<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------------
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 001-12797
CLIFFS DRILLING COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0248934
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1200 SMITH STREET, SUITE 300
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 651-9426
(Registrant's Telephone Number, Including Area Code)
The registrant meets the conditions set forth in General Instructions H
(1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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 [ ]
(Exhibit Index Located on Page 18)
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CLIFFS DRILLING COMPANY
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations (Unaudited) -
CLIFFS DRILLING COMPANY
Three Months Ended March 31, 1999 and 1998................................................3
Consolidated Balance Sheets (Unaudited) -
CLIFFS DRILLING COMPANY
March 31, 1999 and December 31, 1998......................................................4
Consolidated Statements of Cash Flows (Unaudited) -
CLIFFS DRILLING COMPANY
Three Months Ended March 31, 1999 and 1998................................................5
Notes to Interim Consolidated Financial Statements (Unaudited)..............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................16
SIGNATURES......................................................................................17
EXHIBIT INDEX...................................................................................18
</TABLE>
2
<PAGE> 3
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1999 1998
------------- -------------
(In thousands, except
per share amounts)
Post - Pre -
Acquisition Acquisition
------------- -------------
<S> <C> <C>
REVENUES:
Revenues ...................................... $ 79,796 $ 97,636
Income from Equity Investments ................ 160 140
------------- -------------
79,956 97,776
COSTS AND EXPENSES:
Operating Expenses ............................ 54,460 60,622
Depreciation, Depletion and Amortization ...... 8,877 7,302
General and Administrative Expense ............ 1,987 2,149
------------- -------------
65,324 70,073
------------- -------------
OPERATING INCOME ................................... 14,632 27,703
OTHER INCOME (EXPENSE):
Interest Income ............................... 465 553
Interest Expense .............................. (5,231) (5,074)
Other, net .................................... (46) (148)
------------- -------------
INCOME BEFORE INCOME TAXES ......................... 9,820 23,034
INCOME TAX EXPENSE ................................. 3,437 8,062
------------- -------------
NET INCOME ......................................... $ 6,383 $ 14,972
============= =============
NET INCOME PER COMMON SHARE:
Basic ......................................... N/A $ 0.95
============= =============
Diluted ....................................... N/A $ 0.93
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic ......................................... N/A 15,838
============= =============
Diluted ....................................... N/A 16,044
============= =============
</TABLE>
See accompanying notes to interim consolidated financial statements.
The merger of RBF Cliffs Acquisition Corp., a wholly-owned subsidiary of
R&B Falcon Corporation, with and into Cliffs Drilling Company was effective on
December 1, 1998 and was accounted for using the purchase method of accounting.
The purchase price adjustments were "pushed down" and recorded in the
consolidated financial statements of Cliffs Drilling Company, which affects the
comparability of the post-acquisition and pre-acquisition results of operations
and cash flows. See Note 2.
3
<PAGE> 4
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
ASSETS (In thousands, except
share information)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents .................................................. $ 42,717 $ 36,276
Accounts Receivable, net of allowance for doubtful accounts of $472 at
March 31, 1999 and December 31, 1998 ................................... 53,971 35,670
Notes and Other Receivables, Current ....................................... 3,819 6,704
Inventories ................................................................ 10,822 10,335
Drilling Contracts in Progress ............................................. 27,752 29,483
Prepaid Insurance .......................................................... 266 2,248
Other Prepaid Expenses ..................................................... 3,956 2,893
------------ ------------
Total Current Assets ................................................. 143,303 123,609
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment ................................................. 507,268 504,189
Other ...................................................................... 5,190 4,550
------------ ------------
512,458 508,739
Less: Accumulated Depreciation, Depletion and Amortization ................ (11,396) (2,898)
------------ ------------
Net Property and Equipment ........................................... 501,062 505,841
DEFERRED CHARGES AND OTHER ASSETS:
Goodwill, net of accumulated amortization of $589 and $150 at March 31, 1999
and December 31, 1998, respectively .................................... 70,227 70,579
Debt Issue Costs and Other ................................................. 3,982 4,139
Investments in and Advances to Unconsolidated Affiliates ................... 3,837 2,580
Due from Parent ............................................................ 10,488 10,508
------------ ------------
TOTAL ASSETS ......................................................... $ 732,899 $ 717,256
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ........................................................... $ 28,035 $ 28,843
Accrued Interest ........................................................... 7,785 2,672
Other Accrued Expenses ..................................................... 22,295 21,426
------------ ------------
Total Current Liabilities ............................................ 58,115 52,941
10.25% SENIOR NOTES ............................................................ 202,439 202,935
DEFERRED INCOME TAXES .......................................................... 59,625 55,094
OTHER LIABILITIES .............................................................. 1,848 1,797
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 1,000 shares authorized, issued and
outstanding at March 31, 1999 and 30,000,000 shares authorized
and 1,000 shares issued and outstanding at December 31, 1998 ........... -- --
Paid-in Capital ............................................................ 405,069 405,069
Retained Earnings (Deficit) ................................................ 5,803 (580)
------------ ------------
Total Shareholders' Equity ........................................... 410,872 404,489
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 732,899 $ 717,256
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 5
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1999 1998
------------- -------------
(In thousands)
Post - Pre -
Acquisition Acquisition
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income .................................................................... $ 6,383 $ 14,972
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation, Depletion and Amortization ................................... 8,877 7,302
Deferred Income Tax Expense ................................................ 4,531 1,968
Mobilization Expense Amortization .......................................... -- 195
Loss (Gain) on Disposition of Assets ....................................... (173) 5
Amortization of Debt Issue Costs ........................................... 231 227
Amortization of Restricted Stock ........................................... -- 154
Amortization of Debt Premium ............................................... (168) (168)
Other ...................................................................... 65 147
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable .................................................... (15,416) 6,345
Inventories ............................................................ 292 (1,144)
Drilling Contracts in Progress ......................................... 1,731 8,627
Prepaid Insurance and Other Prepaid Expenses ........................... 919 (1,556)
Investments in and Advances to Unconsolidated Affiliates ............... (1,257) (346)
Due from Parent ........................................................ 20 --
Accounts Payable and Other Accrued Expenses ............................ 5,225 13,462
------------- -------------
Net Cash Provided By Operating Activities ....................... 11,260 50,190
INVESTING ACTIVITIES:
Capital Expenditures .......................................................... (5,003) (23,750)
Proceeds from Sale of Property and Equipment .................................. 512 677
------------- -------------
Net Cash Used In Investing Activities ........................... (4,491) (23,073)
FINANCING ACTIVITIES:
Payments on Borrowings ........................................................ (328) --
Debt Issue Costs .............................................................. -- (32)
------------- -------------
Net Cash Used In Financing Activities ........................... (328) (32)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................................... 6,441 27,085
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 36,276 28,122
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 42,717 $ 55,207
============= =============
</TABLE>
See accompanying notes to interim consolidated financial statements.
The merger of RBF Cliffs Acquisition Corp., a wholly-owned subsidiary of
R&B Falcon Corporation, with and into Cliffs Drilling Company was effective on
December 1, 1998 and was accounted for using the purchase method of accounting.
The purchase price adjustments were "pushed down" and recorded in the
consolidated financial statements of Cliffs Drilling Company, which affects the
comparability of the post-acquisition and pre-acquisition results of operations
and cash flows. See Note 2.
5
<PAGE> 6
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal and recurring adjustments) necessary to present a fair statement
of the results for the periods included herein have been made and the
disclosures contained herein are adequate to make the information presented not
misleading. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Cliffs Drilling Company (the
"Company") annual report on Form 10-K for the year ended December 31, 1998.
2. BUSINESS COMBINATION
Effective December 1, 1998, a change in control of the Company occurred as
a result of the merger of RBF Cliffs Acquisition Corp., a wholly-owned
subsidiary of R&B Falcon Corporation ("R&B Falcon"), with and into the Company
(the "Merger"). As a result of the Merger, each outstanding share of common
stock, $0.01 par value ("Common Stock") of the Company was converted into 1.7
shares of R&B Falcon common stock and cash in lieu of fractional shares, as
provided for in an Agreement and Plan of Merger dated August 21, 1998 (the
"Merger Agreement"). The Company is now a wholly-owned subsidiary of R&B Falcon.
The Merger was accounted for using the purchase method of accounting.
Accordingly, an allocation of the purchase price was assigned to the assets and
liabilities of the Company based on their estimated fair values. The purchase
price adjustments were "pushed down" to the consolidated financial statements of
the Company.
The accompanying Consolidated Statements of Operations include the effects
of the Merger beginning December 1, 1998. Unaudited pro forma consolidated
operating results of the Company for the three months ended March 31, 1998,
assuming the Merger was effective as of January 1, 1998, are summarized as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Revenues............................................... $97,776
Operating Income....................................... 26,137
Net Income............................................. 13,954
</TABLE>
The pro forma information for the three months ended March 31, 1998 includes
adjustments for additional depreciation of $1.1 million based on the fair market
values of the drilling rigs and other property and equipment, goodwill
amortization of $.5 million and a reduction in income taxes of $.5 million. The
pro forma information is not necessarily indicative of the results of operations
had the Merger occurred on the assumed dates or the results of operations for
any future period.
6
<PAGE> 7
3. NOTES PAYABLE
Long-term debt at March 31, 1999 consists solely of 10.25% Senior Notes due
2003 (the "Senior Notes") in the aggregate principal amount of $199.7 million
and debt premium, net of amortization, of $2.7 million. In addition to the
$150.0 million of Senior Notes sold during 1996, the Company sold $50.0 million
of Senior Notes on August 7, 1997 at a premium of $3.9 million. Considering the
premium, the effective interest rate on the $50.0 million Senior Notes is 9.5%.
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.
Upon consummation of the Merger, the Company offered to purchase for cash
all of the outstanding Senior Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest to the change of control
payment date, as required by the indenture governing the Senior Notes (the
"Change of Control Offer"). On January 28, 1999, the Company purchased all of
the $.3 million principal amount of Senior Notes tendered pursuant to the Change
of Control Offer.
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 Guarantors"). Each Subsidiary Guarantor is 100%
owned by the Company. R&B Falcon is not a guarantor of the Senior Notes.
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>
March 31, December 31,
1999 1998
------------ --------------
(In thousands)
<S> <C> <C>
Current Assets .................................................... $ 6,897 $ 7,133
Non-Current Assets ................................................ 69,746 68,766
------------ --------------
Total Assets ................................................. $ 76,643 $ 75,899
============ ==============
Current Liabilities ............................................... $ 1,715 $ 3,794
Non-Current Liabilities ........................................... 63,599 63,089
Equity ............................................................ 11,329 9,016
------------ --------------
Total Liabilities and Equity ................................. $ 76,643 $ 75,899
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
------------ -------------
(In thousands)
<S> <C> <C>
Revenues........................................................... $ 4,602 $ 36,016
Operating Income................................................... $ 867 $ 10,663
Net Income......................................................... $ 379 $ 8,501
</TABLE>
Effective May 31, 1998, three Subsidiary Guarantors were merged into the
Company. Accordingly, the above financial information excludes amounts related
to these former Subsidiary Guarantors for periods ended on or subsequent to
May 31, 1998.
7
<PAGE> 8
4. BUSINESS SEGMENTS
The Company's operating results by business segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Revenues:
Daywork Drilling .............................. $ 40,178 $ 60,972
Engineering Services .......................... 48,992 43,629
MOPU Operations ............................... 1,221 2,328
Corporate Office and Other .................... 66 130
Eliminations .................................. (10,501) (9,283)
---------- ----------
Consolidated ................................ $ 79,956 $ 97,776
========== ==========
Operating Income (Loss):
Daywork Drilling .............................. $ 4,173 $ 21,951
Engineering Services .......................... 12,739 7,073
MOPU Operations ............................... 355 968
Corporate Office and Other .................... (2,635) (2,289)
---------- ----------
Consolidated ................................ $ 14,632 $ 27,703
========== ==========
</TABLE>
Intersegment sales by the Daywork Drilling segment to the Engineering
Services segment were $10,501,000 and $9,283,000 in the first quarter of 1999
and 1998, respectively.
The Company's largest customer for the quarters ended March 31, 1999 and
1998 was PDVSA Exploration and Production, the Venezuela government-owned oil
company ("PDVSA"), and its predecessors. Revenues from PDVSA and its
predecessors accounted for approximately 54% and 41%, respectively, of the
Company's consolidated revenues during each quarter.
5. DERIVATIVES AND HEDGING INSTRUMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument be measured
at its fair value, recorded in the balance sheet as either an asset or liability
and that changes in the derivative's fair value be recognized currently in
earnings. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and is not expected to have a significant impact on the Company's
consolidated financial statements and related disclosures upon adoption.
6. CHANGE IN PRESENTATION
Certain financial statement items have been reclassified in the prior year
to conform with the current year presentation.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are within "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-Q.
GENERAL
Effective December 1, 1998, a change in control of the Company occurred as
a result of the Merger. The Company is now a wholly-owned subsidiary of R&B
Falcon. The Merger was accounted for using the purchase method of accounting.
Accordingly, an allocation of the purchase price was assigned to the assets and
liabilities of the Company based on their estimated fair values. The purchase
price adjustments were "pushed down" to the consolidated financial statements of
the Company, which affects the comparability of the post-acquisition and
pre-acquisition results of operations and cash flows.
Activity in the contract drilling industry and related oil service
businesses has deteriorated significantly in recent months due to decreased
worldwide demand for drilling rigs and related services resulting from a
substantial decline in crude oil prices. More recently, crude oil prices have
recovered somewhat, but there can be no guarantee that demand for drilling rigs
and services will increase. 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. If crude oil prices decline from current
levels, or a weakness in crude oil prices continued for an extended period,
there could be a further deterioration in both rig utilization and dayrates.
The Company's daywork drilling operations benefited during early 1998 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 resulted in increased dayrates and utilization of the Company's
drilling rigs. The same factors both positively and negatively affected the
Company's engineering services business segment during early 1998, in that
increased exploration activity caused an increase in demand for the Company's
engineering services; however, reduced rig availability made it more difficult
for the Company to contract drilling rigs required for performance of turnkey
drilling operations. In late 1998 and early 1999, lower crude oil prices
affected exploration and production spending, which created significantly lower
dayrates and utilization for offshore drilling companies, particularly in the
U.S. Gulf of Mexico. Crude oil prices have begun to recover, but there can be no
assurance that demand for the Company's drilling rigs and services will
increase.
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 mobile offshore production unit
("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
9
<PAGE> 10
general economic conditions, the extent of worldwide oil and gas production and
demand therefor, government regulations and environmental concerns.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
The Company recognized net income of $6.4 million in the first quarter of
1999 compared to net income of $15.0 million in the first quarter of 1998.
Revenues decreased $17.8 million and operating income decreased $13.1 million in
the same period. These decreases were partially offset by a decrease in income
taxes of $4.6 million. Decreased operating results from the Company's daywork
drilling business segment contributed to the reductions in revenues and
operating income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------- Increase
1999 1998 (Decrease)
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Daywork Drilling ................... $ 40,178 $ 60,972 $ (20,794)
Engineering Services ............... 48,992 43,629 5,363
MOPU Operations .................... 1,221 2,328 (1,107)
Corporate Office and Other ......... 66 130 (64)
Eliminations ....................... (10,501) (9,283) (1,218)
----------- ----------- -----------
Consolidated ................... $ 79,956 $ 97,776 $ (17,820)
=========== =========== ===========
Operating Income (Loss):
Daywork Drilling ................... $ 4,173 $ 21,951 $ (17,778)
Engineering Services ............... 12,739 7,073 5,666
MOPU Operations .................... 355 968 (613)
Corporate Office and Other ......... (2,635) (2,289) (346)
----------- ----------- -----------
Consolidated ................... $ 14,632 $ 27,703 $ (13,071)
=========== =========== ===========
</TABLE>
Daywork Drilling
Daywork drilling revenues decreased $20.8 million and operating income
decreased $17.8 million in the first quarter of 1999 compared to the first
quarter of 1998. The decreases in revenues and operating income were primarily
due to reduced dayrates and utilization. These decreases were partially offset
by revenues and operating income from 4 rigs which commenced operations
subsequent to the first quarter of 1998 and revenues associated with a contract
termination during the first quarter of 1999. Termination revenues of $1.5
million recorded in the first quarter of 1999 represent unrecovered costs for
modifications made to the jack-up drilling rig which operated in Qatar. In
accordance with the terms of the contract, the Company will also receive
additional contract termination revenues in the amount of $2.4 million, which
will be recognized as revenue over the remaining term of the contract or until
such time as the rig begins a new contract.
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:
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------ Increase
1999 1998 (Decrease)
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Daywork Drilling Revenues (1):
Jack-up Rigs:
International ................... $ 12,530 $ 15,697 $ (3,167)
Domestic ........................ 6,981 25,716 (18,735)
Land Rigs ......................... 17,246 12,282 4,964
Platform/Workover Rigs ............ 3,261 6,532 (3,271)
Other ............................. 160 745 (585)
---------- ---------- ----------
Total ....................... $ 40,178 $ 60,972 $ (20,794)
========== ========== ==========
Average Rig Utilization (2):
Jack-up Rigs:
International ................... 87% 100%
Domestic ........................ 44% 100%
Land Rigs ......................... 91% 88%
Platform/Workover Rigs ............ 60% 100%
Average Dayrates:
Jack-up Rigs:
International ................... $ 33,258 $ 31,251
Domestic ........................ 20,023 34,530
Land Rigs ......................... 16,494 15,257
Platform/Workover Rigs ............ 12,080 13,717
</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.
Engineering Services
Engineering services revenues increased $5.4 million and operating income
increased $5.7 million in the first quarter of 1999 compared to the first
quarter of 1998. The Company completed 6 turnkey contracts in both the first
quarter of 1999 and the first quarter of 1998. Five of the 6 contracts completed
during the first quarter of 1999 were international contracts in Venezuela
compared to 4 international contract completions in the first quarter of 1998.
Three domestic turnkey contracts incurred losses in the first quarter of 1998
which negatively affected margins in that quarter while no domestic turnkey
losses were incurred in the first quarter of 1999.
International operating margins are currently stronger than domestic
margins due to improved drilling efficiencies and reductions 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, as well as margins of other competitors.
11
<PAGE> 12
In April, 1998, the Company was awarded a contract from PDVSA to drill
60 turnkey wells in Venezuela. Aggregate revenues for the 60 wells are expected
to range from approximately $450 million to $500 million depending upon, among
other things, various options to be elected by PDVSA. The Company commenced
drilling under the program in March, 1998. The program is expected to extend
over approximately three and one-half years and is expected to utilize 7 of the
Company's land drilling rigs in Venezuela. As of March 31, 1999, the Company had
completed 14 of the 60 wells, with cumulative revenues realized in the amount of
$117.6 million. During the first quarter of 1999, PDVSA and the Company
renegotiated prices for the next 14 wells to be drilled under this program in
response to the market downturn that has occurred. As a result, both revenues
and average margins to be realized on these wells are expected to decline.
The Company expects to drill these 14 wells during 1999. One additional well
is expected to complete under the original 60 well turnkey contract prior to
the negotiated price reduction taking effect. No assurance can be given that
the remaining wells will ultimately be drilled or that the program can be
completed within the intended time frame.
At March 31, 1999, the Company had 7 turnkey wells in progress in Venezuela
and one turnkey well in progress in the U.S. Gulf of Mexico.
MOPU Operations
MOPU revenues decreased $1.1 million and operating income decreased $.6
million in the first quarter of 1999 compared to the first quarter of 1998. The
decreases in revenues and operating income were primarily due to one MOPU which
was stacked during the first quarter of 1999.
The Company currently owns 4 MOPUs, 3 of which are under contract and
currently operating.
Corporate Office and Other
Corporate Office and Other includes corporate overhead and other
non-reportable business segments. Operating losses increased $.3 million in
the first quarter of 1999 compared to the first quarter of 1998 primarily
due to goodwill amortization in the amount of $.5 million recorded during
the first quarter of 1999.
Other Income (Expense) and Income Taxes
The Company recognized $8.2 million of other expense, including income
taxes, in the first quarter of 1999 compared to $12.7 million of other expense
in the first quarter of 1998. The net decrease resulted primarily from a $4.6
million decrease in income taxes.
The Company will file as part of the consolidated group of R&B Falcon,
its parent. Accordingly, the Company has accrued income taxes in line with
R&B Falcon's consolidated effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $6.4 million from $36.3 million at
December 31, 1998 to $42.7 million at March 31, 1999. The increase resulted from
$11.2 million provided by operating activities, offset by $4.5 million used in
investing activities and $.3 million used in financing activities.
Operating Activities
Net cash of $11.2 million provided by operating activities included $8.5
million used in working capital and other activities. "Accounts Receivable"
increased from December 31, 1998 to March 31, 1999 due primarily to the
completion of international turnkey wells at the end of the first quarter of
1999.
12
<PAGE> 13
Investing Activities
Net cash of $4.5 million used in investing activities during the first
quarter of 1999 included capital expenditures totaling $5.0 million used
primarily to fund renovation activities on various drilling rigs and to purchase
drill pipe.
The Company has capital expenditure plans totaling approximately $3.5
million during the remainder of 1999 primarily for drilling rig capital
expenditures and drill pipe purchases. The Company intends to fund these capital
expenditures with available cash and internally generated cash flow. The
Company's projection of 1999 capital expenditures is based upon a continuation
of the Company's program to upgrade rigs and related equipment. The actual level
of capital expenditures may be higher due to contract requirements or in the
event of unforeseen breakdown of equipment that was not scheduled for
replacement, or lower in the event of inadequate cash flow from operations.
Financing Activities
Long-term debt at March 31, 1999 consists solely of Senior Notes in the
aggregate principal amount of $199.7 million and debt premium, net of
amortization, of $2.7 million. In addition to the $150.0 million of Senior Notes
sold during 1996, the Company sold $50.0 million of Senior Notes on August 7,
1997 at a premium of $3.9 million. Considering the premium, the effective
interest rate on the $50.0 million Senior Notes is 9.5%. 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.
Upon consummation of the Merger, the Company offered to purchase for cash
all of the outstanding Senior Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest to the change of control
payment date, as required by the indenture governing the Senior Notes (the
"Change of Control Offer"). On January 28, 1999, the Company purchased all of
the $.3 million principal amount of Senior Notes tendered pursuant to the Change
of Control Offer.
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 $50.0
million principal amount of the Senior Notes at a redemption price equal to 110%
of the principal amount, provided that at least $150.0 million in aggregate
principal amount of the Senior Notes remain outstanding immediately after such
redemption.
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 on a
senior unsecured basis by the Subsidiary 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, as hereinafter defined. 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
13
<PAGE> 14
indenture and the Senior Notes. Each Subsidiary Guarantor is 100% owned by the
Company. R&B Falcon is not a guarantor of the Senior Notes.
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.
The Company currently maintains a $35.0 million revolving credit facility
("Revolving Credit Facility") with ING (U.S.) Capital Corporation ("ING") which
matures on May 31, 2000. At March 31, 1999, the Company had no indebtedness
outstanding under the Revolving Credit Facility, but had $.4 million in letters
of credit outstanding, thereby leaving $34.6 million available under the credit
facility.
Exchange Rate Gains and Losses
Approximately 84% of the Company's revenues and a substantial portion of
its operating income were sourced from its foreign operations in the first
quarter of 1999. 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.
The effects of these transactions totaled $.7 million in the first quarter of
1999 and are included in "Operating Expenses" in the Consolidated Statements of
Operations. The Company does not speculate in foreign currencies or maintain
significant foreign currency cash balances. The Company will continue to be
exposed to future foreign currency gains and losses if the currency continues to
be volatile. Despite the political and economic risks in Venezuela, the Company
believes that the country continues to be a favorable market for its services.
Cautionary Statements
The ability of the Company to fund working capital, capital expenditures
and debt service in excess of cash on hand will depend 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.
IMPACT OF YEAR 2000
General Description of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, many
computer programs recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
14
<PAGE> 15
Year 2000 Issue Evaluations and Assessments
Based upon preliminary equipment analyses and evaluations, the Company does
not believe that operational equipment programming modifications are necessary.
The Company is currently communicating with vendors, suppliers and shippers
(collectively referred to as "third party vendors") regarding Year 2000
compliance and will work with them to minimize disruption in the Company's
operations as a result of their Year 2000 problems. To date, the Company is not
aware of any third party vendors with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity or capital resources.
Based upon internal assessments, the Company determined that it was necessary to
modify or replace portions of its accounting software so that its computer
systems would function properly with respect to dates in the year 2000 and
thereafter. The Company elected to replace certain accounting software rather
than invest in modifications of existing programs. The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems.
Costs
The replacement software and related installation costs were approximately
$2.3 million, the majority of which was capitalized as of December 31, 1998. The
software conversions were substantially completed as of December 31, 1998. The
Company expects to incur approximately $.5 million during 1999 for other
modifications and conversions.
Risks
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. The Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, modifications or conversions,
disruptions generally resulting from Year 2000 issues could materially adversely
affect the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company has no means of ensuring that third party vendors will be Year
2000 ready. The inability of third party vendors to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by third party vendors is not determinable.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there is no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the cost and extent of training
associated with needed conversions and similar uncertainties.
Contingency Plans
The Company has contingency plans for certain critical applications and is
evaluating such plans for others. These contingency plans involve manual
workarounds and replacement equipment.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLIFFS DRILLING COMPANY
Date May 12, 1999 By /s/ Edward A. Guthrie
-------------------------- --------------------------------
Edward A. Guthrie
Vice President - Finance
Date May 12, 1999 By /s/ Cindy B. Taylor
-------------------------- ---------------------------------
Cindy B. Taylor
Vice President - Controller
and Secretary
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,717
<SECURITIES> 0
<RECEIVABLES> 58,262
<ALLOWANCES> 472
<INVENTORY> 10,822
<CURRENT-ASSETS> 143,303
<PP&E> 512,458
<DEPRECIATION> 11,396
<TOTAL-ASSETS> 732,899
<CURRENT-LIABILITIES> 58,115
<BONDS> 202,439
0
0
<COMMON> 0
<OTHER-SE> 410,872
<TOTAL-LIABILITY-AND-EQUITY> 732,899
<SALES> 79,956
<TOTAL-REVENUES> 79,956
<CGS> 54,460
<TOTAL-COSTS> 65,324
<OTHER-EXPENSES> (419)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,231
<INCOME-PRETAX> 9,820
<INCOME-TAX> 3,437
<INCOME-CONTINUING> 6,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,383
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
