SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-57325
CHILES OFFSHORE LLC
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 76-0547408
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
File No. 333-57325-01 File No. 333-57325-02 File No. 333-57325-03
CHILES OFFSHORE FINANCE CORP. CHILES COLUMBUS LLC CHILES MAGELLAN LLC
(Exact Name of Registrant as (Exact Name of Registrant as (Exact Name of Registrant as
Specified in its Charter) Specified in its Charter) Specified in its Charter)
DELAWARE DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
76-0568691 76-0568690 76-0568689
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
</TABLE>
11200 WESTHEIMER, SUITE 410, HOUSTON, TEXAS 77042-3227
(Address of Principal Executive Offices) (Zip Code)
(713) 339-3777
(Registrants' Telephone Number, Including Area Code)
Indicate by check mark whether each of the registrants: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes[ X ] No[ ]
As of May 10, 1999, 1,000 shares of the common stock of Chiles Offshore
Finance Corp. were outstanding.
HO1:\154690\04\3BCY04!.DOC\73293.0016
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================================================
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents - restricted................. $ 1,992,096 $ 8,739,497
Cash restricted for interest payments.................. 5,500,000 5,500,000
Prepaid expenses....................................... 4,975 12,308
Interest receivables................................... 262,898 263,000
--------------- ---------------
Total current assets 7,759,969 14,514,805
--------------- ---------------
RIGS UNDER CONSTRUCTION AND EQUIPMENT....................... 137,712,379 111,786,825
Less accumulated depreciation.......................... (79,588) (62,188)
--------------- ---------------
Net rigs under construction and equipment......... 137,632,791 111,724,637
--------------- ---------------
CASH RESTRICTED FOR CONSTRUCTION............................ 29,480,302 47,974,015
--------------- ---------------
DEFERRED DEBT ISSUANCE COSTS AND OTHER...................... 4,124,474 4,219,267
--------------- ---------------
Total Assets...................................... $178,997,536 $ 178,432,724
=============== ===============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 137,833 $ 2,660,950
Accrued liabilities.................................... 4,970,304 2,176,920
--------------- ---------------
Total current liabilities......................... 5,108,137 4,837,870
LONG TERM DEBT.............................................. 110,000,000 110,000,000
--------------- ---------------
Total liabilities................................. $115,108,137 $ 114,837,870
=============== ===============
MEMBERS' EQUITY:
Capital contributions, net of offering costs........... 63,730,707 63,730,707
Cumulative (losses) income since inception............. 158,692 (135,853)
--------------- ---------------
Total members' equity.................................. 63,889,399 63,594,854
--------------- ---------------
Total Liabilities and Members' Equity.................. $178,997,536 $ 178,432,724
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period For the For the
from Inception Three Months Three Months
(August 5, 1997) to Ended Ended
March 31, 1999 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUE............................ - - -
OPERATING EXPENSES: - - -
General & administrative expenses $ (1,330,505) $ (187,672) $ (82,290)
Depreciation..................... (79,588) (17,400) (2,565)
--------------- ------------ -----------
Operating loss............... (1,410,093) (205,072) (84,855)
INTEREST INCOME.................... 4,001,144 545,330 363,086
INTEREST EXPENSE................... (2,432,359) (45,713) -
--------------- ------------ -----------
NET INCOME (LOSS).................. $ 158,692 $ 294,545 $ 278,231
=============== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SEACOR
Offshore Group C
Rigs, Inc. COI, LLC Members Total
-------------------- ----------------- -------------------- --------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998......... $ 34,871,153 $ 8,730,983 $ 19,992,718 $ 63,594,854
NET INCOME for the three months ended
March 31, 1999................... 163,119 40,794 90,632 294,545
-------------------- ----------------- -------------------- --------------------
BALANCE, March 31, 1999............ $ 35,034,272 $ 8,771,777 $ 20,083,350 $ 63,889,399
==================== ================= ==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period For the For the
from Inception Three Months Three Months
(August 5, 1997) to Ended Ended
March 31, 1999 March 31, 1999 March 31, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 158,692 $ 294,545 $ 278,231
Adjustments to reconcile net loss to net cash
provided by (required by) operating activities
-
Depreciation.............................. 79,588 17,400 2,565
Amortization of deferred expenses......... 78,239 1,797 -
Increase (decrease) in operating cash flows
resulting from-
Interest receivable....................... (262,898) 102 -
Accounts payable.......................... 70,231 (2,523,117) (3,950,236)
Accrued liabilities....................... 4,970,304 2,793,384 55,546
Prepaid expenses and other................ (22,794) (8,833) (4,123)
--------------------- --------------------- ---------------------
Net cash provided by (used in) operating
activities.............................. 5,071,362 575,278 (3,618,017)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (107,583,645) (25,816,392) (9,878,354)
--------------------- --------------------- ---------------------
Net cash required by investing activities (107,583,645) (25,816,392) (9,878,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
Membership capital contributions, net........ 33,984,884 - -
Net proceeds from issuance of notes.......... - - -
Net proceeds from issuance of senior notes... 105,499,797 - -
--------------------- --------------------- ---------------------
Net cash provided by financing activities 139,484,681 - -
RESTRICTED CASH, beginning of period............. - 62,213,512 -
NET INCREASE (DECREASE) IN RESTRICTED CASH....... 36,972,398 (25,241,114) -
--------------------- --------------------- ---------------------
RESTRICTED CASH, end of period................... (36,972,398) (36,972,398) -
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN CASH.................. - - -
CASH AND CASH EQUIVALENTS, beginning of period... - - 32,341,117
--------------------- --------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period......... $ - $ - $18,844,746
===================== ===================== =====================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Noncash investing activities -
Purchase of property in exchange for
membership interest....................... $21,260,000 - -
Noncash financing activities -
Receipt of net assets in exchange for
membership interest....................... $ 8,486,000 - -
Cash paid for interest - net of capitalized $ 436,318 - -
interest..................................
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZED INTEREST
The Company capitalizes interest applicable to the construction of
offshore drilling rigs as a cost of such assets. Interest capitalized for the
three months ended March 31, 1999 and March 31, 1998 was $2.7 million and $0,
respectively. Interest expense is shown net of interest capitalized in the
Consolidated Statement of Operations.
2. BASIS OF PRESENTATION
Chiles Offshore LLC (the "Company") is engaged in the construction of
offshore drilling rigs which will be contracted to oil and gas operators upon
completion of construction. The Company was formed under the laws of the State
of Delaware on August 5, 1997. The Company has operated as a development stage
company since its inception by devoting substantially all of its efforts to
designing, engineering and contracting with shipyards and vendors for two
offshore drilling rigs, raising capital and securing contracts for the rigs. The
Company has not generated revenues, nor is there any assurance that the Company
will generate significant revenues in the future. In addition, there can be no
assurance that the Company will successfully complete the transition from a
development stage company to successful operations. Additional risk factors
associated with the Company's operations include, but are not limited to, oil
and gas prices, capital expenditure plans of oil and gas operators, access to
capital, completion of construction of the rigs and competition. As a result of
the aforementioned factors, and the related uncertainties, there can be no
assurance of the Company's future success. The Company has a loss from
operations of $1,410,093 for the period from inception (August 5, 1997) to March
31, 1999. Management is currently pursuing a business strategy which includes
obtaining drilling contracts with oil and gas operators, employment of rig
personnel, selection and procurement of drilling equipment and overseeing the
construction of the rigs and installation of drilling equipment. There is no
assurance that this business strategy will be achieved. While pursuing this
business strategy, the Company will experience cash flow deficits until the rig
construction is completed and the rigs are placed in operation. As a result of
the aforementioned factors and related uncertainties, there is substantial doubt
as to the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
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 months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Registration
Statement on Form S-4 (No. 333-57325). Chiles Offshore LLC has three wholly
owned subsidiaries, Chiles Offshore Finance Corp. ("Finance"), Chiles Columbus
LLC ("Columbus") and Chiles Magellan LLC ("Magellan").
6
<PAGE>
3. NOTES PAYABLE
Long-term debt at March 31, 1999 consisted solely of 10% Senior Notes
(the "Notes") due 2008 in the aggregate principal amount of $110.0 million. The
Notes were co-issued by the Company jointly with Finance (the "Issuers"). The
Notes are guaranteed by Columbus and Magellan, jointly and severally, on an
unsecured basis. The Issuers received net proceeds from the Notes of
approximately $105.5 million after deducting estimated offering-related
expenses. The net proceeds of the Notes have been placed in escrow to partially
fund the construction of two rigs and pay the first two semi-annual interest
installments. The Notes are redeemable in May 2003, at a premium to par, except
that until May 2001, up to 35% of the Notes may be redeemable with the proceeds
of a public equity offering, also at a premium to par, both at the option of the
Issuers.
4. BANK FACILITY
The Company has entered into an agreement with two banks to provide a
revolving credit facility of $25.0 million (the "Bank Facility"). The Bank
Facility will be available to the Company upon delivery of the first of the two
rigs. The Bank Facility will bear interest at the rate of LIBOR plus 1.25% and
matures on December 31, 2004, at which time the outstanding principal amount
will be due. The Bank Facility is guaranteed by Columbus and Magellan.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with a shipyard and various
equipment vendors for delivery of two mobile offshore drilling rigs, Chiles
Columbus and Chiles Magellan, at a combined cost of approximately $171.3
million, exclusive of interest during construction and costs associated with
arranging financing. At March 31, 1999, the Company had outstanding purchase
commitments of approximately $41.0 million with respect to these rigs and
equipment. These amounts will become payable in future periods in accordance
with terms of the construction contract and vendor agreements. The Chiles
Columbus is scheduled for delivery in the second quarter of 1999 and the Chiles
Magellan is scheduled for delivery in the third quarter of 1999. The Company
expects to finance these costs with the net cash proceeds of the equity
financing completed in 1997, the issuance of the Notes and the Bank Facility.
Subject to the satisfaction of customary conditions precedent, including that
there shall have occurred no material adverse change with respect to the Company
or its business, assets, properties, condition (financial or otherwise) or
prospects since the date of the execution of the Bank Facility, availability
under the Bank Facility will commence upon the first delivery of a rig. The
Company expects that with the net cash proceeds from the sale of equity and
Notes in combination with the Bank Facility, it will be able to finance the
construction and outfitting cost required to place the rigs in service.
6. COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), was issued. SFAS established
standards for reporting and display of comprehensive income and its component in
a full set of general purpose financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. The Company has
no non-owner changes in equity during the three months ended March 31, 1999 and
therefore, no reporting and display of comprehensive income was required.
7. OPERATING SEGMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS 131")
was issued. SFAS 131 requires that companies report financial and descriptive
information about their reportable operating segments. The Company adopted SFAS
131 in 1998; however, the Company is still in the development stage and has no
material operating information to report for the three months ended March 31,
1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Chiles Offshore LLC (the "Company")
(including the Notes thereto) included elsewhere in this Quarterly Report on
Form 10-Q.
The Company is a development stage company formed in August 1997 for
the purpose of constructing, owning and operating a fleet of state-of-the-art
premium offshore jackup drilling rigs. At formation of the Company, COI, LLC
(a Delaware limited liability company formed by members of management of the
Company and certain other investors) contributed $0.36 million in cash to the
capital of the Company and assets with an agreed-upon value of $8.5 million
and a historical cost of $2.3 million. The difference of $6.2 million between
such agreed-upon value and historical cost has been recorded on the balance
sheet of the Company as "Rigs under construction and equipment". At formation
of the Company and in the final phase of the Company's equity financing, which
was completed in December 1997 (the "Equity Financing"), SEACOR Offshore Rigs
Inc. contributed an aggregate of $35.0 million in cash. Other accredited
investors contributed $20.0 million in cash in the Equity Financing.
In April 1998, the Company completed the private placement of $110.0
million of 10% Senior Notes due 2008 (the "Notes") issued by the Company and
Chiles Offshore Finance Corp., a wholly-owned subsidiary of the Company. The
Company received net proceeds of $105.5 million from the issuance and sale of
the Notes. Also in April 1998, the Company entered into a $25.0 million credit
agreement with two banks (the "Bank Facility"). In September 1998, the Company
completed a registered exchange offer for the Notes issued in the private
placement (the "Exchange Offer"). In the Exchange Offer, all of the Notes
issued in the private placement were exchanged for substantially identical
Notes that were registered under the Securities Act of 1933, as amended.
The Company is constructing two jackup drilling rigs, the Chiles
Columbus and the Chiles Magellan (the "Rigs"), at a shipyard in Brownsville,
Texas. The Chiles Columbus is scheduled for delivery in late May 1999, and the
Chiles Magellan is scheduled for delivery in September 1999. The Company is
currently engaged in rig-related design, engineering, procurement and
construction activities and is preparing for the commencement of business
operations of the Rigs. As of March 31, 1999, the Company had approximately
$37.0 million of cash on hand, of which amount $37.0 million was restricted for
construction of the Rigs and the second semi-annual interest payment on the
Notes. The Company has been informed by the shipyard that, as of March 31, 1999,
construction of the Chiles Columbus was approximately 97% complete and
construction of the Chiles Magellan was approximately 57% complete.
DEVELOPMENT STAGE COMPANY
The Company has operated as a development stage company since inception
by devoting substantially all of its efforts to designing, engineering and
contracting with shipyards and vendors for the Rigs, raising capital, employing
personnel and securing contracts for the Rigs. The Company has not generated
operating revenues, nor is there any assurance that the Company will generate
significant operating revenues until the Rigs are placed in service. In
addition, there can be no assurance that the Company will successfully complete
the transition from a development stage company to successful operations.
Additional risk factors associated with the Company's operations include, but
are not limited to, oil and gas prices, capital expenditure plans of oil and gas
operators, access to capital, completion of construction of the Rigs and
competition. As a result of the aforementioned factors and the related
uncertainties, there can be no assurance of the Company's future success.
The Company had a loss from operations of approximately $.2 million for
the three months ended March 31, 1999 and $1.4 million for the period from
inception (August 5, 1997) to March 31, 1999. The Company's management is
currently pursuing a business strategy that includes obtaining drilling
contracts with oil and gas operators, employment of rig personnel, completing
the construction of the Rigs and the purchase of drilling equipment, and
8
<PAGE>
overseeing the construction of the Rigs and installation of the drilling
equipment. There can be no assurance that this business strategy will be
achieved. While pursuing this business strategy, the Company will experience
cash flow deficits until construction is completed and the Rigs are placed in
operation. As a result of these conditions, a doubt exists as to the Company's
ability to continue as a going concern until the Rigs are placed in service and
the Company is able to achieve successful operations. The Company's financial
statements included elsewhere herein do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
RESULTS OF OPERATIONS
Since inception, the Company has engaged in no operations other than
managing construction of the Rigs and related matters. The Company has not
generated any operating revenues to date. From inception to March 31, 1999, the
Company has had a net income of approximately $0.2 million as a result of
interest income in excess of general and administrative expenses, interest
expense and depreciation. For the three months ended March 31, 1999, the Company
had net income of approximately $0.3 million as a result of interest income in
excess of general and administrative expenses, interest expense and
depreciation. Operating loss of approximately $0.2 million during the first
quarter of 1999 increased approximately $0.1 million from the first quarter of
1998 primarily due to increased marketing and employment costs, including
crew-related employment expenses, and other administrative costs.
OUTLOOK
The Company's business and operations are materially dependent upon the
condition of the oil and natural gas industry and, specifically, the exploration
and production expenditures of oil and gas companies. Due to the Company's
initial focus on the Gulf of Mexico, the Company's business and operations will
be particularly dependent upon the condition of the oil and natural gas industry
in the Gulf of Mexico and on the exploration and production expenditures of oil
and gas companies there. The offshore contract drilling industry historically
has been and is expected to continue to be highly competitive and cyclical.
During 1998, the decline in product prices in the oil and gas industry resulted
in significantly reduced dayrates and decreased utilization, particularly in the
Gulf of Mexico jackup market, and excess supply in such market. Sustained weak
commodity prices, economic problems in countries outside the United States, or a
number of other factors beyond the Company's control could further curtail
spending by oil and gas companies. The Company has entered into a drilling
contract (the "CNG Contract") with CNG Producing Company for the use of the
Chiles Columbus in the Gulf of Mexico upon delivery of such Rig from the
shipyard and completion of testing of its equipment and drilling systems. The
CNG Contract calls for the drilling of one well, which is expected to require
approximately 60 days. CNG Producing Company then has the option to use the
Chiles Columbus to drill one or two additional wells. In connection with the CNG
Contract, the Chiles Columbus will be modified to extend the legs from 477 feet
to 511 feet in length, as a result of which the Rig is scheduled to be delivered
in late May 1999. While the Company anticipates that it will obtain drilling
contracts for the Rigs, no assurance can be given that additional drilling
contracts will be obtained, or obtained on a timely basis, nor can the Company
predict that the dayrates payable under any drilling contract will be equal to
or greater than the operating costs of the Rigs and other fixed costs, and
current payment liabilities, including interest payable with respect to the
Notes and drawings under the Bank Facility. In such event, the Company expects
to use the Bank Facility, subject to the terms and conditions of the Bank
Facility, to meet operating cost requirements and other current payment
liabilities until market conditions improve. If depressed market conditions
continue and availability under the Bank Facility is fully drawn or for any
reason is unavailable, the Company would need to raise additional liquidity to
sustain its operations and there is no assurance that the Company would be able
to do so. The Company cannot predict whether or not current market conditions
will improve or deteriorate further, or to what extent. The current trends in
market conditions, if continued, would have a material adverse effect on the
Company's future results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has had negative cash flow, excluding
interest income, and has financed its operations with a combination of the sale
of equity interests in the Company and the issuance and sale of the Notes. From
April 1, 1999 through the scheduled delivery dates of the Rigs, the Company
expects to incur approximately $47.9 million in aggregate costs to complete
9
<PAGE>
construction and outfitting of the Rigs, including internal construction costs
and excluding net capitalized interest. The shipyard construction contracts are
fixed-price contracts, except for any approved change orders, and approximately
95% of the aggregate cost of owner furnished equipment is fixed under firm
delivery contracts with various vendors. The Company expects to finance these
costs with the net cash proceeds of the Equity Financing completed in l997, the
net proceeds from the issuance and sale of the Notes and the Bank Facility.
Although availability under the Bank Facility will not commence prior to the
delivery of the first of the two Rigs, the Company expects that with the net
cash proceeds from the sale of equity interests and the Notes, in combination
with the Bank Facility, it will be able to finance the construction and
outfitting costs required to place the Rigs in service. As of March 31, 1999,
the Company had approximately $37.0 million cash on hand, all of which was
restricted for construction of the Rigs and the second semi-annual interest
payment on the Notes. As of March 31, 1999, the Company had $110.0 million of
long term debt related to the Notes. Additionally, when the first Rig is placed
in operation, borrowings under the Bank Facility are expected to be available,
subject to the terms and conditions of the Bank Facility, together with any cash
flow from operations of such Rig, to cover the remaining construction,
outfitting and overhead costs and working capital requirements associated with
the second Rig.
Because the Rigs are newbuilds, the Company does not expect to incur
material additional capital expenditures associated with the Rigs in the
foreseeable future. The Company has not budgeted for any mobilization of either
Rig from the shipyard into the operating area of the Gulf of Mexico, or to
another market which, if it occurs, could materially increase Rig operating
expense levels and reduce revenues while either Rig is in transit and not
working. Any unanticipated capital expenditures or mobilizations could adversely
affect cash flow from operations and operating income in the period incurred.
Due to the current depressed industry market conditions, no assurance can be
given that additional drilling contracts will be obtained for the Rigs, or
obtained on a timely basis, or if obtained, that dayrates payable under such
drilling contracts will be equal to or greater than the operating costs of the
Rigs and other fixed costs and current payment liabilities, including interest
payable with respect to the Notes and drawings under the Bank Facility. In such
event, the Company expects to use the Bank Facility, subject to the terms and
conditions of the Bank Facility, to meet operating cost requirements and other
current payment liabilities until market conditions improve. The Company
believes that the Bank Facility should be adequate to address any short-term
liquidity needs created by such events. However, if depressed market conditions
continue and availability under the Bank Facility is fully drawn or for any
reason is unavailable, the Company would need to raise additional liquidity to
sustain its operations and there is no assurance that the Company would be able
to do so.
In addition to capital requirements associated with Rig construction,
the Company has significant debt service obligations, principally with respect
to the Notes. As the Notes bear interest at a rate of 10% per annum, the Company
will require $11.0 million per year to cover interest payments on the Notes as
long as all of the Notes are outstanding. Semi-annual interest payments on the
Notes are due on May 1 and November 1 and commenced on November 1, 1998.
Interest on the Notes through May 1, 1999 will be paid from amounts held in
restricted cash accounts. Thereafter, the Company expects to finance debt
service on the Notes and on borrowings outstanding under the Bank Facility with
cash flow from operations and, if necessary, additional borrowings under the
Bank Facility. If cash flow from operations is insufficient to service the
Company's debt, the Company would need to raise additional liquidity to sustain
its operations and there is no assurance it would be able to do so.
YEAR 2000 ISSUES
The Company has initiated and is in the process of carrying out an
assessment of Year 2000 ("Y2K") compliance issues. Although the Company has been
in existence only since August 1997, and since its inception the Company has
acquired only new systems, equipment, components and related software, a full
assessment of the Company's Y2K compliance is now underway. The Y2K assessment
being undertaken by the Company is designed to review all of the Company's
systems and equipment with respect to Y2K compliance. This assessment includes a
review of both information technology ("IT") systems (e.g., computer hardware
and software) and non-information Technology ("non-IT") systems (e.g., embedded
technology such as microcontrollers). As part of the assessment, the Company is
seeking to obtain certification of Y2K compliance from its vendors and
suppliers. The Company's administrative IT systems are stand-alone, standard
products that have not been custom developed or modified. The Company will seek
to obtain certifications from the vendors of such systems as to their Y2K
compliance. The Company will also acquire certain specialized IT systems and
expects to obtain certification of their Y2K compliance prior to acquisition and
installation of such specialized IT systems. Those vendors that are unable to
10
<PAGE>
provide Y2K compliance certification, if any, will be requested to provide
replacement components or systems that are Y2K compliant under warranty
provisions of the Company's purchase agreements. This phase of the Company's Y2K
assessment is expected to be completed, with respect to the Company's currently
existing vendor relationships, during the second quarter of 1999. The Company
also has a program underway requesting Y2K compliance certifications from its
suppliers. This program is expected to be completed during the second quarter of
1999.
As the Company is a development stage company, it presently does not
have any operating revenues. The Company will initiate a program to identify any
other third parties with whom a material relationship exists. The Company will
seek to obtain certification of Y2K compliance from any such third parties. If
any such third parties are unable to provide such certification, the Company
will seek to minimize any negative effect of such non-compliance on the Company
until the third party becomes Y2K compliant or until an alternative relationship
is established.
As of March 31, 1999, the Company has incurred nominal administrative
cost in conducting its Y2K compliance program. Early results of this program
have not identified any system, equipment, component or software owned or used
by the Company that is not Y2K compliant. Although the total cost to complete
the Company's Y2K program cannot be determined at this time, it is not expected
to be material because all of the Company's IT and non-IT equipment has been
purchased within the last two years, and the procurement arrangements of the
Company for such equipment require vendors to provide only Y2K compliant items.
Such procurement arrangements also require that any such equipment that is not
Y2K compliant be replaceable under the applicable warranty provisions.
The Company is in the process of developing contingency plans that are
intended to address worst-case business interruptions, such as future
interruptions of drilling services aboard the Rigs after they begin operations
or interruptions in the delivery of equipment and materials to be utilized in
the Company's future drilling operations. The Company anticipates that its
contingency planning phase will be completed by mid-1999. The Company's failure
to fully implement its Y2K program or the occurrence of an unexpected Y2K
problem could result in the disruption of normal business activities or
operations and have a material adverse effect on the Company's results of
operations, liquidity or financial condition. However, based upon the work
performed to date and the anticipated completion of the Company's Y2K program by
mid-1999, the Company does not believe that such matters will have a material
adverse effect on its results of operations. With respect to third parties,
there can be no assurance that their systems will be rendered Y2K complaint on a
timely basis or that any resulting Y2K issues would not have a material adverse
effect on the results of operations of the Company.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, operating difficulties arising from shortages of
equipment or qualified personnel or as a result of other causes, casualty
losses, industry fleet capacity, changes in foreign and domestic oil and gas
exploration and production activity, competition, changes in foreign political,
social and economic conditions, regulatory initiatives and compliance with
governmental regulations, the ability to attract and retain qualified personnel,
customer preferences, Year 2000 issues and various other matters, many of which
are beyond the Company's control. The list of risks included here is not
exhaustive. Other sections of this Report and the Company's other filings with
the Securities and Exchange Commission include additional factors that could
adversely affect the Company's business and financial performance. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements. The forward-looking statements in this Report speak
only as of the date of this Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any forward-looking statement is based.
11
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index for a list of the exhibits to this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by any of the Registrants during the
quarterly period covered by this Report.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, each of the Registrants has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHILES OFFSHORE LLC
CHILES OFFSHORE FINANCE CORP.
CHILES COLUMBUS LLC
CHILES MAGELLAN LLC
By: /s/ Dick H. Fagerstal
-------------------------------------------
Dick H. Fagerstal
Senior Vice President, Chief Financial
Officer and Secretary
By: /s/ William A. Thorogood
-------------------------------------------
William A. Thorogood
Vice President - Controller
Dated: May 12, 1999
13
<PAGE>
EXHIBIT INDEX
3.1 Limited Liability Company Certificate of Chiles Offshore LLC
(incorporated by reference to Exhibit 3.1 to the Registrants'
Registration Statement on Form S-4 (Registration No. 333-57325))
3.2 Amended and Restated Operating Agreement, dated as of December 16,
1997, among the members of Chiles Offshore LLC (incorporated by
reference to Exhibit 3.2 to the Registrants' Registration Statement
on Form S-4 (Registration No. 333-57325))
3.3 Amendment No. 1, dated effective as of April 28, 1998, to Amended
and Restated Operating Agreement of Chiles Offshore LLC, among the
members of Chiles Offshore LLC (incorporated by reference to Exhibit
3.3 to the Registrants' Registration Statement on Form S-4
(Registration No. 333-57325))
3.4 Certificate of Incorporation of Chiles Offshore Finance Corp.
(incorporated by reference to Exhibit 3.4 to the Registrants'
Registration Statement on Form S-4 (Registration No. 333-57325))
3.5 Bylaws of Chiles Offshore Finance Corp. (incorporated by reference
to Exhibit 3.5 to the Registrants' Registration Statement on Form
S-4 (Registration No. 333-57325))
3.6 Certificate of Formation of Chiles Columbus LLC (incorporated by
reference to Exhibit 3.6 to the Registrants' Registration Statement
on Form S-4 (Registration No. 333-57325))
3.7 Limited Liability Company Agreement of Chiles Columbus LLC
(incorporated by reference to Exhibit 3.7 to the Registrants'
Registration Statement on Form S-4 (Registration No. 333-57325))
3.8 Certificate of Formation of Chiles Magellan LLC (incorporated by
reference to Exhibit 3.8 to the Registrants' Registration Statement
on Form S-4 (Registration No. 333-57325))
3.9 Limited Liability Company Agreement of Chiles Magellan LLC
(incorporated by reference to Exhibit 3.9 to the Registrants'
Registration Statement on Form S-4 (Registration No. 333-57325))
27.1 Financial Data Schedule (filed herewith)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILES OFFSHORE LLC CONTAINED IN THE ACCOMPANYING
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,760
<PP&E> 137,712
<DEPRECIATION> 80
<TOTAL-ASSETS> 178,998
<CURRENT-LIABILITIES> 5,108
<BONDS> 110,000
0
0
<COMMON> 0
<OTHER-SE> 63,889
<TOTAL-LIABILITY-AND-EQUITY> 178,998
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 295
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
