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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, 1997
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 May 7, 1997: 7,573,332
(Exhibit Index Located on Page 15)
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CLIFFS DRILLING COMPANY
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<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, 1997 and 1996...............................3
Consolidated Balance Sheets -
CLIFFS DRILLING COMPANY
March 31, 1997 (Unaudited) and December 31, 1996.........................4
Consolidated Statements of Cash Flows (Unaudited) -
CLIFFS DRILLING COMPANY
Three Months Ended March 31, 1997 and 1996...............................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 2. CHANGES IN SECURITIES............................................13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................13
SIGNATURES.....................................................................14
EXHIBIT INDEX..................................................................15
</TABLE>
2
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CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
1997 1996
-------- --------
(In thousands, except
per share amounts)
<S> <C> <C>
REVENUES:
Revenues ............................................................ $ 60,283 $ 29,061
Income from Equity Investments ...................................... 593 17
-------- --------
60,876 29,078
COSTS AND EXPENSES:
Operating Expenses .................................................. 40,520 21,846
Depreciation, Depletion and Amortization ............................ 3,876 1,503
General and Administrative Expense .................................. 1,904 1,398
-------- --------
46,300 24,747
-------- --------
OPERATING INCOME ......................................................... 14,576 4,331
OTHER INCOME (EXPENSE):
Loss on Disposition of Assets ....................................... (103) (23)
Interest Income ..................................................... 368 360
Interest Expense .................................................... (3,977) (26)
Exchange Rate Gain .................................................. 80 1,133
Other, net .......................................................... (240) (83)
-------- --------
INCOME BEFORE INCOME TAXES ............................................... 10,704 5,692
INCOME TAX EXPENSE ....................................................... 3,746 1,992
-------- --------
NET INCOME ............................................................... 6,958 3,700
DIVIDENDS APPLICABLE TO PREFERRED STOCK .................................. -- (31)
-------- --------
NET INCOME APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES ............................................ $ 6,958 $ 3,669
======== ========
NET INCOME PER SHARE ..................................................... $ 0.90 $ 0.62
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 7,689 5,876
======== ========
</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,
1997 1996
--------- ---------
(UNAUDITED)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents ............................................... $ 14,926 $ 39,181
Accounts Receivable, net of allowance for doubtful accounts of
$797 at March 31, 1997 and December 31, 1996, respectively .......... 39,569 28,866
Notes and Other Receivables, Current .................................... 3,913 4,922
Inventories ............................................................. 5,653 5,807
Drilling Contracts in Progress .......................................... 4,096 17,669
Prepaid Insurance ....................................................... 4,441 7,408
Other Prepaid Expenses .................................................. 6,627 6,349
--------- ---------
Total Current Assets .............................................. 79,225 110,202
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment .............................................. 330,721 283,223
Other ................................................................... 14,880 16,530
--------- ---------
345,601 299,753
Less: Accumulated Depreciation, Depletion and Amortization ............. (84,857) (83,279)
--------- ---------
Net Property and Equipment ........................................ 260,744 216,474
NOTES AND OTHER RECEIVABLES, LONG-TERM ...................................... 3,155 3,510
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES .................... 5,027 4,434
DEFERRED CHARGES AND OTHER .................................................. 4,660 4,926
========= =========
TOTAL ASSETS ...................................................... $ 352,811 $ 339,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ........................................................ $ 24,467 $ 30,545
Accrued Interest ........................................................ 5,847 2,007
Other Accrued Expenses .................................................. 14,105 9,429
--------- ---------
Total Current Liabilities ......................................... 44,419 41,981
10.25% SENIOR NOTES ......................................................... 150,000 150,000
DEFERRED INCOME TAXES ....................................................... 8,629 5,028
DEFERRED INCOME AND OTHER ................................................... 358 369
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized; 8,003,436 and
7,996,436 shares issued and 7,576,273 and 7,566,504 shares outstanding
at March 31, 1997 and December 31, 1996, respectively ................. 80 80
Paid-in Capital ......................................................... 153,737 153,513
Retained Earnings (Deficit) ............................................. 1,241 (5,717)
Less: Notes Receivable from Officers for Restricted Stock .............. (186) (186)
Restricted Stock .................................................. (200) (223)
Treasury Stock, at cost, 427,163 and 429,932 shares at March 31,
1997 and December 31, 1996, respectively ....................... (5,267) (5,299)
--------- ---------
Total Shareholders' Equity ........................................ 149,405 142,168
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 352,811 $ 339,546
========= =========
</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,
--------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income .................................................................... $ 6,958 $ 3,700
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation, Depletion and Amortization ................................... 3,876 1,503
Deferred Income Tax Expense ................................................ 3,601 1,992
Mobilization Expense Amortization .......................................... 25 130
Loss on Disposition of Assets .............................................. 103 23
Amortization of Debt Issue Costs ........................................... 187 --
Other ...................................................................... 100 (59)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable .................................................... (9,694) (10,258)
Inventories ............................................................ 154 (679)
Drilling Contracts in Progress ......................................... 13,573 8,072
Prepaid Insurance and Other Prepaid Expenses ........................... 2,664 (744)
Investments in and Advances to Unconsolidated Affiliates ............... (593) (17)
Accounts Payable and Other Accrued Expenses ............................ 2,438 (4,516)
-------- --------
Net Cash Provided By (Used In) Operating Activities ............. 23,392 (853)
INVESTING ACTIVITIES:
Capital Expenditures .......................................................... (19,877) (2,810)
Acquisition of Rigs and Related Equipment ..................................... (28,500) --
Proceeds from Sale of Property and Equipment .................................. 279 227
Insurance Proceeds from Loss of Rig and Related Equipment ..................... -- 292
Collection of Notes Receivable ................................................ 355 217
-------- --------
Net Cash Used In Investing Activities ........................... (47,743) (2,074)
FINANCING ACTIVITIES:
Acquisition of Treasury Stock ................................................. -- (661)
Proceeds from Exercise of Stock Options ....................................... 96 --
Payments for Redemption of Preferred Stock .................................... -- (850)
Preferred Stock Dividends ..................................................... -- (31)
-------- --------
Net Cash Provided By (Used In) Financing Activities ............. 96 (1,542)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................................... (24,255) (4,469)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 39,181 26,405
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 14,926 $ 21,936
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
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CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
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. Fully diluted earnings per share is not
presented for any period because it is either anti-dilutive or is not
materially different than primary earnings per share.
The Company issued 2,113,557 shares of common stock, $.01 par value
("Common Stock"), upon conversion of 1,115,988 shares of its 1,150,000 issued
and outstanding shares of Preferred Stock on January 17, 1996. The remaining
34,012 shares of Preferred Stock 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.
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," (SFAS No. 128) which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under SFAS No. 128, primary earnings per share computed in
accordance with APB Opinion No. 15 will be replaced with a new simpler
calculation called basic earnings per share. Basic earnings per share will
exclude the dilutive effect of stock options. The impact is expected to result
in an increase in earnings per share for the three months ended March 31, 1997
of $0.01 per share, with no impact on the three months ended March 31, 1996.
The impact of SFAS No. 128 on the calculation of diluted earnings per share for
these quarters is not expected to be material.
3. ACQUISITIONS AND FINANCING
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the West Indies Drilling Joint Venture, a
joint venture between Cliffs Drilling Trinidad Limited and Well Services
(Marine) Limited, which owns an additional jack-up drilling rig (the "WINDJV"),
and their related assets (collectively referred to as the "Southwestern Rigs")
operated by Southwestern Offshore Corporation, a Delaware corporation
("Southwestern"). The purchase price of the Southwestern Rigs was (a) $103.8
million in cash (after reductions of $6.2 million for
6
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required refurbishments of certain Southwestern Rigs not made prior to closing)
plus (b) issuance of 1.2 million shares of the Company's Common Stock and (c)
assumption of certain contractual liabilities, including the Company's
guarantee of $4.25 million in indebtedness of the WINDJV to Citibank N.A.
related to the refurbishment of the jack-up drilling rig owned by it (together
with accrued but unpaid interest thereon and costs of collection). In addition,
on May 10, 1996, the Company acquired the jack-up drilling rig OCEAN MAGALLANES
from Diamond Offshore Southern Company ("Diamond") for $4.5 million. The
Company renamed this unit Cliffs Drilling 155. On September 30, 1996, the
Company acquired a land rig from Quarles Drilling Corp. for $2.9 million which
has been refurbished and is expected to commence operations during the second
quarter of 1997 in Venezuela.
On January 24, 1997, the Company completed the acquisition of the stock of
a subsidiary of Andrade Gutierrez Perfuracao Ltda. owning the jack-up drilling
rig ATENA, four 1,500 HP land drilling rigs, miscellaneous drilling equipment
and a contract to operate a platform rig in Brazil (the "AGP Acquisition"). The
purchase price was $28.5 million in cash.
4. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the acquisition of the Southwestern Rigs using the purchase method of
accounting given the related assumptions and adjustments, the offering of
$150.0 million of Senior Notes and the issuance of 1.2 million shares of the
Company's Common Stock valued at an average price of $18.51 per share in
connection with the Southwestern Rigs acquisition.
The pro forma financial information is based upon the historical
consolidated financial statements of the Company and Southwestern for the three
months ended March 31, 1996. The historical results of Southwestern include the
results of operations of the rigs that were available for service during the
indicated periods.
The pro forma financial information for the three months ended March 31,
1996 was prepared assuming that the transactions described above were
consummated as of January 1, 1996. The pro forma financial information has been
prepared based upon assumptions deemed appropriate by the Company and may not
be indicative of actual results. The historical results of Southwestern's
operations are included with the Company's results beginning May 23, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C>
Revenues......................................................... $ 38,504
Net Income....................................................... 1,662
Net Income Per Share ............................................ $ 0.23
</TABLE>
5. CHANGE IN PRESENTATION
Certain financial statement items have been reclassified in the prior year
to conform with the current year presentation.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under the captions "General" and
"Liquidity and Capital Resources" within this item and elsewhere in this Form
10-Q. All subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by the Cautionary Statements.
GENERAL
Activity in the contract drilling industry and related oil service
businesses has improved over the last two years due to increased worldwide
demand stemming from higher levels of pricing for oil and natural gas. Over the
past several years, the supply of offshore drilling rigs has declined while the
demand for such rigs has increased, resulting in increases in worldwide
utilization rates. 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. Crude oil and natural gas prices have continued to
fluctuate over the last several years. This price volatility creates some
market uncertainties, despite the overall improvement in oil and gas market
fundamentals.
The oil and gas industry has experienced extreme market cycles over the
past decade. The Company has endeavored to mitigate the effect of this
volatility by diversifying its scope of operations. To achieve its strategic
objective, the Company established separate but related lines of business in
daywork drilling, engineering services and MOPU operations. The Company also
has pursued foreign drilling and production opportunities in order to expand
geographically. 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 March 31, 1997 and 1996
The Company recognized net income of $7.0 million during the first quarter
of 1997 compared to net income of $3.7 million in the first quarter of 1996.
Revenues increased $31.8 million and operating income increased $10.2 million
in the same period. These increases were partially offset by $4.0 million of
increased interest expense associated with debt acquired to finance various rig
acquisitions. Improved operating results from the Company's daywork drilling
business segment contributed to the increases in revenues and operating income.
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<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
-------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling ............. $ 34,144 $ 6,913 $ 27,231
Engineering Services ......... 26,701 23,694 3,007
MOPU Operations .............. 1,592 992 600
Oil and Gas .................. 169 399 (230)
Eliminations ................. (1,730) (2,920) 1,190
-------- -------- --------
Consolidated ............. $ 60,876 $ 29,078 $ 31,798
======== ======== ========
Operating Income (Loss):
Daywork Drilling ............. $ 14,217 $ 737 $ 13,480
Engineering Services ......... 1,582 4,229 (2,647)
MOPU Operations .............. 721 679 42
Oil and Gas .................. 5 130 (125)
Corporate Office ............. (1,949) (1,424) (525)
Eliminations ................. -- (20) 20
-------- -------- --------
Consolidated ............. $ 14,576 $ 4,331 $ 10,245
======== ======== ========
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $27.2 million and operating income
increased $13.5 million in the first quarter of 1997 compared to the first
quarter of 1996. Of the $13.5 million increase in operating income, $9.2
million was generated from 10 of 11 jack-up drilling rigs acquired in May, 1996
and one jack-up drilling rig acquired in January, 1997. Operating income also
increased due to improved dayrates for the Company's jack-up drilling rigs and
land rigs. Cliffs Drilling 201 operated as a drilling rig in Mexico at higher
dayrates during the first quarter of 1997, while it operated as a workover rig
in the U.S. Gulf of Mexico during the same period in 1996.
On May 23, 1996, the Company completed the acquisition of 9 jack-up
drilling rigs and a 50% interest in the WINDJV which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. In addition,
on May 10, 1996, the Company acquired a jack-up drilling rig from Diamond and
renamed it Cliffs Drilling 155. Seven of the 11 acquired jack-up drilling rigs
are currently operating in the Gulf of Mexico and one jack-up rig is operating
in each of Venezuela, Qatar and Trinidad. The other jack-up rig acquired in
May, 1996 commenced refurbishment activities during the fourth quarter of 1996
and is expected to begin operations late in the second quarter of 1997.
Shipyard or material delays and other events could potentially extend the
refurbishment period and delay the Company's ability to earn income from the
drilling rig.
On September 30, 1996, the Company acquired an additional land rig for
$2.9 million. The Company has refurbished the drilling rig, mobilized the unit
to Venezuela and expects to commence operations during the second quarter of
1997.
On January 24, 1997, the Company completed the AGP Acquisition which
included one jack-up drilling rig and 4 land rigs for a purchase price of $28.5
million in cash. The jack-up rig ATENA, renamed Cliffs Drilling 156, is
currently operating in Venezuela. The Company is currently refurbishing one of
the 4 land drilling rigs and expects to refurbish at least one additional unit
for operations in Venezuela during 1997. See "Liquidity and Capital Resources."
The Company operates its drilling rigs on both a term and a spot
(well-to-well) basis. Drilling rigs contracted on a term basis generally work
in various international locations, while drilling rigs contracted on a spot
basis generally work in the U.S. Gulf of Mexico. The following table summarizes
revenues, utilization and average dayrates for significant classes of the
Company's drilling rigs:
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<TABLE>
<CAPTION>
INCREASE
1997 1996 (DECREASE)
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues (1):
Jack-up Rigs:
International ........... $ 8,728 $ 1,596 $ 7,132
Domestic ................ 16,510 -- 16,510
Land Rigs ................. 6,102 4,885 1,217
Other (2) ................. 2,804 432 2,372
--------- --------- ---------
Total ............... $ 34,144 $ 6,913 $ 27,231
========= ========= =========
Average Rig Utilization (3):
Jack-up Rigs:
International ........... 99% 71%
Domestic ................ 99% N/A
Land Rigs ................. 100% 100%
Average Dayrates (4):
Jack-up Rigs:
International ........... $ 26,100 $ 22,607
Domestic ................ 26,351 N/A
Land Rigs ................. 10,907 8,947
</TABLE>
- ------------------
(1) Includes revenues earned from affiliates.
(2) Includes Cliffs Drilling 201, which was bareboat chartered to a 50% owned
joint venture for use as a drilling rig during the first quarter of 1997
and as a workover rig to a third party during the same period in 1996,
WINDJV operations during the first quarter of 1997 and 2 labor maintenance
contracts.
(3) Utilization rates are based upon the number of actively marketed rigs in
the fleet and exclude rigs which are unavailable for operations during
periods of refurbishment and upgrade.
(4) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
Engineering Services
Engineering services revenues increased $3.0 million in the first quarter
of 1997 compared to the first quarter of 1996 while operating income decreased
$2.6 million during the same period. The Company completed 3 turnkey contracts
in the first quarter of 1997 compared to 4 turnkey contracts in the first
quarter of 1996. One of the 3 contracts completed during the first quarter of
1997 incurred losses which adversely affected reported margins. Domestic
turnkey contractors continue to bid wells very aggressively, resulting in
intense competition which has adversely affected the Company's domestic turnkey
margins.
In February, 1997, the Company was awarded a contract to drill 12 turnkey
wells for Corpoven, S.A. in Venezuela. Total expected revenues for the 12 wells
are approximately $91.1 million. The wells are expected to be drilled during
the period from February, 1997 to September, 1998.
At March 31, 1997, the Company had 3 turnkey wells in progress in
Venezuela.
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MOPU Operations
MOPU revenues increased $.6 million and operating income increased
slightly in the first quarter of 1997 compared to the first quarter of 1996.
The increases 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 1996, offset in part by the loss of income from Cliffs
Drilling 11 which was sold during the second quarter of 1996.
The Company currently owns 5 MOPUs. All of the units are under contract and
4 are currently operating. The other MOPU is expected to commence operations
during the second quarter of 1997.
Oil and Gas
Oil and gas revenues decreased $.2 million and operating income decreased
$.1 million in the first quarter of 1997 compared to the first quarter of 1996,
primarily due to decreased production volumes. The Company does not expect any
significant activity related to oil and gas exploration and production
activities during 1997.
Corporate Overhead
Corporate overhead increased $.5 million in the first quarter of 1997
compared to the first quarter of 1996, primarily due to increased costs
associated with the Southwestern operations and an increase in employment
related costs.
Other Income (Expense) and Income Taxes
The Company recognized $7.6 million of other expense, including income
taxes, during the first quarter of 1997 compared to $.6 million of other
expense during the same period in 1996. The net change resulted primarily from
a $4.0 million increase in interest expense associated with the Senior Notes,
an increase in income taxes of $1.8 million and a decrease in exchange rate
gains of $1.1 million. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $24.3 million from $39.2 million at
December 31, 1996 to $14.9 million at March 31, 1997. The decrease resulted
from $47.8 million used in investing activities, offset in part by $23.4
million provided by operating activities and $.1 million provided by financing
activities.
Operating Activities
Net cash of $23.4 million provided by operating activities included $8.5
million provided by working capital and other activities. "Accounts Receivable"
increased from December 31, 1996 to March 31, 1997 due primarily to the timing
of cash receipts related to U.S. Gulf of Mexico and Venezuela daywork
operations. "Drilling Contracts in Progress" and "Accounts Payable" decreased
due to the completion of the 3 turnkey contracts that were in progress at
December 31, 1996. "Other Accrued Expenses" increased primarily due to various
refurbishment projects in progress at March 31, 1997.
Investing Activities
Net cash of $47.8 million used in investing activities included $28.5
million used to fund the AGP Acquisition which closed during January, 1997 and
$19.9 million spent on upgrade and renovation activities on other drilling rigs
and MOPUs.
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<PAGE> 12
The Company has capital expenditure requirements totaling approximately
$29 million during the remainder of 1997. Of this total, approximately $9
million relates to projects commenced in 1996 which will complete in 1997, $6
million relates to refurbishment of the land rigs obtained in the AGP
Acquisition, $3 million relates to upgrades which will be funded by customers
through improved dayrates or contract terms and approximately $11 million
relates to other capital expenditures, including drill pipe. The Company
intends to fund these capital expenditure requirements with available cash,
internally-generated cash flow and amounts currently available under its
Revolving Credit Facility.
Financing Activities
In conjunction with the acquisition of the Southwestern Rigs, the Company
issued the Senior Notes in the aggregate principal amount of $150.0 million.
Interest on the Senior Notes is payable semi-annually during each May and
November. The Senior Notes do not require any payments of principal prior to
their stated maturity on May 15, 2003, but the Company is required to make
offers to purchase Senior Notes upon the occurrence of certain events as
defined in the indenture, such as asset sales or a change of control of the
Company. The Senior Notes are not redeemable at the option of the Company prior
to May 15, 2000. The Senior Notes are senior unsecured obligations of the
Company, ranking pari passu in right of payment with all senior indebtedness
and senior to all subordinated indebtedness, and are guaranteed by the
Company's principal subsidiaries. The indenture under which the Senior Notes
are issued imposes significant operating and financial restrictions on the
Company. Such restrictions affect, and in many respects limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness, create liens, sell assets and make dividends or other payments.
On June 27, 1996, the Company and ING (U.S.) Capital Corporation ("ING")
modified and amended the Company's $20 million Revolving Credit Facility to,
among other things, increase the amount available under such facility to $35
million. The Revolving Credit Facility matures on May 31, 1998. At March 31,
1997, the Company had no indebtedness outstanding under the Revolving Credit
Facility.
On January 17, 1996, the Company issued 2,113,557 shares of Common Stock
upon conversion of 1,115,988 shares of its 1,150,000 issued and outstanding
shares of Preferred Stock. The remaining 34,012 shares of Preferred Stock were
redeemed for cash in the amount of $25.69 per share plus $0.22 per share in
accrued dividends thereon at a cost to the Company of approximately $.9
million.
Cash of $.1 million was provided from exercises of stock options by
employees.
Exchange Rate Gains and Losses
Approximately 38% of the Company's revenues and a substantial portion of
its operating income were sourced from its Venezuelan operations during the
first quarter of 1997. 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; however, the Venezuelan
government allowed the Bolivar to "float" relative to other currencies on April
22, 1996. Significant devaluation of the Bolivar occurred at that date, which
subjected the Company to exchange rate losses on its net monetary assets.
Foreign currency
12
<PAGE> 13
exchange rate losses of $1.2 million incurred during 1996 offset exchange rate
gains realized 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 will
continue 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.
Cautionary Statements
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.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the first quarter of 1997, 2,769 shares of the Company's common
stock, $.01 par value, held by the Company as treasury shares were sold to the
Cliffs Drilling Company 401(k) Savings Plan at an aggregate price of $159,600,
with individual transactions at market prices on the various dates of sale
ranging from $50.00 to $75.13 per share. These sales were made in reliance on
an exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, inasmuch as these sales constituted transactions by the
issuer not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.3.2 Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 by and
among Delavney-Gestao E Consultadoria LDA., Construtora
Andrade Gutierrez S.A., Andrade Gutierrez Perfuracao
LTDA., Driltech Inc. and the Company.
10.18.2 Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated December 6, 1996 (included as of
Exhibit 2.3.2).
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
13
<PAGE> 14
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: May 7, 1997 By: /s/ Edward A. Guthrie
------------------------- ----------------------------
Edward A. Guthrie
Vice President - Finance
Date: May 7, 1997 By: /s/ Cindy B. Taylor
------------------------- -----------------------------
Cindy B. Taylor
Vice President - Controller
14
<PAGE> 15
EXHIBIT INDEX
2.3.2 Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated as of December 6, 1996 by and
among Delavney-Gestao E Consultadoria LDA., Construtora
Andrade Gutierrez S.A., Andrade Gutierrez Perfuracao
LTDA., Driltech Inc. and the Company.
10.18.2 Amendment No. 2 dated as of April 24, 1997 to Stock
Purchase Agreement dated December 6, 1996 (included as of
Exhibit 2.3.2).
27 Financial Data Schedule.
15
<PAGE> 1
EXHIBIT 2.3.2
AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT (the "Amendment") is
made and entered into as of this 24th day of April, 1997, by and between
DELAVNEY-GESTAO E CONSULTADORIA LDA., a corporation organized under the laws of
the Madeira Islands ("Seller"), CONSTRUTORA ANDRADE GUTIERREZ S.A., a
corporation organized under the laws of Brazil ("Construtora"), ANDRADE
GUTIERREZ PERFURACAO LTDA., a corporation organized under the laws of Brazil
("Andrade"), DRILTECH INC., a corporation organized under the laws of the
Cayman Islands ("Driltech"), (Construtora, Andrade and Driltech being
collectively referred to herein as "Parent"), and CLIFFS DRILLING COMPANY, a
corporation organized under the laws of the State of Delaware ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller, Construtora, Andrade, Driltech, and Buyer entered into
a Stock Purchase Agreement dated as of December 6, 1996 (the "Original
Agreement") with respect to the purchase and sale of all of the issued and
outstanding shares of capital stock of GREENBAY DRILLING COMPANY LTD., a
corporation organized under the laws of the British Virgin Islands ("BVI"),
(capitalized terms used herein without definition having the meanings ascribed
to such terms in the Original Agreement); and
WHEREAS, Seller, Construtora, Andrade, Driltech, and Buyer entered into
an Amendment No. 1 to Stock Purchase Agreement dated as of January 24, 1997
(the "First Amendment") providing for certain post-Closing arrangements with
respect to certain matters as described therein; and
WHEREAS, the parties desire to amend the Original Agreement, as
amended by the First Amendment, as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
covenants and conditions herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. The parties acknowledge and agree that the Assets owned by BVI as
of the Closing Date did not include the Drilling Contract(s) between Petroleo
Brasileiro S.A. - Petrobras ("Petrobras") and Parent (the "Petrobras
Contracts") or the related Lease Agreement associated with the Leased Drilling
Rig, inasmuch as the assignments from Parent into BVI or its designee of such
Petrobras Contracts and the Lease Agreement become effective only upon receipt
and effectiveness of the consent of Petrobras to the transfer of the Petrobras
Contracts and the consent of Hercules Offshore Corporation ("Hercules") to the
transfer of the Lease Agreement (collectively referred to herein as the
"Consents"), respectively.
2. Notwithstanding the terms and provisions of Section 8.2(b) and
(c) of the Original Agreement, it is agreed that:
(a) From and after the Closing Date up to and including the
effective date of the Consents of Petrobras and Hercules to the
assignment of the Petrobras Contracts and the Lease Agreement,
respectively, by Parent to BVI or its designee,
(i) Parent shall operate the Leased Drilling Rig and
perform the Petrobras Contracts and Lease Agreement, for its
benefit and at its sole cost, risk and expense; and
(ii) Parent shall (A) maintain insurance covering the
top drive and related equipment associated with the Leased
Drilling
-1-
<PAGE> 2
Rig, (B) name Buyer and BVI as additional insureds with respect
to the top drive and related equipment, and (C) waive all rights
of subrogation against Buyer and BVI with respect to claims and
losses associated with the top drive and related equipment.
(b) As of the effective date of the Consents of Petrobras and
Hercules to the assignment of the Petrobras Contracts and the Lease
Agreement by Parent to BVI or its designee, such assignments shall
become effective, and thereafter Buyer shall be responsible for
operation of the Leased Drilling Rig and performance of the Petrobras
Contracts and the Lease Agreement.
(c) In the event that Seller and Parent are unable to obtain
Consents of Petrobras and Hercules with an effective date on or before
May 1, 1997, (i) the term "Assets" shall be deemed not to include the
Petrobras Contracts, the related Lease Agreement, or the top drive and
related equipment associated with the Leased Drilling Rig; (ii) Buyer
shall reassign or cause BVI to reassign to Seller or Parent all right,
title and interest of Buyer and BVI in and to the top drive and related
equipment associated with the Leased Drilling Rig; and (iii) if the
inability to obtain Consent of Petrobras is not due to the breach by
Buyer of its obligations set forth in Section 5 of this Amendment,
Seller and/or Parent shall pay to Buyer liquidated damages in the amount
of $1,500,000.
3. Notwithstanding the terms and provisions of Section 8.5 of the
Original Agreement, it is agreed that:
(a) In the event that the Leased Drilling Rig shall become an
actual, constructive, arranged or compromised total loss prior to the
effective date of the Consents of Petrobras and Hercules, (i) the term
"Assets" shall be deemed not to include the Petrobras Contracts, the
related Lease Agreement, or the top drive and related equipment
associated with the Leased Drilling Rig; and (ii) Seller and/or Parent
shall pay to Buyer liquidated damages in the amount of $1,500,000.
(b) In the event that the Leased Drilling Rig sustains damage
not amounting to an actual, constructive, arranged or compromised total
loss prior to the effective date of the Consents of Petrobras and
Hercules, the terms of Section 8.5(c) of the Original Agreement shall
apply, except that references to Closing and Closing Date therein shall
refer instead to the effective date of the assignment by Parent to BVI
or its designee of the Petrobras Contracts and the Lease Agreement.
4. From the date hereof until the earlier to occur of (i) the
effective date of the Consents of Petrobras and Hercules, or (ii) May 1, 1997,
the terms and provisions of the Original Agreement shall be interpreted, with
respect only to the Leased Drilling Rig, the Petrobras Contracts and the Lease
Agreement, as if the Closing and the Closing Date had not yet occurred.
5. It is acknowledged and agreed that from and after the date
hereof, all references to the "Closing" or the "Closing Date" in the
indemnification provisions of Article X of the Original Agreement shall, with
respect only to the Leased Drilling Rig, the Petrobras Contracts and the Lease
Agreement, be deemed to refer instead to the effective date of the Consents of
Petrobras and Hercules to the assignment of the Petrobras Contracts and the
Lease Agreement, respectively, by Parent to BVI or its designee.
6. It is acknowledged and agreed that as between the parties, the
rights and obligations set forth in the Original Agreement, as amended by the
First Amendment and this Amendment, including without limitation the
-2-
<PAGE> 3
indemnification provisions set forth in Article X of the Original Agreement, as
amended, shall override any conflicting provisions contained in any documents,
instruments or agreements between any or all of the parties, on the one hand,
and Petrobras or Hercules, on the other.
7. Seller and Parent will each use its Best Efforts to obtain the
Consents of Petrobras and Hercules as soon as practicable. Buyer will use its
Best Efforts (i) to assist Seller and Parent in obtaining the Consents of
Petrobras and Hercules as soon as practicable and (ii) deliver to Petrobras all
documents necessary for such acceptance within seven days following request
from Petrobras. Buyer will take all necessary action within its control to
cause its Brazilian affiliate to be accepted by Petrobras, and Buyer will
refrain from taking any action inconsistent with obtaining the Consent of
Petrobras and performing the Petrobras Contracts.
8. This instrument is executed and shall constitute an instrument
supplemental to and in amendment of the Original Agreement, as amended by the
First Amendment, and shall be construed with and as a part of the Original
Agreement, as amended by the First Amendment.
9. Except as modified and expressly amended by this Amendment and
any other supplement or amendment, the Original Agreement, as amended by the
First Amendment, is in all respects ratified and confirmed, and all of the
terms provisions and conditions thereof shall be and remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers hereunto duly authorized as of the date
first above written.
DELAVNEY-GESTAO E CONSULTADORIA LDA.
By: /s/ Trajano A. Souza Carmo
------------------------------------------
Trajano A. Souza Carmo
Manager
CONSTRUTORA ANDRADE GUTIERREZ S.A.
By: /s/ Trajano A. Souza Carmo
------------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
ANDRADE GUTIERREZ
PERFURACAO LTDA.
By: /s/ Trajano A. Souza Carmo
------------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
DRILTECH INC.
By: /s/ Trajano A. Souza Carmo
------------------------------------------
Trajano A. Souza Carmo
Attorney-in-fact
CLIFFS DRILLING COMPANY
By: /s/ Edward A. Guthrie
------------------------------------------
Edward A. Guthrie, Vice
President-Finance
-3-
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,926
<SECURITIES> 0
<RECEIVABLES> 44,279
<ALLOWANCES> 797
<INVENTORY> 5,653
<CURRENT-ASSETS> 79,225
<PP&E> 345,601
<DEPRECIATION> 84,857
<TOTAL-ASSETS> 352,811
<CURRENT-LIABILITIES> 44,419
<BONDS> 150,000
0
0
<COMMON> 80
<OTHER-SE> 149,325
<TOTAL-LIABILITY-AND-EQUITY> 352,811
<SALES> 60,876
<TOTAL-REVENUES> 60,876
<CGS> 40,520
<TOTAL-COSTS> 46,300
<OTHER-EXPENSES> (105)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,977
<INCOME-PRETAX> 10,704
<INCOME-TAX> 3,746
<INCOME-CONTINUING> 6,958
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,958
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
</TABLE>
