- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 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>
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<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.)
11200 WESTHEIMER, SUITE 410, HOUSTON, TEXAS 77042-3227
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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 November 10, 1999, 1,000 shares of the common stock of Chiles
Offshore Finance Corp. were outstanding.
73293.0016
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 4,812,689 $ 8,739,497
Cash restricted for interest payments............................ - 5,500,000
Accounts and other receivables................................... 2,013,128 263,000
Prepaid expenses................................................. 148,977 12,308
Total current assets....................................... 6,974,794 14,514,805
PROPERTY AND EQUIPMENT:
Drilling Rig and Equipment....................................... 92,017,684 356,086
Less accumulated depreciation.................................... (1,158,636) (62,188)
Net property and equipment................................ 90,859,048 293,898
Rig under construction........................................... 89,900,970 111,430,739
Total property and equipment..................................... 180,760,018 111,724,637
CASH RESTRICTED FOR CONSTRUCTION...................................... - 47,974,015
DEFERRED DEBT ISSUANCE COSTS AND OTHER................................ 4,015,831 4,219,267
Total Assets.............................................. $191,750,643 $ 178,432,724
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 4,511,550 $ 2,660,950
Accrued liabilities.............................................. 5,373,121 2,176,920
Total current liabilities................................. 9,884,671 4,837,870
LONG TERM DEBT........................................................ 120,000,000 110,000,000
Total liabilities......................................... $ 129,884,671 $ 114,837,870
MEMBERS' EQUITY:
Capital contributions, net of offering costs..................... 63,730,707 63,730,707
Retained Deficit ................................................ (1,864,735) (135,853)
Total members' equity............................................ 61,865,972 63,594,854
Total Liabilities and Members' Equity............................ $ 191,750,643 $ 178,432,724
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the For the
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
---------------------- ------------------------ ----------------------- ---------------------
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REVENUE.............................. $ 2,350,025 - $ 2,877,934 -
OPERATING EXPENSES:
Rig Operating Expenses............ 1,666,486 - 2,069,107 -
General & administrative expenses. 382,303 $ 186,128 826,421 $ 555,058
Depreciation...................... 874,321 17,400 1,096,448 38,433
---------------------- ------------------------ ----------------------- ---------------------
Operating loss................ (573,085) (203,528) (1,114,042) (593,491)
INTEREST INCOME...................... 55,229 1,603,549 778,659 2,554,343
INTEREST EXPENSE, NET................ (1,018,109) (857,240) (1,393,498) (1,692,072)
---------------------- ------------------------ ----------------------- ---------------------
NET INCOME (LOSS).................... $ (1,535,965) $ 542,781 $ (1,728,881) $ 268,780
====================== ======================== ======================= =====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
For the For the
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------------- -------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ (1,728,881) $ 268,780
Adjustments to reconcile net loss to net cash provided by
(required by) operating activities -
Depreciation..................................... 1,096,448 38,443
Amortization of deferred expenses................ 53,212 176,137
Increase (decrease) in operating cash flows resulting
from-
Accounts and other receivable.................... (1,750,128) (573,445)
Accounts payable................................. 1,850,600 (3,950,236)
Accrued liabilities.............................. 3,196,200 4,886,821
Prepaid expenses and other....................... (136,669) (5,044)
------------------------- -------------------------
Net cash provided by (used in) operating
activities.................................... 2,580,782 841,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (69,981,605) (55,068,682)
------------------------- -------------------------
Net cash required by investing activities..... (69,981,605) (55,068,682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of senior notes........... - 105,775,000
Proceeds from bank facility.......................... 10,000,000 -
------------------------- -------------------------
Net cash provided by financing activities..... 10,000,000 105,775,000
RESTRICTED CASH, beginning of period..................... 62,213,512 -
RESTRICTED CASH, end of period........................... - 83,277,213
------------------------- -------------------------
NET (INCREASE) DECREASE IN RESTRICTED CASH............... 62,213,512 (83,277,213)
------------------------- -------------------------
NET INCREASE (DECREASE) IN CASH.......................... 4,812,689 (31,729,439)
CASH AND CASH EQUIVALENTS, beginning of period........... - 32,341,117
------------------------- -------------------------
CASH AND CASH EQUIVALENTS, end of period................. $ 4,812,689 $ 611,678
========================= =========================
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest , net of interest capitalized $ (1,724,213) -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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CHILES OFFSHORE LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
REVENUE
Drilling contracts are on a day rate basis, and revenue and drilling
expenses are recognized as work progresses.
CAPITALIZED INTEREST
Chiles Offshore LLC (the "Company") capitalizes interest applicable
to the construction of offshore drilling rigs as a cost of such assets. Interest
capitalized for the nine months ended September 30, 1999 and September 30, 1998
was $7.0 million and $3.1 million, respectively. Interest expense is shown net
of interest capitalized in the Consolidated Statement of Operations.
2. 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 nine-month and three-month periods and
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. The Company has three wholly
owned subsidiaries, Chiles Offshore Finance Corp. ("Finance"), Chiles Columbus
LLC ("Columbus") and Chiles Magellan LLC ("Magellan").
3. BUSINESS AND INDUSTRY CONDITIONS
The Company is engaged in the construction and subsequent operation
of two mobile offshore drilling rigs (each a "Rig" and together, the "Rigs"),
one of which is currently contracted to an oil and gas operator and one of which
is expected to be placed in service upon completion of construction. The Company
was formed under the laws of the State of Delaware on August 5, 1997. Since its
inception and until July 1999, the Company operated as a development stage
company, devoting substantially all of its efforts to constructing the Rigs,
raising capital and securing contracts for the Rigs. In the third quarter of
1999, the Company completed its development stage activity and the Company is no
longer reported as a development stage company. During the third quarter of
1999, construction of the second Rig, the Chiles Magellan, was nearing
completion and the Rig was delivered on October 25, 1999. As of September 30,
1999, the Company had purchase commitments of $11.9 million and accounts payable
of $3.7 million with respect to completion of the Rigs. The Company estimates
that it will require approximately $0.9 million of working capital for the
Chiles Magellan in connection with start-up operations. The shipyard
construction contracts are fixed-price contracts with all change orders approved
and over 99% of the aggregate cost of owner furnished equipment is fixed under
firm delivery contracts with various vendors.
In August 1999, the Company entered into a drilling contract for the
use of the Chiles Magellan in the Gulf of Mexico. Under the terms of the
contract, the Company agreed to make certain enhancements to the Chiles Magellan
at a cost of $4.9 million, exclusive of financing costs, and, subject to certain
conditions, the customer agreed to contribute $1.5 million toward the cost of
such enhancements. During the third quarter of 1999, the customer funded $1.0
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million of the enhancements and the balance of $0.5 million is expected to be
funded during the fourth quarter of 1999. During October 1999, a vendor has
agreed to provide one-year payment terms, with interest, for $2.5 million of
such enhancements. Additionally, in October 1999, the Company entered into
arrangements with another vendor to defer payment on $1.0 million of costs
related to the construction of the Rigs for one year.
Because the Rigs are new construction, the Company does not expect to
incur material additional capital expenditures associated with the Rigs in the
foreseeable future, unless specific requests for modifications are made by a
customer in connection with a drilling contract. Any unanticipated capital
expenditures could adversely affect cash in the period such expenditures are
incurred. Mobilization costs of the Company's Rigs from one drilling location to
another drilling location or to another market are normally not budgeted
because, under normal conditions, such mobilization costs are recovered from the
customer; however, any unrecovered mobilization costs, if they are incurred,
could materially increase Rig operating expense levels, reduce revenues while
the Rig is in transit and not working, and adversely affect cash flow from
operations and operating income in the period in which such expenses are
incurred.
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 are and will continue to be particularly dependent upon the condition
of the oil and natural gas industry and on the exploration and production
expenditures of oil and gas companies operating in the Gulf of Mexico. The
offshore contract drilling industry historically has been and is expected to
continue to be highly competitive and cyclical. During 1998, the decline in
commodity 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 of rigs. During 1999, crude oil prices recovered,
however, there can be no assurance that demand for drilling rigs will increase.
Sustained weak commodity prices, economic problems in countries outside the
United States, and a number of other factors beyond the Company's control could
further curtail spending by oil and gas companies. The Company cannot predict
whether or not current market conditions will continue their favorable trend and
if so, to what extent. A sustained period of depressed market conditions would
have a material adverse effect on the Company's future results of operations.
While the Company anticipates that it will continue to 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, other fixed costs, and
current liabilities, including interest payable with respect to the Notes (as
defined in Note 4 below) and drawings under the Bank Facility (as defined in
Note 5 below). The Company expects borrowings under the Bank Facility, subject
to the terms and conditions of the Bank Facility, to be sufficient to meet
operating costs and other current liabilities.
4. NOTES PAYABLE
Long-term debt at September 30, 1999 consisted 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 offering expenses. 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.
5. BANK FACILITY
The Company has entered into an agreement with two banks to provide a
senior secured revolving credit facility of $25.0 million (the "Bank Facility").
The Bank Facility bears interest at the rate of LIBOR plus 1.25% and matures on
December 31, 2004, at which time any outstanding principal amount and any unpaid
interest will be due. The Bank Facility is guaranteed by Columbus and Magellan.
At September 30, 1999, borrowings under the Bank Facility were $10.0 million at
6
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an interest rate of 6.8% through December 2, 1999. As of November 1, 1999 the
Company had drawn a total of $22.0 million under the Bank Facility.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with a shipyard and various
equipment vendors for delivery of the Chiles Magellan, at a cost of
approximately $91.7 million, exclusive of financing costs. At September 30,
1999, the Company had outstanding purchase commitments of approximately $11.9
million with respect to the remaining balance of the cost of the Chiles
Magellan. These amounts will become payable in future periods in accordance with
terms of the construction contract and vendor agreements.
7. COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), was issued. SFAS 130 established
standards for reporting and display of comprehensive income and its components
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 nine months ended September 30,
1999 and therefore, no reporting and display of comprehensive income was
required.
8. 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 has only one Rig operating and no material
operating information to report for the nine months ended September 30, 1999.
9. RELATED PARTY TRANSACTION
SEACOR Offshore Rigs Inc. ("SEACOR Rigs") is a wholly owned
subsidiary of SEACOR SMIT Inc. ("SEACOR"), a New York Stock Exchange listed
company. SEACOR Rigs currently owns 55.38% of the aggregate membership interests
in the Company. SEACOR currently owns approximately $41.5 million of the
outstanding principal amount of the Notes. In addition, SEACOR has entered into
certain swap arrangements with a financial institution with respect to notional
amounts equal to approximately $68.1 million in aggregate principal amount of
the Notes.
10. SUBSEQUENT EVENTS
On November 1, 1999, the Company paid, as scheduled, the semi-annual
interest payment of $5.5 million related to the Notes.
In October 1999, the Company entered into amendments to the Indenture
governing the Notes (the "Amendments"), which were approved by the holders of a
majority of the outstanding principal amount of the Notes, and which had the
effect of eliminating certain covenants contained in such Indenture. In
consideration for such approval, the consenting holders of Notes received $1.00
for each $1,000 in aggregate principal amount of Notes held by them.
Also in October 1999, the Company accepted a commitment letter (the
"Commitment") from its bank lenders that, among other things and subject to
certain conditions, will increase the existing $25.0 million availability under
the Bank Facility to a reducing revolving credit commitment of $40.0 million.
The Commitment provides for a floating interest rate of LIBOR plus 1-3/8% per
annum on amounts outstanding under the Bank Facility and provides for repayment
of such amounts in eight successive quarterly installments of $1,875,000
beginning March 31, 2003, followed by eight quarterly installments of
$3,125,000, with the remaining balance payable on December 31, 2006. As a
7
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condition precedent to the increase in availability under the existing Bank
Facility, the Company must reduce the aggregate outstanding principal amount of
Notes by $15.0 million, to $95.0 million. The Company expects to apply the
proceeds of the sale of membership interests in the Offering described below to
meet this requirement.
On November 5, 1999, the Company commenced an offering of membership
interests and rights to purchase membership interests (the "Offering") which
provides all current members of the Company with a pro rata right to purchase
such securities in the aggregate amount of $15.0 million. In connection with the
Offering, SEACOR Rigs, which currently owns 55.38% of the aggregate membership
interests in the Company, has agreed to purchase its 55.38% pro rata share of
the securities offered and to subscribe for and purchase all other securities
offered that are not subscribed for and purchased by other current members.
Purchasers in the Offering will acquire $15 million of membership interests and
receive rights to acquire an additional $3.0 million of membership interests at
the same valuation for a period of four and one-half years after the
consummation of the Offering. The Company plans to use the $15.0 million of
proceeds from the Offering to repurchase, at par, $15.0 million in aggregate
principal amount of Notes, from SEACOR. At such time as the $15.0 million
principal amount of Notes are purchased by the Company and retired, the Company
expects to incur an extraordinary loss of approximately $0.6 million for the
write-off of deferred financing costs related to such Notes.
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 was 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 "Property 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. ("SEACOR
Rigs") contributed an aggregate of $35.0 million in cash. Other accredited
investors contributed $20.0 million in cash in the Equity Financing.
In 1997, the Company commenced construction of two premium offshore
jackup drilling rigs, the Chiles Columbus and the Chiles Magellan (each a
"Rig" and together, the "Rigs") with a total estimated cost of $171.3 million,
exclusive of financing costs. In April 1998, the Company completed a 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 approximately $105.5 million
from the issuance and sale of the Notes. Also in April 1998, the Company
entered into a $25.0 million senior secured revolving credit facility 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. During 1999, the
Company made certain enhancements to the Rigs at a cost of $4.0 million, net
of customer contributions for the enhancements and exclusive of financing
costs.
The Company took delivery of the Chiles Columbus in May 1999 and the
Rig is currently operating in the U.S. Gulf of Mexico. The Company took delivery
of the Chiles Magellan in October 1999 and the Rig is currently operating in the
U.S. Gulf of Mexico. The Company has completed its development stage of activity
and is no longer reporting as a development stage company. As of September 30,
1999, the Company had approximately $4.8 million of cash on hand and the Company
had outstanding borrowings under the Bank Facility of $10.0 million.
See " - Subsequent Events."
8
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The Company's revenue is primarily a function of the rates per day
worked paid by the Company's customers for each Rig and by the level of
utilization of the Rigs. Dayrates and utilization are largely dependent upon the
capital expenditure programs of the Company's oil and gas company customers,
which are dependent upon the prevailing and expected levels of oil and gas
prices and the other factors discussed in "--Outlook" below.
The following table provides the Rig utilization rates and average
revenue per day for the periods indicated for the Chiles Columbus, the only Rig
in operation during such periods:
<TABLE>
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Three months ended Nine months ended
September 30 September 30
(in thousands)
1999 1998 1999 1998
------------------------------- -------------------------------
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Rig utilization 98.3% - 98.6% -
Average daily revenue per Rig $ 26,024 - $25,464 -
</TABLE>
Because the Company had no Rigs in operation during 1998, no data for
Rig utilization and average daily revenue per Rig is reported for the three and
nine month periods ended September 30, 1998. Rig utilization for the nine months
ended September 30, 1999 include only the days which the Chiles Columbus was
available after completion of construction.
RESULTS OF OPERATIONS
The following table provides revenue, expense and operating profit
information for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(in thousands)
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C>
Revenue $ 2,350 $ - $ 2,878 $ -
Operating Loss (574) (203) (1,114) (593)
General & administrative
expense 382 186 826 555
Interest expense 1,018 857 1,393 1,692
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The Chiles Columbus was delivered in May 1999 and commenced
operations in June 1999. The Company's revenue for the three and nine month
periods ended September 30, 1999 increased approximately $2.3 million and $2.9
million, respectively, compared to the same periods ended September 30, 1998 as
a result of the operation of this Rig.
The Company's operating loss for the three and nine month periods
ended September 30, 1999 increased approximately $0.4 million and $0.5 million,
respectively, compared to the same periods ended September 30, 1998 as the
operation of the Chiles Columbus provided revenues that were greater than Rig
operating expenses, but not sufficient to cover all of the Company's operating
expenses.
The Company's general and administrative expense for the three and
nine month periods ended September 30, 1999 increased approximately $0.2 million
and $0.3 million, respectively, compared to the same periods ended September 30,
1998 as marketing and other administrative expenses increased with the delivery
of the Chiles Columbus.
9
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The Company's interest expense for the three months ended September
30, 1999 increased approximately $0.2 million as compared to the same period
ended September 30, 1998 as interest was no longer capitalized with respect to
debt incurred for the Chiles Columbus after its delivery in May 1999. The
Company's interest expense for the nine months ended September 30, 1999
decreased approximately $0.3 million as compared to the same period ended
September 30, 1998 as construction costs for the Rigs were greater in 1999 than
in 1998, causing a higher level of capitalized interest expense.
The Company's depreciation expense for the three and nine month
periods ended September 30, 1999 increased approximately $0.9 million and $1.1
million, respectively, compared to the same periods ended September 30, 1998 as
a result of commencement of operations of the Chiles Columbus.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $1.7 million for
the nine month period ended September 30, 1999 as compared to the same period
ended September 30, 1998 as the operations of the Chiles Columbus provided an
increase in working capital. The Company took delivery of the Chiles Columbus in
May 1999. The Chiles Magellan was delivered in October 1999, and is under
contract and has commenced operations in the U.S. Gulf of Mexico. Net cash used
for the construction of the Rigs for the nine month period ended September 30,
1999 increased by $15.0 million compared to the same period ended September 30,
1998.
The Company estimates that it will require approximately $0.9 million
of working capital for the Chiles Magellan in connection with start-up
operations. As of September 30, 1999, the Company had purchase commitments of
$11.9 million and accounts payable of $3.7 million with respect to completion of
the Rigs. In connection with the drilling contract for the Chiles Magellan, in
the fourth quarter of 1999 the Company expects to receive $0.5 million in
customer contributions for enhancements to such Rig, subject to successful
completion of the enhancements and certain other conditions. As of September 30,
1999, the Company had approximately $4.8 million in cash on hand. As of
September 30, 1999, the Company had $120.0 million of long term debt, consisting
of $110.0 million of outstanding principal amount of the Notes and $10.0 million
of borrowings under the $25.0 million Bank Facility. The Company has commenced a
rights offering to its members that is expected to provide an additional $15.0
million of equity capital in the fourth quarter of 1999. The Company plans to
use the $15.0 million of proceeds from the offering to repurchase, at par, $15.0
million in aggregate principal amount of Notes. See "--Subsequent Events."
Because the Rigs are new construction, the Company does not expect to
incur material additional capital expenditures associated with the Rigs in the
foreseeable future, unless specific requests for modifications are made by a
customer in connection with a drilling contract. Any unanticipated capital
expenditures could adversely affect cash in the period such expenditures are
incurred. Mobilization costs of the Company's Rigs from one drilling location to
another drilling location or to another market are normally not budgeted
because, under normal conditions, such mobilization costs are recovered from the
customer; however, any unrecovered mobilization costs, if they are incurred,
could materially increase Rig operating expense levels, reduce revenues while
the Rig is in transit and not working, and could adversely affect cash flow from
operations and operating income in the period in which such expenses are
incurred.
SUBSEQUENT EVENTS
The Company took delivery of the Chiles Magellan in October 1999. The
Rig has left the shipyard and commenced operations under a drilling contract in
the U.S. Gulf of Mexico. As of November 1, 1999, the Company had increased its
outstanding borrowings under the $25.0 million Bank Facility from $10.0 million
to $22.0 million. During October 1999, the Company entered into arrangements for
deferral of vendor payments totaling $3.5 million related to the construction of
the Rigs for a period of one year. On November 1, 1999, the Company paid, as
scheduled, the semi-annual interest payment of $5.5 million related to the
Notes.
At the end of September 1999, the Company launched a consent
solicitation requesting that the holders of Notes approve amendments to the
Indenture governing the Notes (the "Amendments") which would have the effect of
eliminating most of the restrictive covenants contained in the Indenture. In
October 1999, the holders of a majority of the outstanding principal amount of
the Notes approved the Amendments which, among other things, allows the Company
10
<PAGE>
to proceed with its effort to increase the availability under the Bank Facility.
In consideration for such approval, the consenting holders of Notes received
$1.00 for each $1,000 in aggregate principal amount of Notes held by them. See
"Submission of Matters to a Vote of Security Holders."
In October 1999, the Company accepted a commitment letter (the
"Commitment") from its bank lenders that, among other things and subject to
certain conditions, will increase the existing $25.0 million availability under
the Bank Facility to a reducing revolving credit commitment of $40.0 million.
The Commitment provides for a floating interest rate of LIBOR plus 1-3/8% per
annum on amounts outstanding under the Bank Facility and provides for repayment
of such amounts in eight quarterly installments of $1,875,000 beginning March
31, 2003, followed by eight successive quarterly installments of $3,125,000,
with the remaining balance payable on December 31, 2006. As a condition
precedent to the increase in availability under the existing Bank Facility, the
Company must reduce the aggregate outstanding principal amount of Notes by $15.0
million, to $95.0 million. The Company expects to apply the proceeds of the sale
of membership interests in the Offering described below to meet this
requirement.
On November 5, 1999, the Company commenced an offering of membership
interests and rights to purchase membership interests (the "Offering") which
provides all current members of the Company with a pro rata right to purchase
such securities in the aggregate amount of $15.0 million. In connection with the
Offering, SEACOR Offshore Rigs Inc. ("SEACOR Rigs"), which currently owns 55.38%
of the aggregate membership interests in the Company, has agreed to purchase its
55.38% pro rata share of the securities offered and to subscribe for and
purchase all other securities offered that are not subscribed for and purchased
by other current members. Purchasers in the Offering will acquire $15 million of
membership interests and receive rights to acquire an additional $3.0 million of
membership interests at the same valuation for a period of four and one-half
years after the consummation of the Offering. The Company plans to use the $15.0
million of proceeds from the Offering to repurchase, at par, $15.0 million in
aggregate principal amount of Notes from SEACOR SMIT Inc. ("SEACOR"). At such
time as the $15.0 million principal amount of Notes are purchased by the Company
and retired, the Company expects to incur an extraordinary loss of approximately
$0.6 million for the write-off of deferred financing costs related to such
Notes.
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 are and will continue to 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 commodity 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 of rigs. During 1999, crude oil prices have recovered but there
can be no assurance that demand for drilling rigs will increase. Sustained weak
commodity prices, economic problems in countries outside the United States, and
a number of other factors beyond the Company's control could further curtail
spending by oil and gas companies. The Company cannot predict whether or not
current market conditions will continue their favorable trend and if so, to what
extent. A sustained period of depressed market conditions would have a material
adverse effect on the Company's future results of operations.
At September 30, 1999, the Chiles Columbus was under a multi-well
contract in the U.S. Gulf of Mexico, and, if all wells are drilled as currently
planned by the operator, work for the Rig is expected to continue through the
second quarter of 2000. In August 1999, the Company entered into a contract for
the use of the Chiles Magellan in the Gulf of Mexico. The contract calls for the
drilling of one well, estimated to be completed in 120 days, to begin, at the
Company's option, between December 1, 1999 and April 30, 2000. Pursuant to the
contract, the customer will have the option to use the Chiles Magellan, under
certain circumstances, for additional wells in the same area for a specified
period of time after conclusion of the first well. Under the terms of the
contract, the Company has agreed to make certain enhancements to the Chiles
Magellan at a cost of approximately $4.9 million, exclusive of financing costs,
and subject to certain conditions, the customer agreed to contribute $1.5
million toward the costs of such enhancements. During the second quarter of
11
<PAGE>
1999, the customer funded $1.0 million of the enhancements and the balance is
expected to be funded during the fourth quarter of 1999. The Chiles Magellan is
presently under contract and the Rig has a contract backlog of more than five
months.
While the Company anticipates that it will continue to 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. The Company expects borrowings under
the Bank Facility, subject to the terms and conditions of the Bank Facility, to
be sufficient to meet operating costs and other current liabilities.
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 has
obtained certifications from the vendors of such systems as to their Y2K
compliance. The Company has acquired certain specialized IT systems and has
obtained from most vendors certification of their Y2K compliance. Those vendors
that were unable to 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 was completed, with respect to the Company's
currently existing vendor relationships, during the third 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 fourth
quarter of 1999.
The Company has undertaken a program to identify any other third
parties with whom a material relationship exists. The Company is in the process
of obtaining 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 September 30, 1999, the Company has incurred nominal
administrative cost in conducting its Y2K compliance program. Results of this
program as of such date 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 approximately 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 during the fourth quarter of 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 the end of the fourth quarter of 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
12
<PAGE>
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, the ability of the Company to raise additional equity or
other forms of liquidity, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates with respect to
its drawings upon the Bank Facility. The market value of the Notes, which were
originally issued on April 29, 1998, is sensitive to changes in interest rates.
The Notes, which are due May 1, 2008, have a stated interest rate of 10.0% and
an effective interest rate of 10.4%. At September 30, 1999, the fair value of
the Notes, based on quoted market prices, was approximately $88.0 million, as
compared to a carrying amount of $110.0 million. Since September 30, 1999, there
has been no significant change in the value of the Notes. The Company is also
exposed to changes in the prices of oil and natural gas. The offshore contract
drilling industry is dependent upon the exploration and production programs of
oil and gas companies, which in turn are influenced by the price of oil and
natural gas.
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
On September 28, 1999, the Company launched a consent solicitation
with respect to the Amendments to the Indenture governing the Notes, requesting
the elimination of most of the restrictive covenants contained therein. In
13
<PAGE>
October 1999, the holders of a majority of the outstanding principal amount of
the Notes approved the Amendments which, among other things, allows the Company
to proceed with its effort to increase the availability under the Bank Facility.
In consideration for such approval, the consenting holders of Notes received
$1.00 for each $1,000 in aggregate principal amount of Notes held by them.
Holders of 62% of the aggregate outstanding principal amount of Notes voted in
favor of approving the Amendments and the Company paid these holders $68,505 in
the aggregate. SEACOR, an affiliate of the Company, abstained from the consent
solicitation in accordance with the Indenture. Holders of 10% of the aggregate
outstanding principal amount of Notes voted against approving the Amendments.
Holders of 7% of the aggregate outstanding principal amount of Notes (other than
SEACOR) abstained with respect to approving the Amendments. Holders of 21% of
the aggregate outstanding principal amount of Notes did not respond.
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.
14
<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: November 15, 1999
15
<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)
<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>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,813
<SECURITIES> 0
<RECEIVABLES> 2,013
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,975
<PP&E> 180,760
<DEPRECIATION> 1,158
<TOTAL-ASSETS> 191,751
<CURRENT-LIABILITIES> 9,885
<BONDS> 110,000
0
0
<COMMON> 0
<OTHER-SE> 61,866
<TOTAL-LIABILITY-AND-EQUITY> 191,751
<SALES> 0
<TOTAL-REVENUES> 2,878
<CGS> 0
<TOTAL-COSTS> 2,069
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,393
<INCOME-PRETAX> (1,729)
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