended
December 31, 1997
a) To include operating
results for all of
1997 for the drilling
and production units
acquired from Well
Services (Marine)
Limited by Cliffs
Drilling on December
29, 1997. $ 17.3 $ 11.1 $ 2.6 $ - $ 1.3 .7 .7
b) To consolidate the
operating results of
the West Indies Joint
Venture for all of
1997. The remaining
50% interest in the
venture was acquired
by Cliffs Drilling
on August 1, 1997:
Record 100%
of results 5.3 2.3 .6 (.5) .7
Reverse equity
in earnings (1.0) (.4)
c) To adjust interest
expense for Cliffs
Drilling as if the $50
million senior notes
issued on August 7,
1997 had been
outstanding for the
entire year. (2.7) (.9)
d) To adjust interest
expense for R&B Falcon
as if the $1.1 billion
senior notes issued in
April 1998 had been
issued January 1, 1997.
Interest rates on the
$1.1 billion senior
notes are less than on
the debt retired. 6.5 2.3
e) To record additional
depreciation due to
the additions to
property and
equipment as a
result of recording
Cliffs Drilling's
assets at their
estimated fair value. 11.0 (3.9)
f) To record amortization
of excess cost over
net assets acquired
based on 40 year
amortization period. 2.0
g) Additional shares
for conversion of
Cliffs Drilling's
shares at a ratio of
1.7 to 1 for R&B
Falcon shares. 10.6 10.9
------ ------ ------ ----- ----- ---- ----
Totals for the year
ended December
31, 1997 $ 21.6 $ 13.4 $ 16.2 $ 3.3 $ (.9) 11.3 11.6
====== ====== ====== ===== ===== ==== ====
For the Nine Months Ended September 30, 1998
a) To adjust interest
expense for R&B Falcon
as if the $1.1 billion
senior notes issued in
April 1998 had been
issued January 1, 1998.
Interest rates on the
$1.1 billion senior
notes are less than on
the debt retired. $ - $ - $ - $ 1.7 $ .6
b) To record additional
depreciation due to
the additions to
property and
equipment as a
result of recording
Cliffs Drilling's
assets at their
estimated fair value. 4.7 (1.6)
c) To record amortization
of excess cost over
net assets acquired
based on 40 year
amortization period. 1.5
d) Additional shares
for conversion of
Cliffs Drilling's
shares at a ratio
of 1.7 to 1 for
R&B Falcon shares. 11.1 11.2
------ ------ ------ ----- ----- ---- ----
Totals for the nine
months ended September
30, 1998 $ - $ - $ 6.2 $ 1.7 $(1.0) 11.1 11.2
====== ====== ====== ===== ===== ==== ====
(c) Exhibits
23 - Consent of Ernst & Young LLP, with respect to the
financial statements of Cliffs Drilling Company.
99.1 - Financial statements of Cliffs Drilling Company
for the year ended December 31, 1997.
99.2 - Financial statements of Cliffs Drilling Company
for period ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
R&B FALCON CORPORATION
By /s/Leighton E. Moss
Leighton E. Moss
Senior Vice President
Dated: January 20, 1999
EXHIBIT INDEX
Number Exhibit
----- ---------------------------------------------------
23 Consent of Ernst & Young LLP, with respect to the
financial statements of Cliffs Drilling Company.
99.1 Financial statements of Cliffs Drilling Company for
the year ended December 31, 1997.
99.2 Financial statements of Cliffs Drilling Company for
period ended September 30, 1998.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
We consent to the use of our report dated February 13, 1998 included in the
Annual Report (Form 10-K) of Cliff's Drilling Company for the year ended
December 31, 1997, filed with the Securities and Exchange Commission,
incorporated by reference herein and included in Exhibit 99.1 of this Form
8-K/A of R&B Falcon Corporation.
/s/ERNST & YOUNG LLP
Houston, Texas
January 19, 1999
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Cliffs Drilling Company
We have audited the accompanying consolidated balance sheets of Cliffs
Drilling Company as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cliffs Drilling Company at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 13, 1998
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------
1997 1996 1995
--------- --------- --------
(In thousands, except per share
amounts)
REVENUES:
Revenues $ 261,887 $ 132,341 $ 84,156
Income (Loss) from Equity Investments 1,745 768 (867)
--------- --------- --------
263,632 133,109 83,289
COSTS AND EXPENSES:
Operating Expenses 148,158 91,984 67,713
Depreciation, Depletion and Amortization 20,443 10,388 7,271
General and Administrative Expense 8,731 6,300 5,289
--------- --------- --------
177,332 108,672 80,273
--------- --------- --------
OPERATING INCOME 86,300 24,437 3,016
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets 3,150 3,694 2,666
Interest Income 1,941 2,725 1,065
Interest Expense (17,838) (9,265) (199)
Exchange Rate Gain (Loss) (174) - 2,554
Other, net (1,596) (173) (1,250)
--------- --------- --------
INCOME BEFORE INCOME TAXES 71,783 21,418 7,852
INCOME TAX EXPENSE 25,124 6,996 2,406
--------- --------- --------
NET INCOME 46,659 14,422 5,446
DIVIDENDS APPLICABLE TO PREFERRED STOCK - (31) (2,659)
--------- --------- --------
NET INCOME APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES $ 46,659 $ 14,391 $ 2,787
========= ========= ========
NET INCOME PER COMMON SHARE:
Basic $ 3.06 $ 1.05 $ 0.34
========= ========= ========
Diluted $ 3.01 $ 1.02 $ 0.34
========= ========= ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 15,237 13,736 8,192
========= ========= ========
Diluted 15,493 14,083 8,213
========= ========= ========
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
1997 1996
--------- ---------
(In thousands, except
share information)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 28,122 $ 39,181
Accounts Receivable, net of allowance for
doubtful accounts of $352 and $797 at
December 31, 1997 and 1996, respectively 53,341 28,866
Notes and Other Receivables, Current 10,190 4,922
Inventories 7,551 5,807
Drilling Contracts in Progress 16,503 17,669
Prepaid Insurance 1,772 7,408
Other Prepaid Expenses 6,595 6,349
--------- ---------
Total Current Assets 124,074 110,202
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment 453,915 283,223
Other 15,373 16,530
--------- ---------
469,288 299,753
Less: Accumulated Depreciation, Depletion (100,061) (83,279)
--------- ---------
Net Property and Equipment 369,227 216,474
NOTES AND OTHER RECEIVABLES, LONG-TERM - 3,510
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 1,828 4,434
DEFERRED CHARGES AND OTHER 5,022 4,926
--------- ---------
TOTAL ASSETS $ 500,151 $ 339,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 33,171 30,545
Accrued Interest 2,673 2,007
Other Accrued Expenses 30,414 9,429
--------- ---------
Total Current Liabilities 66,258 41,981
10.25% SENIOR NOTES 203,606 150,000
DEFERRED INCOME TAXES 14,335 5,028
DEFERRED INCOME AND OTHER 23 369
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares
authorized; 16,321,932 and 15,562,940 shares
issued and 15,906,880 and 15,133,008 shares
outstanding at December 31, 1997 and 1996,
respectively 163 80
Paid-in Capital 182,420 153,513
Retained Earnings (Deficit) 40,942 (5,717)
Less: Notes Receivable from Officers for
Restricted Stock - (186)
Restricted Stock (2,467) (223)
Treasury Stock, at cost, 415,052 and 429,932
shares at December 31, 1997 and 1996, respectively (5,129) (5,299)
--------- ---------
Total Shareholders' Equity 215,929 142,168
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 500,151 $ 339,546
========= =========
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
OPERATING ACTIVITIES:
Net Income $ 46,659 $ 14,422 $ 5,446
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation, Depletion and Amortization 20,443 10,388 7,271
Deferred Income Tax Expense 9,307 5,184 1,848
Impairment of Oil and Gas Leasehold Cost - 1,017 -
Mobilization Expense Amortization 447 314 519
Gain on Disposition of Assets (3,150) (3,694) (2,666)
Amortization of Debt Issue Costs 822 462 -
Amortization of Restricted Stock 430 28 25
Amortization of Debt Premium (269) - -
Tax Benefit Associated with Exercise
of Stock Options 2,930 1,603 -
Other 1,465 (1,352) 46
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable (29,743) (19,907) (3,728)
Inventories (1,744) (1,667) 1,612
Drilling Contracts in Progress 1,169 (6,324) (6,261)
Prepaid Insurance and Other Prepaid
Expenses 4,943 (10,688) 2,500
Investments in and Advances to
Unconsolidated Affiliates (1,392) (928) 3,767
Accounts Payable and Other Accrued
Expenses 24,277 18,256 4,546
--------- --------- ---------
Net Cash Provided By Operating
Activities 76,594 7,114 14,925
INVESTING ACTIVITIES:
Capital Expenditures (84,535) (36,027) (11,687)
Acquisition of Rigs and Related Equipment (61,969) (108,477) (1,750)
Acquisition of Equity Interest in Rig
and Related Equipment - (3,237) -
Proceeds from Sale of Property and Equipment 5,627 6,856 372
Insurance Proceeds from Loss of Rig and
Related Equipment - 292 14,308
Collection of Notes Receivable 3,696 977 1,576
--------- --------- ---------
Net Cash Provided By (Used In)
Investing Activities (137,181) (139,616) 2,819
FINANCING ACTIVITIES:
Proceeds from Borrowings 60,375 150,000 7,000
Payments on Borrowings (12,184) - (7,000)
Proceeds from Exercise of Stock Options 2,260 2,129 -
Debt Issue Costs (923) (5,309) -
Acquisition of Treasury Stock - (661) -
Payments for Redemption of Preferred Stock - (850) -
Preferred Stock Dividends - (31) (2,659)
--------- --------- ---------
Net Cash Provided By (Used In)
Financing Activities 49,528 145,278 (2,659)
--------- --------- ---------
NET INCREASE (DECREASE ) IN CASH AND CASH
EQUIVALENTS (11,059) 12,776 15,085
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,181 26,405 11,320
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,122 $ 39,181 $ 26,405
========= ========= =========
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Notes
Receivable
from
Officers
Common Stock for
------------ Paid- Retained Re- Re-
Par In Earnings stricted sticted Treasury
Shares Value Capital (Deficit) Stock Stock Stock
------ ----- ------ -------- -------- ------- --------
(In thousands, except share amounts)
Balance at
December 31,1994 8,178,894 $ 45 $ 99,135 $(22,895) $ (232) $ (57) $(5,115)
Net Income - - - 5,446 - - -
Preferred Stock
Dividends Declared - - - (2,659) - - -
Amortization of
Restricted Stock - - - - - 25 -
Employer Contri-
butions to 401(k)
Savings Plan 47,240 - 51 - - - 271
--------- ---- -------- -------- ------ ----- ------
Balance at
December 31, 1995 8,226,134 45 99,186 (20,108) (232) (32) (4,844)
========= ==== ======== ======== ====== ===== =======
Net Income - - - 14,422 - - -
Preferred Stock
Conversion 4,227,114 21 27,879 - - - -
Preferred Stock
Dividends Declared - - - (31) - - -
Common Stock Issued
in Connection with
Offshore Rig
Acquisition 2,400,000 12 22,203 - - - -
Restricted Stock
Issuances 13,500 - 220 - - (220) -
Acquisition of
Treasury Stock (86,000) - - - - - (661)
Collection of Officers'
Notes Receivable - - - - 46 - -
Amortization of
Restricted Stock - - - - - 29 -
Exercise of Stock
Options 316,050 2 2,127 - - - -
Tax Benefit
Associated with
Exercise of Stock
Options - - 1,603 - - - -
Employer Contri
butions to 401(k)
Savings Plan 36,210 - 295 - - - 206
---------- ---- -------- ------- ------- ------ -------
Balance at
December 31, 1996 15,133,008 80 153,513 (5,717) (186) (223) (5,299)
========== ==== ======== ======= ======= ====== =======
Net Income - - - 46,659 - - -
Stock Split - 76 (76) - - - -
Common Stock
Issued in
Connection with
Offshore
Rig Acquisition 437,939 4 20,496 - - - -
Restricted Stock
Issuances 90,600 1 3,165 - - (3,166) -
Restricted Stock
Cancellations (17,800) - (492) - - 492 -
Collection of
Officers' Notes
Receivable - - - - 186 - -
Amortization of
Restricted Stock - - - - - 430 -
Exercise of Stock
Options 243,900 2 2,258 - - - -
Tax Benefit
Associated with
Exercise of Stock
Options - - 2,930 - - - -
Employer
Contributions to
401(k) Savings
Plan 19,233 - 626 - - - 170
---------- ---- -------- -------- ----- -------- -----
Balance at
December 31, 1997 15,906,880 $163 $182,420 $ 40,942 $ - $ (2,467) (5,129)
========== ==== ======== ======== ===== ======== ======
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Corporate Structure and Principles of Consolidation
The accompanying consolidated financial statements include the
activities and accounts of Cliffs Drilling Company (the "Company"), all
wholly-owned subsidiaries of the Company and the Company's international
activities, which are organized as foreign branches. All significant
intercompany transactions and balances are eliminated in consolidation.
The Company uses the equity method to account for affiliates in which it
does not have control. Cliffs Neddrill Central Turnkey International
("CNCTI"), a joint venture among the Company, Neddrill Turnkey Drilling
B.V. and Perforadora Central, S.A. de C.V., was created to drill turnkey
wells in the Bay of Campeche and Bay of Tampico in Mexico. Drilling
operations commenced in February, 1993 and completed in 1995. On May 23,
1996, the Company acquired the stock of Viking Trinidad Limited (renamed
Cliffs Drilling Trinidad Limited), which owned a 50% interest in the West
Indies Drilling Joint Venture (the "WINDJV"). The WINDJV was a joint
venture between Cliffs Drilling Trinidad Limited and Well Services (Marine)
Limited ("Well Services"), which owned a jack-up drilling rig. On August 1,
1997, Cliffs Drilling Trinidad Limited acquired an additional 49% interest
in the WINDJV from Well Services. On December 29, 1997, the Company
acquired the remaining 1% interest in the WINDJV from Well Services. In
1996, the Company became a 50% joint venture partner with Perforadora
Central, S.A. de C.V. by forming Cliffs Central Drilling International
("CCDI") for the marketing of drilling services in Mexico. In 1996, the
Company became a 1/3 (33 1/3%) owner of Servicios Integrados Petroleros
C.C.I., S.A. ("CCI"). CCI is a joint venture company among the Company,
Inelectra S.A. and Cementaciones Petroleras Venezolanas C.A. which markets
drilling services in Venezuela.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company's policy is to invest cash in short-term investments.
Uninvested cash balances are kept at minimum levels. Investments are valued
at cost, which approximates market. The Company considers all highly liquid
cash investments with a maturity date of three months or less when
purchased to be cash equivalents.
Concentration of Credit Risk
The market for the Company's services is the oil and gas industry, and
the Company's customers consist primarily of integrated and government-
owned international oil companies and independent oil and gas producers.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company has in place insurance to cover certain exposure in its foreign
operations and provides allowances for potential credit losses when
necessary. Accordingly, management considers such credit risk to be
limited.
Inventories
Inventories, consisting principally of tubular goods consumed in turnkey
drilling operations and spare drilling parts, are carried at cost, specific
identification method.
Drilling Contracts in Progress
The Company recognizes revenues and expenses related to its turnkey
drilling contracts when all terms and conditions of the contract have been
fulfilled. Consequently, the costs related to in-progress turnkey drilling
contracts are deferred as drilling contracts in progress until the contract
is completed and revenue is realized. The amount of drilling contracts in
progress is dependent on the volume of contracts, the duration of the
contract at the end of the reporting period and the contract amount.
Provision for losses on incomplete contracts is made when such losses are
anticipated.
The Company's Daywork Drilling business segment frequently leases its
jack-up and land drilling rigs to the Engineering Services business segment
for turnkey drilling operations. Revenues, expenses and profits generated
by the drilling rigs operating under turnkey contracts are deferred until
the contract is completed. While the turnkey contract is in progress, the
rig operating profit is offset against drilling contracts in progress. Rig
operating losses are recognized when incurred and are not deferred.
Rig Mobilization and Demobilization Costs
The Company defers costs of moving a drilling unit or MOPU under
contract to a new area of operation. The deferred mobilization costs are
amortized on a straight-line basis over the term of the applicable drilling
contract. Unamortized mobilization costs were $2,770,000 and $24,000 at
December 31, 1997 and 1996, respectively.
Demobilization charges, in general, are reimbursed by the customer based
upon contract terms. In situations where demobilization charges are not
reimbursed and are expected to be material, estimated demobilization costs
are accrued over the term of the applicable contract. Unanticipated
demobilization costs are expensed as incurred at the completion of the
contract.
Property and Equipment
Property and equipment are carried at original cost or at adjusted net
realizable value, as applicable. Major renewals and betterments are
capitalized in the property accounts, while the cost of repairs and
maintenance is charged to operating expenses in the period incurred.
Acquisitions of rigs and related equipment have been accounted for under
the purchase method of accounting and therefore, the results of the
acquired assets are combined with the Company's results only from the
acquisition date forward.
Interest on funds borrowed for construction of qualifying assets is
capitalized during the construction period. Amortization of capitalized
interest is included in "Depreciation, Depletion and Amortization" in the
Consolidated Statements of Operations.
Cost and accumulated depreciation, depletion and amortization are
removed from the accounts when assets are sold or retired, and the
resulting gains or losses are included in the Consolidated Statements of
Operations.
Depreciation of property and equipment is provided on the straight-line
basis at rates based upon expected useful lives of the various classes of
assets as follows:
Rigs and Related Equipment:
Jack-Up Drilling Rigs 15 Years
Platform Drilling Rigs 15 Years
Land Drilling Rigs 16 Years
MOPUs 10 Years
Drill Pipe 5 Years
Other (excluding oil
and gas properties) 3 - 5 Years
No depreciation expense is recorded during periods of construction or
refurbishment. To provide for any deterioration that may occur while the
rigs are not operating for an extended period of time, a minimum
depreciation charge is provided at a reduced rate of 25% of the normal
depreciation rate.
Costs related to the exploration and development of oil and gas
properties are accounted for under the "Successful Efforts" method of
accounting. Lease acquisition costs related to oil, gas and mineral
properties are capitalized when incurred. The acquisition costs of unproved
properties, which are individually significant, are assessed on a property-
by-property basis, and a loss is recognized by provision of a valuation
allowance when the assessment indicates an impairment in value. Exploration
costs, excluding exploratory wells, are charged to expense as incurred.
Costs of drilling exploratory wells are capitalized pending determination
as to whether the wells have proved reserves which justify commercial
development. If commercial reserves are not found, the drilling costs are
charged to dry hole expense. Tangible and intangible drilling costs
applicable to productive exploratory wells and to the development of oil
and gas reserves are capitalized.
The cost of productive leaseholds is amortized by field on the unit of
production basis by applying the ratio of produced oil and gas to estimated
proved reserves. Lease and well equipment and intangible drilling costs
associated with productive wells are amortized based on proved developed
reserves.
Impairment of Long-Lived Assets
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which
requires that certain long-lived assets be reviewed for impairment whenever
events indicate that the carrying amount of an asset may not be
recoverable, and that an impairment loss be recognized under certain
circumstances in the amount by which the carrying value exceeds the fair
value of the asset. SFAS No. 121 requires assets to be grouped, for
purposes of evaluating potential impairment of assets, at the lowest level
for which there are identifiable cash flows. Previously, the Company
evaluated impairment of its oil and gas assets on an aggregate Company-wide
basis, rather than a disaggregate basis. Upon the issuance of SFAS No. 121
and receipt of an annual independent petroleum engineering report, the
Company began its analysis of impairment under the new guidelines. This
evaluation indicated that the undiscounted estimated future cash flows
attributable to the proved oil and gas reserves of one property were less
than its carrying amount. Accordingly, the Company recorded a $737,000
charge in 1995 to write the impaired property down to its fair value. The
impairment loss is included in "Depreciation, Depletion and Amortization"
in the Consolidated Statements of Operations.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Deferred income taxes are provided on items recognized in different periods
for financial and tax reporting purposes. See Note 6 of Notes to
Consolidated Financial Statements.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Under APB 25, generally, no
compensation expense is recognized for an employee stock option when the
exercise price equals the market price of the underlying stock on the date
of grant. Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As provided in the statement, the Company
elected to continue to measure compensation expense using the guidelines of
APB 25 and to include disclosures of net income and earnings per share as
if the fair value based method of accounting were utilized. See Note 9 of
Notes to Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenues from its daywork drilling and MOPU
operations as services are rendered, based upon the contracted daily rate
multiplied by the number of operating days in the period. Turnkey drilling
contract revenues are recognized when all terms and conditions of the
contract have been fulfilled. The Company recognizes oil and gas revenues
from its interests in producing wells based upon the sales method.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company's
operations. Foreign currency gains and losses are included in the
Consolidated Statements of Operations during the period incurred.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. The earnings per
share amounts and weighted average number of common and common equivalent
shares outstanding prior to 1997 have been restated as required to comply
with SFAS No. 128. See Note 11 of Notes to Consolidated Financial
Statements.
Earnings per share and weighted average shares have been retroactively
adjusted to reflect a two-for-one stock split effected in the form of a
100% stock dividend effective May 22, 1997 (the "Stock Split").
The Company issued 2,113,557 shares (pre-split basis) of Common Stock,
$.01 par value ("Common Stock") upon conversion of 1,115,988 shares of its
1,150,000 issued and outstanding shares of $2.3125 Convertible Exchangeable
Preferred Stock ("Preferred Stock") on January 17, 1996. See Note 10 of
Notes to Consolidated Financial Statements.
Segment Reporting
In 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
("SFAS No. 131"). SFAS No. 131 changes the reporting of segment information
in annual financial statements and also requires reporting selected segment
information in interim financial reports to shareholders. SFAS No. 131 is
effective for years beginning after December 15, 1997 and is not expected
to have a significant impact on the Company's consolidated financial
statements and related disclosures upon adoption.
Change in Presentation
Certain financial statement items have been reclassified in prior years
to conform with the current year presentation.
2. Notes and Other Receivables, Long-Term
Effective January 1, 1993, the Company sold its 4 inland posted barge
drilling rigs and rights to certain oil and gas production payment proceeds
generated from a proceeds-of-production drilling program for an aggregate
sales price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000
in notes. The first note had a face amount of $1,000,000 and was repaid in
March, 1995. The second note had a face amount of $7,500,000, with interest
calculated at the base rate on corporate loans as quoted by the Wall Street
Journal plus one and one-half percent (1 1/2%). Principal and interest on
the $7,500,000 note was payable on a monthly basis solely from the proceeds
of the oil and gas production payment on which the note was based. The note
was scheduled to mature on January 1, 1998; however, it was repaid in May,
1997 in connection with the Company's disposition of the various oil and
gas related interests underlying the long-term note receivable. The Company
recorded a net gain of $2,718,000 related to the disposition of the oil and
gas related interests.
3. Property and Equipment
On December 29, 1997, the Company completed the acquisition of 2
offshore platform drilling rigs, one self propelled jack-up
drilling/workover rig and substantially all of the assets used in the
offshore contract drilling business in Trinidad previously operated by Well
Services. The purchase price totaled $44,000,000 consisting of cash of
$23,500,000 and the issuance by the Company of 437,939 shares of Common
Stock. An additional $3,000,000 of contingent cash consideration may be
paid to the Sellers if certain post-closing criteria are met. The outcome
of the contingency is not determinable at this time, and relates to the
ultimate valuation of the assets acquired.
Effective October 1, 1997, the Company exercised an option to purchase
a platform drilling rig which is currently operating in Brazil. The
purchase price was $4,250,000.
Effective August 1, 1997, the Company acquired substantially all of the
remaining 50% interest of the WINDJV. The purchase price was $8,371,000
consisting of $6,000,000 of cash and $2,371,000 of debt assumed, net of
various working capital amounts acquired.
On January 24, 1997, the Company completed the acquisition of the stock
of a subsidiary of Andrade Gutierrez Perfuracao Ltda., which owned the jack-
up drilling rig ATENA, four 1,500 HP land drilling rigs, miscellaneous
drilling equipment and a contract to operate a platform rig in Brazil (the
"AGP Acquisition"). The purchase price was $28,500,000 in cash.
On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2,850,000. The rig was refurbished and is currently
operating in Venezuela.
On June 19, 1996, Cliffs Drilling No. 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico and the charterer
exercised its option to purchase the unit for $5,392,000, resulting in a
gain of $2,684,000.
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the WINDJV, which owned an additional
jack-up drilling rig, and their related assets (collectively referred to as
the "Southwestern Rigs") operated by Southwestern Offshore Corporation
("Southwestern"). The purchase price of the Southwestern Rigs was (a)
$103,800,000 in cash (after reductions of $6,200,000 for required
refurbishments of certain Southwestern Rigs not made prior to closing) plus
(b) issuance of 1,200,000 shares (pre-split basis) of the Company's Common
Stock, and (c) assumption of certain contractual liabilities, including the
Company's guarantee of $4,250,000 in indebtedness of the WINDJV to Citibank
N.A. related to the refurbishment of the jack-up drilling rig owned by it
(together with accrued but unpaid interest thereon and costs of
collection).
On May 10, 1996, the Company acquired the jack-up drilling rig OCEAN
MAGALLANES from Diamond Offshore Southern Company for $4,500,000. The
Company renamed this unit Cliffs Drilling 155, which is currently operating
in Venezuela.
On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage
during demobilization from Venezuela to the U.S. Gulf of Mexico. During an
inspection of the hull damage by the Company and its insurance adjusters,
other damage was discovered which was attributed to an earthquake in
Venezuela in May, 1994. The rig was declared a compromised total loss by
the Company's insurance underwriters. The Company received $14,600,000 from
its insurance underwriters for damages to the MARQUETTE. The Company has
scrapped the rig and salvaged various rig equipment for use on other rigs
or to sell. The Company recognized a gain of $2,715,000 on the disposition
of the unit during 1995.
Interest capitalization associated with rig refurbishments during the
years ended December 31, 1997, 1996 and 1995 was $629,000, $730,000 and $0,
respectively.
4. Investments in and Advances to Unconsolidated Affiliates
The Company's investments in and advances to unconsolidated affiliates
are not significant at or for the years ended December 31, 1997 and 1996;
therefore, applicable disclosures were not required. The following
information summarizes the Statement of Operations of CNCTI for the year
ended December 31, 1995:
Revenues $ 24,052,000
Operating expenses 26,638,000
------------
Operating loss (2,586,000)
Other, net 433,000
------------
Net loss $ (2,153,000)
============
5. Notes Payable
Long-term debt at December 31, 1997 consists solely of 10.25% Senior
Notes due 2003 (the "Senior Notes") in the aggregate principal amount of
$200,000,000 and debt premium, net of amortization, of $3,606,000. In
addition to the $150,000,000 of Senior Notes sold during 1996, the Company
sold $50,000,000 of Senior Notes on August 7, 1997 at a premium of
$3,875,000. Considering the premium, the effective interest rate on the
$50,000,000 Senior Notes is 9.5%. Interest on the Senior Notes is payable
semi-annually during each May and November. The Senior Notes do not require
any payments of principal prior to their stated maturity on May 15, 2003,
but the Company is required to make offers to purchase Senior Notes upon
the occurrence of certain events as defined in the indenture, such as asset
sales or a change of control of the Company.
On or after May 15, 2000, the Senior Notes are redeemable at the option
of the Company, in whole or in part, at a price of 105% of principal if
redeemed during the twelve months beginning May 15, 2000, at a price of
102.5% of principal if redeemed during the twelve months beginning May 15,
2001, or at a price of 100% of principal if redeemed after May 15, 2002, in
each case together with interest accrued to the redemption date.
Notwithstanding the foregoing, the Company may at its option use all or a
portion of the proceeds from a public equity offering consummated on or
prior to May 15, 1999, to redeem up to $50,000,000 principal amount of the
Senior Notes at a redemption price equal to 110% of the principal amount,
provided that at least $150,000,000 in aggregate principal amount of the
Senior Notes remain outstanding immediately after such redemption.
The Senior Notes are senior unsecured obligations of the Company,
ranking pari passu in right of payment with all senior indebtedness and
senior to all subordinated indebtedness. The Senior Notes are
unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured basis by the Company's principal subsidiaries (the "Subsidiary
Guarantors"), and the Subsidiary Guarantees rank pari passu in right of
payment with all senior indebtedness of the Subsidiary Guarantors and
senior to all subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees may be released under certain circumstances. The
Senior Notes and the Subsidiary Guarantees are effectively subordinated to
all secured indebtedness, including amounts outstanding under the Revolving
Credit Facility. The Subsidiary Guarantees provide that each Subsidiary
Guarantor will unconditionally guarantee, jointly and severally, the full
and prompt performance of the Company's obligations under the indenture and
the Senior Notes. Each Subsidiary Guarantor is 100% owned by the Company.
The indenture under which the Senior Notes are issued imposes
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness, make
capital expenditures, create liens, sell assets and make dividends or other
payments.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined
such financial statements and other disclosures are not material to
investors. The assets, equity, income and cash flows of the non-guarantor
subsidiaries on an individual and combined basis are less than 1% of the
consolidated assets, equity, income and cash flows, respectively, of the
Company and are inconsequential. The combined condensed financial
information of the Company's Subsidiary Guarantors is as follows:
At December 31,
----------------------
1997 1996
--------- ---------
(In thousands)
Current Assets $ 31,872 $ 19,798
Non-Current Assets 214,462 140,042
--------- ---------
Total Assets $ 246,334 $ 159,840
========= =========
Current Liabilities $ 21,417 $ 8,078
Non-Current Liabilities 189,004 135,499
Equity 35,913 16,263
--------- ---------
Total Liabilities and Equity $ 246,334 $ 159,840
========= =========
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Revenues $ 96,166 $ 51,081 $ 1,921
Operating Income (Loss) $ 41,400 $ 14,224 $ (787)
Net Income (Loss) $ 19,650 $ 5,264 $ (531)
The Senior Notes had a fair value of $214,960,000 at December 31, 1997,
or a 7.48% premium to carrying value, based upon the quoted market price of
the debt.
The Company executed the Second Restated Credit Agreement with
International Nederlanden (U.S.) Capital Corporation, now known as ING
(U.S.) Capital Corporation ("ING") during the first quarter of 1994,
thereby converting its $10,000,000 working capital credit facility to a
$20,000,000 revolving line of credit ("Revolving Credit Facility") subject
to certain borrowing base limitations. All advances to the Company from
the Revolving Credit Facility bear interest at one-quarter of one percent
(1/4%) per annum plus the greater of the prevailing Federal Funds Rate plus
one-half percent (1/2%) or a referenced average prime rate; or at the
adjusted LlBOR rate plus two percent (2%) per annum. The foregoing rates
are subject to an increase of one-half percent (1/2%) in the event certain
financial criteria are not met. The Company is also obligated to pay ING
(i) a commitment fee equal to one-half percent (1/2%) per annum on the
average daily unadvanced portion of the commitments and (ii) a letter of
credit fee of two percent (2%) per annum on the average daily undrawn and
unexpired amount of each letter of credit during the period that sum
remains outstanding.
On June 27, 1996, the Company and ING modified and amended the
$20,000,000 Revolving Credit Facility to, among other things, increase the
amount available under such facility to $35,000,000. The Revolving Credit
Facility matures on May 31, 1998.
The Revolving Credit Facility is secured by accounts receivable, certain
rig inventory and equipment, certain oil and gas properties and the stock
of certain subsidiaries of the Company. Under the Second Restated Credit
Agreement with ING, as amended, the Company is required to comply with
various covenants including, but not limited to, the maintenance of various
financial ratios, and is restricted from declaring, making or paying any
dividends on the Common Stock.
Availability and borrowings under the Revolving Credit Facility are as
follows:
December 31,
----------------------
1997 1996
--------- ---------
(In thousands)
Line of credit available $ 32,583 $ 32,583
Short-term borrowings outstanding - -
Letters of credit outstanding 2,417 2,417
Interest payments on all indebtedness amounted to $17,035,000,
$7,527,000 and $198,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
6. Income Taxes
During 1996 and 1997, the Company utilized all net operating loss
carryforwards and foreign tax credit carryforwards generated in prior years
which were available to offset future taxable income. For financial
reporting purposes, a valuation allowance of $1,589,000 was provided at
December 31, 1996 to reduce deferred tax assets to a level which, more
likely than not, would be realized. The valuation allowance was eliminated
during 1997 to reflect the use of the related foreign tax assets in the
reduction of current year liabilities.
The Company provided for $25,124,000 and $6,996,000 of income taxes for
the years ended December 31, 1997 and 1996, respectively. This represents
an effective tax rate of 35% and 33% for the years 1997 and 1996,
respectively. Current taxes consist of Federal income taxes and taxes paid
in foreign jurisdictions. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income
tax purposes. The significant components of deferred tax assets and
liabilities are as follows:
December 31,
--------------------
1997 1996
--------- ---------
(In thousands)
Deferred tax liabilities:
Tax over book depreciation $ 11,886 $ 7,235
Certain prepaid expenses 620 2,593
Mobilization 970 -
Foreign income taxes 1,399 -
Undistributed earnings of subsidiaries - 250
--------- ---------
Total deferred tax liabilities 14,875 10,078
Deferred tax assets:
Accounts receivable reserves 123 279
Restricted stock 76 -
Foreign tax credits - 3,811
Minimum tax credits - 641
Net operating loss carryforwards - 492
Percentage depletion carryforward - 678
Other, net 341 738
--------- ---------
Total deferred tax assets 540 6,639
Valuation allowance for deferred tax assets - (1,589)
--------- ---------
Net deferred tax assets 540 5,050
--------- ---------
Net deferred tax liabilities $ 14,335 $ 5,028
========= =========
Tax benefits of $2,930,000 and $1,603,000 associated with the exercise
of non-qualified stock options during the years ended December 31, 1997 and
1996, respectively, are reflected as a component of shareholders' equity.
For financial reporting purposes, income before income taxes includes
the following components:
For the Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Income before income taxes:
United States $ 15,778 $ 992 $ 125
Foreign 56,005 20,426 7,727
--------- --------- ---------
Total $ 71,783 $ 21,418 $ 7,852
========= ========= =========
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
For the Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Current:
Federal $ 10,907 $ 144 $ 100
Foreign 4,910 1,668 458
--------- --------- ---------
Total Current 15,817 1,812 558
Deferred:
Federal 7,908 5,184 1,848
Foreign 1,399 - -
--------- --------- ---------
Total Deferred 9,307 5,184 1,848
--------- --------- ---------
$ 25,124 $ 6,996 $ 2,406
========= ========= =========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
For the Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Tax at U.S. statutory rates $ 25,124 $ 7,496 $ 2,748
Foreign tax provision 6,308 1,668 458
Foreign tax credits available (4,909) (1,361) -
Alternative minimum tax provision - 144 100
Alternative minimum credits available - (144) (100)
Change in valuation allowance (1,589) (720) (368)
Safe harbor lease termination - - (897)
Other, net 190 (87) 465
--------- --------- ---------
Income tax expense $ 25,124 $ 6,996 $ 2,406
========= ========= =========
Income tax payments amounted to $11,508,000, $1,854,000 and $531,000 for
the years ended December 31, 1997, 1996 and 1995.
7. Pro Forma Financial Information
The following unaudited pro forma financial information gives effect to
the acquisition of the Southwestern Rigs using the purchase method of
accounting given the related assumptions and adjustments, the offering of
$150,000,000 of Senior Notes and the issuance of 1,200,000 shares (pre-
split basis) of the Company's Common Stock valued at an average price of
$18.51 per share (pre-split basis) in connection with the Southwestern Rigs
acquisition.
The pro forma financial information is based upon the historical
consolidated financial statements of the Company and Southwestern for the
years ended December 31, 1996 and 1995. The historical financial statements
of Southwestern include the operating results of the Southwestern Rigs
during the periods indicated to the date of acquisition, May 23, 1996.
However, the financial statements of Southwestern exclude depreciation
expense related to the Southwestern Rigs because Southwestern managed,
rather than owned, the rigs. The historical results of Southwestern include
the results of operations of the rigs that were available for service
during the indicated periods. During the year ended December 31, 1995, 40%
of the Southwestern Rigs were not available for service as a result of
being cold stacked or refurbished.
The pro forma financial information was prepared assuming that the
transactions described above were consummated as of January 1, 1995. The
pro forma financial information has been prepared based upon assumptions
deemed appropriate by the Company and may not be indicative of actual
results. The historical results of Southwestern's operations are included
with the Company's results beginning May 23, 1996. The unaudited Pro Forma
Consolidating Statements of Operations for the years ended December 31,
1996 and 1995 are included in the Company's Forms 8-K dated September 19,
1997 and May 23, 1996, respectively.
Year Ended
December 31,
--------------------
1996 1995
--------- ---------
(In thousands,
except per
Share amounts)
(Unaudited)
Revenues $ 147,672 $ 108,854
Net Income (Loss) $ 10,273 $ (7,937)
Net Income (Loss) Per Common Share:
Basic $ 0.70 $ (1.00)
Diluted $ 0.68 $ (1.00)
8. Defined Contribution Plan
The Company has a defined contribution plan ("401(k) Plan"). Under the
401(k) Plan, an employee who has reached age 21 and completed 90 days of
service is eligible to participate in the plan through contributions that
range in one percent multiples up to 16% of salary, with a 1997 dollar
maximum of $9,500. In addition, the Company contributes (or "matches") on
behalf of each participant shares of Common Stock equal to 100% of the
portion of each participant's contribution which does not exceed 6% of the
participant's annual salary. Employer contributions for certain highly
compensated employees may be further limited through the operation of the
non-discrimination requirements found in Sections 401(k) and 401(m) of the
Internal Revenue Code.
Employee contributions can be invested in any or all of 6 investment
options in multiples of 5%. Employer contributions are invested in the
Company's Common Stock. Employee contributions are 100% vested and non-
forfeitable. Employer contributions are subject to a graded vesting
schedule, with participants becoming fully vested upon completion of five
years employment service with the Company. Distributions from the 401(k)
Plan are made upon retirement, death, disability or separation of service.
Participants may borrow up to one-half (1/2) of their vested interest in
the plan, limited to a maximum of $50,000. Contributions to the 401(k) Plan
and earnings on contributions are not included in a participant's gross
income until distributed to the participant. Contributions to the 401(k)
Plan by the Company were $531,000, $413,000 and $365,000 for the years 1997,
1996 and 1995, respectively.
9. Capital Stock
The Company's Revolving Credit Facility and the indenture governing the
Senior Notes of the Company restrict payment of dividends on the Common
Stock. Specifically, the indenture restricts the payment of dividends based
on (i) availability of funds under a formula based on previously unapplied
cumulative net income since April 1, 1996 plus certain stock sale proceeds
raised after May 15, 1996 plus $10,000,000 and (ii) satisfaction of the
then applicable minimum interest coverage ratio for debt incurrence.
Cumulative net income for purposes of the test excludes gains or losses on
asset sales and certain other non-recurring charges or credits as specified
in the indenture. Although the Company was not prohibited from paying cash
dividends under the terms of the indenture as of December 31, 1997,
management does not intend to declare any cash dividends in the foreseeable
future.
The Company has a 1988 Incentive Equity Plan under which stock options,
stock appreciation rights, restricted stock and deferred stock awards for
up to 650,000 shares (pre-split basis) of the Company's Common Stock may be
awarded to officers, directors and key employees. The Company's 1988
Incentive Equity Plan is designed to attract and reward key executive
personnel. At December 31, 1997, the Company had 38,850 shares of Common
Stock reserved for issuance under the 1988 Incentive Equity Plan.
Stock Options
Stock options granted pursuant to the 1988 Incentive Equity Plan expire
not more than ten years from the date of grant and typically vest over
three years, with 50% vesting after one year and 25% vesting in each of the
succeeding two years. All of the options granted by the Company were
granted at an option price equal to the fair market value of the Common
Stock at the date of grant.
Changes in the number of outstanding options on the Company's Common
Stock are summarized as follows:
Weighted
Number of Average
Shares Under Exercise Price
Option (Per Share)
------------ --------------
Outstanding Options at December 31, 1994 524,400 $6.68
Canceled (4,400) $6.85
-------
Outstanding Options at December 31, 1995 520,000 $6.68
=======
Granted 368,000 $13.82
Exercised (316,050) $6.74
Canceled (500) $6.44
-------
Outstanding Options at December 31, 1996 571,450 $11.24
=======
Granted 86,500 $33.39
Exercised (243,900) $9.27
Canceled (80,000) $14.00
-------
Outstanding Options at December 31, 1997 334,050 $17.76
=======
Exercisable, December 31,
1995 475,250 $6.71
1996 199,700 $6.60
1997 103,550 $10.27
At December 31, 1997, the following options were outstanding and
exercisable and had the indicated weighted average remaining contractual
lives:
Outstanding Exercisable
- ------------------- --------------------
Weighted Weighted Weighted
Average Average Range of Average
Number Exercise Number Exercise Exercise Remaining
of Price of Price Prices Contractual
Options (Per Share) Options (Per Share) (Per Share) Life (Years)
- ------- ----------- ------- ----------- --------------- ------------
247,550 $12.30 103,550 $10.27 $6.44 - $14.00 7.3
86,500 $33.39 - - $32.75 - $69.50 9.4
- ------- -------
334,050 $17.76 103,550 $10.27 $6.44 - $69.50 7.8
======= =======
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions:
Year Ended
December 31,
------------------
1997 1996
------ ------
Weighted Average Risk-Free Interest Rate 6.5% 6.3%
Dividend Yield 0.0% 0.0%
Weighted Average Stock Price Volatility Factor 60.1% 41.7%
Expected Life of the Options (Years) 4 4
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. The calculated weighted average
fair values of options granted during 1997 and 1996 were $17.41 and $5.67,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. This pro
forma financial information is calculated in accordance with SFAS 123, but
is not likely to be representative of the effects on reported net income in
future years. The Company's pro forma information follows:
Year Ended
December 31,
------------------
1997 1996
------- -------
(In thousands, except
per share amounts)
Pro Forma Net Income $45,965 $13,973
Pro Forma Net Income Per Common Share:
Basic $3.02 $1.02
Diluted $2.95 $0.99
Restricted Stock
The Company's Board of Directors has awarded restricted stock to the
Company's officers and key employees from time to time. Awards totaling
90,600 shares and one award of 5,000 shares (pre-split) were made during
1997 and 1996, respectively. Restrictions on 1997 awards of 88,600 shares
lapse with respect to 25% of the entire award after one year and after each
of the succeeding three years. Restrictions on 1997 awards of 2,000 shares
lapse with respect to 33 1/3% of the entire award after one year and after
each of the succeeding two years. The 1996 award of 5,000 shares (pre-
split) was forfeited during 1997. Expense related to amortization of
restricted stock was $430,000, $29,000 and $25,000 for the years 1997, 1996
and 1995, respectively. Deferred compensation expense relative to non-
vested shares of restricted stock, measured by the market value of the
stock on the date of grant, is being amortized on a straight-line basis
over the restriction period. The unamortized deferred compensation expense,
which has been deducted from equity in the Consolidated Balance Sheets,
amounted to $2,467,000 and $223,000 at December 31, 1997 and 1996,
respectively.
Effective December 31, 1992, the Company's Board of Directors approved
the sale of 35,000 shares of restricted Common Stock to certain key
executives. The price paid for the restricted stock was $6.63 per share.
The Company extended full recourse, interest-bearing loans to the key
executives in the aggregate amount of $232,000. Interest was calculated at
seven and one-half percent (7 1/2%) per annum payable quarterly and accrued
on the last day of March, June, September and December until the notes were
due on December 31, 1997. All such loans were paid by December 31, 1997. In
connection with the restricted stock sale, the Company executed deferred
stock agreements with the executives which provided for a share match in
the event certain performance criteria were achieved over the five-year
period ending December 31, 1997. The performance measures were attained by
the Company, resulting in an award of 14,400 additional shares of Common
Stock on February 18, 1998. Compensation expense of $590,000 related to the
deferred stock awards was accrued during 1997 when it became probable that
the Company performance criteria would be met. No such compensation expense
was accrued during the years ended December 31, 1996 and 1995.
10. Redeemable Preferred Stock
On January 17, 1996, the Company issued 2,113,557 shares (pre-split) of
Common Stock upon conversion of 1,115,988 shares of its 1,150,000 issued
and outstanding shares of Preferred Stock. The remaining 34,012 shares of
Preferred Stock were redeemed for cash in the amount of $25.69 per share
plus $0.22 per share in accrued dividends thereon at a cost to the Company
of approximately $881,000.
11. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands, except
per share amounts)
Numerator:
Net Income $ 46,659 $ 14,422 $ 5,446
Preferred Stock Dividends - (31) (2,659)
--------- --------- ---------
Numerator for Basic Earnings Per Share -
Income Available to Common Shareholders 46,659 14,391 2,787
Effect of Dilutive Securities:
Preferred Stock Dividends - 31 -
--------- --------- ---------
Numerator for Diluted Earnings Per
Share - Income Available to Common
Shareholders After Assumed Coversions $ 46,659 $ 14,422 $ 2,787
Denominator:
Denominator for Basic Earnings Per Share -
Weighted Average Shares 15,237 13,736 8,192
Effect of Dilutive Securities:
Stock Options 196 147 12
Restricted Stock 56 6 9
Contingent Deferred Stock 4 - -
Convertible Exchangeable Preferred Stock - 194 -
--------- --------- ---------
Dilutive Potential Common Shares 256 347 21
Denominator for Diluted Earnings Per Share -
Adjusted Weighted Average Shares and
Assumed Conversions 15,493 14,083 8,213
Net Income Per Common Share:
Basic $ 3.06 $ 1.05 $ 0.34
========= ========= =========
Diluted $ 3.01 $ 1.02 $ 0.34
========= ========= =========
12. Commitments and Contingent Liabilities
The Company leases its headquarters office, office equipment and other
items under operating leases expiring at various dates during the next five
years. Management expects that, in the normal course of business, leases
that expire will be renewed or replaced by other leases. Total rent expense
under operating leases was $1,534,000, $856,000 and $560,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Minimum future
obligations under non-cancelable operating leases at December 31, 1997 for
the following five years are $1,324,000, $828,000, $679,000, $173,000 and
$0, respectively.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incidental to the ordinary course of business.
Management believes that the probable resolution of such contingencies will
not materially affect the financial position or results of operations of
the Company.
13. Business Segments
During each of the three years in the period ended December 31, 1997,
the Company conducted the following business activities:
Daywork Drilling - domestic and foreign drilling of oil and gas
wells on a dayrate basis for major and independent oil and gas companies
on land, inland waters and offshore.
Engineering Services - domestic and foreign drilling of oil and gas
wells on a turnkey basis for major and independent oil and gas companies
on land, inland waters and offshore and foreign well engineering and
management services.
MOPU Operations - domestic and foreign operation of mobile offshore
production units on a dayrate basis for major and independent oil and
gas companies.
Oil and Gas - domestic exploration, development and production of
hydrocarbon reserves.
Depreciation
Operating Depletion
Income Identifiable Capital and
Revenues (Loss) Assets Expenditures Amortization
--------- -------- --------- ------------ ------------
(In thousands)
December 31, 1997
Daywork Drilling $ 173,602 $ 71,623 $ 422,587 $ 168,822 $ 15,750
Engineering Services 91,723 20,446 40,685 - 27
MOPU Operations 8,663 3,582 34,866 6,976 4,065
Oil and Gas 410 (330) 2,013 456 311
Corporate Office - (9,021) - - 290
Eliminations (10,766) - - - -
--------- -------- --------- --------- --------
Consolidated $ 263,632 $ 86,300 $ 500,151 $ 176,254 $ 20,443
========= ======== ========= ========= ========
December 31, 1996
Daywork Drilling $ 77,882 $ 23,048 $ 257,555 $ 158,650 $ 9,021
Engineering Services 60,517 8,036 42,521 - 32
MOPU Operations 4,329 2,872 35,661 7,719 793
Oil and Gas 1,156 (3,108) 3,809 350 654
Corporate Office - (6,411) - - 111
Eliminations (10,775) - - - (223)
--------- -------- --------- --------- --------
Consolidated $ 133,109 $ 24,437 $ 339,546 $ 166,719 $ 10,388
========= ======== ========= ========= ========
December 31, 1995
Daywork Drilling $ 26,363 $ 2,761 $ 56,639 $ 11,814 $ 4,193
Engineering Services 56,970 2,609 37,302 - 30
MOPU Operations 4,920 2,492 30,017 825 1,360
Oil and Gas 2,788 541 5,004 798 1,732
Corporate Office - (5,387) - - 98
Eliminations (7,752) - - - (142)
--------- -------- --------- --------- --------
Consolidated $ 83,289 $ 3,016 $ 128,962 $ 13,437 $ 7,271
========= ======== ========= ========= ========
Intersegment sales between the Daywork Drilling and Engineering Services
business segments were $10,766,000, $10,775,000 and $7,752,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Such
intersegment sales were accounted for at prices comparable to unaffiliated
customer sales.
Identifiable assets by industry segment include assets directly
identified with those operations. Capital expenditures for the year ending
December 31, 1997 include $20,500,000 of non-cash investing activity
related to 437,939 shares of Common Stock issued in connection with the
acquisition of the assets used in the offshore contract drilling business
in Trinidad of Well Services and $9,250,000 of non-cash investing activity
related to the acquisition of substantially all of the remaining 50%
interest of the WINDJV. Capital expenditures for the year ending December
31, 1996 include $22,215,000 of non-cash investing activity related to
1,200,000 shares (pre-split basis) of Common Stock issued in connection
with the acquisition of the Southwestern Rigs.
The Company derived a significant amount of its revenues from a few
customers in each of the three years in the period ended December 31, 1997.
The following table summarizes information with respect to these major
customers.
% of
Consolidated
Customer Reporting Segment Revenues
-------- ----------------- --------
December 31, 1997
Corpoven, S.A. Daywork Drilling and Engineering Services 31%
December 31, 1996
Corpoven, S.A. Daywork Drilling and Engineering Services 31%
December 31, 1995
Corpoven, S.A. Daywork Drilling and Engineering Services 35%
Maraven, S.A. Daywork Drilling and Engineering Services 19%
Texaco Exploration &
Production, Inc. Engineering Services 12%
14. Distribution of Earnings and Assets
The following table sets forth financial information with respect to the
Company and its subsidiaries on a consolidated basis by geographical area.
Operating
Income Identifiable
Revenues (Loss) Assets
--------- --------- ---------
(In thousands)
December 31, 1997
United States $ 97,199 $ 33,218 $ 204,985
Venezuela 124,242 41,217 144,025
Qatar 26,448 11,937 59,466
Trinidad 4,782 2,249 68,578
Other 10,961 6,410 23,097
Corporate Overhead - (8,731) -
--------- --------- ---------
Total $ 263,632 $ 86,300 $ 500,151
========= ========= =========
December 31, 1996
United States $ 59,961 $ 6,874 $ 220,520
Venezuela 56,242 14,639 58,890
Qatar 5,767 1,562 20,298
Trinidad 909 699 3,955
Other 10,230 6,963 35,883
Corporate Overhead - (6,300) -
--------- --------- ---------
Total $ 133,109 $ 24,437 $ 339,546
========= ========= =========
December 31, 1995
United States $ 30,783 $ 2,178 $ 82,934
Venezuela 51,308 5,881 45,434
Other 1,198 246 594
Corporate Overhead - (5,289) -
--------- --------- ---------
Total $ 83,289 $ 3,016 $ 128,962
========= ========= =========
Revenues, operating income (loss) and identifiable assets have been
reclassified in prior years to conform with the current year presentation.
15. Quarterly Financial Data (Unaudited)
Quarterly operating results for the years ended December 31, 1997 and
1996 are summarized as follows:
(Unaudited)
For the Quarter Ended
------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(In thousands, except per share amounts)
1997:
Revenues $ 60,876 $ 60,470 $ 68,120 $ 74,166
Operating Income 14,576 22,367 23,880 25,477
Net Income 6,958 13,628 12,291 13,782 (1)
Net Income per Common Share:
Basic $ 0.46 $ 0.90 $ 0.80 $ 0.90 (1)(2)
Diluted $ 0.45 $ 0.89 $ 0.79 $ 0.88 (1)(2)
1996:
Revenues $ 29,078 $ 13,778 $ 43,497 $ 46,756 (3)
Operating Income 4,331 2,461 9,585 8,060 (3)
Net Income 3,700 1,985 4,309 4,428 (3)
Net Income Applicable to
Common and Common
Equivalent Shares 3,669 1,985 4,309 4,428 (3)
Net Income per Common Share:
Basic $ 0.31 $ 0.15 $ 0.29 $ 0.30 (2)(3)
Diluted $ 0.30 $ 0.15 $ 0.29 $ 0.29 (2)
- -----------------
(1) The second quarter of 1997 includes a net gain on disposition of assets
of $2,575,000.
(2) The 1996 and first three quarters of 1997 earnings per share amounts
have been restated to comply with SFAS No. 128. In addition, the 1996
and first quarter of 1997 earnings per share and weighted average
shares have been retroactively adjusted to reflect the Stock Split.
(3) During the second quarter of 1996, the Company did not complete any
turnkey wells in its Engineering Services division. Fourth quarter 1996
results include $2,941,000 in costs associated with an unsuccessful
well drilled by the Company's oil and gas business segment.
Exhibit 99.2
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(In thousands, except
per share amounts)
REVENUES:
Revenues $ 94,497 $ 67,827 $ 269,239 $ 187,952
Income from Equity Investments 9 293 291 1,514
-------- -------- --------- ---------
94,506 68,120 269,530 189,466
COSTS AND EXPENSES:
Operating Expenses 54,718 36,176 157,350 108,061
Depreciation, Depletion and
Amortization 7,505 5,801 21,246 14,160
General and Administrative Expense 4,176 2,263 8,694 6,422
-------- -------- --------- ---------
66,399 44,240 187,290 128,643
-------- -------- --------- ---------
OPERATING INCOME 28,107 23,880 82,240 60,823
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets 71 125 194 2,597
Interest Income 447 532 1,496 1,074
Interest Expense (5,224) (4,786) (15,192) (12,572)
Exchange Rate Loss (1,003) (375) (1,605) (157)
Other, net 28 (467) (371) (1,185)
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 22,426 18,909 66,762 50,580
INCOME TAX EXPENSE 7,849 6,618 23,367 17,703
-------- -------- --------- ---------
NET INCOME $ 14,577 $ 12,291 $ 43,395 $ 32,877
======== ======== ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.92 $ 0.80 $ 2.73 $ 2.17
======== ======== ========= =========
Diluted $ 0.91 $ 0.79 $ 2.71 $ 2.13
======== ======== ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 15,913 15,274 15,868 15,184
======== ======== ========= =========
Diluted 16,001 15,560 16,030 15,439
======== ======== ========= =========
See accompanying notes to interim consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
1998 1997
------------- ------------
ASSETS (In thousands)
CURRENT ASSETS:
Cash and Cash Equivalents $ 37,269 $ 28,122
Accounts Receivable, net of allowance for doubtful
accounts of $200 and $352 at September 30, 1998
and December 31, 1997, respectively 59,605 53,341
Notes and Other Receivables, Current 4,313 10,190
Inventories 11,503 7,551
Drilling Contracts in Progress 11,593 16,503
Prepaid Insurance 1,774 1,772
Other Prepaid Expenses 7,963 6,595
--------- ---------
Total Current Assets 134,020 124,074
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment 513,217 453,915
Other 18,660 15,373
--------- ---------
531,877 469,288
Less: Accumulated Depreciation, Depletion
and Amortization (121,922) (100,061)
--------- ---------
Net Property and Equipment 409,955 369,227
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
AFFILIATES 1,939 1,828
DEFERRED CHARGES AND OTHER 4,386 5,022
--------- ---------
TOTAL ASSETS $ 550,300 $ 500,151
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 27,257 $ 33,171
Accrued Interest 7,798 2,673
Other Accrued Expenses 27,011 30,414
--------- ---------
Total Current Liabilities 62,066 66,258
10.25% SENIOR NOTES 203,103 203,606
DEFERRED INCOME TAXES 21,105 14,335
OTHER LIABILITIES 1,460 23
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares
authorized; 16,340,411 and 16,321,932 shares
issued and 15,952,101 and 15,906,880 shares
outstanding at September 30, 1998 and December
31, 1997, respectively 163 163
Paid-In Capital 182,871 182,420
Retained Earnings 84,337 40,942
Less: Restricted Stock - (2,467)
Treasury Stock, at cost, 388,310 and 415,052
shares at September 30, 1998 and December 31,
1997, respectively (4,805) (5,129)
--------- ---------
Total Shareholders' Equity 262,566 215,929
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 550,300 $ 500,151
========= =========
See accompanying notes to interim consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
OPERATING ACTIVITIES:
Net Income $ 14,577 $ 12,291 $ 43,395 $ 32,877
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation, Depletion and
Amortization 7,505 5,801 21,246 14,160
Deferred Income Tax Expense (Benefit) 2,992 (712) 6,770 9,722
Mobilization Expense Amortization 377 - 770 25
Gain on Disposition of Assets (71) (125) (194) (2,597)
Amortization of Debt Issue Costs 227 209 680 582
Amortization of Restricted Stock 1,894 191 2,212 269
Amortization of Debt Premium (168) (101) (503) (101)
Other 363 498 797 546
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Accounts Receivable 12,130 (10,516) (387) (28,366)
Inventories (1,784) (593) (3,798) (846)
Drilling Contracts in Progress 1,102 (3,896) 4,921 8,241
Prepaid Insurance and Other Prepaid
Expenses 3,281 578 (2,140) 1,316
Investments in and Advances to
Unconsolidated Affiliates 430 227 (111) (1,136)
Accounts Payable and Other (1,967) 9,949 (2,747) 11,778
-------- -------- -------- --------
Net Cash Provided By Operating
Activities 40,888 13,801 70,911 46,470
INVESTING ACTIVITIES:
Capital Expenditures (21,305) (8,797) (63,471) (56,638)
Acquisition of Rigs and Related
Equipment - (6,000) - (34,500)
Proceeds from Sale of Property and
Equipment 318 118 1,528 3,642
Collection of Notes Receivable - - - 3,537
-------- -------- -------- --------
Net Cash Used In Investing
Activities (20,987) (14,679) (61,943) (83,959)
FINANCING ACTIVITIES:
Proceeds from Borrowings - 53,875 - 60,375
Payments on Borrowings - (5,684) - (12,184)
Proceeds from Exercise of Stock Options 103 2,017 211 2,149
Debt Issue Costs - (818) (32) (818)
-------- -------- -------- --------
Net Cash Provided By
Financing Activities 103 49,390 179 49,522
-------- -------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 20,004 48,512 9,147 12,033
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 17,265 2,702 28,122 39,181
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 37,269 $ 51,214 $ 37,269 $ 51,214
======== ======== ======== ========
See accompanying notes to interim consolidated financial statements.
CLIFFS DRILLING COMPANY
Notes to Interim Consolidated Financial Statements (Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal and recurring adjustments)
necessary to present a fair statement of the results for the periods
included herein have been made and the disclosures contained herein are
adequate to make the information presented not misleading. Operating
results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
2. Notes Payable
Long-term debt at September 30, 1998 consists solely of 10.25% Senior
Notes due 2003 (the "Senior Notes") in the aggregate principal amount of
$200.0 million and debt premium, net of amortization, of $3.1 million. In
addition to the $150.0 million of Senior Notes sold during 1996, the
Company sold $50.0 million of Senior Notes on August 7, 1997 at a premium
of $3.9 million. Considering the premium, the effective interest rate on
the $50.0 million Senior Notes is 9.5%. Interest on the Senior Notes is
payable semi-annually during each May and November. The Senior Notes do not
require any payments of principal prior to their stated maturity on May 15,
2003, but the Company is required to make offers to purchase Senior Notes
upon the occurrence of certain events as defined in the indenture, such as
asset sales or a change of control of the Company. See Note 6 of Notes to
Interim Consolidated Financial Statements.
The Senior Notes are senior unsecured obligations of the Company,
ranking pari passu in right of payment with all senior indebtedness and
senior to all subordinated indebtedness. The Senior Notes are
unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured basis by the Company's principal subsidiaries (the "Subsidiary
Guarantors"), and the Subsidiary Guarantees rank pari passu in right of
payment with all senior indebtedness of the Subsidiary Guarantors and
senior to all subordinated indebtedness of the Subsidiary Guarantors. The
Subsidiary Guarantees may be released under certain circumstances. The
Senior Notes and the Subsidiary Guarantees are effectively subordinated to
all secured indebtedness, including amounts outstanding under the Company's
$35.0 million revolving credit facility ("Revolving Credit Facility") with
ING (U.S.) Capital Corporation ("ING"). The Subsidiary Guarantees provide
that each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, the full and prompt performance of the Company's obligations
under the indenture and the Senior Notes. Each Subsidiary Guarantor is 100%
owned by the Company.
The indenture under which the Senior Notes are issued imposes
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness, make
capital expenditures, create liens, sell assets and make dividends or other
payments.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined
such financial statements and other disclosures are not material to
investors. The assets, equity, income and cash flows of the non-guarantor
subsidiaries on an individual and combined basis are less than 1% of the
consolidated assets, equity, income and cash flows, respectively, of the
Company and are inconsequential. The combined condensed financial
information of the Company's Subsidiary Guarantors is as follows:
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
Current Assets $ 9,107 $ 31,872
Non-Current Assets 64,802 214,462
--------- ---------
Total Assets $ 73,909 $ 246,334
========= =========
Current Liabilities $ 1,679 $ 21,417
Non-Current Liabilities 61,856 189,004
Equity 10,374 35,913
--------- ---------
Total Liabilities and Equity $ 73,909 $ 246,334
========= =========
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
(In thousands)
Revenues $ 19,247 $ 66,668
Operating Income $ 5,311 $ 28,627
Net Income $ 3,253 $ 12,484
Effective May 31, 1998, three Subsidiary Guarantors were merged into
Cliffs Drilling Company.
The Company currently maintains a $35.0 million Revolving Credit
Facility with ING which matures May 31, 2000. At September 30, 1998, the
Company had no indebtedness outstanding under the Revolving Credit
Facility, but had $.4 million in letters of credit outstanding, thereby
leaving $34.6 million available under the credit facility.
3. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. The earnings per
share amounts and weighted average number of common and common equivalent
shares outstanding for the three and nine months ended September 30, 1997
have been restated as required to comply with SFAS No. 128.
The following table sets forth the computation of basic and diluted
earnings per share. The numerator for basic and diluted earnings per share
is the same.
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share amounts)
Numerator:
Numerator for Basic and Diluted
Earnings Per Share - Income
Available to Common Shareholders
After Assumed Conversions $ 14,577 $ 12,291 $ 43,395 $ 32,877
Denominator:
Denominator for Basic Earnings
Per Share - Weighted Average
Shares 15,913 15,274 15,868 15,184
Effect of Dilutive Securities:
Stock Options 59 195 101 209
Restricted Stock 29 91 61 46
-------- -------- -------- --------
Dilutive Potential Common Shares 88 286 162 255
-------- -------- -------- --------
Denominator for Diluted Earnings
Per Share - Adjusted Weighted
Average Shares and Assumed
Conversions 16,001 15,560 16,030 15,439
Net Income Per Common Share:
Basic $ 0.92 $ 0.80 $ 2.73 $ 2.17
======== ======== ======== ========
Diluted $ 0.91 $ 0.79 $ 2.71 $ 2.13
======== ======== ======== ========
4. Comprehensive Income
During the first quarter of 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130"). SFAS No. 130 establishes new rules for the
reporting and disclosure of comprehensive income and its components in a
full set of financial statements. To the extent the Company has
comprehensive income, it would present these items in a statement of
changes in shareholders' equity. However, the Company had no items of
comprehensive income during the three and nine months ended September 30,
1998 and 1997 and therefore, comprehensive income is equal to net income
for each period.
5. Segment Reporting
In 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
("SFAS No. 131"). SFAS No. 131 changes the reporting of segment information
in annual financial statements and also requires reporting selected segment
information in interim financial reports to shareholders. SFAS No. 131 is
effective for years beginning after December 15, 1997 and is not expected
to have a significant impact on the Company's consolidated financial
statements and related disclosures upon adoption.
6. Merger Agreement
On August 21, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with R&B Falcon Corporation, a Delaware
corporation ("R&B Falcon"), and RBF Cliffs Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of R&B Falcon ("RBF Subsidiary"),
providing for the acquisition of the Company by R&B Falcon by means of a
merger of RBF Subsidiary with and into the Company (the "Merger"). Upon
consummation of the Merger, each share of common stock of the Company will
be exchanged for 1.7 shares of newly issued common stock of R&B Falcon. The
exchange of shares is expected to be tax-free for both companies, and the
transaction will be accounted for as a purchase.
The Company currently has outstanding $200.0 million in principal amount
of Senior Notes. Upon consummation of the Merger, the Company will be
required to offer to purchase for cash all of the outstanding Senior Notes
at a purchase price equal to 101% of the principal amount of each Senior
Note, plus accrued and unpaid interest to the change of control payment
date. The offer must provide for purchase of the Senior Notes within 60
days following the Merger.
The obligations of the Company and R&B Falcon to consummate the Merger
are subject to certain conditions, including the approval of the holders of
at least a majority of the outstanding shares of the Company's common stock
and other conditions customary for transactions of this nature. A special
meeting of stockholders of the Company is scheduled to be held on Friday,
November 20, 1998, to consider and vote upon the Merger. Should a majority
of the outstanding shares of the Company vote in favor of the Merger and
other conditions be satisfied, the combination is expected to be made
effective on November 30, 1998. Under certain circumstances, the Company
could become obligated to pay to R&B Falcon a $30 million breakup fee in
the event that the Company enters into an agreement for, or consummates, a
business combination with a third party within specified periods following
termination of the Merger Agreement, should it be so terminated.
7. Change in Presentation
Certain financial statement items have been reclassified in the prior
year to conform with the current year presentation.
