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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 MARCH 31, 1996
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 April 23, 1996: 6,190,928
(Exhibit Index Located on Page 14)
Page 1 of 17 Pages
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CLIFFS DRILLING COMPANY
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Operations (Unaudited) -
CLIFFS DRILLING COMPANY
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets -
CLIFFS DRILLING COMPANY
March 31, 1996 (Unaudited) and December 31, 1995 . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) -
CLIFFS DRILLING COMPANY
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . 5
Notes to Interim Consolidated Financial Statements (Unaudited) . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1996 1995
--------- ---------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,061 $ 14,278
Income (Loss) from Equity Investments . . . . . . . . . . . . . . . . . . . . . 17 4
--------- ---------
29,078 14,282
COSTS AND EXPENSES:
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,846 9,439
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . . . . . . 1,503 2,073
General and Administrative Expense . . . . . . . . . . . . . . . . . . . . . . . 1,398 1,352
--------- ---------
24,747 12,864
--------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,331 1,418
OTHER INCOME (EXPENSE):
Gain (Loss) on Disposition of Assets . . . . . . . . . . . . . . . . . . . . . (23) 7
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 294
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) (32)
Exchange Rate Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,133 (126)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83) (68)
--------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,692 1,493
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,992 373
--------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700 1,120
DIVIDENDS APPLICABLE TO PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . (31) (665)
--------- ---------
NET INCOME APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,669 $ 455
========= =========
NET INCOME PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.62 $ 0.11
========= =========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.11
=========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,876 4,092
========= =========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,092
=========
</TABLE>
See accompanying notes to interim consolidated financial statements.
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CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------------- ---------------
(UNAUDITED)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . $ 21,936 $ 26,405
Accounts Receivable, net of allowance for doubtful accounts of
$797 at March 31, 1996 and December 31, 1995, respectively . . 16,108 11,170
Notes and Other Receivables, Current . . . . . . . . . . . . . . 6,840 1,812
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,793 4,114
Drilling Contracts in Progress . . . . . . . . . . . . . . . . . 3,267 11,339
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . 694 957
Other Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . 3,303 2,400
--------------- ---------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 56,941 58,197
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment . . . . . . . . . . . . . . . . . . . 124,698 122,777
Oil and Gas Properties ("successful efforts" method) . . . . . . 23,673 23,497
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,491 3,201
--------------- ---------------
151,862 149,475
Less: Accumulated Depreciation, Depletion and Amortization . . . (84,852) (83,525)
--------------- ---------------
Net Property and Equipment . . . . . . . . . . . . . . . . 67,010 65,950
NOTES AND OTHER RECEIVABLES, LONG-TERM . . . . . . . . . . . . . . 4,224 4,441
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES . . . . . 286 269
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 105
--------------- ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . $ 128,540 $ 128,962
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . $ 15,036 $ 20,392
Accrued Expenses, Including Interest . . . . . . . . . . . . . . 6,636 3,946
--------------- ---------------
Total Current Liabilities . . . . . . . . . . . . . . . . 21,672 24,338
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . 1,447 1,447
DEFERRED INCOME AND OTHER . . . . . . . . . . . . . . . . . . . . . 401 412
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
December 31, 1995 ($28,750 liquidation value) . . . . . . . . . -- 28,750
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized;
6,631,661 and 4,518,104 shares issued and 6,189,930 and
4,113,067 shares outstanding at March 31, 1996 and December
31, 1995, respectively . . . . . . . . . . . . . . . . . . . 66 45
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . 127,085 99,186
Retained Earnings (Deficit) . . . . . . . . . . . . . . . . . . . (16,439) (20,108)
Less: Notes Receivable from Officers for Restricted Stock . . . (232) (232)
Restricted Stock . . . . . . . . . . . . . . . . . . . . . (27) (32)
Treasury Stock, at cost, 441,731 and 405,037 shares at
March 31, 1996 and December 31, 1995, respectively . . (5,433) (4,844)
--------------- ---------------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 105,020 74,015
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . $ 128,540 $ 128,962
=============== ===============
</TABLE>
See accompanying notes to interim consolidated financial statements.
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CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------------
1996 1995
------------ ------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,700 $ 1,120
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . . . . . 1,503 2,073
Mobilization Expense Amortization . . . . . . . . . . . . . . . . . . . . . . . 130 127
(Gain) Loss on Disposition of Assets . . . . . . . . . . . . . . . . . . . . . 23 (7)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59) 50
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,258) (7,062)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (679) 442
Drilling Contracts in Progress . . . . . . . . . . . . . . . . . . . . . . . 8,072 (1,568)
Prepaid Insurance and Other Prepaid Expenses . . . . . . . . . . . . . . . . (744) 1,695
Investments in and Advances to Unconsolidated Affiliates . . . . . . . . . . (17) 1,396
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1)
Accounts Payable and Other Accrued Liabilities . . . . . . . . . . . . . . . (2,524) (2,760)
------------ ------------
Net Cash Used In Operating Activities . . . . . . . . . . . . . . . . . (853) (4,495)
INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,810) (2,881)
Proceeds from Sale of Property and Equipment . . . . . . . . . . . . . . . . . . 227 63
Insurance Proceeds from Loss of Rig and Related Equipment . . . . . . . . . . . . 292 --
Collection of Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 217 1,128
------------ ------------
Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . (2,074) (1,690)
FINANCING ACTIVITIES:
Acquisition of Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . (661) --
Payments for Redemption of Preferred Stock . . . . . . . . . . . . . . . . . . . (850) --
Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (665)
------------ ------------
Net Cash Used In Financing Activities . . . . . . . . . . . . . . . . . (1,542) (665)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (4,469) (6,850)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . 26,405 11,320
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . $ 21,936 $ 4,470
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
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CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
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 months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. 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, 1995.
2. EARNINGS PER SHARE
Primary earnings per share computations are based on net income less dividends
on the Company's $2.3125 Convertible Exchangeable Preferred Stock ("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 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. CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
The Company converted 1,115,988 shares of its 1,150,000 issued and outstanding
shares of $2.3125 Convertible Exchangeable Preferred Stock on January 17, 1996.
The Company issued 2,113,557 shares of Common Stock upon conversion of the
Preferred Stock. The remaining 34,012 shares were redeemed for cash in the
amount of $25.69 per share plus $.22 per share in accrued and unpaid dividends
thereon through the redemption date at a cost to the Company of approximately
$.9 million.
4. ACQUISITIONS AND FINANCING
On April 8, 1996, the Company entered into a letter of intent to acquire 9
jack-up drilling rigs owned by Viking Supply Ships A.S., Norway ("Viking"), and
one jack-up drilling rig owned by Production Partner Inc., together with their
related assets, all of which are operated by Southwestern Offshore Corporation
("Southwestern"), a wholly-owned subsidiary of Viking. One of the 9 Viking rigs
is committed to a Trinidad joint venture in which Viking has a 50% interest.
The purchase price is $110 million in cash plus 1,200,000 shares of the
Company's Common Stock and the assumption of certain contractual liabilities,
including $4.3 million in indebtedness related to the refurbishment of the
jack-up drilling rig contracted to work in Trinidad. The transaction provides
that 4 of the rigs will be refurbished and upgraded at a cost to Viking.
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Consummation of these transactions is subject to customary due diligence,
execution of a final purchase and sale agreement, regulatory approvals,
financing being obtained by the Company and satisfaction of customary closing
conditions to be contained in the purchase and sale agreement.
On April 18, 1996, the Company signed a memorandum of agreement with a
subsidiary of Diamond Offshore Drilling, Inc. ("Diamond") for the purchase by
the Company of the jack-up drilling rig OCEAN MAGALLANES for $4.5 million. The
drilling rig is currently stacked in Chile, and upon delivery, the unit will be
mobilized to Venezuela for refurbishment and upgrade. The rig is committed under
a letter of intent to work for an initial eight months in Lake Maracaibo,
Venezuela for Maraven S.A., an affiliate of Petroleos de Venezuela, S.A.
The Company plans to offer Senior Notes due 2003 ("Notes") in the amount of $150
million to fund the acquisitions. The Notes will be senior unsecured obligations
of the Company ranking pari passu in right of payment with all senior
indebtedness of the Company and senior to all subordinated indebtedness of the
Company. The net proceeds to the Company from the sale of the Notes are
estimated to be approximately $145 million after deducting expenses of the
offering. Of the net proceeds, the Company intends to utilize $110 million to
pay the cash portion of the Southwestern rig acquisition and $12 million to
acquire, mobilize and refurbish the OCEAN MAGALLANES. The remaining proceeds
will be used for general corporate purposes which may include up to $15 million
to acquire land rigs for work in Venezuela.
5. TREASURY STOCK
The Company purchased on the open market 43,000 shares of its Common Stock at an
aggregate purchase price of $661,000, or $15.38 per share, during the three
months ended March 31, 1996. All of the acquired shares are held as Common Stock
in treasury, less shares issued to certain benefit plans.
6. CHANGE IN PRESENTATION
Certain financial statement items have been reclassified in the prior year to
conform with the current year presentation.
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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 increased
worldwide demand stemming from higher levels of pricing for oil and natural
gas. 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 cyclical markets by
diversifying its scope of operations. 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 by the
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 March 31, 1996 and 1995
The Company recognized net income, before preferred dividends, of $3.7 million
during the first quarter of 1996 compared to net income of $1.1 million in the
first quarter of 1995. Revenues increased $14.8 million in the first quarter of
1996 compared to the same period in 1995 while operating income increased $2.9
million in the same period. The increase in both revenues and operating income
was primarily due to increased contributions from the engineering services
business segment, primarily attributable to the operations in Venezuela.
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
-------------- -------------- --------------
(UNAUDITED)
(In thousands)
<S> <C> <C> <C>
Revenues:
Daywork Drilling . . . . . . . . . . . $ 6,913 $ 6,653 $ 260
Engineering Services . . . . . . . . . 23,694 7,048 16,646
MOPU Operations . . . . . . . . . . . . 992 1,285 (293)
Oil and Gas . . . . . . . . . . . . . . 399 390 9
Eliminations . . . . . . . . . . . . . (2,920) (1,094) (1,826)
-------------- -------------- --------------
Consolidated . . . . . . . . . . . . $ 29,078 $ 14,282 $ 14,796
============== ============== ==============
Operating Income (Loss):
Daywork Drilling . . . . . . . . . . . $ 737 $ 501 $ 236
Engineering Services . . . . . . . . . 4,229 1,773 2,456
MOPU Operations . . . . . . . . . . . . 679 565 114
Oil and Gas . . . . . . . . . . . . . . 130 (46) 176
Corporate Office . . . . . . . . . . . (1,424) (1,375) (49)
Eliminations . . . . . . . . . . . . . (20) -- (20)
-------------- -------------- --------------
Consolidated . . . . . . . . . . . . $ 4,331 $ 1,418 $ 2,913
============== ============== ==============
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $.3 million in the first quarter of 1996
compared to the first quarter of 1995, and operating income increased $.2
million during the same period. Daywork drilling operating results reflect
increased revenues and operating income primarily due to Cliffs Drilling Rig
54, a 3000 HP land drilling rig which began operations during the third quarter
of 1995, offset in part by the loss of the jack-up drilling rig MARQUETTE
during 1995.
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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 adjuster, other damage was
discovered which was attributed to an earthquake in Venezuela in May, 1994. The
rig was declared a compromised total loss by the Company's insurance
underwriters. The Company received $14.6 million from its insurance underwriters
for these damages. The Company has scrapped the rig and salvaged various rig
equipment for use on other rigs or to sell. See "Liquidity and Capital
Resources."
One of the Company's 2 jack-up drilling rigs is currently being used as a
workover rig in the U.S. Gulf of Mexico. The other jack-up drilling rig is
undergoing repairs and upgrade in a shipyard in Venezuela. Upon completion of
the repairs and upgrade, the unit will be mobilized to Colombia to drill 2
wells. All 6 of the Company's land drilling rigs are currently under contract
in Venezuela. Contracts on 2 of the 5 land drilling rigs working for Corpoven,
S.A. ("Corpoven") extend into September, 1996, and the other 3 land drilling
rigs have contracts or agreements which extend into February, 1997. The other
land drilling rig, Cliffs Drilling Rig 54, is currently drilling the second
well of a 2 well contract. See "Liquidity and Capital Resources."
Engineering Services
Engineering services revenues increased $16.6 million in the first quarter of
1996 compared to the first quarter of 1995, and operating income increased $2.5
million during the same period. Four turnkey contracts were completed during the
first quarter of 1996 compared to one turnkey contract completion in the same
period in 1995. Two of the 4 contracts completed during the first quarter of
1996 were international contracts in Venezuela, which generally generate greater
revenues and operating income than domestic contracts.
The Company currently has 3 turnkey wells in progress, including 2 wells in
Venezuela and one well in the United States. The Company expects to complete
the domestic well during the second quarter of 1996 with break-even results.
MOPU Operations
MOPU revenues decreased $.3 million in the first quarter of 1996 compared to the
first quarter of 1995, while operating income increased $.1 million during the
same period. The variances in revenues and operating income were primarily due
to operations associated with the LANGLEY and another MOPU, neither of which
operated during the first quarter of 1995, offset in part by reduced operating
results from 2 idle MOPUs which were under either an operating or standby
contract in the first quarter of 1995.
The LANGLEY has been bareboat chartered to Sedco Forex International, Inc.
("Sedco") for a five-year term for use as a MOPU offshore Nigeria. The Company
plans to mobilize the MOPU to Nigeria after completion of modifications during
the second quarter of 1996. The Company is receiving a standby rate for the unit
while it is being modified. Sedco has an option to purchase the rig at the end
of the charter.
Four of the Company's 6 MOPUs are currently under contract. One MOPU is on a
month-to-month contract, and the other 3 units are contracted on a term basis.
One of the units, Cliffs No. 11, was bareboat chartered for use as a workover
rig in the U.S. Gulf of Mexico during 1994 and will complete its two-year
charter during June, 1996. The charterer has an option to purchase the rig at
the end of the charter.
Oil and Gas
Oil and gas revenues in the first quarter of 1996 were consistent with revenues
in the first quarter of 1995, primarily due to increased average gas prices,
offset by decreased gas production during the first quarter of 1996 compared to
the same period in 1995. Operating income increased $.2
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<PAGE> 10
million during the same period, primarily because of decreased depreciation,
depletion and amortization and operating expenses.
Corporate Overhead
Corporate overhead increased $.1 million in the first quarter of 1996 compared
to the first quarter of 1995. The increase was primarily due to an overall
increase in employment costs.
Other Income (Expense) and Income Taxes
The Company recognized $.6 million of other expense during the first quarter of
1996 compared to $.3 million of other expense during the same period in 1995.
The net increase in other expense resulted primarily from an increase in income
taxes, offset in part by an increase in exchange rate gains related to
Venezuelan Brady Bond transactions. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $4.5 million from $26.4
million at December 31, 1995 to $21.9 million at March 31, 1996. The decrease
resulted from $.9 million used to fund operating activities, $2.8 million used
to fund capital expenditures, $.9 million used for redemption of Preferred
Stock and payment of related dividends, $.6 million used for acquisition of
Treasury Stock, and $.7 million received from the collection of notes
receivable and the sale of property and equipment.
Cash of $.9 million used to fund operating activities included $6.2 million
used for working capital and other requirements. "Accounts Receivable"
increased from December 31, 1995 to March 31, 1996 due primarily to the timing
of cash receipts related to Venezuela daywork and turnkey operations. "Notes
and Other Receivables, Current" increased primarily due to an insurance claim
related to a turnkey well in progress at March 31, 1996. "Drilling Contracts in
Progress" and "Accounts Payable" decreased due to the completion of the 4
turnkey contracts in progress at December 31, 1995. "Accrued Expenses,
Including Interest" increased primarily as a result of income taxes accrued
during the first quarter of 1996.
Cash was used during the first quarter of 1996 to fund $2.8 million of capital
expenditures, which related primarily to upgrade and renovation activities on
the jack-up drilling rig LASALLE and the LANGLEY. The Company has plans for
other capital expenditures totaling approximately $14.8 million during 1996.
The Company intends to fund these capital expenditure requirements with
internally-generated cash flow and amounts currently available under its
revolving line of credit.
On April 8, 1996, the Company entered into a letter of intent to acquire 9
jack-up drilling rigs owned by Viking and one jack-up drilling rig owned by
Production Partner Inc., together with their related assets, all of which are
operated by Southwestern. One of the 9 Viking rigs is committed to a Trinidad
joint venture in which Viking has a 50% interest. The purchase price is $110
million in cash plus 1,200,000 shares of the Company's Common Stock and the
assumption of certain contractual liabilities, including $4.3 million in
indebtedness related to the refurbishment of the jack-up drilling rig
contracted to work in Trinidad. The transaction provides that 4 of the rigs
will be refurbished and upgraded at a cost to Viking. Consummation of this
transaction is subject to customary due diligence, execution of a final
purchase and sale agreement, regulatory approvals, financing being obtained by
the Company and satisfaction of customary closing conditions to be contained in
the purchase and sale agreement.
On April 18, 1996, the Company signed a memorandum of agreement with a
subsidiary of Diamond for the purchase by the Company of the jack-up drilling
rig OCEAN MAGALLANES for $4.5 million. The drilling rig is currently stacked in
Chile, and upon delivery, the unit will be mobilized to Venezuela for
refurbishment and upgrade. The rig is committed under a letter of intent to
work for an initial eight months in Lake Maracaibo, Venezuela for Maraven S.A.,
an affiliate of Petroleos de Venezuela, S.A.
10
<PAGE> 11
The Company plans to offer Notes in the amount of $150 million to fund the
acquisitions. The Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with all senior indebtedness of the
Company and senior to all subordinated indebtedness of the Company. The net
proceeds to the Company from the sale of the Notes are estimated to be
approximately $145 million after deducting expenses of the offering. Of the net
proceeds, the Company intends to utilize $110 million to pay the cash portion of
the Southwestern rig acquisition and $12 million to acquire, mobilize and
refurbish the OCEAN MAGALLANES. The remaining proceeds will be used for
general corporate purposes which may include up to $15 million to acquire land
rigs for work in Venezuela.
The Company converted 1,115,988 shares of its 1,150,000 issued and outstanding
shares of Preferred Stock on January 17, 1996. The Company issued 2,113,557
shares of Common Stock upon conversion of the Preferred Stock. The remaining
34,012 shares were redeemed for cash in the amount of $25.69 per share plus
$0.22 per share in accrued and unpaid dividends thereon through the redemption
date at a cost to the Company of approximately $.9 million.
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 adjuster, other damage was
discovered which was attributed to an earthquake in Venezuela in May, 1994. The
rig was declared a compromised total loss by the Company's insurance
underwriters. The Company received $14.6 million from its insurance underwriters
for these damages. The Company has scrapped the rig and salvaged various rig
equipment for use on other rigs or to sell.
Approximately 68% of the Company's revenues and a substantial portion of its
operating income were sourced from its Venezuelan operations during the first
quarter of 1996. 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 contracts. The
Company may be exposed to the risk of foreign currency losses in connection with
its foreign operations. Such losses are the result of holding net monetary
assets (cash and receivables in excess of payables) denominated in foreign
currencies during periods of a strengthening U.S. dollar. The Company's foreign
exchange gains and losses are primarily attributable to the Venezuelan Bolivar.
Venezuela instituted currency exchange controls during June, 1994, which
continued through all of 1995 and substantially eliminated exchange losses
attributable to the Company's Venezuelan operations during most of 1995. The
Company realized $1.2 million in gains in connection with Venezuelan Brady Bond
transactions during the first quarter of 1996. The effects of these transactions
are reported as "Exchange Rate Gain (Loss)" in the Consolidated Statements of
Operations. The Company does not speculate in foreign currencies or maintain
significant foreign currency cash balances. The Company continues to be exposed
to future foreign currency gains and losses if the currency continues to be
volatile. Despite the political and economic risks in Venezuela, the Company
believes that the country continues to be a favorable market for its services.
The Company's $20.0 million revolving line of credit agreement with
Internationale Nederlanden (U.S.) Capital Corporation ("INCC") matures on
January 1, 1998. As of March 31, 1996, the Company had no outstanding balance on
the revolving line of credit with INCC.
The ability of the Company to fund working capital, capital expenditures and
debt service 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.
11
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
99.1 Press release concerning letter of intent dated April 8, 1996.
99.2 Press release concerning memorandum of agreement dated April 18,
1996.
(b) Reports on Form 8-K
None.
12
<PAGE> 13
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: April 23, 1996 By: /s/ Edward A. Guthrie
------------------ ----------------------------
Edward A. Guthrie
Vice President - Finance
Date: April 23, 1996 By: /s/ Cindy B. Taylor
------------------ ----------------------------
Cindy B. Taylor
Corporate Controller
13
<PAGE> 14
EXHIBIT INDEX
27 Financial Data Schedule
99.1 Press Release Dated April 9, 1996
99.2 Press Release Dated April 18, 1996
14
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,936
<SECURITIES> 0
<RECEIVABLES> 23,745
<ALLOWANCES> 797
<INVENTORY> 4,793
<CURRENT-ASSETS> 56,941
<PP&E> 151,862
<DEPRECIATION> 84,852
<TOTAL-ASSETS> 128,540
<CURRENT-LIABILITIES> 21,672
<BONDS> 0
<COMMON> 66
0
0
<OTHER-SE> 104,954
<TOTAL-LIABILITY-AND-EQUITY> 128,540
<SALES> 29,078
<TOTAL-REVENUES> 29,078
<CGS> 21,846
<TOTAL-COSTS> 24,747
<OTHER-EXPENSES> (1,387)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 5,692
<INCOME-TAX> 1,992
<INCOME-CONTINUING> 3,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,700
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CLIFFS NEWS RELEASE
- ---------------------------- ------------------------------------
DRILLING COMPANY DATE: April 9, 1996
1200 SMITH STREET, SUITE 300 CONTACT: EDWARD A. GUTHRIE
HOUSTON, TEXAS 77002 VICE PRESIDENT - FINANCE
PHONE: (713) 651-9426
================================================================================
Houston, Texas, (April 9, 1996) - - Cliffs Drilling Company
(NASDAQ:CLDR) announced today that it has entered into a letter of intent to
acquire nine jackup drilling rigs owned by Viking Supply Ships A.S, Norway,
("Viking") and one jackup drilling rig owned by Production Partner Inc.,
together with their related assets, all of which are operated by Southwestern
Offshore Corporation, a wholly-owned subsidiary of Viking ("Southwestern").
One of the nine Viking rigs is committed to a Trinidad joint venture in which
Viking has a 50% interest (the "Joint Venture"). The purchase price is $110
million in cash plus 1.2 million shares of Cliffs Drilling Common Stock. The
transaction provides that four of the rigs will be refurbished and upgraded.
Consummation of the transaction is subject to customary due diligence,
execution of a final purchase and sale agreement, regulatory approvals,
financing being obtained by Cliffs Drilling and satisfaction of customary
closing conditions to be contained in the purchase and sale agreement.
Nine of the ten rigs being acquired are cantilevered, four are of
independent leg design and six are of mat design. The rigs are capable of
operating in water depths from 100 to 200 feet. Six of the rigs are currently
operating under contracts in the Gulf of Mexico and four are currently being
upgraded. Of the four rigs being upgraded, one is already contracted for work
in Qatar and one is contracted for work in Trinidad by the Joint Venture. In
conjunction with the acquisition, it is expected that Cliffs Drilling Company
will employ substantially all of the employees of Southwestern.
Douglas E. Swanson, Chairman of the Board, President and Chief
Executive Officer of Cliffs Drilling, said that "the acquisition of the
Southwestern rigs will significantly expand the Cliffs Drilling jackup fleet
and broaden the Company's areas of operations, particularly in the active Gulf
of Mexico market." After the acquisition, Cliffs Drilling will own twelve
jackup rigs, six Mobile Offshore Production Units and six land rigs.
Cliffs Drilling Company is a diversified drilling contractor engaged
in providing contract drilling services on both a turnkey and daywork basis,
mobile offshore production units and well engineering and management services.
* * * * *
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<PAGE> 1
EXHIBIT 99.2
CLIFFS NEWS RELEASE
- ---------------------------- ------------------------------------
DRILLING COMPANY DATE: April 18, 1996
1200 SMITH STREET, SUITE 300 CONTACT: EDWARD A. GUTHRIE
HOUSTON, TEXAS 77002 VICE PRESIDENT-FINANCE
PHONE: (713) 651-9426
================================================================================
Houston, Texas, (April 18, 1996) - - Cliffs Drilling Company
(NASDAQ:CLDR) today announced the signing of a memorandum of agreement with a
subsidiary of Diamond Offshore Drilling, Inc. for the purchase by Cliffs
Drilling Company of the jackup drilling rig OCEAN MAGALLANES for $4.5 million.
The 150' water depth rated, independent leg, cantilever, Levingston 011-C
design jackup drilling rig is currently stacked in Punta Arenas, Chile. Upon
delivery, the unit will be mobilized to Venezuela for refurbishment and
upgrade. The rig is committed to work under a letter of intent for eight
months in Lake Maracaibo, Venezuela for MARAVEN S.A., an affiliate of Petroleos
de Venezuela, S.A.
Cliffs Drilling Company is a diversified international drilling
contractor engaged in providing contract drilling services on both a turnkey
and daywork basis, mobile offshore production units and well engineering and
management services.
* * * * *
Page 1 of 1
