<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
COMMISSION FILE NUMBER 0-16703
CLIFFS DRILLING COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0248934
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1200 SMITH STREET, SUITE 300
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 651-9426
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (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
----- -----
Number of shares of Common Stock outstanding as of August 11, 1995: 4,103,683
(Exhibit Index Located on Page 16)
Page 1 of 17 Pages
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CLIFFS DRILLING COMPANY
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Operations (Unaudited) -
CLIFFS DRILLING COMPANY
Three and Six Months Ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets -
CLIFFS DRILLING COMPANY
June 30, 1995 (Unaudited) and December 31, 1994 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) -
CLIFFS DRILLING COMPANY
Three and Six Months Ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 5
Notes to Interim Consolidated Financial Statements (Unaudited). . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1995 1994 1995 1994
-------- ------- -------- --------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,457 $15,475 $ 28,735 $ 31,955
Income (Loss) from Equity Investments . . . . . . . . . . . . . . . . (504) 1,072 (500) 1,069
-------- ------- -------- --------
13,953 16,547 28,235 33,024
COSTS AND EXPENSES:
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 12,315 7,459 21,754 15,150
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . 1,383 3,513 3,456 7,100
Contract Termination Provision . . . . . . . . . . . . . . . . . . . -- 1,762 -- 3,377
General and Administrative Expense . . . . . . . . . . . . . . . . . 1,265 1,268 2,617 2,519
-------- ------- -------- --------
14,963 14,002 27,827 28,146
-------- ------- -------- --------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . (1,010) 2,545 408 4,878
OTHER INCOME (EXPENSE):
Gain (Loss) on Disposition of Assets . . . . . . . . . . . . . . . . (48) 590 (41) 536
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 162 566 377
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (262) (65) (423)
Exchange Rate Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . 428 (783) 302 (995)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (655) (235) (723) (663)
-------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . (1,046) 2,017 447 3,710
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . . . . . . (261) 499 112 772
-------- ------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . (785) 1,518 335 2,938
DIVIDENDS APPLICABLE TO PREFERRED STOCK . . . . . . . . . . . . . . . . (665) (665) (1,330) (1,330)
-------- ------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES . . . . . . . . . . . . . . . . . . . . . . . $ (1,450) $ 853 $ (995) $ 1,608
======== ======= ======== ========
NET INCOME (LOSS) PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.35) $ 0.20 $ (0.24) $ 0.37
======== ======= ======== ========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . . $ (0.35) $ 0.20 $ (0.24) $ 0.37
======== ======= ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,104 4,196 4,096 4,328
======== ======= ======== ========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . . 4,104 4,196 4,096 4,328
======== ======= ======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
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CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- ------------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 2,765 $ 11,320
Accounts Receivable, net of allowance for doubtful accounts of $407 and
$408 at June 30, 1995 and December 31, 1994, respectively . . . . . . 9,307 8,499
Notes and Other Receivables -- Current . . . . . . . . . . . . . . . . 3,038 2,366
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,603 5,726
Drilling Contracts in Progress . . . . . . . . . . . . . . . . . . . . 10,714 5,074
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,067 577
Other Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,929 5,486
--------- ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 35,423 39,048
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment . . . . . . . . . . . . . . . . . . . . . . 156,734 148,085
Oil and Gas Properties ("successful efforts" method) . . . . . . . . . 23,402 22,699
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,146 3,079
--------- ---------
183,282 173,863
Less: Accumulated Depreciation, Depletion and Amortization . . . . . . (106,066) (102,615)
--------- ---------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . 77,216 71,248
NOTES AND OTHER RECEIVABLES -- LONG-TERM . . . . . . . . . . . . . . . . 4,780 5,017
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES . . . . . . . . 4,086 4,036
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 818
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,128 $ 120,167
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,849 $ 14,808
Accrued Expenses, Including Interest . . . . . . . . . . . . . . . . . 5,737 4,909
Notes Payable -- Current . . . . . . . . . . . . . . . . . . . . . . . 2,000 --
--------- ---------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . 22,586 19,717
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 516
DEFERRED INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 303
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
$2.3125 Convertible Exchangeable Preferred Stock, 3,000,000 shares
authorized; 1,150,000 shares issued and outstanding at June 30, 1995
and December 31, 1994, respectively ($28,750 liquidation value) . . . 28,750 28,750
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized; 4,518,104
shares issued and 4,100,464 and 4,089,447 shares outstanding at
June 30, 1995 and December 31, 1994, respectively . . . . . . . . . 45 45
Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,153 99,135
Retained Earnings (Deficit) . . . . . . . . . . . . . . . . . . . . . . (23,890) (22,895)
Less: Notes Receivable from Officers for Restricted Stock . . . . . . (232) (232)
Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . (44) (57)
Treasury Stock, at cost, 417,640 and 428,657 shares at June 30,
1995 and December 31, 1994, respectively . . . . . . . . . (4,988) (5,115)
--------- ---------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . 70,044 70,881
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $ 122,128 $ 120,167
========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 5
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
1995 1994 1995 1994
---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . $ (785) $ 1,518 $ 335 $ 2,938
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization . . . . . . . . 1,383 3,513 3,456 7,100
Contract Termination Provision . . . . . . . . . . . . . -- 1,762 -- 3,377
Mobilization Expense Amortization . . . . . . . . . . . . 130 109 257 269
(Gain) Loss on Disposition of Assets . . . . . . . . . . 48 (590) 41 (536)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5 115 (200)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable . . . . . . . . . . . . . . . . . . 4,582 4,060 (2,480) 436
Inventories . . . . . . . . . . . . . . . . . . . . . . 681 (3,057) 1,123 (3,686)
Drilling Contracts in Progress . . . . . . . . . . . . (4,065) (9,589) (5,633) (10,348)
Prepaid Expenses and Other Current Assets . . . . . . . (690) (695) 1,005 (1,378)
Investments in and Advances to Unconsolidated
Affiliates . . . . . . . . . . . . . . . . . . . . . (1,446) (1,844) (50) (169)
Other Assets . . . . . . . . . . . . . . . . . . . . . 1 345 -- (802)
Accounts Payable and Other Accrued Liabilities . . . . 3,794 5,108 1,034 7,625
---------- ----------- ----------- -----------
Net Cash Provided By (Used In) Operating
Activities . . . . . . . . . . . . . . . . . . . . 3,698 645 (797) 4,626
INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . . . . . . . . . (6,987) (1,686) (9,868) (6,455)
Proceeds from Sale of Property and Equipment . . . . . . . 140 57 203 73
Collection of Notes Receivable . . . . . . . . . . . . . . 109 256 1,237 590
---------- ----------- ----------- -----------
Net Cash Used in Investing Activities . . . . . . . . (6,738) (1,373) (8,428) (5,792)
FINANCING ACTIVITIES:
Proceeds from Borrowings . . . . . . . . . . . . . . . . . 2,000 10,500 2,000 10,500
Payments on Borrowings . . . . . . . . . . . . . . . . . . -- (8,582) -- (12,575)
Acquisition of Treasury Stock . . . . . . . . . . . . . . . -- (2,109) -- (3,920)
Preferred Stock Dividends . . . . . . . . . . . . . . . . . (665) (665) (1,330) (1,330)
---------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities . . . . . . . . . . . . . . . . . . . . 1,335 (856) 670 (7,325)
---------- ----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . (1,705) (1,584) (8,555) (8,491)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . 4,470 3,708 11,320 10,615
---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . $ 2,765 $ 2,124 $ 2,765 $ 2,124
========== =========== =========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 6
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1995
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal and recurring adjustments) necessary to present a
fair statement of the results for the periods included herein have been made
and the disclosures contained herein are adequate to make the information
presented not misleading. Operating results for the three and six months ended
June 30, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1994.
2. EARNINGS PER SHARE
Primary earnings (loss) per share computations are based on net income (loss)
less dividends on the Company's $2.3125 Convertible Exchangeable Preferred
Stock (the "Preferred Stock"), divided by the average number of common shares
and equivalents outstanding during the respective periods. Common stock
equivalents include the number of shares issuable upon exercise of stock
options, less the number of shares that could have been repurchased with the
exercise proceeds using the treasury stock method. The Preferred Stock is not
included in the primary earnings (loss) per share computation as it is not a
common stock equivalent. Fully diluted earnings per common share computations
are made after the assumption of conversion of the Preferred Stock when the
effect of such conversion is dilutive.
3. SUBSEQUENT EVENTS
Subsequent to June 30, 1995, the Company drew $1.0 million under its revolving
line of credit to fund its working capital requirements.
On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage during
demobilization from Venezuela to the U.S. Gulf of Mexico. During an inspection
of the hull damage by the Company and its insurance adjusters, other damage was
discovered which has been attributed to an earthquake in Venezuela in May,
1994. The Company and its underwriters are currently assessing the damage. The
Company has insurance to cover repair of the damage resulting from these
incidents.
4. CHANGE IN PRESENTATION
Certain financial statement items have been reclassified in the prior year to
make them conform with the current year presentation.
6
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Activity in the contract drilling industry and related oil service businesses
has shown signs of improvement over the last two years due to various market
consolidations. Crude oil and natural gas prices have continued to fluctuate
over the last two years. This price volatility creates an uncertain domestic
market and competition, therefore, remains intense within the contract drilling
industry. The financial condition and results of operations of the Company and
other drilling contractors are dependent upon the price of oil and natural gas,
as demand for their services is primarily dependent upon the level of spending
by oil and gas companies for exploration, development and production
activities.
The Company has endeavored to mitigate the effect of volatile product pricing
by diversifying its scope of operations beyond the domestic daywork contract
drilling market. To achieve its strategic objective, the Company established
separate but related lines of business in turnkey drilling and MOPU operations,
and pursued foreign drilling and production opportunities. Each of the
Company's business segments will continue to be affected, however, by the
unsettled energy markets, which are influenced by a variety of factors,
including general economic conditions, the extent of worldwide oil and gas
production and demand therefor, government regulations, and environmental
concerns.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995 and 1994
The Company recognized a net loss, before preferred dividends, of $.8 million
during the second quarter of 1995 compared to net income of $1.5 million in the
second quarter of 1994. Operating income decreased $3.6 million in the second
quarter of 1995 compared to the same period in 1994. The decrease in operating
income was primarily due to a reduction in engineering services operating
income of $1.8 million, a reduction in foreign daywork drilling operating
income of $1.1 million and a reduction in MOPU operating income of $.7 million.
<TABLE>
<CAPTION>
Increase
1995 1994 (Decrease)
----------- ----------- -------------
(Unaudited)
(In thosands)
<S> <C> <C> <C>
Revenues:
Daywork Drilling:
Domestic . . . . . . . . . . . . . . . . . . . $ -- $ 7 $ (7)
Foreign . . . . . . . . . . . . . . . . . . . 8,324 8,356 (32)
Engineering Services . . . . . . . . . . . . . . 5,145 3,557 1,588
MOPU Operations . . . . . . . . . . . . . . . . 1,190 4,810 (3,620)
Oil and Gas . . . . . . . . . . . . . . . . . . 401 791 (390)
Eliminations . . . . . . . . . . . . . . . . . . (1,107) (974) (133)
----------- ----------- ------------
Consolidated . . . . . . . . . . . . . . . . . $ 13,953 $ 16,547 $ (2,594)
=========== =========== ============
Operating Income (Loss):
Daywork Drilling:
Domestic . . . . . . . . . . . . . . . . . . . $ -- $ 3 $ (3)
Foreign . . . . . . . . . . . . . . . . . . . 1,015 2,110 (1,095)
Engineering Services . . . . . . . . . . . . . . (1,033) 739 (1,772)
MOPU Operations . . . . . . . . . . . . . . . . 392 1,114 (722)
Oil and Gas . . . . . . . . . . . . . . . . . . (94) (67) (27)
Corporate Office . . . . . . . . . . . . . . . . (1,290) (1,284) (6)
Eliminations . . . . . . . . . . . . . . . . . . -- (70) 70
----------- ----------- ------------
Consolidated . . . . . . . . . . . . . . . . . (1,010) $ 2,545 $ (3,555)
=========== =========== ============
</TABLE>
7
<PAGE> 8
Daywork Drilling
Domestic daywork drilling operating results reflect the Company's strategy to
diversify away from the volatile domestic market. The Company mobilized the
balance of its land rig fleet to Venezuela during the first quarter of 1994.
Foreign daywork drilling operating income decreased $1.1 million during the
second quarter of 1995 compared to the second quarter of 1994. Foreign daywork
drilling operating results reflect decreased operating income primarily due to
the stacking of one of the Company's jack-up drilling rigs which completed
operations in Mexico during the fourth quarter of 1994 for Cliffs Neddrill
Central Turnkey International ("CNCTI"), a joint venture in which the Company
holds a one-third ownership interest. This decrease was partially offset by
operating income generated from the demobilization of 2 of the Company's
jack-up drilling rigs which worked in Venezuela. The Company's 2 jack-up
drilling rigs operating in Venezuela continued drilling operations during April
on a well-to-well basis at reduced dayrates from those received
in 1994. Subsequent to expiration of the contracts, one of the jack-up rigs
was demobilized to the U.S. Gulf of Mexico. The other jack-up rig was
demobilized to an offshore location outside Venezuela and contracted to drill a
turnkey well which is expected to be completed during the third quarter of
1995.
On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage during
demobilization from Venezuela to the U.S. Gulf of Mexico. During an inspection
of the hull damage by the Company and its insurance adjusters, other damage was
discovered which has been attributed to an earthquake in Venezuela in May,
1994. The Company and its underwriters are currently assessing the damage. The
Company has insurance to cover repair of the damage resulting from these
incidents. See "Liquidity and Capital Resources."
Contracts on 2 of the 5 land drilling rigs working for Corpoven S.A.
("Corpoven") have been extended for one year into September, 1996 at increased
dayrates. The other 3 land drilling rigs have contracts or agreements which
extend into February, 1997.
Engineering Services
Engineering services revenues increased $1.6 million in the second quarter of
1995 compared to the second quarter of 1994, while operating income decreased
$1.8 million during the same period. Two turnkey drilling contracts were
completed during the second quarter of 1995 compared to 3 turnkey drilling
contracts completed during the same period in 1994. The $1.0 million operating
loss reported in the second quarter of 1995 was attributable to losses incurred
on the 2 turnkey drilling contracts completed during the quarter and to the
accrual of $.5 million for an expected loss on a turnkey drilling contract in
progress at June 30, 1995. One of the turnkey wells which was completed during
the second quarter of 1995 and 2 of the turnkey wells which were completed
during the same period in 1994 were drilled by CNCTI and recorded under the
equity method.
At June 30, 1995, the Company had 2 turnkey wells in progress in Venezuela and
2 additional turnkey wells in progress in the United States.
MOPU Operations
MOPU revenues decreased $3.6 million in the second quarter of 1995 compared to
the second quarter of 1994. MOPU operating income decreased $.7 million during
the same period. The decrease in revenues and operating income was primarily
due to the expirations in May and September, 1994 of the two-year contracts on
the 3 MOPUs which worked in Venezuela. The 3 MOPUs which worked in Venezuela
contributed revenues of $3.9 million and operating income of $.5 million during
the second quarter of 1994. One of the 3 MOPUs was demobilized to the United
States during the second quarter of 1994 and is currently being marketed. In
the fourth quarter of 1994, the charterer exercised options to purchase the
other 2 MOPUs, which worked in Venezuela, for a total of $4.0 million. See
"Liquidity and Capital Resources."
8
<PAGE> 9
The contract for MARLIN No. 4, which was operating in the Gulf of Mexico,
expired at the end of April, 1994. The Company renovated the unit during the
third quarter of 1994 and secured a contract for operations which commenced in
the second quarter of 1995. The option for a contract on another MOPU, Cliffs
No. 10, terminated in February, 1995; however, the Company secured an option
for a two-year contract on this unit in the second quarter of 1995. The supply
unit currently operating in the Bay of Campeche, Mexico is expected to complete
operations during the third quarter of 1995.
Oil and Gas
Oil and gas revenues decreased $.4 million in the second quarter of 1995
compared to the second quarter of 1994, primarily due to reduced gas revenues
resulting from production declines and lower gas prices during the second
quarter of 1995 compared to the same period in 1994. Operating losses
increased slightly during the same period, primarily due to the decrease in
revenues, partially offset by reduced depreciation, depletion and amortization
and operating expenses.
Corporate Overhead
Corporate overhead was held constant during the second quarter of 1995 compared
to the second quarter of 1994.
Other Income (Expense)
The Company recognized $.2 million of other income during the second quarter of
1995 compared to $1.0 million of other expense during the same period in 1994.
The net decrease in other expense resulted primarily from a reduction in
exchange rate losses of $1.2 million and a reduction in income taxes of $.8
million, offset in part by a reduction in gains on disposition of assets of $.6
million and an increase in other net expenses of $.5 million. Exchange rate
losses decreased due to the imposition of exchange controls in Venezuela during
1994 and due to gains realized on currency swaps and Venezuela Brady Bond
transactions. See "Liquidity and Capital Resources." Other net expenses
increased primarily due to $.7 million of costs and expenses incurred in
connection with the evaluation of a business combination that was not
consummated.
9
<PAGE> 10
Six Months Ended June 30, 1995 and 1994
The Company recognized net income, before preferred dividends, of $.3 million
during the first six months of 1995 compared to net income of $2.9 million in
the first six months of 1994. Operating income decreased $4.5 million in the
first six months of 1995 compared to the same period in 1994. The decrease in
operating income was primarily due to a reduction in MOPU operating income of
$2.2 million, a reduction in foreign daywork drilling operating income of $2.1
million, a reduction in engineering services operating income of $.4 million
and an increase in corporate overhead of $.1 million, offset in part by a
reduction in oil and gas operating losses of $.2 million and a reduction in
domestic daywork drilling operating losses of $.1 million.
<TABLE>
<CAPTION>
Increase
1995 1994 (Decrease)
--------- -------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Revenues:
Daywork Drilling:
Domestic ................................................ $ -- $ 15 $ (15)
Foreign ................................................. 14,977 15,560 (583)
Engineering Services ....................................... 12,193 6,471 5,722
MOPU Operations ............................................ 2,475 10,589 (8,114)
Oil and Gas ................................................ 791 1,365 (574)
Eliminations ............................................... (2,201) (976) (1,225)
--------- -------- --------
Consolidated ............................................ $ 28,235 $ 33,024 $ (4,789)
========= ======== ========
Operating Income (Loss):
Daywork Drilling:
Domestic ............................................... $ -- $ (62) $ 62
Foreign ................................................ 1,516 3,610 (2,094)
Engineering Services ...................................... 740 1,165 (425)
MOPU Operations ........................................... 957 3,197 (2,240)
Oil and Gas ............................................... (140) (403) 263
Corporate Office .......................................... (2,665) (2,559) (106)
Eliminations .............................................. -- (70) 70
--------- -------- --------
Consolidated .......................................... $ 408 $ 4,878 $ (4,470)
========= ======== ========
</TABLE>
Daywork Drilling
Domestic daywork drilling operating results reflect the Company's strategy to
diversify away from the volatile domestic market. The Company mobilized the
balance of its land rig fleet to Venezuela during the first quarter of 1994.
Foreign daywork drilling revenues decreased $.6 million during the first six
months of 1995 compared to the first six months of 1994 while operating income
decreased $2.1 million during the same period. Foreign daywork drilling
operating results reflect decreased revenues and operating income primarily due
to the stacking of one of the Company's jack-up drilling rigs which completed
operations in Mexico during the fourth quarter of 1994 for CNCTI. These
decreases were partially offset by revenues and operating income generated from
the demobilization of 2 of the Company's jack-up drilling rigs which worked in
Venezuela. The Company's 2 jack-up drilling rigs operating in Venezuela
continued drilling operations during April on a well-to-well basis at reduced
dayrates from those received in 1994. Subsequent to expiration of the
contracts, one of the jack-up rigs was demobilized to the U.S. Gulf of Mexico.
The other jack-up rig was demobilized to an offshore location outside Venezuela
and contracted to drill a turnkey well which is expected to be completed during
the third quarter of 1995.
On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage during
demobilization from Venezuela to the U.S. Gulf of Mexico. During an inspection
of the hull damage by the Company and its insurance adjusters, other damage was
discovered which has been attributed to an earthquake in Venezuela in May,
1994. The Company and its underwriters are currently
10
<PAGE> 11
assessing the damage. The Company has insurance to cover repair of the damage
resulting from these incidents. See "Liquidity and Capital Resources."
Contracts on 2 of the 5 land drilling rigs working for Corpoven have been
extended for one year into September, 1996 at increased dayrates. The other 3
land drilling rigs have contracts or agreements which extend into February,
1997.
Engineering Services
Engineering services revenues increased $5.7 million in the first six months of
1995 compared to the first six months of 1994, while operating income decreased
$.4 million during the same period. Three turnkey drilling contracts were
completed during the first six months of 1995 compared to 4 turnkey drilling
contracts completed during the same period in 1994. Operating income for the
first six months of 1995 was partially offset by $.7 million of losses incurred
on 2 completed turnkey drilling contracts and the accrual of $.5 million for an
expected loss on one turnkey drilling contract in progress at June 30, 1995.
One of the turnkey wells which was completed during the first six months of
1995 and 2 of the turnkey wells which were completed during the same period in
1994 were drilled by CNCTI and recorded under the equity method.
At June 30, 1995, the Company had 2 turnkey wells in progress in Venezuela and
2 additional turnkey wells in progress in the United States.
MOPU Operations
MOPU revenues decreased $8.1 million in the first six months of 1995 compared
to the first six months of 1994. MOPU operating income decreased $2.2 million
during the same period. The decrease in revenues and operating income was
primarily due to the expirations in May and September, 1994 of the two-year
contracts on the 3 MOPUs which worked in Venezuela. The 3 MOPUs which worked
in Venezuela contributed revenues of $8.6 million and operating income of $2.0
million during the first six months of 1994. One of the 3 MOPUs was
demobilized to the United States during the second quarter of 1994 and is
currently being marketed. In the fourth quarter of 1994, the charterer
exercised options to purchase the other 2 MOPUs, which worked in Venezuela, for
a total of $4.0 million. See "Liquidity and Capital Resources."
The contract for MARLIN No. 4, which was operating in the Gulf of Mexico,
expired at the end of April, 1994. The Company renovated the unit during the
third quarter of 1994 and secured a contract for operations which commenced in
the second quarter of 1995. The option for a contract on another MOPU, Cliffs
No. 10, terminated in February, 1995; however, the Company secured an option
for a two-year contract on this unit in the second quarter of 1995. The supply
unit currently operating in the Bay of Campeche, Mexico is expected to complete
operations during the third quarter of 1995.
Oil and Gas
Oil and gas revenues decreased $.6 million during the first six months of 1995
compared to the same period in 1994, primarily due to reduced gas revenues
resulting from production and lower gas prices during the first six months of
1995 compared to the same period in 1994. Operating losses decreased $.2
million during the same period, primarily because reduced depreciation,
depletion and amortization and operating expenses more than offset the decrease
in revenues.
Corporate Overhead
Corporate overhead increased slightly during the first six months of 1995
compared to the same period in 1994, due primarily to employment related costs.
11
<PAGE> 12
Other Income (Expense)
The Company recognized $.1 million of other expense during the first six months
of 1995 compared to $1.9 million of other expense during the same period in
1994. The net decrease in other expense resulted primarily from a reduction in
exchange rate losses of $1.3 million and a reduction in income taxes of $.7
million. Exchange rate losses decreased due to the imposition of exchange
controls in Venezuela during 1994 and due to gains realized on currency swaps
and Venezuela Brady Bond transactions. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased $8.5 million from $11.3
million at December 31, 1994 to $2.8 million at June 30, 1995. The decrease
resulted from $.8 million used to fund operating activities, $9.9 million used
to fund capital expenditures and $1.3 million used for payments of preferred
stock dividends, partially offset by $2.0 million in borrowings and $1.5
million received from the collection of notes receivable and the sale of
property and equipment.
Cash of $.8 million used to fund operating activities included $5.0 million
used for working capital and other requirements, primarily the funding of the
Company's engineering services operations. "Drilling Contracts in Progress"
increased from December 31, 1994 to June 30, 1995 due primarily to the
Company's turnkey operations in Venezuela. "Other Prepaid Expenses" decreased
from December 31, 1995 to June 30, 1995 due primarily to the sale of Venezuelan
tax deposits.
Cash was used during the first six months of 1995 to fund $9.9 million of
capital expenditures, which primarily related to the purchase and renovation of
a 3000 HP land rig, Cliffs Drilling Rig 54. The Company expects to spend an
additional $1.2 million on this rig during the third quarter of 1995 in
preparation for an initial contract to drill 2 wells on a daywork basis in
Venezuela, which is expected to commence in the third quarter of 1995. The
Company has plans for other capital expenditures totaling approximately $3.0
million during the last six months of 1995. The Company intends to fund these
remaining capital expenditure requirements with internally-generated cash flow
and amounts currently available under its revolving line of credit.
Two of the Company's jack-up drilling rigs operating in Venezuela continued
drilling operations during April on a well-to-well basis at reduced dayrates
from those received in 1994. Subsequent to expiration of the contracts, one of
the jack-up rigs was demobilized to the U.S. Gulf of Mexico. The other jack-up
rig was demobilized to an offshore location outside Venezuela and contracted to
drill a turnkey well which is expected to be completed during the third quarter
of 1995. On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull
damage during demobilization from Venezuela to the U.S. Gulf of Mexico. During
an inspection of the hull damage by the Company and its insurance adjusters,
other damage was discovered which has been attributed to an earthquake in
Venezuela in May, 1994. The Company and its underwriters are currently
assessing the damage. The Company has insurance to cover repair of the damage
resulting from these incidents.
The LANGLEY, one of 3 MOPUs which worked in Venezuela, ended its two-year
contract in May, 1994, and the contract was not extended. The rig was
demobilized back to the United States, and the demobilization costs were
reimbursed to the Company by the charterer. Each of the 2 remaining MOPUs
which worked in Venezuela had initial contract terms of two years which expired
in September, 1994, subject to certain buyout options. The charterer exercised
its option to purchase the FRANKLIN and FORRESTAL effective December, 1994 for
total proceeds of $4.0 million.
Approximately 72% of the Company's revenues and a substantial portion of its
operating income were sourced from its Venezuelan operations during the first
six months of 1995. These operations are subject to customary political and
foreign currency risks in addition to operational risks. The Company has
attempted to reduce these risks through insurance and the structure of its
12
<PAGE> 13
contracts. Exchange losses increased substantially in 1994 due to significant
devaluation of the Venezuelan Bolivar during the second quarter of 1994.
Venezuela instituted currency exchange controls during June, 1994 in response
to this devaluation. These exchange controls continue in effect and have
substantially eliminated exchange losses attributable to the Company's
Venezuelan operations during the first six months of 1995. However, the
Company continues to be exposed to future losses if the currency becomes
volatile. Despite the current economic situation in Venezuela, the Company
believes that the country continues to be a favorable market for its services.
During March, 1995, the Company sold 500 million Bolivars of Venezuelan tax
deposits at a 17.5% discount and received $2.4 million in equivalent Bolivars,
resulting in an exchange loss of $.5 million. This loss is offset by $.9
million in gains recorded in connection with currency swaps and Venezuela Brady
Bond transactions. The effects of these transactions are reported as "Exchange
Rate Gain (Loss)" in the Consolidated Statements of Operations.
The Company's $20.0 million revolving line of credit agreement with
Internationale Nederlanden (U.S.) Capital Corporation ("INCC") matures on
January 1, 1996 and is expected to be renewed prior to its expiration. As of
June 30, 1995, the outstanding balance of the Company's revolving line of
credit with INCC was $2.0 million. Subsequent to June 30, 1995, the Company
drew an additional $1.0 million under its revolving line of credit to fund its
working capital requirements.
The Company from time to time purchases its Common Stock in the open market.
During 1994, the Company purchased 427,000 shares of its Common Stock at an
aggregate purchase price of $5.1 million, or approximately $11.93 per share.
Management of the Company believes that the Common Stock is trading at prices
which do not reflect the value of the Company and has determined that the
acquisition of such stock would be in the best interest of the Company and its
shareholders. All of the acquired shares are held as Common Stock in treasury,
less shares issued under certain benefit plans. No treasury stock was
purchased during the first six months of 1995.
The ability of the Company to fund working capital, capital expenditures, debt
service and dividends in excess of cash on hand will be dependent upon the
success of the Company's domestic and foreign operations. To the extent that
internal sources are insufficient to meet those cash requirements, the Company
can draw on its available credit facility or seek other debt or equity
financing; however, the Company can give no assurance that such other debt or
equity financing would be available on terms acceptable to the Company.
In any case, the satisfaction of long-term capital requirements will depend
upon successful implementation by the Company of its business strategy and
future results of operations. Management believes it has successfully
implemented the strategy to achieve results of operations commensurate with its
immediate and near-term liquidity requirements.
13
<PAGE> 14
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on May 18, 1995, at
which the shareholders voted on the election of three directors and the
appointment of the Company's independent public accountants. Of the 3,586,533
shares of Common Stock present in person or by proxy, 3,582,145 shares were
voted for the election of H. Robert Hirsch as a director, 3,582,141 shares were
voted for the election of Randolph Newcomer as a director, and 3,582,111 shares
were voted for the election of Joseph E. Reid as a director, with 4,388, 4,392
and 4,422 shares withheld, respectively; and 3,581,191 shares were voted for the
appointment of Ernst & Young LLP as the Company's independent public accountants
for 1995, while 2,965 shares were voted against such appointment with 2,377
shares abstaining. Directors whose terms of office continued were Michael M.
Cone, John D. Weil, Robert M. McInnes and Douglas E. Swanson.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLIFFS DRILLING COMPANY
Date: August 11, 1995 By: /s/ Edward A. Guthrie
--------------------------
Edward A. Guthrie
Vice President - Finance
Date: August 11, 1995 By: /s/ Cindy B. Taylor
-----------------------
Cindy B. Taylor
Corporate Controller
15
<PAGE> 16
EXHIBIT INDEX
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and the Consolidated Balance Sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,765
<SECURITIES> 0
<RECEIVABLES> 12,752
<ALLOWANCES> 407
<INVENTORY> 4,603
<CURRENT-ASSETS> 35,423
<PP&E> 183,282
<DEPRECIATION> 106,066
<TOTAL-ASSETS> 122,128
<CURRENT-LIABILITIES> 22,586
<BONDS> 0
<COMMON> 45
28,750
0
<OTHER-SE> 69,999
<TOTAL-LIABILITY-AND-EQUITY> 122,128
<SALES> 28,235
<TOTAL-REVENUES> 28,235
<CGS> 21,754
<TOTAL-COSTS> 27,827
<OTHER-EXPENSES> (104)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 447
<INCOME-TAX> 112
<INCOME-CONTINUING> 335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
