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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-16703
CLIFFS DRILLING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 76-0248934
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1200 SMITH STREET, SUITE 300 77002
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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Registrant's telephone number, including area code: (713) 651-9426
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
$2.3125 Convertible Exchangeable Preferred Stock
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the Registrant's common stock, $.01 par
value, held by nonaffiliates, as of March 5, 1997, was $399,745,687. All
executive officers and directors of the Registrant are treated as if they may be
deemed affiliates of the Registrant.
Number of shares of Common Stock, $.01 par value, of the Registrant
outstanding at March 5, 1997, was 7,573,861.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS REFERENCED IN THIS REPORT
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Certain portions of the Registrant's definitive proxy
statement for the 1997
Annual Meeting of Shareholders Part III
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(Exhibit Index Located on Pages 48 to 51)
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TABLE OF CONTENTS TO FORM 10-K
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PAGE
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PART
I
1. Business and Properties..................................... 2
and
2.
General..................................................... 2
Recent Developments......................................... 2
Industry Conditions and Company Strategy.................... 2
Contract Drilling and MOPU Operations....................... 4
Oil and Gas Operations...................................... 8
Environmental Controls...................................... 8
Government Regulation....................................... 8
Risks and Insurance......................................... 9
Risks Inherent in Foreign Operations........................ 9
Employees................................................... 10
Other Properties............................................ 10
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security-Holders......... 10
PART II
5. Market For Registrant's Common Equity and Related
Stockholder Matters....................................... 10
6. Selected Financial Data..................................... 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
8. Financial Statements and Supplementary Data................. 20
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 21
PART III
10. Directors and Executive Officers of the Registrant.......... 21
11. Executive Compensation...................................... 21
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 21
13. Certain Relationships and Related Transactions.............. 21
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 21
SIGNATURES......................................................... 23
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
Cliffs Drilling Company (the "Company") is an international contract
drilling and engineering company. The Company is primarily engaged in daywork
drilling, engineering services and the development and operation of mobile
offshore production units ("MOPUs"). The Company has historically deployed its
assets in areas where it can achieve long-term growth and generate stable cash
flows and net income. This strategy has led to five consecutive years of
positive net income, while many other offshore drilling contractors have
experienced significant losses over the comparable period. The Company's
domestic operations are concentrated in the Texas/Louisiana Gulf Coast region
and its foreign operations are concentrated in Venezuela, Qatar, Mexico,
Trinidad and Nigeria. The Company owns 13 jack-up drilling rigs, 11 land rigs, 5
MOPUs and a 50% interest in a joint venture which owns one jack-up drilling rig.
The Company and its predecessors have been in the contract drilling
business since 1978. The Company entered the turnkey drilling business in 1982
in an effort to more fully utilize its existing fleet of rigs and complement its
daywork drilling operations. In response to the economic conditions which
adversely affected the domestic contract drilling business during the 1980s, the
Company undertook a strategic plan in 1989 to further diversify its scope of
operations and geographic concentration beyond the traditional domestic daywork
drilling market. The Company's management implemented a proactive approach to
identify, develop and exploit several market segments which provided higher
margins and more reliable operating income and cash flow. To achieve its
strategic objectives, the Company continued to emphasize its turnkey drilling
operations, expanded its well engineering and management services, became a
leader in the development and operation of MOPUs and deployed its drilling rigs
into selected international markets. With the implementation of this strategy,
the Company has positioned itself to benefit from increases in drilling and
production activities in several markets worldwide.
RECENT DEVELOPMENTS
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 1500 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.
In February, 1997, the Company was awarded a contract to drill 12 turnkey
wells for Corpoven, S.A. ("Corpoven") in Venezuela. The total expected revenues
for the 12 wells are approximately $93.1 million. The wells are expected to be
drilled during the period from February, 1997 to September, 1998.
INDUSTRY CONDITIONS AND COMPANY STRATEGY
Activity in the contract drilling industry and related oil service
businesses has improved over the last two years due to increased worldwide
demand 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 higher utilization rates. In addition, oil and gas
companies have experienced decreases in exploration and production costs from
technological advances such as increased use of 3-D seismic surveys, advances in
drill bits and completion technologies and use of new production techniques such
as MOPUs and subsea completions. In an effort to more quickly realize the
significant gas revenues attainable from shallow water drilling in the Gulf of
Mexico, oil and gas companies are producing reserves at faster rates. These
enhanced production methods increase the net present value of the reserves
produced and significantly shorten the reserve life in the Gulf of Mexico,
thereby necessitating additional drilling. In addition, the U.S. natural gas
market, which had experienced weak market conditions throughout the early 1990s,
has substantially improved in recent months. All of these factors have resulted
in increased demand for offshore rigs in the Gulf of Mexico and an increase in
both utilization and dayrates for jack-up drilling rigs. Current market dynamics
in the Gulf of Mexico have resulted in greater utilization of the Company's rigs
and services.
The Company's management has adopted a proactive approach to identify,
develop and exploit several market segments which the Company believes provide
high margins and reliable operating income and cash flow. In addition,
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the Company has sought to identify business opportunities that would expand its
asset base, increase profitability and enhance shareholder value. The Company's
acquisition criteria include, among others, the objectives of increasing
operating leverage and diversifying geographically. As a result of its actions,
the Company is now positioned in 3 primary business segments, namely, daywork
drilling, engineering services and MOPU operations. See Note 12 of Notes to
Consolidated Financial Statements.
Daywork Drilling. The Company began operations as a daywork contract
driller in the Gulf of Mexico and the Texas/Louisiana Gulf Coast region. Because
of depressed conditions in the domestic oil and gas industry during the 1980s
and early 1990s, the Company sold certain drilling rigs and deployed its
remaining rigs into selected international markets. These strategic decisions
were made to enable the Company to stabilize cash flows during an extended
market downturn. The Company has expanded its asset base and currently has a
balance of term and spot (well-to-well) contracts.
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 (the
"WINDJV"), a joint venture between Cliffs Drilling Trinidad Limited and Well
Services (Marine) Limited, which owns an additional jack-up drilling rig, 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 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, $.01 par value per share 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). The 50% interest in the WINDJV
acquired by the Company is actually the interest held by Cliffs Drilling
Trinidad Limited, which the Company acquired on the same day. 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. The Company signed an initial eight-month
contract with Maraven for use of the rig in Lake Maracaibo, Venezuela. 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 AGP Acquisition for a purchase price of $28.5 million
in cash.
Upon completion of all planned refurbishments, the Company will operate 2
jack-up rigs and 11 land rigs in Venezuela, 8 jack-up rigs in the Gulf of
Mexico, 2 jack-up rigs in Qatar and one jack-up rig in each of Mexico and
Trinidad. Of the 14 jack-up drilling rigs owned by the Company or in which the
Company has an interest, 13 are cantilevered, 5 have top drives and
substantially all have been refurbished in the last five years or are currently
in the process of being refurbished.
Engineering Services. Turnkey drilling has been a key element in the
Company's long-term strategy since 1982. The Company believes that its downhole
engineering expertise, extensive operating experience, veteran personnel and
risk management capabilities have allowed the Company to reduce the risks
inherent in turnkey drilling operations. From 1982 through December 31, 1996,
the Company completed 270 turnkeys with aggregate revenues of $690.0 million,
direct income before depreciation and allocated overhead of $91.0 million, and
operating income of $61.1 million. In recent years, the turnkey drilling market
has become more competitive as more companies entered the market and margins
were reduced. Domestic turnkey operators have been very aggressive in pricing
Gulf of Mexico turnkeys, and competition is intense. International turnkeys have
achieved greater acceptance, and the Company believes that expansion
opportunities exist in this market. The Company believes its expertise has
enabled it to be more selective in its turnkey drilling operations and to
achieve profitable turnkey drilling operating results. The Company also began
providing well engineering and management services during 1993 as an expansion
of this business segment. Under these arrangements, the Company is responsible
for well design and well site supervision.
MOPU Operations. The conversion of offshore drilling rigs into MOPUs has
become one of the attractive niches in which the Company has diversified its
operations. Since 1989, the Company has pioneered the development and operation
of MOPUs, which allow the Company to participate in the more stable oil and gas
production market. MOPUs are offshore production systems, usually converted
jack-up rigs, from which the drilling equipment is removed and production
equipment is installed. MOPUs generally are contracted on a term basis for
several years and are
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characterized by relatively high operating margins, with most of the operating
costs assumed by the customer. The Company also believes that its engineering
expertise and experience with MOPUs give it a competitive advantage which will
allow the Company to take advantage of opportunities in both domestic and
foreign markets.
CONTRACT DRILLING AND MOPU OPERATIONS
The following table provides the current status of and information about
the drilling rigs and MOPUs owned and operated by the Company as of March 5,
1997. Substantially all of these assets are pledged to secure the Company's
revolving credit facility ("Revolving Credit Facility") with ING (U.S.) Capital
Corporation ("ING"), formerly International Nederlanden (U.S.) Capital
Corporation.
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YEAR RATED DEPTH
DELIVERED/ ---------------- TYPE OF EXPIRATION
EQUIPMENT TYPE(A) REFURBISHED WATER DRILLING LOCATION CONTRACT DATE
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JACK-UP DRILLING RIGS
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DOMESTIC(8)
Southwestern 100................ MC 1982/1993 100(#) 25,000(#) Gulf of Mexico Well-to-Well July, 1997
Southwestern 150................ IC 1979/1994 150(#) 20,000(#) Gulf of Mexico Well-to-Well May, 1997
Southwestern 151................ IC 1981/1993 150(#) 25,000(#) Gulf of Mexico Well-to-Well September, 1997
Southwestern 152................ MC 1980/1993 150(#) 25,000(#) Gulf of Mexico Well-to-Well April, 1997
Southwestern 153................ MC 1980/1994 150(#) 25,000(#) Gulf of Mexico Well-to-Well September, 1997
Southwestern 154................ IC 1979/1996 150(#) 20,000(#) Gulf of Mexico Well-to-Well April, 1997
Southwestern 180................ MS 1978/1997 184(#) 25,000(#) Shipyard N/A N/A
Southwestern 200................ MC 1979/1992 200(#) 25,000(#) Gulf of Mexico Well-to-Well May, 1997
INTERNATIONAL(6)
Cliffs Drilling 155............. IC 1980/1996 150(#) 22,000(#) Venezuela Term Daywork April, 1997
Cliffs Drilling 156............. IC 1983 150(#) 25,000(#) Venezuela Term Daywork January, 1998
LASALLE......................... IC 1982/1997 150(#) 25,000(#) Qatar Term Daywork April, 2000
Southwestern 160................ IC 1980/1996 160(#) 20,000(#) Qatar Term Daywork August, 1998
Cliffs Drilling 12.............. MC 1980/1996 200(#) 20,000(#) Mexico Term Daywork December, 1998
Southwestern Marine 4 (b)....... MC 1982/1996 110(#) 25,000(#) Trinidad Term Daywork June, 1997
LAND DRILLING RIGS
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INTERNATIONAL(11)
Cliffs Drilling 28(c)........... 1977/1994 -- 25,000(#) Venezuela Term Daywork May, 1998
Cliffs Drilling 34.............. 1980 -- 18,000(#) Venezuela N/A N/A
Cliffs Drilling 35.............. 1980 -- 18,000(#) Venezuela N/A N/A
Cliffs Drilling 36.............. 1982 -- 18,000(#) Brazil N/A N/A
Cliffs Drilling 37.............. 1982 -- 18,000(#) Brazil N/A N/A
Cliffs Drilling 40.............. 1980/1991 -- 25,000(#) Venezuela Term Daywork September, 1997
Cliffs Drilling 41(c)........... 1981/1994 -- 25,000(#) Venezuela Term Daywork August, 1998
Cliffs Drilling 42(c)........... 1981/1994 -- 25,000(#) Venezuela Term Daywork June, 1998
Cliffs Drilling 43(c)........... 1981/1991 -- 25,000(#) Venezuela Term Daywork February, 1998
Cliffs Drilling 54.............. 1981/1995 -- 30,000(#) Venezuela Term Daywork July, 1997
Cliffs Drilling 55.............. 1983/1997 -- 35,000(#) Louisiana Yard Term Daywork April, 1998
MOBILE OFFSHORE PRODUCTION UNITS
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DOMESTIC(3)
Cliffs Drilling 4............... 1967/1995 150(#) -- Gulf of Mexico Month-to-Month N/A
Cliffs Drilling 8............... 1977/1993 250(#) -- Gulf of Mexico Term Daywork December, 1997
Cliffs Drilling 14.............. 1980/1996 200(#) -- Gulf of Mexico Term Daywork July, 1997
INTERNATIONAL(2)
Cliffs Drilling 10.............. 1979/1993 250(#) -- Shipyard Term Daywork October, 1998
LANGLEY......................... 1965/1996 150(#) -- Nigeria Term Daywork December, 2001
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(a) Abbreviations:
MC = mat supported cantilever jack-up mobile offshore drilling unit
IC = independent leg cantilever jack-up mobile offshore drilling unit
MS = mat supported slot jack-up mobile offshore drilling unit
(b) Formerly the Southwestern 110, the Southwestern Marine 4 is owned by the
WINDJV in which the Company has an indirect 50% ownership interest.
(c) Contracted to the Company's Engineering Services business segment for
turnkey drilling activities.
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Daywork Drilling. The Company currently owns and operates 25 drilling rigs,
consisting of 13 jack-up drilling rigs, a 50% interest in the WINDJV which owns
one jack-up drilling rig, and 11 land drilling rigs. Under daywork drilling
contracts, the Company provides a drilling rig with required personnel to the
operator, who supervises the drilling of the contracted well. Compensation to
the Company is based on a negotiated rate per day that the rig is utilized.
Daywork drilling contracts generally specify the type of equipment to be used,
the size of the hole and the depth of the proposed well. Under a daywork
drilling contract, the Company generally bears no part of the costs due to
downhole losses (such as time delays for various reasons, including stuck drill
stem and blowout).
Most of the Company's drilling contracts are obtained through competitive
bids. Generally, domestic drilling contracts are for a single well while foreign
drilling contracts are for multiple wells, with the terms and rates varying
depending upon the nature and duration of the work, the equipment and services
supplied and other matters. The contracts typically obligate the Company to pay
certain operating expenses, including wages of drilling personnel, maintenance
expenses, incidental rig supplies, equipment and local office facilities.
Domestic drilling contracts are typically subject to termination by the customer
on short notice, usually upon payment of a fee. Foreign drilling contracts
generally require longer notice periods for termination and also may require
that the customer pay mobilization and demobilization expenses.
Engineering Services. The Company has been active in drilling wells on a
turnkey basis since 1982. Under a turnkey drilling contract, the Company
contracts to drill a well to a contract depth under specified conditions for a
fixed price. In addition, the Company provides technical expertise and
engineering services, as well as most of the equipment required for the well,
and is compensated when the contract terms have been satisfied. On a turnkey
well, the Company from time to time operates rigs subcontracted from other
drilling contractors on a dayrate basis. The Company also subcontracts
substantially all of the related services and manages the drilling process. The
risks to the Company on a turnkey drilling contract are substantially greater
than on a well drilled on a daywork basis because the Company assumes most of
the risks associated with drilling operations generally assumed by the operator
in a daywork contract, including risk of blowout, loss of hole, stuck drill
stem, machinery breakdowns, abnormal drilling conditions and risks associated
with subcontractors' services, supplies and personnel. The Company employs a
technically proficient and experienced engineering staff that examines the
available seismic, geologic and drilling data to identify and minimize many of
the drilling risks assumed by the Company. The Company believes that the
application of this expertise allows it to evaluate the risks of a proposed
contract and bid accordingly. When possible, the Company seeks fixed price
contracts from its subcontractors to minimize or eliminate cost fluctuations.
The Company also maintains insurance coverage against certain drilling hazards.
See "Business and Properties -- Risks and Insurance."
The Company completed 13 turnkey drilling contracts during 1996 and 15
turnkey drilling contracts during 1995, with revenues of $56.1 million and $54.2
million, respectively. The increase in revenues was primarily attributable to
the mix of turnkey wells drilled during 1996 and 1995. One of the turnkey
contracts completed in 1995 related to the Company's interest in Cliffs Neddrill
Central Turnkey International ("CNCTI"), a joint venture among Cliffs Drilling
International, Inc. ("International"), a wholly-owned subsidiary of the Company,
Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A. de C.V.
("Central"). The joint venture turnkey contract was accounted for under the
equity method in the Company's consolidated financial statements. See Note 4 of
Notes to Consolidated Financial Statements. Three turnkey drilling contracts
have been completed since December 31, 1996 with contract revenues of $25.6
million. The Company currently has 2 Venezuelan turnkey drilling contracts in
progress with expected contract revenues of approximately $13.8 million.
The Company also provides well engineering and management services. Under
these agreements, the Company is responsible for well design and well site
supervision. The Company has provided these services both domestically and
internationally since 1993.
MOPU Operations. The Company currently owns 5 MOPUs capable of operating in
both domestic and foreign waters. MOPU contracts are generally on a dayrate
basis and are normally long-term, either for a period of years or a period of
time sufficient to obtain the economic production from an offshore oil and gas
field or wells within such field. It is not unusual for such contracts to
contain renewal provisions at the option of the customer. Under such contracts,
the Company is generally responsible for maintenance, operation and repair of
the MOPU hull structure. The Company is generally not responsible for risk of
pollution or for damage to or replacement of the customer's production
equipment, although the Company generally is responsible for damage to its
production equipment. The Company maintains
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insurance coverage against risk of damage to or loss of the MOPUs and related
equipment as is customary in the industry. See "Business and Properties -- Risks
and Insurance."
Utilization. The Company's rigs are inactive from time to time. The Company
believes that its stacking procedures minimize stacking and maintenance costs,
and that the stacked rigs could be placed in service with minimal cost and delay
should it become attractive to do so.
Foreign Operations. For the fiscal years ended December 31, 1996, 1995 and
1994, 55%, 63% and 78%, respectively, of the Company's consolidated revenues
were derived from foreign operations, principally in Venezuela. See Note 13 of
Notes to Consolidated Financial Statements.
The Company currently operates 6 jack-up drilling rigs in international
locations, including 2 rigs in Venezuela, 2 rigs in Qatar and one rig in each of
Mexico and Trinidad. The Company currently operates 6 land drilling rigs in
Venezuela and expects to mobilize additional land rigs for Venezuelan operations
during 1997. The Company currently operates one MOPU in Nigeria and expects to
mobilize one additional MOPU to the Arabian Gulf during the second quarter of
1997.
On May 23, 1996, the Company acquired the stock of Viking Trinidad Limited,
which owned a 50% interest in the WINDJV. Viking Trinidad Limited was renamed
Cliffs Drilling Trinidad Limited.
In 1996, the Company formed Cliffs Central Drilling International ("CCDI"),
a 50/50 joint venture with Central, for the marketing of drilling services in
Mexico. CNCTI was formed in 1992 and completed all drilling operations in Mexico
during 1995.
Operations of the Company which are conducted in foreign countries are
subject to certain political, economic and other uncertainties not encountered
by purely domestic drillers, including risk of expropriation, nationalization,
labor disputes, foreign taxation, foreign and domestic monetary policies and
regulations which may limit operations in areas by foreign companies and/or
personnel. Generally, the Company purchases insurance to protect against some or
all losses due to events of political risks, such as nationalization,
expropriation, war, confiscation and deprivation. Occasionally, customers will
indemnify the Company against such losses. See "Business and
Properties-Government Regulation."
Customers. The Company's largest customer for the year ended December 31,
1996, Corpoven, accounted for approximately 31% of the Company's consolidated
revenues. The Company's 3 largest customers for the year ended December 31,
1995, Corpoven, Maraven, S.A. and Texaco Exploration & Production, Inc.,
accounted for approximately 66% of the Company's consolidated revenues. The
Company's 4 largest customers for the year ended December 31, 1994, Corpoven,
Maraven, Dresser-Rand Company and CNCTI, a joint venture in which the Company's
wholly owned subsidiary was a joint venture partner, accounted for approximately
78% of the Company's consolidated revenues. The loss of any major customer could
have an adverse impact on the Company's operations for such period of time as
may be required to find other users for the equipment. See Note 12 of Notes to
Consolidated Financial Statements.
Equipment and Supplies. The Company obtains required supplies, services and
equipment from a variety of sources. The Company has not in the past experienced
shortages of such materials necessary to conduct the Company's business.
However, such shortages could occur in the future and could have a material
adverse effect on the Company's operations. There may be additional delays or
shortages associated with obtaining supplies, services and equipment,
particularly with respect to the Company's foreign operations.
Competition. Demand for offshore drilling rigs and utilization are much
improved from previous years. However, the drilling industry remains highly
competitive, and no one or few drilling contractors is dominant. The Company
competes with numerous other drilling contractors, some of which are
substantially larger than the Company and possess appreciably greater financial
and other resources. During the last three years, there have been several
business consolidations which have reduced the fragmented nature of the drilling
industry. Although this has decreased the total number of competitors, the
Company believes that competition for drilling contracts will continue to be
intense in the foreseeable future.
Price competition is generally the major factor in the energy service
industry, but the technical capability of specialized drilling equipment and
personnel at the time and place required by customers is also important. Other
competitive factors include technical and engineering expertise, work force
experience, rig suitability, safety record,
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efficiency, condition of equipment, reputation and customer relations. The
Company believes that it competes favorably with respect to all of these
factors. If demand for drilling rigs increases in the future, rig availability
may also become a competitive factor. Competition is usually on a regional
basis; however, drilling rigs are mobile and can be moved from one region to
another in response to increased demand, and an oversupply of rigs in any region
may result. The Company's domestic turnkey drilling and MOPU operations are
concentrated in the Texas/Louisiana Gulf Coast area, and its foreign daywork and
turnkey drilling operations are primarily in Venezuela. In foreign markets, the
Company competes with many of the same competitors under the same factors as in
the domestic markets. Demand for onshore and offshore drilling and production
equipment is also dependent on the exploration and development programs of oil
and gas companies, which are in turn influenced by the financial condition of
such companies, general economic conditions, prices of oil and gas and political
considerations and policies. Improved technologies such as 3-D seismic, subsea
completions, floating production systems and directional drilling have reduced
the number of wells necessary to maintain or even increase supplies of oil and
gas, and have therefore improved overall industry fundamentals.
Historically, there have been few drilling contractors specializing in
turnkey drilling contracts because of the extent of engineering and technical
expertise required to manage the risks inherent in turnkey drilling operations,
the magnitude of management commitment and the financial resources required. In
recent years, the turnkey drilling market has become more competitive as more
companies entered the market and margins were reduced. Domestic turnkey
contractors have been very aggressive in pricing Gulf of Mexico turnkeys and
competition is intense.
In order to remain competitive in the current environment, the Company has
enhanced its geographical diversification, participated in turnkey drilling
contracts, developed and marketed well engineering and management services and
become active in the development and operation of MOPUs. The Company believes
that MOPUs offer several economic advantages to oil and gas operators, namely,
optimizing the use of exploration budgets by avoiding the high capital costs of
production platforms, providing more flexibility than conventional fixed
platforms in producing oil and gas and allowing for the economic development of
smaller reserves. Although the Company believes there is a market for additional
MOPUs, the Company can give no assurance that there will be sufficient demand
for MOPUs at rates which are profitable. Currently, margins on MOPU operations
are high, which is likely to result in increased competition. Moreover, MOPUs
are not widely utilized, and most companies that do utilize MOPUs own and
operate their own units. The Company believes that its experience in MOPU
operations enables it to compete favorably in the MOPU market. For these
reasons, the Company views MOPUs as an attractive opportunity to expand its
offshore services.
Acquisitions and Dispositions of Assets. On October 31, 1991, the Company
purchased 3 jack-up rigs from Chiles Offshore Corporation. These rigs were
refurbished, converted to MOPUs and used as portacompressors in Venezuela. The
Company purchased 5 jack-up drilling rigs during the fourth quarter of 1992 and
converted 2 of the 5 rigs to MOPUs, converted one unit for use as a mobile
offshore supply unit in Mexico, used one unit for drilling operations in Mexico
and bareboat chartered the other unit to a third party for use as a workover rig
in the U.S. Gulf of Mexico. During 1995, the Company purchased and renovated a
3000 HP land rig, Cliffs Drilling 54, for an initial contract to drill 2 wells
on a daywork basis in Venezuela.
On May 23, 1996, the Company completed the acquisition of the Southwestern
Rigs for a purchase price of (a) $103.8 million in cash 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. In addition, on May 10, 1996, the Company acquired a
jack-up drilling rig from Diamond for $4.5 million. The Company signed an
initial eight-month contract with Maraven for use of the rig in Lake Maracaibo,
Venezuela. 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 AGP Acquisition for a purchase price of
$28.5 million in cash.
As a result of hurricane damage sustained in August, 1992, one of the
Company's MOPUs, the Marlin No. 3, was declared a constructive total loss in
September, 1992, and insurance underwriters paid the Company $10 million. The
Company sold its four inland posted barge drilling rigs effective January 1,
1993. Pursuant to buyout options exercised by the charterer during the fourth
quarter of 1994, the Company sold 2 of the 3 portacompressors which worked in
Lake Maracaibo, Venezuela. As a result of damage caused by an earthquake, the
jack-up drilling rig MARQUETTE was declared a compromised total loss in
December, 1995, and insurance underwriters paid the Company $14.6 million. On
7
<PAGE> 9
June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat charter as a
workover rig in the U.S. Gulf of Mexico, and the charterer exercised its option
to purchase the unit for $5.4 million, resulting in a gain of $2.7 million.
OIL AND GAS OPERATIONS
Since 1987, the Company has engaged in oil and gas exploration and
production activities in conjunction with marketing the Company's contract
drilling services, primarily turnkey, under the Company's contract drilling
support ("CDS") program. Under this program, the Company has taken working
interests in oil and gas properties in connection with the award to the Company
of a drilling contract. The Company's policy has been that its working interest
in such CDS wells would generally not exceed 25%. In 1993, the Company began to
de-emphasize its CDS program due to marginal financial performance of the
segment. The Company's oil and gas operations were not significant; therefore,
applicable disclosures were not required at or for the years ended December 31,
1996 and 1995.
ENVIRONMENTAL CONTROLS
The Company believes it is in substantial compliance with applicable
federal, state, local and foreign laws and regulations relating to environmental
controls. Also, the existence of such laws and regulations has not had, nor at
this time is expected to have, any materially restrictive effect on the Company.
To date, the Company has not accounted for costs or capital expenditures
incurred for environmental control facilities separately from other costs
incurred in the operation of its businesses. The Company does not, however,
believe that any such costs or expenditures have been material, and the Company
does not expect that under present conditions such costs or expenditures will
become material in the foreseeable future.
GOVERNMENT REGULATION
The drilling of oil and gas wells is subject to various federal, state,
local and foreign laws, rules and regulations. The Company, as an owner or
operator of domestic offshore facilities, may be liable for the costs of removal
and damages arising out of a pollution incident to the extent set forth in the
Federal Water Pollution Control Act, as amended by the Oil Pollution Act of 1990
and the Outer Continental Shelf Lands Act. In addition, the Company may also be
subject to other civil claims arising out of any such incident. Certain of the
Company's facilities are also subject to regulations of the Environmental
Protection Agency ("EPA") that require the preparation and implementation of
spill prevention control and countermeasure plans relating to possible discharge
of oil into navigable waters. The Company supplements its activities in this
regard by membership in the Clean Gulf Association, which provides pollution
control facilities to its members. Other regulations of the EPA may require the
Company to take certain precautions in storing, handling and transporting
certain hazardous wastes. State statutory provisions relating to oil and natural
gas generally include requirements as to well spacing, waste prevention,
production limitations, pollution prevention and clean-up, obtaining drilling
permits and similar matters. The Company believes that it is in compliance in
all material respects with such laws, rules and regulations and that such
compliance has not had any material adverse effect on its operations or
financial condition.
The drilling industry is dependent on the demand for services from the oil
and gas exploration industry and, accordingly, is affected by changing tax laws,
price controls and other laws relating to the energy business. The Company's
business is affected generally by political developments and by federal, state,
local and foreign laws, rules and regulations which may relate directly to the
oil and gas industry. The adoption of laws, rules and regulations, both domestic
and foreign, which curtail exploration and development drilling for oil and gas
for economic, environmental and other policy reasons may adversely affect the
Company's operations by limiting available drilling and production
opportunities. The Company's foreign operations are subject to political,
economic and other uncertainties associated with foreign operations generally,
as well as the additional risks of fluctuating currency values and exchange
controls. Governments may from time to time suspend or curtail drilling
operations or leasing activities when such operations are considered to be
detrimental to the environment or to jeopardize public safety.
MOPUs and MOPU operations are subject to certain federal, state, local and
foreign laws, rules and regulations relating to engineering, design, structural,
safety, operational and inspection standards or requirements, and changes in
such standards or requirements could adversely affect the Company's MOPU
operations.
8
<PAGE> 10
RISKS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather and seas. These hazards could cause personal
injury, suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains broad insurance coverage, including all risks physical damage,
employer's liability, comprehensive general liability or commercial contract
indemnity and workers' compensation insurance. The Company's third party
liability insurance coverage is approximately $100 million per occurrence. The
Company believes that it is adequately insured for public liability and property
damage to others with respect to its operations. However, such insurance may not
be sufficient to protect the Company against liability for all consequences of
well disasters, extensive fire damage or damage to the environment. The Company
also carries insurance to cover physical damage to or loss of its drilling rigs
and MOPUs. In view of difficulties that may be encountered in renewing such
insurance at reasonable rates, no assurance can be given that the Company will
be able to maintain the type and amount of coverage that it considers adequate.
The occurrence of a significant event for which the Company is not fully insured
could have a material adverse effect on the Company's financial position and
results of operations.
The Company also maintains insurance coverage to protect against certain
hazards inherent in its turnkey contract drilling and oil and gas operations.
This insurance was most recently renewed on June 1, 1996, and is scheduled for
renewal on October 1, 1997. This insurance, which is principally through
Underwriters at Lloyd's and Institute of London Underwriters Companies, covers
"control of well" (including blowouts above and below the surface); cratering;
seepage and pollution; and care, custody and control. The Company believes that
it maintains insurance in accordance with industry standards. The Company's
current insurance program provides $500,000 coverage per occurrence for care,
custody and control, and $75 million coverage per occurrence for control of
well, cratering and seepage and pollution associated with foreign operations.
The amount of coverage per occurrence provided by the Company's current
insurance program for domestic land, coastal and inland water, and offshore
operations is $10 million, $20 million and $30 million, respectively, for
control of well, cratering and seepage and pollution. Each form of coverage
provides for a retention amount for the account of the Company, as well as a
maximum limit of liability. Each casualty is an occurrence, and there may be
more than one such occurrence on a well, each of which would be subject to a
separate retention amount. No assurance can be given that the Company will be
able to maintain the types and amounts of coverage that it considers adequate
with respect to its turnkey drilling and oil and gas operations. If the Company
were unable to insure against certain of these risks, either because such
insurance was no longer available or because the premium costs became too great
in relation to the coverage afforded, the Company's insurance might not be
adequate to protect the Company against liability from all consequences of well
disasters, downhole problems, extensive fire damage or damage to the
environment. The occurrence of a casualty or loss against which the Company is
not fully insured could have a material adverse effect on the Company's
financial position.
RISKS INHERENT IN FOREIGN OPERATIONS
For the fiscal year ended December 31, 1996, 55% of the Company's
consolidated revenues was derived from foreign sources or from services
performed abroad, principally in Venezuela. Foreign operations and export sales
are subject in varying degrees to risks inherent in doing business abroad. Such
risks include the possibility of unfavorable changes in tax or other laws;
partial or total expropriation; currency exchange rate fluctuations and
restrictions on currency repatriation; the disruption of operations from labor
and political disturbances, insurrection or war; and the requirements of partial
local ownership of operations in certain countries. Foreign governments may from
time to time suspend or curtail drilling operations or leasing activities when
such operations are considered to be detrimental to the environment or to
jeopardize public safety.
9
<PAGE> 11
EMPLOYEES
At December 31, 1996, the Company employed 1,106 persons as follows:
<TABLE>
<CAPTION>
SALARIED HOURLY
EMPLOYEES EMPLOYEES
--------- ---------
<S> <C> <C>
Domestic............................................... 153 417
Venezuela.............................................. 180 297
Other.................................................. 49 10
</TABLE>
There were no collective bargaining contracts covering the Company's
domestic employees or employees in foreign locations in effect as of December
31, 1996, except for employees in Venezuela who are covered by the Collective
Labor Contract of the Venezuelan Petroleum Industry.
OTHER PROPERTIES
The Company owns an office building and warehouse on a 2.5 acre tract of
land in Lafayette Parish, Louisiana. The Company leases additional properties,
including its executive offices in Houston, Texas, a yard in Lafayette,
Louisiana, 2 field offices in Venezuela and a field office in Doha, Qatar.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to a number of lawsuits which are ordinary, routine
litigation incidental to the Company's business, the outcome of which,
individually, or in the aggregate, is not expected to have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1996.
PART I I
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the over-the-counter market
and quoted on The Nasdaq Stock Market ("Nasdaq") under the symbol "CLDR." The
following table sets forth the range of high and low sales prices per share of
Common Stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
1996 1995
------------ -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
March 31........................................ $15 3/4 $13 3/4 $14 1/4 $11 1/4
June 30......................................... $34 $15 1/4 $15 $12 1/2
September 30.................................... $36 3/4 $25 3/4 $15 1/4 $13
December 31..................................... $69 1/4 $33 1/2 $16 3/8 $13 1/16
</TABLE>
On March 5, 1997, the closing sale price of the Company's Common Stock, as
reported by Nasdaq, was 53 1/2 per share. On that date, there were approximately
1,754 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and it is
not anticipated that cash dividends will be paid to holders of Common Stock in
the foreseeable future. Under the Company's 10.25% Senior Notes due 2003 (the
"Senior Notes") and Revolving Credit Facility with ING, the Company is
restricted from declaring, making or paying cash dividends on the Common Stock.
The Company's $2.3125 Convertible Exchangeable Preferred Stock (the
"Preferred Stock") was traded on Nasdaq during 1995 under the symbol "CLDRP."
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
10
<PAGE> 12
Stock upon conversion of the Preferred Stock. 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. Holders of shares of
the Preferred Stock had the option to convert any or all of such shares of
Preferred Stock into fully paid and nonassessable shares of Common Stock of the
Company prior to the redemption date at a rate of 1.89394 shares of Common Stock
for each full share of Preferred Stock. No payment or adjustment was made upon
any conversion of shares of Preferred Stock on account of any dividends on the
shares surrendered for conversion, and the holder lost any right to payment of
dividends on the shares surrendered for conversion. No fractional shares of
Common Stock were issued upon conversion but, in lieu thereof, an appropriate
amount was paid in cash by the Company based upon the reported last sales price
for the shares of Common Stock on the date of conversion. The right of holders
of Preferred Stock to convert shares of Preferred Stock into Common Stock
terminated on the redemption date.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Company. The amounts as of and for each of the five years in
the period ended December 31, 1996 have been derived from audited consolidated
financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein. The selected consolidated financial data
provided below are not necessarily indicative of the future results of
operations or financial performance of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues............................. $ 133,109 $ 83,289 $ 83,693 $ 65,538 $ 76,838
Costs and Expenses:
Operating Expenses................ 91,984 67,713 50,907 35,171 57,646
Depreciation, Depletion and
Amortization.................... 10,388 7,271 14,008 17,438 12,883
Contract Termination Provision.... -- -- 5,193 577 --
Write-down in Carrying Value of
Oil Gas Properties.............. -- -- -- -- 1,500
General and Administrative
Expense......................... 6,300 5,289 5,114 4,807 4,512
--------------- --------------- --------------- --------------- ---------------
Operating Income..................... 24,437 3,016 8,471 7,545 297
Other Income (Expense)(1)............ (10,015) 2,430 (2,415) (3,919) 2,721
--------------- --------------- --------------- --------------- ---------------
Net Income........................... 14,422 5,446 6,056 3,626 3,018
Dividends Applicable to Preferred
Stock(2).......................... (31) (2,659) (2,659) (2,659) (2,659)
--------------- --------------- --------------- --------------- ---------------
Net Income Applicable to Common and
Common Equivalent Shares.......... $ 14,391 $ 2,787 $ 3,397 $ 967 $ 359
=============== =============== =============== =============== ===============
Net Income per Share................. $ 2.08 $ 0.68 $ 0.80 $ 0.21 $ 0.11
=============== =============== =============== =============== ===============
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding(2).................... 6,926 4,108 4,223 4,514 3,257
SUMMARY BALANCE SHEET DATA:
Working Capital...................... $ 68,221 $ 33,859 $ 19,331 $ 20,402 $ 24,830
Property and Equipment, Net.......... 216,474 65,950 71,248 86,506 101,178
Total Assets......................... 339,546 128,962 120,167 133,523 150,203
Notes Payable, Long-Term............. -- -- -- 13,108 28,348
10.25% Senior Notes(3)............... 150,000 -- -- -- --
Redeemable Preferred Stock(2)........ -- 28,750 28,750 28,750 28,750
Total Shareholders'
Equity(2)(4)(5)................... $ 142,168 $ 74,015 $ 70,881 $ 72,494 $ 71,446
</TABLE>
11
<PAGE> 13
- ---------------
(1) Includes items of other income and expense, interest expense and income
taxes. Includes net gains on disposition of assets of $3.7 million, interest
income of $2.7 million and interest expense of $9.3 million in 1996, net
gains on disposition of assets of $2.7 million and net exchange rate gains
of $2.6 million in 1995, net exchange rate losses of $1.2 million in 1994,
litigation settlement and expenses of $3.7 million in 1993 and net gains on
disposition of assets of $5.0 million in 1992.
(2) 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.
(3) In part to finance the acquisition of the Southwestern Rigs, the Company
sold $150 million of Senior Notes.
(4) The Company issued 1,200,000 shares of Common Stock in connection with the
acquisition of the Southwestern Rigs.
(5) The Company has not paid any cash dividends on its Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K 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-K 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-K.
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
Company's daywork drilling operations have benefited from the tight supply of
jack-up drilling rigs both in the U.S. Gulf of Mexico and internationally.
Increased exploration activity coupled with a reduction in rig availability has
resulted in increasing dayrates and utilization of the Company's drilling rigs.
The same factors have positively and negatively affected the Company's
engineering services business segment, in that increased exploration activity
has caused an increase in demand for the Company's engineering services;
however, reduced rig availability has made it more difficult for the Company to
contract drilling rigs required for performance of turnkey drilling operations.
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.
12
<PAGE> 14
RESULTS OF OPERATIONS
Year 1996 Versus 1995
The Company recognized net income, before preferred dividends, of $14.4
million in 1996 compared to net income of $5.4 million in 1995. Revenues
increased $49.8 million and operating income increased $21.4 million from 1995
to 1996. Improved operating results from the Company's daywork drilling and
engineering services business segments contributed to the increases in revenues
and operating income.
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
-------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling..................................... $ 77,882 $26,363 $51,519
Engineering Services................................. 60,517 56,970 3,547
MOPU Operations...................................... 4,329 4,920 (591)
Oil and Gas.......................................... 1,156 2,788 (1,632)
Eliminations......................................... (10,775) (7,752) (3,023)
-------- ------- -------
Consolidated................................. $133,109 $83,289 $49,820
======== ======= =======
Operating Income (Loss):
Daywork Drilling..................................... $ 23,048 $ 2,761 $20,287
Engineering Services................................. 8,036 2,609 5,427
MOPU Operations...................................... 2,872 2,492 380
Oil and Gas.......................................... (3,108) 541 (3,649)
Corporate Office..................................... (6,411) (5,387) (1,024)
-------- ------- -------
Consolidated................................. $ 24,437 $ 3,016 $21,421
======== ======= =======
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $51.5 million and operating income
increased $20.3 million in 1996 compared to 1995. Of the $20.3 million increase
in operating income, $14.3 million was generated from 10 of 11 jack-up drilling
rigs acquired in May, 1996. Operating income also increased due to improved
dayrates for the Company's jack-up drilling rigs and land rigs. In addition,
Cliffs Drilling 54 worked the entire year in 1996 compared to approximately one
quarter of the year in 1995. Cliffs Drilling 12 worked the majority of 1996,
while it was stacked during all of 1995. These improvements in operating income
were partially reduced by the loss of income associated with the Marquette. See
"Year 1995 Versus 1994 -- Daywork Drilling."
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 in the second quarter of 1997.
13
<PAGE> 15
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:
<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International...................................... $17,989 $12,183 $ 5,806
Domestic........................................... 33,984 -- 33,984
Land Rigs............................................. 20,403 14,152 6,251
Other(2).............................................. 5,506 28 5,478
------- ------- -------
Total......................................... $77,882 $26,363 $51,519
======= ======= =======
Average Rig Utilization(3):
Jack-up Rigs:
International...................................... 100% 100%
Domestic........................................... 96% N/A
Land Rigs............................................. 100% 100%
Average Dayrates(4):
Jack-up Rigs:
International...................................... $25,724 $20,133
Domestic........................................... 22,667 N/A
Land Rigs............................................. 9,085 7,335
</TABLE>
- ---------------
(1) Includes revenues earned from affiliates.
(2) Includes Cliffs Drilling 12, which was stacked during all of 1995, but was
bareboat chartered to a third party for use as a workover rig during most
of 1996, 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.
On September 30, 1996, the Company acquired an additional land rig for $2.9
million. The Company has refurbished the drilling rig and expects to mobilize
the unit to Venezuela and 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 expects to refurbish at least 2 of
the 4 land drilling rigs for operations in Venezuela during 1997. See "Liquidity
and Capital Resources."
Engineering Services
Engineering services revenues increased $3.5 million and operating income
increased $5.4 million in 1996 compared to 1995. The Company completed 13
turnkey contracts in 1996 compared to 15 turnkey contracts in 1995. Five of the
13 contracts completed during 1996 were international contracts in Venezuela,
which were completed at improved margins from wells drilled in prior years.
International operating margins increased during 1996 due to improved drilling
efficiencies and a reduction in lost time well activities. Domestic turnkey
contractors continue to bid wells very aggressively, resulting in intense
competition which has adversely affected the Company's domestic turnkey margins.
14
<PAGE> 16
The Company had 3 turnkey wells in progress at December 31, 1996, all of
which were completed by February, 1997. The Company provided well engineering
and management services during 1996 and 1995, primarily in Venezuela. These
activities contributed operating income of $.4 million and $.7 million in 1996
and 1995, respectively.
MOPU Operations
MOPU revenues decreased $.6 million and operating income increased $.4
million in 1996 compared to 1995. The decrease in revenues was primarily due to
3 MOPUs which were under operating or standby contracts during 1995 but were
idle in 1996. In addition, the Cliffs Drilling 11 was sold during June, 1996.
These decreases in revenue were partially offset by revenues associated with the
LANGLEY, which was under contract during all of 1996, while it was stacked
during most of 1995. Operating income associated with the LANGLEY offset the
decreases in operating income associated with the other MOPUs.
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 $1.6 million and operating income decreased
$3.6 million in 1996 compared to 1995. The decrease in revenues was primarily
due to a $1.4 million settlement of a contractual dispute with Columbia Gas
Transmission Corp., a subsidiary of Columbia Gas System Inc. ("Columbia Gas")
recorded during 1995. The decrease in operating income was primarily due to
approximately $2.9 million in costs associated with an unsuccessful well drilled
during the fourth quarter of 1996. The Company does not expect any significant
activity related to oil and gas exploration and production activities during
1997.
Corporate Overhead
Corporate overhead increased $1.0 million in 1996 compared to 1995. The
increase was 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 $10.0 million of other expense in 1996 compared to
$2.4 million of other income in 1995. The net change resulted primarily from a
$9.1 million increase in interest expense associated with the Senior Notes, an
increase in income taxes of $4.6 million and a decrease in exchange rate gains
of $2.6 million, offset in part by an increase in interest income and gains on
disposition of assets. See "Liquidity and Capital Resources."
The increase in income taxes relates primarily to the overall increase in
income from 1995 to 1996. The effective tax rates were 33% and 31% in 1996 and
1995, respectively, with the majority of the recorded expense constituting
deferred taxes. At December 31, 1996, the Company had various tax assets that
were recorded as a reduction of the tax liability related to taxable temporary
differences, a portion of which were reserved. The Company's realization of
these assets is primarily dependent upon the mix of foreign source and other
income. The Company's current mix of operations appears sufficient to enable the
Company to realize the majority of these tax assets. See Note 6 of Notes to
Consolidated Financial Statements.
15
<PAGE> 17
Year 1995 Versus 1994
The Company recognized net income, before preferred dividends, of $5.4
million in 1995 compared to net income of $6.1 million in 1994. Operating income
decreased $5.5 million from 1994 to 1995. The decrease in operating income was
primarily due to a reduction in foreign daywork drilling operating income of
$4.4 million, a reduction in MOPU operating income of $1.9 million, a reduction
in engineering services operating income of $1.0 million, and an increase in
corporate overhead of $.2 million, offset in part by an increase in oil and gas
operating income of $2.0 million.
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling.................................... $ 26,363 $ 32,481 $ (6,118)
Engineering Services................................ 56,970 36,079 20,891
MOPU Operations..................................... 4,920 16,020 (11,100)
Oil and Gas......................................... 2,788 2,470 318
Eliminations........................................ (7,752) (3,357) (4,395)
-------- -------- ---------
Consolidated..................................... $ 83,289 $ 83,693 $ (404)
======== ======== =========
Operating Income (Loss):
Daywork Drilling.................................... $ 2,761 $ 7,100 $ (4,339)
Engineering Services................................ 2,609 3,581 (972)
MOPU Operations..................................... 2,492 4,415 (1,923)
Oil and Gas......................................... 541 (1,439) 1,980
Corporate Office.................................... (5,387) (5,184) (203)
Eliminations........................................ -- (2) 2
-------- -------- ---------
Consolidated..................................... $ 3,016 $ 8,471 $ (5,455)
======== ======== =========
</TABLE>
Daywork Drilling
Daywork drilling revenues decreased $6.1 million and operating income
decreased $4.3 million in 1995 compared to 1994. 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. The Company's
other 2 jack-up drilling rigs operated in Venezuela through April, 1995 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. The turnkey
portion of the well was completed during the third quarter of 1995, and the rig
completed operations on a daywork basis offshore Venezuela during the first
quarter of 1996.
16
<PAGE> 18
The Company operates its drilling rigs on both a term and a spot 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 the Company's significant classes of drilling rigs:
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Daywork Drilling Revenues(1):
Jack-up Rigs:
International....................................... $12,183 $21,997 $ (9,814)
Domestic............................................ -- -- --
Land Rigs........................................... 14,152 10,465 3,687
Other.................................................. 28 19 9
------- ------- --------
Total.......................................... $26,363 $32,481 $ (6,118)
======= ======= ========
Average Rig Utilization(2):
Jack-up Rigs:
International....................................... 100% 93%
Domestic............................................ N/A N/A
Land Rigs.............................................. 100% 100%
Average Dayrates (3):
Jack-up Rigs:
International.......................................... $20,133 $21,499
Domestic............................................... N/A N/A
Land Rigs.............................................. 7,335 6,608
</TABLE>
- ---------------
(1) Includes revenues earned from affiliates.
(2) 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.
(3) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
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 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 scrapped the rig and salvaged various rig
equipment for use on other rigs or to sell. See "Liquidity and Capital
Resources."
Contracts on 2 of the 5 land drilling rigs working for Corpoven were
extended to September, 1996 at increased dayrates. The other 3 land drilling
rigs have contracts or agreements which extended into February, 1997. The
Company acquired, renovated and mobilized an additional land rig to Venezuela
which began drilling operations during September, 1995.
Engineering Services
Engineering services revenues increased $20.9 million and operating income
decreased $1.0 million in 1995 compared to 1994. Fifteen turnkey contracts were
completed in both 1995 and 1994. The revenue increase is primarily attributable
to the mix of turnkey wells drilled during 1995 and 1994. One of the 15 turnkey
wells completed in 1995 and 5 of the 15 turnkey wells completed in 1994 were
drilled by CNCTI and recorded under the equity method. One of the 15 turnkey
wells completed in 1994 was drilled by Cliffs Neddrill Turnkey International, a
joint venture in which the Company had a 50% interest, and also recorded under
the equity method. See Note 4 of Notes to Consolidated Financial Statements.
Despite the change in the mix of turnkey wells drilled, overall operating
margins have decreased.
17
<PAGE> 19
Domestic turnkey operators have been very aggressive in pricing Gulf of Mexico
turnkeys, and competition is intense. Various operational problems also caused
turnkey margins to decline. Five of the turnkey wells completed in 1995 and one
turnkey well in progress at December 31, 1995 encountered downhole problems and
as a result, the Company recorded losses of $3.7 million in the 1995 results of
operations on these 6 contracts. Two of the wells which completed in 1994
encountered downhole problems and as a result, the Company recorded losses of
$3.2 million in the 1994 results of operations on these contracts.
The Company provided well engineering and management services during 1995
and 1994, primarily in Venezuela and Mexico. These activities contributed
operating income of $.7 million and $1.0 million in 1995 and 1994, respectively.
MOPU Operations
MOPU revenues decreased $11.1 million and operating income decreased $1.9
million in 1995 compared to 1994. 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 $11.9 million and operating income of $1.6
million during 1994. After completing its contract in Venezuela, the LANGLEY was
demobilized to the United States during the second quarter of 1994 and was idle
until the fourth quarter of 1995. The unit was subsequently bareboat chartered
for a five-year term for use as a MOPU offshore Nigeria. The rig was mobilized
to Nigeria in midyear 1996 following modifications. The charterer exercised
buyout options and purchased the other 2 units which worked in Venezuela for a
total of $4.0 million in the fourth quarter of 1994. No gain or loss was
recognized upon buyout of the 2 units. See "Liquidity and Capital Resources."
Oil and Gas
Oil and gas revenues increased $.3 million and operating income increased
$2.0 million in 1995 compared to 1994. The increases were primarily due to a
$1.4 million settlement of a contractual dispute with Columbia Gas and decreased
depreciation, depletion and amortization and operating expenses, offset in part
by reduced gas revenues resulting from production declines and lower gas prices
during 1995 compared to 1994.
Corporate Overhead
Corporate overhead increased $.2 million in 1995 compared to 1994. The
increase was primarily due to an overall increase in employment-related costs.
Other Income (Expense)
The Company recognized $2.4 million of other income in 1995 compared to
$2.4 million of other expense in 1994. The net change resulted primarily from an
increase in net exchange rate gains and net gains on disposition of assets,
offset in part by an increase in income taxes. See "Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $12.8 million from $26.4 million at
December 31, 1995 to $39.2 million at December 31, 1996. The increase resulted
from net cash provided by financing activities of $145.3 million and net cash
provided by operating activities of $7.1 million, offset in part by net cash
used in investing activities of $139.6 million.
Operating Activities
Net cash of $7.1 million provided by operating activities included $21.3
million used for working capital and other requirements. "Accounts Receivable"
increased from December 31, 1995 to December 31, 1996 due primarily to daywork
drilling receivables associated with the Southwestern Rigs acquired on May 23,
1996, drilling operations in Colombia, Mexico and Qatar and the timing of cash
receipts related to international daywork and turnkey operations. "Notes and
Other Receivables, Current" increased primarily due to an insurance claim
related to an underground blowout on a domestic turnkey well. "Prepaid
Insurance" increased due to an extension of the policy period of insurance
coverage from the prior year and increased insurance premiums. "Other Prepaid
Expenses" increased primarily due to a
18
<PAGE> 20
deposit related to the AGP Acquisition which closed on January 24, 1997.
"Accounts Payable" and "Other Accrued Expenses" increased due to increased
domestic and international operations and the timing of payments.
Investing Activities
Net cash of $139.6 million used to fund investing activities included
$144.5 million of acquisition costs and related capital expenditures associated
with the jack-up drilling rig acquisitions completed during May, 1996 and the
land drilling rig acquisition completed in September, 1996. In addition, cash
was used for upgrade and renovation activities on other drilling rigs and MOPUs.
On January 24, 1997, the Company completed the AGP Acquisition for a
purchase price of $28.5 million in cash. The ATENA, renamed Cliffs Drilling 156,
is currently operating in Venezuela. The Company expects to refurbish at least 2
of the 4 land drilling rigs for operations in Venezuela during 1997.
In addition to the rig acquisitions completed in January, 1997, the Company
has capital expenditure requirements totaling approximately $48 million during
1997. Of this total, approximately $19 million relates to projects commenced in
1996 which will complete in 1997, $7 million relates to refurbishment of the
land rigs obtained in the AGP Acquisition, $11 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.
"Investment in and Advances to Unconsolidated Affiliates" increased from
December 31, 1995 to December 31, 1996 due primarily to $3.2 million paid for
the acquisition of an equity interest in the WINDJV. In connection with such
acquisition, the Company also guaranteed $4.25 million in indebtedness of the
WINDJV.
On June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico. The charterer exercised
its option to purchase the unit for $5.4 million. The Company recognized a $2.7
million gain on disposition of the unit during June, 1996.
Financing Activities
Cash of $145.3 million was provided by financing activities and included
$150.0 million generated from the placement of Senior Notes, offset in part by
cash used to fund debt issue costs which are reported as "Deferred Charges and
Other" in the Consolidated Balance Sheets.
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. See Note 5 of Notes to Consolidated Financial Statements. 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 direct and indirect
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 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 December 31, 1996, 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.
19
<PAGE> 21
The Company from time to time purchases its Common Stock in the open
market. During 1996, the Company purchased 43,000 shares of its Common Stock at
an aggregate purchase price of $.7 million, or approximately $15.38 per share.
All of the acquired shares are held as Common Stock in treasury, less shares
issued under certain benefit plans.
Exchange Rate Gains and Losses
Approximately 42% of the Company's revenues and a substantial portion of
its operating income were sourced from its Venezuelan operations during 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; 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 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.
Deferred Tax Assets Valuation Allowance
The Company has recorded a deferred tax asset of $3,811,000 for foreign tax
credit carryforwards at December 31, 1996 which expire during the years 1998
through 2001. At December 31, 1996, the Company provided a valuation allowance
of $1,589,000 with respect to its deferred tax assets, primarily related to
foreign tax credit carryforwards generated in previous years. A majority of the
Company's foreign source income is related to operations in Venezuela. Companies
operating in Venezuela are required to apply inflationary accounting for tax
purposes. Due to the volatile nature of this calculation and the direct
relationship it has on the overall effective tax rate on such income, the
Company was unable to conclude that it was more likely than not that the
resulting deferred tax assets would be fully realized.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
appear on pages 25 through 47 hereof and are incorporated by reference into this
Item 8. Selected quarterly financial data is set forth in Note 14 of Notes to
Consolidated Financial Statements, which is incorporated herein by reference.
20
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants regarding accounting principles or practices for financial statement
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders, which is to be filed with the Securities and Exchange
Commission (the "Commission"), describes the directors and executive officers of
the Company and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding management compensation and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under captions "Principal Shareholders" and
"Security Ownership of Management" in the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders, which is to be filed with the
Commission, describes the security ownership of certain beneficial owners and
management and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, which is to be filed with the Commission, sets forth information
regarding certain relationships and related transactions and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Schedules" on
page 24.
(3) Exhibits
See Exhibit Index on pages 48 to 51.
The management contracts and compensatory plans or arrangements required to
be filed as Exhibits to this report are as follows:
<TABLE>
<C> <S>
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C>
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan.
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1,
No.33-23508, filed under the Securities Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
fiscal year ended December 31, 1992).
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
fiscal year ended December 31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1994).
</TABLE>
(b) Reports on Form 8-K
None.
22
<PAGE> 24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
November 6, 1997 CLIFFS DRILLING COMPANY
By: /s/ DOUGLAS E. SWANSON
-----------------------------------
Douglas E. Swanson
Chairman of the Board and President
23
<PAGE> 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors.............................. 25
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1996............... 26
Consolidated Balance Sheets, December 31, 1996 and 1995..... 27
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1996............... 28
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Three Years in the Period Ended December
31, 1996.................................................. 29
Notes to Consolidated Financial Statements.................. 30
Schedule:
For Each of the Three Years in the Period Ended
December 31, 1996:
II Valuation and Qualifying Accounts.......... 47
</TABLE>
All other schedules for which provision is made in the applicable rules and
regulations of the Securities and Exchange Commission have been omitted as the
schedules are not required under the related instructions, are not applicable or
the information required thereby is set forth in the Consolidated Financial
Statements or the Notes thereto.
24
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
CLIFFS DRILLING COMPANY
We have audited the accompanying consolidated balance sheets of Cliffs
Drilling Company as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cliffs Drilling Company at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the Consolidated Financial Statements, in 1995
the Company adopted a new method of accounting for impairment of long-lived
assets.
ERNST & YOUNG LLP
Houston, Texas
February 21, 1997
25
<PAGE> 27
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Revenues.............................................. $132,341 $84,156 $81,508
Income (Loss) from Equity Investments................. 768 (867) 2,185
-------- ------- -------
133,109 83,289 83,693
COSTS AND EXPENSES:
Operating Expenses.................................... 91,984 67,713 50,907
Depreciation, Depletion and Amortization.............. 10,388 7,271 14,008
Contract Termination Provision........................ -- -- 5,193
General and Administrative Expense.................... 6,300 5,289 5,114
-------- ------- -------
108,672 80,273 75,222
-------- ------- -------
OPERATING INCOME........................................ 24,437 3,016 8,471
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets......................... 3,694 2,666 665
Interest Income....................................... 2,725 1,065 815
Interest Expense...................................... (9,265) (199) (826)
Exchange Rate Gain (Loss)............................. -- 2,554 (1,168)
Other, net............................................ (173) (1,250) (1,111)
-------- ------- -------
INCOME BEFORE INCOME TAXES.............................. 21,418 7,852 6,846
INCOME TAX EXPENSE...................................... 6,996 2,406 790
-------- ------- -------
NET INCOME.............................................. 14,422 5,446 6,056
DIVIDENDS APPLICABLE TO PREFERRED STOCK................. (31) (2,659) (2,659)
-------- ------- -------
NET INCOME APPLICABLE TO COMMON AND COMMON EQUIVALENT
SHARES................................................ $ 14,391 $ 2,787 $ 3,397
-------- ------- -------
NET INCOME PER SHARE.................................... $ 2.08 $ 0.68 $ 0.80
======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.................................... 6,926 4,108 4,223
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 39,181 $ 26,405
Accounts Receivable, net of allowance for doubtful
accounts of $797 at December 31, 1996 and 1995.......... 28,866 11,170
Notes and Other Receivables, Current...................... 4,922 1,812
Inventories............................................... 5,807 4,114
Drilling Contracts in Progress............................ 17,669 11,339
Prepaid Insurance......................................... 7,408 957
Other Prepaid Expenses.................................... 6,349 2,400
-------- --------
Total Current Assets............................... 110,202 58,197
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment................................ 283,223 122,777
Oil and Gas Properties ("successful efforts" method)...... 22,830 23,497
Other..................................................... 3,986 3,201
-------- --------
310,039 149,475
Less: Accumulated Depreciation, Depletion and
Amortization............................................ (93,565) (83,525)
-------- --------
Net Property and Equipment......................... 216,474 65,950
NOTES AND OTHER RECEIVABLES, LONG-TERM...................... 3,510 4,441
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
AFFILIATES................................................ 4,434 269
DEFERRED CHARGES AND OTHER.................................. 4,926 105
-------- --------
TOTAL ASSETS....................................... $339,546 $128,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 30,545 $ 20,392
Accrued Interest.......................................... 2,007 1
Other Accrued Expenses.................................... 9,429 3,945
-------- --------
Total Current Liabilities.......................... 41,981 24,338
10.25% SENIOR NOTES......................................... 150,000 --
DEFERRED INCOME TAXES....................................... 5,028 1,447
DEFERRED INCOME AND OTHER................................... 369 412
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; 7,996,436 and 4,518,104 shares issued and
7,566,504 and 4,113,067 shares outstanding at December
31, 1996 and 1995, respectively......................... 80 45
Paid-in Capital........................................... 153,513 99,186
Retained Earnings (Deficit)............................... (5,717) (20,108)
Less: Notes Receivable from Officers for Restricted
Stock............................................... (186) (232)
Restricted Stock..................................... (223) (32)
Treasury Stock, at cost, 429,932 and 405,037 shares
at December 31, 1996 and
1995, respectively................................. (5,299) (4,844)
-------- --------
Total Shareholders' Equity........................... 142,168 74,015
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $339,546 $128,962
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income............................................... $ 14,422 $ 5,446 $ 6,056
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization.............. 10,388 7,271 14,008
Deferred Income Tax Expense (Benefit)................. 5,184 1,848 (400)
Impairment of Oil and Gas Leasehold Cost.............. 1,017 -- --
Contract Termination Provision........................ -- -- 5,193
Mobilization Expense Amortization..................... 314 519 544
Gain on Disposition of Assets......................... (3,694) (2,666) (665)
Amortization of Debt Issue Costs...................... 462 -- --
Other................................................. 279 71 (829)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable................................. (19,907) (3,728) 9,690
Inventories......................................... (1,667) 1,612 (3,597)
Drilling Contracts in Progress...................... (6,324) (6,261) (4,722)
Prepaid Insurance and Other Prepaid Expenses........ (10,688) 2,500 (1,583)
Investments in and Advances to Unconsolidated
Affiliates....................................... (928) 3,767 (2,184)
Deferred Charges and Other.......................... -- -- (454)
Accounts Payable and Other Accrued Expenses......... 18,256 4,546 2,667
--------- -------- --------
Net Cash Provided By Operating Activities........ 7,114 14,925 23,724
INVESTING ACTIVITIES:
Capital Expenditures..................................... (36,027) (11,687) (9,100)
Acquisition of Rigs and Related Equipment................ (108,477) (1,750) --
Acquisition of Equity Interest in Rig and Related
Equipment............................................. (3,237) -- --
Proceeds from Sale of Property and Equipment............. 6,856 372 5,917
Insurance Proceeds from Loss of Rig and Related
Equipment............................................. 292 14,308 --
Collection of Notes Receivable........................... 977 1,576 1,027
--------- -------- --------
Net Cash Provided By (Used In) Investing
Activities..................................... (139,616) 2,819 (2,156)
FINANCING ACTIVITIES:
Proceeds from Borrowings................................. 150,000 7,000 17,000
Payments on Borrowings................................... -- (7,000) (30,108)
Debt Issue Costs......................................... (5,309) -- --
Acquisition of Treasury Stock............................ (661) -- (5,096)
Proceeds from Exercise of Stock Options.................. 2,129 -- --
Payments for Redemption of Preferred Stock............... (850) -- --
Preferred Stock Dividends................................ (31) (2,659) (2,659)
--------- -------- --------
Net Cash Provided By (Used In) Financing
Activities..................................... 145,278 (2,659) (20,863)
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 12,776 15,085 705
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 26,405 11,320 10,615
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 39,181 $ 26,405 $ 11,320
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON STOCK OFFICERS
----------------- RETAINED FOR
PAR PAID-IN EARNINGS RESTRICTED RESTRICTED TREASURY
SHARES VALUE CAPITAL (DEFICIT) STOCK STOCK STOCK
--------- ----- -------- --------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.................. 4,513,104 $45 $ 99,133 $(26,292) $(232) $(103) $ (57)
Net Income.................................. -- -- -- 6,056 -- -- --
Treasury Stock Acquired..................... (427,000) -- -- -- -- -- (5,096)
Preferred Stock Dividends Declared.......... -- -- -- (2,659) -- -- --
Amortization of Restricted Stock............ -- -- -- -- -- 46 --
Employer Contributions to 401(k) Savings
Plan...................................... 3,343 -- 2 -- -- -- 38
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1994.................. 4,089,447 45 99,135 (22,895) (232) (57) (5,115)
========= === ======== ======== ===== ===== =======
Net Income.................................. -- -- -- 5,446 -- -- --
Preferred Stock Dividends Declared.......... -- -- -- (2,659) -- -- --
Amortization of Restricted Stock............ -- -- -- -- -- 25 --
Employer Contributions to 401(k) Savings
Plan...................................... 23,620 -- 51 -- -- -- 271
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1995.................. 4,113,067 45 99,186 (20,108) (232) (32) $(4,844)
========= === ======== ======== ===== ===== =======
Net Income.................................. -- -- -- 14,422 -- -- --
Preferred Stock Conversion.................. 2,113,557 21 27,879 -- -- -- --
Preferred Stock Dividends Declared.......... -- -- -- (31) -- -- --
Common Stock Issued in Connection with
Offshore Rig Acquisitions................. 1,200,000 12 22,203 -- -- -- --
Restricted Stock Issuance................... 6,750 -- 220 -- -- (220) --
Acquisition of Treasury Stock............... (43,000) -- -- -- -- -- (661)
Collection of Officers' Notes Receivable.... -- -- -- -- 46 -- --
Amortization of Restricted Stock............ -- -- -- -- -- 29 --
Exercise of Stock Options................... 158,025 2 2,127 -- -- -- --
Tax Benefit Associated with Exercise of
Stock Options............................. -- -- 1,603 -- -- -- --
Employer Contributions to 401(k) Savings
Plan...................................... 18,105 -- 295 -- -- -- 206
--------- --- -------- -------- ----- ----- -------
BALANCE AT DECEMBER 31, 1996.................. 7,566,504 $80 $153,513 $(5,717) $(186) $(223) $(5,299)
========= === ======== ======== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure and Principles of Consolidation
The accompanying consolidated financial statements include the activities
and accounts of Cliffs Drilling Company (the "Company"), all wholly-owned
subsidiaries of the Company and the Company's Venezuelan activities, which are
organized as a foreign branch. The Company uses the equity method to account for
affiliates in which it does not have control. All significant intercompany
transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company's policy is to invest cash in short-term investments.
Uninvested cash balances are kept at minimum levels. Investments are valued at
cost, which approximates market. The Company considers all highly liquid cash
investments with a maturity date of three months or less when purchased to be
cash equivalents.
Inventories
Inventories, consisting principally of tubular goods consumed in turnkey
drilling operations and spare drilling parts, are carried at cost, specific
identification method.
Drilling Contracts in Progress
The Company recognizes revenues and expenses related to its turnkey
drilling contracts when all terms and conditions of the contract have been
fulfilled. Consequently, the costs related to in-progress turnkey drilling
contracts are deferred as drilling contracts in progress until the contract is
completed and revenue is realized. The amount of drilling contracts in progress
is dependent on the volume of contracts, the duration of the contract at the end
of the reporting period and the contract amount. Provision for losses on
incomplete contracts is made when such losses are anticipated.
Rig Mobilization and Demobilization Costs
The Company defers costs of moving a drilling unit or MOPU under contract
to a new area of operation. The deferred mobilization costs are amortized on a
straight-line basis over the term of the applicable drilling contract.
Unamortized mobilization costs were $24,000 and $338,000 at December 31, 1996
and 1995, respectively.
Demobilization charges, in general, are reimbursed by the customer based
upon contract terms. In situations where demobilization charges are not
reimbursed and are expected to be material, estimated demobilization costs are
accrued over the term of the applicable contract. Unanticipated demobilization
costs are expensed as incurred at the completion of the contract.
Revenue Recognition
The Company recognizes revenues from its daywork drilling and MOPU
operations based upon the contracted daily rate multiplied by the number of
operating days in the period. Turnkey drilling contract revenues are recognized
when all terms and conditions of the contract have been fulfilled. The Company
recognizes oil and gas revenues from its interests in producing wells based upon
the sales method.
Each of the 3 MOPUs which worked in Venezuela had an initial contract term
of two years expiring in 1994, subject to certain buyout options. The buyout
options could have been exercised at any time during the contract term.
30
<PAGE> 32
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the Company believed there was a reasonable likelihood that the buyout
options on 2 of the units would be exercised in 1994, the Company deferred
income recognition on these 2 units to the extent of potential losses that could
occur upon exercise of the options. The deferral of income recognition is
reflected as "Contract Termination Provision" in the Consolidated Statements of
Operations.
Property and Equipment
Property and equipment are carried at original cost or at adjusted net
realizable value, as applicable. Major renewals and betterments are capitalized
in the property accounts, while the cost of repairs and maintenance is charged
to operating expenses in the period incurred.
The Company records expenditures made on significant projects as
construction in progress ("CIP") until the assets are ready for their intended
use. No depreciation expense is recorded on amounts included in CIP.
Interest on funds borrowed for construction of qualifying assets is
capitalized during the construction period. Amortization of capitalized interest
is included in "Depreciation, Depletion and Amortization" in the Consolidated
Statements of Operations.
Cost and accumulated depreciation, depletion and amortization are removed
from the accounts when assets are sold or retired, and the resulting gains or
losses are included in the Consolidated Statements of Operations.
Depreciation of property and equipment is provided on the straight-line
basis at rates based upon expected useful lives of the various classes of
assets.
To provide for any deterioration that may occur while the rigs are not
operating for an extended period of time, a minimum depreciation charge is
provided at a reduced rate of 25% of the normal depreciation rate.
Costs related to the exploration and development of oil and gas properties
are accounted for under the "Successful Efforts" method of accounting. Lease
acquisition costs related to oil, gas and mineral properties are capitalized
when incurred. The acquisition costs of unproved properties, which are
individually significant, are assessed on a property-by-property basis, and a
loss is recognized by provision of a valuation allowance when the assessment
indicates an impairment in value. Exploration costs, excluding exploratory
wells, are charged to expense as incurred. Costs of drilling exploratory wells
are capitalized pending determination as to whether the wells have proved
reserves which justify commercial development. If commercial reserves are not
found, the drilling costs are charged to dry hole expense. Tangible and
intangible drilling costs applicable to productive exploratory wells and to the
development of oil and gas reserves are capitalized.
The cost of productive leaseholds is amortized by field on the unit of
production basis by applying the ratio of produced oil and gas to estimated
proved reserves. Lease and well equipment and intangible drilling costs
associated with productive wells are amortized based on proved developed
reserves.
Impairment of Long-Lived Assets
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") which
requires that certain long-lived assets be reviewed for impairment whenever
events indicate that the carrying amount of an asset may not be recoverable, and
that an impairment loss be recognized under certain circumstances in the amount
by which the carrying value exceeds the fair value of the asset. SFAS No. 121
requires assets to be grouped, for purposes of evaluating potential impairment
of assets, at the lowest level for which there are identifiable cash flows.
Previously, the Company evaluated impairment of its oil and gas assets on an
aggregate Company-wide basis, rather than a disaggregate basis. Upon the
issuance of SFAS No. 121 and receipt of an annual independent petroleum
engineering report, the Company began its analysis of impairment under the new
guidelines. This evaluation indicated that the undiscounted estimated future
cash flows attributable to the proved oil and gas reserves of one property were
less than its carrying amount. Accordingly, the Company recorded a $737,000
charge in
31
<PAGE> 33
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 to write the impaired property down to its fair value. The impairment loss
is included in "Depreciation, Depletion and Amortization" in the Consolidated
Statements of Operations.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." Deferred
income taxes are provided on items recognized in different periods for financial
and tax reporting purposes. See Note 6 of Notes to Consolidated Financial
Statements.
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 years. 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 was not included in the
primary earnings per share computation as it was not a common stock equivalent.
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 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, $.01 par value ("Common Stock"), upon
conversion of the Preferred Stock. See Note 10 of Notes to Consolidated
Financial Statements. Primary earnings per share in 1995 would have been $0.88
if the conversions had taken place at the beginning of 1995.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Under APB 25, no compensation expense is
recognized for an employee stock option when the exercise price equals the
market price of the underlying stock on the date of grant. Effective January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). As provided in the
statement, the Company elected to continue to measure compensation expense using
the guidelines of APB 25 and to include disclosures of net income and earnings
per share as if the fair value based method of accounting were utilized. See
Note 9 of Notes to Consolidated Financial Statements.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company's
operations. Foreign currency gains and losses are included in the Consolidated
Statements of Operations during the period incurred.
Concentration of Credit Risk
The market for the Company's services is the oil and gas industry, and the
Company's customers consist primarily of integrated and government-owned
international oil companies and independent oil and gas producers. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade receivables. The Company has in place insurance
to cover certain exposure in its foreign operations and provides allowances for
potential credit losses when necessary. Accordingly, management considers such
credit risk to be limited.
Change in Presentation
Certain financial statement items have been reclassified in prior years to
conform with the current year presentation.
32
<PAGE> 34
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTES AND OTHER RECEIVABLES, LONG-TERM
Effective January 1, 1993, the Company sold its 4 inland posted barge
drilling rigs and rights to certain oil and gas production payment proceeds
generated from a proceeds-of-production drilling program for an aggregate sales
price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000 in notes.
The first note had a face amount of $1,000,000, with interest calculated at the
base rate on corporate loans as quoted by the Wall Street Journal, and was
repaid in March, 1995. Interest was due and payable semi-annually and commenced
June 30, 1993. The second note has a face amount of $7,500,000, bears interest
at the base rate on corporate loans as quoted by the Wall Street Journal plus
one and one-half percent (1 1/2%), and matures on January 1, 1998. Principal and
interest on the $7,500,000 note is payable on a monthly basis solely from the
proceeds of the oil and gas production payment which secures the note. At
December 31, 1996, the remaining note receivable balance was $3,510,000.
3. PROPERTY AND EQUIPMENT
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 $28,500,000 in cash.
On June 19, 1996, Cliffs Drilling 11 completed its two-year bareboat
charter as a workover rig in the U.S. Gulf of Mexico and the charterer exercised
its option to purchase the unit for $5,392,000, resulting in a gain of
$2,684,000. 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 (the
"WINDJV"), a joint venture between Cliffs Drilling Trinidad Limited and Well
Services (Marine) Limited, which owns an additional jack-up drilling rig, and
their related assets (collectively referred to as the "Southwestern Rigs")
operated by Southwestern Offshore Corporation ("Southwestern"). The purchase
price of the Southwestern Rigs was (a) $103,800,000 in cash (after reductions of
$6,200,000 for required refurbishments of certain Southwestern Rigs not made
prior to closing) plus (b) issuance of 1,200,000 shares of the Company's Common
Stock, and (c) assumption of certain contractual liabilities, including the
Company's guarantee of $4,250,000 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 $4,500,000. The Company
renamed this unit Cliffs Drilling 155, which is currently operating in
Venezuela. On September 30, 1996, the Company acquired a land rig from Quarles
Drilling Corp. for $2,850,000, which has been refurbished and is expected to
commence operations in Venezuela during the second quarter of 1997.
During 1995, the Company purchased and renovated a 3000 HP land rig, Cliffs
Drilling 54, for $9,101,000. The unit is currently operating in Venezuela on a
daywork basis. 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 was attributed to an earthquake in Venezuela
in May, 1994. The rig was declared a constructive total loss by the Company's
insurance underwriters. The Company received $14,600,000 from its insurance
underwriters for damages to the MARQUETTE. The Company has scrapped the rig and
salvaged various rig equipment for use on other rigs or to sell. The Company
recognized a $2,715,000 pre-tax gain on the disposition of the unit during 1995.
Interest capitalization associated with rig refurbishments during the year
ended December 31, 1996 totaled $730,000.
33
<PAGE> 35
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Cliffs Neddrill Central Turnkey International ("CNCTI"), a joint venture
among the Company, Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A.
de C.V., was awarded a contract for one turnkey bid package to drill 4 turnkey
wells in the Bay of Campeche, Mexico. Drilling operations commenced in February,
1993. CNCTI was subsequently awarded 2 turnkey bid packages for 2 wells each in
the Bay of Campeche and the Bay of Tampico, Mexico. One and 5 turnkey contracts
were completed by CNCTI during the years ended December 31, 1995 and 1994,
respectively. The Company's one-third interest in CNCTI is recorded under the
equity method. CNCTI completed drilling operations in Mexico during 1995. The
following information summarizes the unaudited Statements of Operations and
Balance Sheets of CNCTI:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------ --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................ $(10) $24,052 $66,717
Operating expenses...................................... (18) 26,638 58,338
---- ------- -------
Operating income (loss)............................... 8 (2,586) 8,379
Other, net.............................................. (77) 433 (1,525)
---- ------- -------
Net income (loss)..................................... $(69) $(2,153) $ 6,854
==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
---- ------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Current assets.............................................. $844 $3,819
Noncurrent assets........................................... -- 16
---- ------
Total assets.............................................. $844 $3,835
==== ======
Current liabilities......................................... $ 34 $2,580
Equity...................................................... 810 1,255
---- ------
Total liabilities and equity.............................. $844 $3,835
==== ======
</TABLE>
5. NOTES PAYABLE
Long-term debt at December 31, 1996 consists solely of 10.25% Senior Notes
due 2003 (the "Senior Notes") in the aggregate principal amount of $150,000,000.
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.
On or after May 15, 2000, the Senior Notes are redeemable at the option of
the Company, in whole or in part, at a price of 105% of principal if redeemed
during the twelve months beginning May 15, 2000, at a price of 102.5% of
principal if redeemed during the twelve months beginning May 15, 2001, or at a
price of 100% of principal if redeemed after May 15, 2002, in each case together
with interest accrued to the redemption date. Notwithstanding the foregoing, the
Company may at its option use all or a portion of the proceeds from a public
equity offering consummated on or prior to May 15, 1999, to redeem up to
$37,500,000 principal amount of the Senior Notes at a redemption price equal to
110% of the principal amount.
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. The Senior Notes are unconditionally guaranteed (the
"Subsidiary Guarantees") on a senior unsecured basis by the Company's principal
subsidiaries (the "Subsidiary
34
<PAGE> 36
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Guarantors"), and the Subsidiary Guarantees rank pari passu in right of payment
with all senior indebtedness of the Subsidiary Guarantors and senior to all
subordinated indebtedness of the Subsidiary Guarantors. The Subsidiary
Guarantees may be released under certain circumstances. The Senior Notes and the
Subsidiary Guarantees are effectively subordinated to all secured indebtedness,
including amounts outstanding under the Revolving Credit Facility. The
Subsidiary Guarantees provide that each Subsidiary Guarantor will
unconditionally guarantee, jointly and severally, the full and prompt
performance of the Company's obligations under the indenture and the Senior
Notes. Each Subsidiary Guarantor is 100% owned by the Company.
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, make capital expenditures, create
liens, sell assets and make dividends or other payments.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined such
financial statements and other disclosures are not material to investors. The
assets, equity, income and cash flows of the non-guarantor subsidiaries on an
individual and combined basis are less than 1% of the consolidated assets,
equity, income and cash flows, respectively, of the Company and are
inconsequential. The combined condensed financial information of the Company's
Subsidiary Guarantors is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1996 1995
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Current Assets.............................................. $ 19,798 $1,287
Non-Current Assets.......................................... 140,042 4,936
-------- ------
Total Assets.............................................. $159,840 $6,223
======== ======
Current Liabilities......................................... $ 8,078 $ 657
Non-Current Liabilities..................................... 135,499 82
Equity...................................................... 16,263 5,484
-------- ------
Total Liabilities and Equity.............................. $159,840 $6,223
======== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $51,081 $1,921 $4,655
Operating Income (Loss)................................ $14,224 $ (787) $ (291)
Net Income (Loss)...................................... $ 5,264 $ (531) $ (155)
</TABLE>
The Company executed the Second Restated Credit Agreement with
International Nederlanden (U.S.) Capital Corporation, now known as ING (U.S.)
Capital Corporation ("ING") during the first quarter of 1994, thereby converting
its $10,000,000 working capital credit facility to a $20,000,000 revolving line
of credit ("Revolving Credit Facility") subject to certain borrowing base
limitations. All advances to the Company from the Revolving Credit Facility bear
interest at one-quarter of one percent ( 1/4%) per annum plus the greater of the
prevailing Federal Funds Rate plus one-half percent ( 1/2%) or a referenced
average prime rate; or at the adjusted LIBOR rate plus two percent (2%) per
annum. The foregoing rates are subject to an increase of one-half percent
( 1/2%) in the event certain financial criteria are not met. The Company is also
obligated to pay ING (i) a commitment fee equal to one-half percent ( 1/2%) per
annum on the average daily unadvanced portion of the commitments and (ii) a
letter of credit fee of two percent (2%) per annum on the average daily undrawn
and unexpired amount of each letter of credit during the period that sum remains
outstanding.
35
<PAGE> 37
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 27, 1996, the Company and ING modified and amended the $20,000,000
Revolving Credit Facility to, among other things, increase the amount available
under such facility to $35,000,000. The Revolving Credit Facility matures on May
31, 1998. At December 31, 1996, the Company had no indebtedness outstanding
under the Revolving Credit Facility.
The Revolving Credit Facility is secured by accounts receivable, rig
inventory, equipment, certain oil and gas properties and the stock of certain
subsidiaries of the Company. Under the Second Restated Credit Agreement with
ING, as amended, the Company is required to comply with various covenants
including, but not limited to, the maintenance of various financial ratios, and
is restricted from declaring, making or paying any dividends on the Common
Stock.
Availability and borrowings under the Revolving Credit Facility are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit available................................ $32,583 $19,460
Short-term borrowings outstanding....................... -- --
Letters of credit outstanding........................... 2,417 540
</TABLE>
Interest payments on all indebtedness amounted to $7,527,000, $198,000 and
$919,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
6. INCOME TAXES
In prior years, the Company incurred net operating losses resulting in tax
net operating loss carryforwards which were available to offset taxable income
in future years. The Company utilized its net operating loss carryforwards in
1995 and 1996 and at December 31, 1996, the Company had net operating loss
carryforwards of $1,407,000 for regular tax purposes and $4,290,000 for
alternative minimum tax purposes which expire during the years 1998 through
2009. In addition, the Company has $3,811,000 of foreign tax credit
carryforwards at December 31, 1996 which expire during the years 1998 through
2001. For financial reporting purposes, a valuation allowance of $1,589,000 and
$2,309,000 at December 31, 1996 and 1995, respectively, is provided to reduce
the deferred tax assets related to these tax carryforward and credit items to a
level which, more likely than not, will be realized. The valuation allowance was
reduced by $720,000 from December 31, 1995 to December 31, 1996 to reflect the
expected use of foreign tax credits which were previously reserved as well as
the use of tax assets in the reduction of current year liabilities.
The Company provided for $6,996,000 of income taxes for the year ended
December 31, 1996. This amount is comprised of a current provision of $1,812,000
for U.S. alternative minimum taxes and taxes paid in foreign jurisdictions and
deferred income taxes of $5,184,000. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income tax
purposes. The significant components of deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $ 7,235 $ 5,434
Section 461(H) prepaid expenses........................... 2,593 --
Undistributed earnings of subsidiaries.................... 250 --
------- -------
Total deferred tax liabilities.................... 10,078 5,434
</TABLE>
36
<PAGE> 38
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Foreign tax credits....................................... 3,811 2,450
Minimum tax credits....................................... 641 500
Accounts receivable reserves.............................. 279 279
Net operating loss carryforwards.......................... 492 1,568
Unused investment tax credits............................. -- 482
Percentage depletion carryforward......................... 678 678
Other, net................................................ 738 339
------- -------
Total deferred tax assets......................... 6,639 6,296
Valuation allowance for deferred tax assets................. (1,589) (2,309)
------- -------
Net deferred tax assets................................... 5,050 3,987
------- -------
Net deferred tax liabilities........................... $ 5,028 $ 1,447
======= =======
</TABLE>
The deferred tax liability balance at December 31, 1996 totaled $5,028,000,
net of $1,603,000 related to the tax benefit associated with the exercise of
non-qualified stock options during 1996, which is reflected as a component of
shareholders' equity.
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes:
United States......................................... $ 992 $ 125 $ 807
Foreign............................................... 20,426 7,727 6,039
------- ------ ------
Total......................................... $21,418 $7,852 $6,846
======= ====== ======
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $ 144 $ 100 $ --
Foreign................................................ 1,668 458 1,190
------ ------ ------
Total Current.................................. 1,812 558 1,190
Deferred:
Federal................................................ 5,184 1,848 (400)
Foreign................................................ -- -- --
------ ------ ------
Total Deferred................................. 5,184 1,848 (400)
------ ------ ------
$6,996 $2,406 $ 790
====== ====== ======
</TABLE>
37
<PAGE> 39
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rates........................... $ 7,496 $2,748 $ 2,396
Foreign tax provision................................. 1,668 458 1,190
Foreign tax credits available......................... (1,361) -- (1,190)
Foreign tax credits available from equity
investments......................................... -- -- (537)
Alternative minimum tax provision..................... 144 100 --
Alternative minimum credits available................. (144) (100) --
Percentage depletion available........................ -- -- (506)
Change in valuation allowance......................... (720) (368) (466)
Safe harbor lease termination......................... -- (897) --
Other, net............................................ (87) 465 (97)
------- ------ -------
Income tax expense.......................... $ 6,996 $2,406 $ 790
======= ====== =======
</TABLE>
Income tax payments amounted to $1,854,000, $531,000 and $982,000 for the
years ended December 31, 1996, 1995 and 1994.
7. 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 $150,000,000 of
Senior Notes and the issuance of 1,200,000 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 years
ended December 31, 1996 and 1995. The historical financial statements of
Southwestern include the operating results of the Southwestern Rigs during the
periods indicated to the date of acquisition, May 23, 1996. However, the
financial statements of Southwestern exclude depreciation expense related to the
Southwestern Rigs because Southwestern managed, rather than owned, the rigs. The
historical results of Southwestern include the results of operations of the rigs
that were available for service during the indicated periods. During the year
ended December 31, 1995, 40% of the Southwestern Rigs were not available for
service as a result of being cold stacked or refurbished.
The pro forma financial information for the year ended December 31, 1996
was prepared assuming that the transactions described above were consummated as
of January 1, 1995. 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. The unaudited Pro Forma
Consolidating Statements of Operations for the year ended December 31, 1995 are
included in the Company's current report on Form 8-K dated May 23, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $147,672 $108,854
Net Income (Loss)...................................... 10,273 (7,937)
Net Income (Loss) Per Share............................ $ 1.38 $ (2.00)
</TABLE>
38
<PAGE> 40
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan ("401(k) Plan"). Under the
401(k) Plan, an employee who has reached age 21 and completed 90 days of service
is eligible to participate in the plan through contributions that range in one
percent multiples up to 16% of salary, with a 1996 dollar maximum of $9,500. In
addition, the Company contributes (or "matches") on behalf of each participant
an amount equal to 100% of the portion of each participant's contribution which
does not exceed 6% of the participant's annual salary. Employer contributions
for certain highly compensated employees may be further limited through the
operation of the non-discrimination requirements found in Sections 401(k) and
401(m) of the Internal Revenue Code.
Employee contributions can be invested in any or all of 6 investment
options in multiples of 5%. Employer contributions are invested in the Company's
Common Stock. Employee contributions are 100% vested and non-forfeitable.
Employer contributions are subject to a graded vesting schedule, with
participants becoming fully vested upon completion of five years employment
service with the Company. Distributions from the 401(k) Plan are made upon
retirement, death, disability or separation of service. Participants may borrow
up to one-half ( 1/2) of their vested interest in the plan, limited to a maximum
of $50,000. Contributions to the 401(k) Plan and earnings on contributions are
not included in a participant's gross income until distributed to the
participant. Contributions to the 401(k) Plan by the Company were $413,000,
$365,000 and $302,000 for the years 1996, 1995 and 1994, respectively.
9. CAPITAL STOCK
The Company's Revolving Credit Facility and the indenture governing the
Senior Notes of the Company restrict payment of dividends on the Common Stock.
Specifically, the indenture restricts the payment of dividends based on (i)
availability of funds under a formula based on previously unapplied cumulative
net income since April 1, 1996 plus certain stock sale proceeds raised after May
15, 1996 plus $10,000,000, (ii) satisfaction of the then applicable minimum
interest coverage ratio for debt incurrence. Cumulative net income for purposes
of the test excludes gains or losses on asset sales and certain other
non-recurring charges or credits as specified in the indenture. Although the
Company was not prohibited from paying cash dividends under the terms of the
indenture as of December 31, 1996, management does not intend to declare any
cash dividends in the foreseeable future.
The Company has a 1988 Incentive Equity Plan under which stock options,
stock appreciation rights, restricted stock and deferred stock awards for up to
650,000 shares of the Company's Common Stock may be awarded to officers,
directors and key employees. The Company's 1988 Incentive Equity Plan is
designed to attract and reward key executive personnel.
Stock options granted pursuant to the 1988 Incentive Equity Plan expire not
more than ten years from the date of grant and typically vest over three years,
with 50% vesting after one year and 25% vesting in each of the next two
succeeding years. All of the options granted by the Company were granted at an
option price equal to the fair market value of the Common Stock at the date of
grant.
39
<PAGE> 41
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the number of outstanding options on the Company's Common Stock
are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES UNDER EXERCISE PRICE
OPTION (PER SHARE)
------------ --------------
<S> <C> <C>
Outstanding Options at December 31, 1993.......... 265,700 $13.42
Granted......................................... 7,500 $12.00
Canceled........................................ (11,000) $13.98
--------
Outstanding Options at December 31, 1994.......... 262,200 $13.36
Canceled........................................ (2,200) $13.69
--------
Outstanding Options at December 31, 1995.......... 260,000 $13.36
Granted......................................... 184,000 $27.64
Exercised....................................... (158,025) $13.47
Canceled........................................ (250) $12.88
--------
Outstanding Options at December 31, 1996.......... 285,725 $22.49
========
Exercisable, December 31,
1994............................................ 215,950 $13.51
1995............................................ 237,625 $13.42
1996............................................ 99,850 $13.20
</TABLE>
At December 31, 1996, the following options were outstanding and
exercisable and had the indicated remaining contractual life:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
SHARES SHARES EXERCISE PRICE EXERCISE PRICE CONTRACTUAL
OUTSTANDING EXERCISABLE (PER SHARE) (PER SHARE) LIFE
- ----------- ----------- --------------- ---------------- -----------
<C> <C> <C> <C> <C>
22,500 22,500 $13.80 - $14.25 $14.14 1 - 4
75,475 75,475 $12.13 - $13.25 $12.95 5 - 7
187,750 1,875 $12.00 - $28.00 $27.32 7 - 10
------- ------
285,725 99,850
======= ======
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1995
----- ----
<S> <C> <C>
Weighted Average Risk-Free Interest Rate.................... 6.3% N/A
Dividend Yield.............................................. 0.0% N/A
Weighted Average Stock Price Volatility Factor.............. 41.7% N/A
Expected Life of the Options (Years)........................ 4 N/A
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The calculated
weighted average fair value of options granted during 1996 was $11.33.
40
<PAGE> 42
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. This pro forma
financial information is calculated in accordance with SFAS 123, but is not
likely to be representative of the effects on reported net income in future
years. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
-------- -----
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
Pro Forma Net Income........................................ $13,973 N/A
Pro Forma Net Income Per Share.............................. $ 2.02 N/A
</TABLE>
The Company's Board of Directors has awarded restricted stock to the
Company's officers and key employees from time to time. One award of 5,000
shares was made in the three-year period ended December 31, 1996. Restrictions
on the 1996 award lapse with respect to 33 1/3% of the entire award after one
year and after each of the succeeding two years. Expense related to amortization
of restricted stock was $29,000, $25,000 and $46,000 for the years 1996, 1995
and 1994, respectively. Deferred compensation expense relative to non-vested
shares of restricted stock, measured by the market value of the stock on the
date of grant, is being amortized on a straight-line basis over the restriction
period. The unamortized deferred compensation expense, which has been deducted
from equity in the Consolidated Balance Sheets, amounted to $223,000 and $32,000
at December 31, 1996 and 1995, respectively.
Effective December 31, 1992, the Company's Board of Directors approved the
sale of 17,500 shares of restricted Common Stock to certain key executives. The
price paid for the restricted stock was $13.25 per share. The Company extended
full recourse, interest-bearing loans to the key executives in the aggregate
amount of $232,000. The promissory notes bear interest at seven and one-half
percent (7 1/2%) per annum payable quarterly as it accrues on the last day of
March, June, September and December until the notes are due on December 31,
1997. Additional shares of deferred stock will be awarded on December 31, 1997
if certain performance criteria are attained by the Company. Compensation
expense related to the deferred stock awards will be accrued in future years if
it becomes probable the Company performance criteria will be met. No such
compensation expense was accrued during the years ended December 31, 1996, 1995
and 1994.
10. REDEEMABLE PREFERRED STOCK
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 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 $881,000.
Holders of shares of the Preferred Stock had the option to convert any or all of
such shares of Preferred Stock into fully paid and nonassessable shares of
Common Stock of the Company prior to the redemption date at a rate of 1.89394
shares of Common Stock for each full share of Preferred Stock. No payment or
adjustment was made upon any conversion of shares of Preferred Stock on account
of any dividends on the shares surrendered for conversion, and the holder lost
any right to payment of dividends on the shares surrendered for conversion. No
fractional shares of Common Stock were issued upon conversion but, in lieu
thereof, an appropriate amount was paid in cash by the Company based upon the
reported last sales price for the shares of Common Stock on the date of
conversion. The right of holders of Preferred Stock to convert shares of
Preferred Stock into Common Stock terminated on the redemption date.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its headquarters office, office equipment and other
items under operating leases expiring at various dates during the next five
years. Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases. Total rent expense under
operating leases was $856,000, $560,000 and
41
<PAGE> 43
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$583,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Minimum future obligations under non-cancelable operating leases at December 31,
1996 for the following five years are $1,022,000, $762,000, $662,000, $177,000
and $8,000, respectively.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incidental to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position or results of operations of the Company.
12. BUSINESS SEGMENTS
During the three years ended December 31, 1996, the Company conducted the
following business activities:
Daywork Drilling -- domestic and foreign drilling of oil and gas wells
on a dayrate basis for major and independent oil and gas companies on land,
inland waters and offshore.
Engineering Services -- domestic and foreign drilling of oil and gas
wells on a turnkey basis for major and independent oil and gas companies on
land, inland waters and offshore and foreign well engineering and
management services.
MOPU Operations -- domestic and foreign operation of mobile offshore
production units on a dayrate basis for major and independent oil and gas
companies.
Oil and Gas -- domestic exploration, development and production of
hydrocarbon reserves.
42
<PAGE> 44
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DEPRECIATION,
OPERATING DEPLETION
INCOME IDENTIFIABLE CAPITAL AND
REVENUES (LOSS) ASSETS EXPENDITURES AMORTIZATION
-------- --------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1996
Daywork Drilling.................. $ 77,882 $23,048 $257,555 $158,650 $ 9,021
Engineering Services.............. 60,517 8,036 42,521 -- 32
MOPU Operations................... 4,329 2,872 35,661 7,719 793
Oil and Gas....................... 1,156 (3,108) 3,809 350 654
Corporate Office.................. -- (6,411) -- -- 111
Eliminations...................... (10,775) -- -- -- (223)
-------- ------- -------- -------- -------
Consolidated...................... $133,109 $24,437 $339,546 $166,719 $10,388
======== ======= ======== ======== =======
December 31, 1995
Daywork Drilling.................. $ 26,363 $ 2,761 $ 56,639 $ 11,814 $ 4,193
Engineering Services.............. 56,970 2,609 37,302 -- 30
MOPU Operations................... 4,920 2,492 30,017 825 1,360
Oil and Gas....................... 2,788 541 5,004 798 1,732
Corporate Office.................. -- (5,387) -- -- 98
Eliminations...................... (7,752) -- -- -- (142)
-------- ------- -------- -------- -------
Consolidated...................... $ 83,289 $ 3,016 $128,962 $ 13,437 $ 7,271
======== ======= ======== ======== =======
December 31, 1994
Daywork Drilling.................. $ 32,481 $ 7,100 $ 64,004 $ 5,692 $ 6,535
Engineering Services.............. 36,079 3,581 19,195 -- 18
MOPU Operations................... 16,020 4,415 31,854 3,263 4,617
Oil and Gas....................... 2,470 (1,439) 5,115 146 2,785
Corporate Office.................. -- (5,184) -- -- 70
Eliminations...................... (3,357) (2) (1) (1) (17)
-------- ------- -------- -------- -------
Consolidated...................... $ 83,693 $ 8,471 $120,167 $ 9,100 $14,008
======== ======= ======== ======== =======
</TABLE>
Intersegment sales were $10,775,000, $7,752,000 and $3,357,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Such intersegment
sales were accounted for at prices comparable to unaffiliated customer sales.
Identifiable assets by industry segment include assets directly identified
with those operations. Capital expenditures for the year ending December 31,
1996 include $22,215,000 of non-cash investing activity related to 1,200,000
shares of Common Stock issued in connection with the acquisition of the
Southwestern Rigs.
43
<PAGE> 45
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company derived a significant amount of its revenues from a few
customers in each of the three years ended December 31, 1996. The following
table summarizes information with respect to these major customers.
<TABLE>
<CAPTION>
% OF
CONSOLIDATED
CUSTOMER REPORTING SEGMENT REVENUES
-------- ----------------- ------------
<S> <C> <C>
December 31, 1996
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 31%
December 31, 1995
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 35%
Daywork Drilling and Engineering
Maraven, S.A......................... Services 19%
Texaco Exploration &
Production, Inc. ................. Engineering Services 12%
December 31, 1994
Daywork Drilling and Engineering
Corpoven, S.A........................ Services 32%
Maraven, S.A......................... Daywork Drilling 18%
Dresser-Rand......................... MOPU Operations 14%
Daywork Drilling and Engineering
CNCTI................................ Services 14%
</TABLE>
The Company settled its take-or-pay litigation with Columbia Gas
Transmission Corp., a subsidiary of Columbia Gas System Inc. ("Columbia Gas")
during 1995. The Company received $1,377,000 related to the settlement, which is
included in oil and gas revenues.
44
<PAGE> 46
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DISTRIBUTION OF EARNINGS AND ASSETS
The following table sets forth financial information with respect to the
Company and its subsidiaries on a consolidated basis by geographical area.
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUES INCOME ASSETS
-------- --------- ------------
<S> <C> <C> <C>
December 31, 1996
United States.......................................... $ 59,961 $ 6,874 $220,520
Venezuela.............................................. 56,242 14,639 58,890
Mexico................................................. 793 635 7,250
Other.................................................. 16,113 8,589 52,886
Corporate Overhead..................................... -- (6,300) --
-------- ------- --------
Total.......................................... $133,109 $24,437 $339,546
======== ======= ========
December 31, 1995
United States.......................................... $ 30,783 $ 2,178 $ 82,934
Venezuela.............................................. 51,308 5,881 45,434
Mexico................................................. 543 25 594
Other.................................................. 655 221 --
Corporate Overhead..................................... -- (5,289) --
-------- ------- --------
Total.......................................... $ 83,289 $ 3,016 $128,962
======== ======= ========
December 31, 1994
United States.......................................... $ 18,092 $ 1,523 $ 55,034
Venezuela.............................................. 53,809 4,412 53,623
Mexico................................................. 11,785 7,645 11,510
Other.................................................. 7 5 --
Corporate Overhead..................................... -- (5,114) --
-------- ------- --------
Total.......................................... $ 83,693 $ 8,471 $120,167
======== ======= ========
</TABLE>
45
<PAGE> 47
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for the years ended December 31, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Revenues.............................. $29,078 $13,778 $43,497 $46,756(1)
Operating Income...................... 4,331 2,461 9,585 8,060(1)
Net Income............................ 3,700 1,985 4,309 4,428(1)
Net Income Applicable to Common and
Common Equivalent Shares............ 3,669 1,985 4,309 4,428(1)
Net Income per Share:
Primary............................. $ 0.62 $ 0.29 $ 0.57 $ 0.58(1)
1995:
Revenues.............................. $14,282 $13,953 $20,036 $35,018(2)
Operating Income (Loss)............... 1,418 (1,010) 917 1,691(2)(3)
Net Income (Loss)..................... 1,120 (785) 1,646 3,465(2)(3)
Net Income (Loss) Applicable to Common
and Common Equivalent Shares........ 455 (1,450) 981 2,801(2)(3)
Net Income (Loss) per Share:
Primary............................. $ 0.11 $ (0.35) $ 0.24 $ 0.68(2)(3)
Assuming Full Dilution.............. $ 0.11 $ (0.35) $ 0.24 $ 0.55(2)(3)
</TABLE>
- ---------------
(1) During the second quarter of 1996, the Company did not complete any turnkey
wells in its Engineering Services division. Fourth quarter 1996 results
include $2,941,000 in costs associated with an unsuccessful well drilled by
the Company's oil and gas business segment.
(2) Fourth quarter 1995 results include oil and gas revenues of $1,377,000
related to the Columbia Gas settlement.
(3) Fourth quarter 1995 results include net exchange rate gains of $1,169,000,
net gains on disposition of assets of $2,713,000, primarily related to the
constructive total loss of the jack-up drilling rig MARQUETTE and impairment
expenses of $737,000 related to oil and gas property write-downs.
46
<PAGE> 48
SCHEDULE II
CLIFFS DRILLING COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
========================================================================================================
BALANCE CHARGED
AT TO COSTS BALANCE
BEGINNING AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
--------- -------- ---------- -------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1996............................................... $797 $ -- $ -- $797
==== ==== ===== ====
1995............................................... $408 $400 $ (11) $797
==== ==== ===== ====
1994............................................... $697 $200 $(489) $408
==== ==== ===== ====
</TABLE>
47
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 among Cleveland- Cliffs Inc ("Cleveland"),
The Cleveland-Cliffs Iron Company, Cliffs Drilling
Company, now Cliffs Resources, Inc. ("Predecessor"),
Cliffs Exploration Company, now Cliffs Oil and Gas
Company ("COGC"), Cliffs Drilling International, Inc.
("International") and New Cliffs Drilling Company, now
Cliffs Drilling Company, the Registrant (the "Company")
(incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
2.2 -- Acquisition Agreement dated as of May 13, 1996 by and
among Southwestern Offshore Corporation, Viking Supply
Ships A.S., Ocean Master III Inc., Production Partner
Inc., Trivium Investments Limited, Helge Ringdal and the
Company, Cliffs Drilling Asset Acquisition Company and
Cliffs Drilling Merger Company (incorporated by reference
to Exhibit 2.2 to the Company's Current Report on Form
8-K filed June 6, 1996).
*2.3 -- 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.
*2.3.1 -- Amendment No. 1 dated as of January 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.
3.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
3.2 -- By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
4.1 -- Certificate of Incorporation of the Company (included as
Exhibit 3.1).
4.2 -- By-Laws of the Company (included as Exhibit 3.2).
4.3 -- Certificate of Designations of the Company's $2.3125
Convertible Exchangeable Preferred Stock (incorporated by
reference to Exhibit 4.3 to the Company's Form 10-K for
the fiscal year ended December 31, 1988).
4.3.1 -- Form of Notice of Redemption for the Holders of the
Company's $2.3125 Convertible Exchangeable Preferred
Stock (incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K filed December 22, 1995).
4.4 -- Form of Indenture between the Company and MTrust Corp.,
N.A., as Trustee, relating to the Company's 9 1/4%
Convertible Subordinated Debentures due 2013
(incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
4.5 -- Specimen form of 9 1/4% Convertible Subordinated
Debenture due 2013 (incorporated by reference to pages 13
to 20 of Exhibit 4.6 to the Company's Registration
Statement on Form S-1, No. 33-23508, filed under the
Securities Act).
4.6 -- Indenture dated as of May 15, 1996 among the Company, as
issuer, Cliffs Drilling Asset Acquisition Company, Cliffs
Drilling Merger Company, International and COGC, as
subsidiary guarantors, and Fleet National Bank, as
trustee (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K filed June 6, 1996).
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4.6.1 -- Supplemental Indenture dated as of July 11, 1996 among
the Company, as issuer, Southwestern Offshore Corporation
(f/k/a Cliffs Drilling Asset Acquisition Company), Cliffs
Drilling Merger Company, International, COGC and DRL,
Inc., as subsidiary guarantors, and Fleet National Bank,
as trustee (incorporated by reference to Exhibit 4.3.1 to
the Company's Registration Statement on Form S-4, No.
333-08273 filed July 17, 1996).
*4.6.2 -- Second Supplemental Indenture dated as of January 24,
1997 among the Company, as issuer, Southwestern Offshore
Corporation (f/k/a Cliffs Drilling Asset Acquisition
Company), Cliffs Drilling Merger Company, International,
COGC, DRL, Inc. and Greenbay Drilling Company Ltd., as
subsidiary guarantors, and Fleet National Bank, as
trustee.
4.7 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Cliffs Drilling Acquisition
Company, Cliffs Drilling Merger Company, International
and COGC, Jefferies & Company, Inc. and ING Baring (U.S.)
Securities, Inc. (incorporated by reference to Exhibit
4.4 to the Company's Current Report on Form 8-K filed
June 6, 1996).
4.8 -- Registration Rights Agreement dated as of May 23, 1996 by
and among the Company, Viking Supply Ships A.S. and
Production Partner Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K
filed June 6, 1996).
10.1 -- Reorganization and Distribution Agreement dated as of
June 8, 1988 (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.2 -- Tax Sharing Agreement dated as of June 21, 1988 between
Cleveland, Predecessor, COGC, International and the
Company (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.3 -- Benefits Agreement dated as of June 21, 1988 between
Cleveland, Predecessor and the Company (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-23508, filed under the
Securities Act).
10.4 -- Drilling Agreement dated January 17, 1986 between
Predecessor and TransAmerican Natural Gas Corporation,
Debtor and Debtor-in-Possession and Certain of its
Affiliates (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form 10, File No.
0-16703).
10.5 -- Agreement dated April 28, 1987, as amended by Additional
Agreements dated August 26, 1987, and February 12, 1988,
between Predecessor and Neddrill Nederland B.V.
(incorporated by reference to Exhibit 10.7 in the
Company's Registration Statement on Form 10, File No.
0-16703).
10.6 -- Agreement dated June 1, 1990, between International and
Neddrill Turnkey Drilling B.V. (incorporated by reference
to Exhibit 10.7.3 to the Company's Form 10-K for the
fiscal year ended December 31, 1990).
10.7 -- Cliffs Drilling Company 1988 Incentive Equity Plan
(incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.7.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.7.2 -- Amendment No. 2 dated May 20, 1993 to the Cliffs Drilling
Company 1988 Incentive Equity Plan (incorporated by
reference to Exhibit 10.7.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
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*10.7.3 -- Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling
Company 1988 Incentive Equity Plan.
10.8 -- Cliffs Drilling Company Incentive Bonus Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9 -- Cliffs Drilling Company Retention Plan for Salaried
Employees (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.9.1 -- Amendment No. 1 dated May 17, 1990 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.1 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.9.2 -- Amendment No. 2 dated May 21, 1992 to the Cliffs Drilling
Company Retention Plan for Salaried Employees
(incorporated by reference to Exhibit 10.9.2 to the
Company's Form 10-K for the fiscal year ended December
31, 1993).
10.10 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, No. 33-23508, filed under the Securities Act).
10.11 -- Form of Restricted Stock Award Agreement entered into
between the Company and certain key executive officers
(incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.11.1 -- Form of Restricted Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.10.1 to the Company's Form 10-K for the
fiscal year ended December 31, 1992).
10.11.2 -- Form of Deferred Stock Award Agreement dated as of
December 31, 1992 entered into between the Company and
certain key executive officers (incorporated by reference
to Exhibit 10.11.2 to the Company's Form 10-K for the
fiscal year ended December 31, 1993).
10.12 -- Exploration and Development Agreement dated as of May 25,
1988 among the Company, Mosbacher Offshore, Inc. and COGC
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No.
33-23508, filed under the Securities Act).
10.12.1 -- Letter Agreement dated February 15, 1991 extending
Exploration and Development Agreement (incorporated by
reference to Exhibit 10.13.1 to the Company's Form 10-K
for the fiscal year ended December 31, 1990).
10.13 -- Second Restated Credit Agreement dated as of March 28,
1994 by and among the Company, COGC, International and
Internationale Nederlanden (U.S.) Capital Corporation,
now ING (U.S.) Capital Corporation ("ING") (incorporated
by reference to Exhibit 10.14.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 1994).
10.13.1 -- First Amendment to Second Restated Credit Agreement dated
as of May 17, 1994, by and among the Company, COGC,
International and ING (incorporated by reference to
Exhibit 10.13.1 to the Company's Form 10-K for the fiscal
year ended December 31, 1994).
10.13.2 -- Second Amendment to Second Restated Credit Agreement
dated as of September 26, 1995, by and among the Company,
COGC, International and ING (incorporated by reference to
Exhibit 10.13.2 to the Company's Form 10-K for the fiscal
year ended December 31, 1995).
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10.13.3 -- Third Amendment to Second Restated Credit Agreement dated
as of December 19, 1995, by and among the Company, COGC,
International and ING (incorporated by reference to
Exhibit 10.13.3 to the Company's Form 10-K for the fiscal
year ended December 31, 1995).
10.13.4 -- Fourth Amendment to Second Restated Credit Agreement
dated as of June 27, 1996, by and among the Company,
COGC, International, Southwestern Offshore Corporation,
DRL, Inc. and ING (incorporated by reference to Exhibit
10.13.3 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1996).
10.14 -- Cliffs Neddrill Central Turnkey International Joint
Venture Agreement dated December 15, 1992, by and among
International, Neddrill Turnkey Drilling B.V. and
Perforadora Central S.A. de C.V. (incorporated by
reference to Exhibit 10.22 to the Company's Form 10-K for
the fiscal year ended December 31, 1992).
10.15 -- Asset Purchase and Sale Agreement dated March 30, 1993,
between the Company, as seller, and Cerrito Investment
Corporation (incorporated by reference to Exhibit 10.23
to the Company's Form 10-Q for the fiscal quarter ended
March 31, 1993).
10.16 -- Form of Executive Agreement dated as of July 20, 1994
(incorporated by reference to Exhibit 10.20 to the
Company's Form 10-Q for the fiscal quarter ended June 30,
1994).
10.17 -- Acquisition Agreement dated as of May 13, 1996 (included
as Exhibit 2.2).
10.18 -- Stock Purchase Agreement dated as of December 6, 1996
(included as Exhibit 2.3).
10.18.1 -- Amendment No. 1 dated as of January 24, 1997 to Stock
Purchase Agreement dated December 6, 1996 (included as
Exhibit 2.3.1).
10.19 -- Indenture dated as of May 15, 1996 (included as Exhibit
4.6).
10.19.1 -- Supplemental Indenture dated as of July 11, 1996
(included as Exhibit 4.6.1).
10.19.2 -- Second Supplemental Indenture dated as of January 24,
1997 (included as Exhibit 4.6.2).
*21.1 -- Subsidiaries of the Registrant.
**23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Huddleston & Co., Inc.
*27 -- Financial Data Schedule.
99.1 -- Joint Venture Agreement dated as of April 18, 1996
between Well Services (Marine) Limited and Viking
Trinidad Limited, as Partners, and Well Services (Marine)
Limited, as Operator, establishing the West Indies
Drilling Joint Venture (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed June 6, 1996).
99.1.1 -- First Amendment dated effective as of April 1, 1996 to
Joint Venture Agreement between Well Services (Marine)
Limited and Viking Trinidad Limited, as Partners, and
Well Services (Marine) Limited, as Operator (incorporated
by reference to Exhibit 99.1.1 to the Company's Current
Report on Form 8-K filed June 6, 1996).
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* Previously filed
** Filed herewith
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or Notes thereto.
51
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-27543, 33-29915, 33-37162, and 33-71778)
pertaining to the 1988 Incentive Equity Plan of Cliffs Drilling Company of our
report dated February 21, 1997, with respect to the consolidated financial
statements and schedule of Cliffs Drilling Company included in the Annual Report
(Form 10-K/A (Amendment No. 2)) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Houston, Texas
November 6, 1997
