<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12797
CLIFFS DRILLING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 76-0248934
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
901 THREADNEEDLE, HOUSTON, TEXAS 77079
(Address of principal executive offices)(Zip code)
(281) 496-5000
(Registrant's telephone number, including area code)
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 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 [ ]
1 of 14
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<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q may contain or incorporate by reference
certain forward-looking statements, including by way of illustration and not of
limitation, statements relating to liquidity, revenues, expenses, margins and
contract rates and terms. The Company strongly encourages readers to note that
some or all of the assumptions, upon which such forward-looking statements are
based, are beyond the Company's ability to control or estimate precisely, and
may in some cases be subject to rapid and material changes. Such assumptions
include the contract status of the Company's drilling units, general market
conditions prevailing in the contract drilling industry (including daily rates
and utilization) and various other trends affecting the contract drilling
industry, including world oil and gas prices, the exploration and development
programs of the Company's customers, the actions of the Company's competitors
and economic conditions generally.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Company or Group of Companies for Which Report is Filed:
Cliffs Drilling Company
The financial statements for the three and nine month periods ended
September 30, 2000 and 1999, include, in the opinion of the Company, all
adjustments (which only consist of normal recurring adjustments) necessary to
present fairly the financial position and results of operations for such
periods. The financial data for the interim periods presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Results of operations for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of results of
operations which will be realized for the year ending December 31, 2000. The
financial statements should be read in conjunction with the Company's Form 10-K
for the year ended December 31, 1999.
2
<PAGE>
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 41,390 $103,730
Accounts receivable:
Trade, net 47,775 38,734
Other 5,537 10,013
Materials and supplies inventory 11,326 7,684
Drilling contracts in progress 5,330 16,674
Other current assets 11,774 7,744
-------- --------
Total current assets 123,132 184,579
-------- --------
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED INVESTEES 4,494 4,657
-------- --------
PROPERTY AND EQUIPMENT:
Drilling 633,583 558,286
Other 4,466 4,171
-------- --------
Total property and equipment 638,049 562,457
Accumulated depreciation, depletion and amortization since
December 1, 1998 (97,315) (49,617)
-------- --------
Net property and equipment 540,734 512,840
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 86,116 84,795
-------- --------
DEFERRED CHARGES AND OTHER ASSETS 7,154 6,755
-------- --------
TOTAL ASSETS $761,630 $793,626
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 12,567 $ 14,211
Accrued liabilities 76,664 75,466
-------- --------
Total current liabilities 89,231 89,677
LONG-TERM OBLIGATIONS 201,433 201,936
OTHER NONCURRENT LIABILITIES 97 1,957
DEFERRED INCOME TAXES 23,055 43,050
PAYABLE TO PARENT 44,495 28,585
-------- --------
Total liabilities 358,311 365,205
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - -
Capital in excess of par value 405,069 405,069
Retained earnings (deficit) since December 1, 1998 (1,750) 23,352
-------- --------
Total stockholder's equity 403,319 428,421
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $761,630 $793,626
======== ========
</TABLE>
The accompanying notes are an integral part of the interim consolidated
financial statements.
3
<PAGE>
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING REVENUES $86,265 $68,128 $210,316 $240,366
------- ------- -------- --------
COSTS AND EXPENSES:
Operating expenses 61,275 50,715 163,912 173,900
Depreciation, depletion and amortization 11,216 9,553 31,875 28,916
General and administrative 4,207 4,905 12,982 9,644
------- ------- -------- --------
Total costs and expenses 76,698 65,173 208,769 212,460
------- ------- -------- --------
OPERATING INCOME 9,567 2,955 1,547 27,906
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (5,415) (5,176) (15,761) (15,661)
Interest income 374 1,295 3,280 2,433
Loss from equity investees (690) (283) (679) (63)
Other, net (216) (139) 238 (189)
------- ------- -------- --------
Total other income (expense) (5,947) (4,303) (12,922) (13,480)
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3,620 (1,348) (11,375) 14,426
INCOME TAX EXPENSE (BENEFIT) 2,580 (1,477) (1,534) 3,399
------- ------- -------- --------
NET INCOME (LOSS) $ 1,040 $ 129 $ (9,841) $ 11,027
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the interim consolidated
financial statements.
4
<PAGE>
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) (unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,841) $ 11,027
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization 31,875 28,916
Deferred income taxes (11,778) 5,697
Loss (gain) on disposition of assets 1,023 (166)
Loss from equity investees 679 63
Amortization of debt issue costs 679 616
Amortization of debt premium (503) (503)
Other (1,859) (5,137)
Changes in assets and liabilities:
Accounts receivable (4,565) 2,095
Materials and supplies inventory (3,642) 3,593
Drilling contracts in progress 11,344 13,645
Prepaid insurance and other prepaid expenses (4,030) 129
Other assets - (2,492)
Accounts payable and other accrued liabilities (5,306) (6,687)
-------- --------
Net cash provided by operating activities 4,076 50,796
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58,401) (10,196)
Proceeds from sale of property and equipment 68 497
Investments in and advances to unconsolidated investees (516) (2,968)
-------- --------
Net cash used in investing activities (58,849) (12,667)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings - (328)
Borrowing from (payments to) parent (7,567) 6,232
-------- --------
Net cash provided by (used in) financing activities (7,567) 5,904
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (62,340) 44,033
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 103,730 36,276
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,390 $ 80,309
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 10,269 $ 10,335
Income taxes paid $ 8,525 $ 2,451
</TABLE>
The accompanying notes are an integral part of the interim consolidated
financial statements.
5
<PAGE>
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - On August 19, 2000, the Company's parent company, R&B Falcon
Corporation, entered into an agreement and plan of merger with Transocean Sedco
Forex Inc. in an all stock transaction. Under the terms of the definitive
agreement, unanimously approved by the board of directors of both companies,
common stockholders of R&B Falcon Corporation will receive a fixed ratio of 0.5
shares of newly issued Transocean Sedco Forex Inc. ordinary shares for each R&B
Falcon Corporation share. Closing of the transaction is expected to occur by the
end of the first quarter of 2001, subject to the approval of stockholders from
both companies, certain regulatory approvals, the sale of all vessels involved
in the coastwise trade before the effective time of the merger, and other
closing conditions. In addition, R&B Falcon Corporation will incur an expense
in connection with the merger as a result of the acceleration of vesting of
certain stock options and restricted stock grants immediately prior to the
merger, which will be based on unvested options and stock prices shortly before
the merger. A portion of this expense will be allocated to the Company based on
a method similar to the overhead allocation discussed below.
INDUSTRY CONDITIONS/LIQUIDITY - Activity in the contract drilling industry
and related oil and gas service businesses deteriorated significantly in 1999
due primarily to decreased worldwide demand for drilling rigs and related
services resulting from a substantial decline in crude oil prices experienced in
1998 through the first quarter of 1999. In mid 1999, crude oil prices began a
recovery, and demand for drilling services started to recover as well. However,
there can be no assurance that demand for drilling rigs and related services
will reach utilization and dayrate levels of 1996-1998. To date, while certain
markets have improved substantially, taken as a whole, demand for drilling rigs
has not recovered to the levels experienced in 1996-1998. Oil and gas
companies' demand for offshore drilling services are a function of: 1) current
and projected oil and gas prices, 2) government taxation and concession/leasing
policies, 3) the oil and gas company's lease inventory and existing drilling
commitments on leases held, 4) the oil and gas company's free cash flow and
general funding availability, 5) the oil and gas company's internal reserve
replacement requirements, 6) geopolitical factors (e.g., the drive for national
hydrocarbons self sufficiency). The first factor is generally the most
important. In particular, the domestic shallow water market tends to be
primarily driven by the price of natural gas. Continued strength in natural gas
prices has recently bolstered this market.
Changes in demand for exploration and production services can impact the
Company's liquidity as supply and demand factors directly affect utilization and
dayrates, which are the primary determinants of cash flow from the Company's
operations. In late 1998 and early 1999, lower crude oil and gas prices reduced
exploration and production spending, which led to significantly lower dayrates
and utilization for offshore drilling companies, particularly in the U.S. Gulf
of Mexico. While there has been some improvement in utilization and dayrates in
certain segments of drilling activity in which the Company participates since
the beginning of 2000, if crude oil and/or gas prices were to decline
substantially from current levels, there could be a deterioration in rig
utilization and dayrates which could have a material adverse effect on the
Company's liquidity, financial position and results of operations.
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 operations. The Company believes its projected level of cash flows
from operations, which assumes an industry recovery in 2000, and cash on hand
will be sufficient to satisfy the Company's short-term and long-term liquidity
requirements. However, if the Company requires additional funds, R&B Falcon
Corporation, who is the parent company of the Company, will provide such funds
through additional investments in the Company, and the Company's management
believes such funds would be available if needed.
GOODWILL - Goodwill was recorded as a result of the merger of the Company and
R&B Falcon Corporation in December 1998. Goodwill has increased $3.0 million
since December 31, 1999 as the result of an income tax contingency incurred by
the Company prior to December 1998. For the three months ended September 30,
2000 and 1999 amortization of goodwill was $.6 million and $.5 million,
respectively. For the nine months ended September 30, 2000 and 1999
amortization of goodwill was $1.7 million and $1.4 million, respectively.
OVERHEAD ALLOCATIONS - As of July 1, 1999, R&B Falcon Corporation provided
substantially all of the Company's general and administrative services including
personnel. General and administrative expenses including payroll costs of R&B
Falcon Corporation are allocated to the Company and other subsidiaries of R&B
Falcon Corporation based on revenues. For the three months ended September 30,
2000 and 1999 general and administrative expenses allocated to the Company were
$4.2 million and $3.9 million, respectively. For the nine months ended
6
<PAGE>
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2000 and 1999 general and administrative expenses allocated to the
Company were $12.1 million and $3.9 million, respectively.
PAYABLE TO PARENT - The Company has payables to R&B Falcon Corporation which
are classified as noncurrent liabilities as the balance is not expected to be
repaid during the next year. The payable is non-interest bearing.
NEWLY ISSUED ACCOUNTING STANDARDS - In December 1999, SEC Staff Accounting
Bulletin: No. 101 - Revenue Recognition in Financial Statements ("SAB 101") was
issued. SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 has been amended allowing the Company to defer its implementation of SAB
101 until the fourth quarter of 2000. The Company is currently reviewing its
accounting practices and if any necessary adjustments are needed to comply, such
adjustments will be made in the fourth quarter of 2000.
RECLASSIFICATION - Certain prior period amounts in the consolidated financial
statements have been reclassified for comparative purposes. Such
reclassifications had no effect on net income or the overall financial condition
of the Company.
B) CONTINGENCIES
In March 1997, an action was filed by Mobil Exploration and Producing U.S.
Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and
Samuel Geary and Associates, Inc. against the Company, its underwriters and
insurance broker in the 16th Judicial District Court of St. Mary Parish,
Louisiana. The plaintiffs alleged damages amounting to in excess of $50.0
million in connection with the drilling of a turnkey well in 1995 and 1996. The
case was tried before a jury in January and February 2000, and a judgment has
been entered based on the jury verdict awarding the plaintiffs damages of
approximately $30.0 million for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. The Company has filed motions for
a new trial and a judgment notwithstanding the verdict in contemplation of
perfecting its appeal of such judgment and believes it will be successful upon
appeal. The Company further believes all but the portion of the verdict
representing excess drilling costs of approximately $4.7 million is covered by
relevant primary and excess liability insurance policies of the Company;
however, the insurers and underwriters have denied coverage. The Company has
instituted litigation against those insurers and underwriters to enforce its
rights under the relevant policies. At this time the Company believes adequate
reserves have been established in order to avoid any ultimate outcome having a
material adverse effect on the Company's consolidated financial position or
results of operations.
In August 2000, an action was filed by Raymond Verdin (formerly an employee
of R&B Falcon Drilling USA, Inc., a subsidiary of R&B Falcon Corporation), on
behalf of himself and those similarly situated, against R&B Falcon Drilling USA,
Inc., Nabors Drilling USA, Inc., Parker Drilling Company, Pride Offshore, Inc.,
Diamond Offshore (USA) Inc., Noble Drilling Corporation, Global Marine Drilling
Company, Marine Drilling International, Inc., Horizon Offshore, Inc., Santa Fe
Drilling Company, Santa Fe International Corporation, Cliffs Drilling Company,
Transocean Offshore, Inc., Rowan Companies, Ensco Offshore Company, Ensco
International Incorporated, Chiles Offshore, L.L.C., Atwood Oceanics, Inc.,
Diamond Offshore Drilling, Inc., Marine Drilling Companies, Pride International,
and R&B Falcon Corporation. The action was filed in the U. S. District Court,
Southern District, Galveston Division, seeking to have the court certify a
nationwide class and to recover damages to be proved, as well as treble damages,
attorneys' fees, expenses, costs and other relief deemed appropriate, for
alleged violations of federal and state antitrust laws and for engaging in
alleged unfair trade practices by suppressing wages and benefits of offshore
workers. By agreement of the parties plaintiff's counsel was allowed to amend
the action by substituting a new plaintiff, Thomas Bryant, who has not been
previously employed by R&B Falcon Corporation or any of its subsidiary or
affiliated companies and who purports to represent the class relief being
sought, and in the amended complaint three new defendants, Parker Drilling
Offshore USA, L.L.C., Helmerich & Payne International Drilling Company and
Helmerich & Payne, Inc. were added. The Company and R&B Falcon Corporation and
its subsidiary believe that they have valid defenses in this matter, intend to
defend their interest vigorously with respect to same and do not believe, based
on information currently available, the ultimate outcome of this matter will
have a material adverse effect on the business or financial condition of the
Company.
7
<PAGE>
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C) PURCHASE OF JACK-UP DRILLING RIGS
In the second quarter of 2000, the Company purchased four jack-up drilling
rigs at fair market value from a wholly-owned subsidiary of R&B Falcon
Corporation for $71.0 million in cash. However, for accounting purposes, such
drilling units were recorded at their net book value of $47.5 million and the
Company recorded a deferred tax asset of $8.2 million and a dividend of $15.3
million.
D) LONG-TERM OBLIGATIONS
Long-term debt at September 30, 2000 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 $1.7 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 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 Corporation 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 (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Current assets $11,121 $ 9,677
Noncurrent assets 86,530 75,584
------- -------
Total assets $97,651 $85,261
======= =======
Current liabilities $ 3,084 $ 2,046
Noncurrent liabilities 83,239 71,131
Equity 11,328 12,084
------- -------
Total liabilities and equity $97,651 $85,261
======= =======
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------- ------------
Revenues $7,761 $10,011
Operating income (loss) $ (500) $ 2,666
Net income (loss) $ (220) $ 1,529
8
<PAGE>
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
E) SEGMENT INFORMATION
The Company's operating results by business segment are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Daywork drilling $38,686 $31,363 $ 90,114 $112,524
Engineering services 47,977 45,328 130,486 153,686
MOPU operations 1,245 1,244 3,710 3,697
Oil and gas 1 43 57 172
Corporate office - - - -
Eliminations (1) (1,644) (9,850) (14,051) (29,713)
------- ------- -------- --------
Consolidated $86,265 $68,128 $210,316 $240,366
======= ======= ======== ========
Operating income:
Daywork drilling $ 4,778 $ 174 $ (7,703) $ 6,443
Engineering services 9,185 7,906 22,746 31,782
MOPU operations 437 523 1,346 1,315
Oil and gas 2 (163) 28 (162)
Corporate office (4,835) (5,485) (14,870) (11,472)
------- ------- -------- --------
Consolidated $ 9,567 $ 2,955 $ 1,547 $ 27,906
======= ======= ======== ========
</TABLE>
(1) Eliminations consist of intersegment sales between the daywork drilling
and engineering services business segments.
In April 1998, the Company entered into a turnkey contract with PDVSA
Exploration and Production ("PDVSA") to drill 60 turnkey wells in Venezuela. The
drilling program commenced in March 1998 and the program was expected to extend
over approximately three and one-half years and to utilize seven of the
Company's land drilling rigs. However, during the first quarter of 1999, in
response to the downturn in the market and changes in both PDVSA's management
and its operating policies, PDVSA and the Company renegotiated prices at reduced
margins and in the fourth quarter of 1999, renegotiations were made at further
reduced margins. By the end of the second quarter of 2000, the Company had
completed 35 of the 60 wells. In February 2000, PDVSA cancelled the turnkey
contract for the remaining 25 wells. Although PDVSA cancelled its turnkey
contract, three of the land drilling rigs that were working on a turnkey basis
have been subsequently contracted to work for PDVSA on a dayrate basis. Also, in
December 1999, the Company commenced work under a new one-year dayrate drilling
contract with PDVSA utilizing Rig 55 which had been previously stacked and has
obtained drilling contracts with PDVSA for two jointly owned land drilling rigs.
The Company is currently bidding on other dayrate contracts with PDVSA and other
operators in Venezuela.
For the three months ended September 30, 2000 and 1999, revenues from PDVSA
of $5.6 million ($.1 million reported in the engineering services segment and
$5.5 million reported in the daywork drilling segment) and $42.4 million ($35.7
million reported in the engineering services segment and $6.7 million reported
in the daywork drilling segment), respectively, accounted for 6.5% and 62.3%,
respectively, of the Company's consolidated operating revenues. For the nine
months ended September 30, 2000 and 1999, revenues from PDVSA of $49.7 million
($38.2 million reported in the engineering services segment and $11.5 million
reported in the daywork drilling segment) and $133.3 million ($116.1 million
reported in the engineering services segment and $17.2 million reported in the
daywork drilling segment), respectively, accounted for 23.6% and 55.4%,
respectively, of the Company's consolidated operating revenues.
9
<PAGE>
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Total assets by segment were as follows (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Daywork drilling $477,368 $414,760
Engineering services 129,481 162,120
MOPU operations 26,418 27,541
Oil and gas 371 420
Corporate office 127,992 188,785
-------- --------
Consolidated $761,630 $793,626
======== ========
F) SUBSEQUENT EVENTS
In the third quarter of 2000, one of the Company's turnkey wells encountered
downhole problems, and the Company took a charge against earnings of $.4 million
in the third quarter of 2000 relating to this well. Since September 30, 2000,
the Company has encountered additional downhole problems with this well, and the
Company expects to take a charge, currently estimated at $5.2 million, against
earnings in the fourth quarter of 2000 relating to this well.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDUSTRY CONDITIONS AND LIQUIDITY
Activity in the contract drilling industry and related oil and gas
service businesses deteriorated significantly in 1999 due primarily to decreased
worldwide demand for drilling rigs and related services resulting from a
substantial decline in crude oil prices experienced in 1998 through the first
quarter of 1999. In mid 1999, crude oil prices began a recovery, and demand for
drilling services started to recover as well. However, there can be no assurance
that demand for drilling rigs and related services will reach utilization and
dayrate levels of 1996-1998. To date, while certain markets have improved
substantially, taken as a whole, demand for drilling rigs has not recovered to
the levels experienced in 1996-1998. Oil and gas companies' demand for offshore
drilling services are a function of: 1) current and projected oil and gas
prices, 2) government taxation and concession/leasing policies, 3) the oil and
gas company's lease inventory and existing drilling commitments on leases held,
4) the oil and gas company's free cash flow and general funding availability, 5)
the oil and gas company's internal reserve replacement requirements, 6)
geopolitical factors (e.g., the drive for national hydrocarbons self
sufficiency). The first factor is generally the most important. In particular,
the domestic shallow water market tends to be primarily driven by the price of
natural gas. Continued strength in natural gas prices has recently bolstered
this market.
Changes in demand for exploration and production services can impact
the Company's liquidity as supply and demand factors directly affect utilization
and dayrates, which are the primary determinants of cash flow from the Company's
operations. In late 1998 and early 1999, lower crude oil and gas prices reduced
exploration and production spending, which led to significantly lower dayrates
and utilization for offshore drilling companies, particularly in the U.S. Gulf
of Mexico. While there has been some improvement in utilization and dayrates in
certain segments of drilling activity in which the Company participates since
the beginning of 2000, if crude oil and/or gas prices were to decline
substantially from current levels, there could be a deterioration in rig
utilization and dayrates which could have a material adverse effect on the
Company's liquidity, financial position and results of operations.
In addition, the Company is subject to risks inherent in foreign
operations, principally in Venezuela. In April 1998, the Company entered into a
turnkey contract with PDVSA Exploration and Production ("PDVSA") to drill 60
turnkey wells in Venezuela. The drilling program commenced in March 1998 and the
program was expected to extend over approximately three and one-half years and
to utilize seven of the Company's land drilling rigs. However, during the first
quarter of 1999, in response to the downturn in the market and changes in both
PDVSA's management and its operating policies, PDVSA and the Company
renegotiated prices at reduced margins and in the fourth quarter of 1999,
renegotiations were made at further reduced margins. By the end of the second
quarter of 2000, the Company had completed 35 of the 60 wells. In February 2000,
PDVSA cancelled the turnkey contract for the remaining 25 wells. Although PDVSA
cancelled its turnkey contract, three of the land drilling rigs that were
working on a turnkey basis have been subsequently contracted to work for PDVSA
on a dayrate basis. Also, in December 1999, the Company commenced work under a
new one-year dayrate drilling contract with PDVSA utilizing Rig 55 which had
been previously stacked and has obtained drilling contracts with PDVSA for two
jointly owned land drilling rigs. The Company is currently bidding on other
dayrate contracts with PDVSA and other operators in Venezuela.
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 operations. The Company believes its projected level of
cash flows from operations, which assumes an industry recovery in 2000, and cash
on hand will be sufficient to satisfy the Company's short-term and long-term
liquidity requirements. However, if the Company requires additional funds, R&B
Falcon Corporation, who is the parent company of the Company, will provide such
funds through additional investments in the Company, and the Company's
management believes such funds would be available if needed.
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RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 and 1999
The Company recognized a net loss of $9.8 million for the nine months
ended September 30, 2000 compared to net income of $11.0 million for the same
period in 1999. Such decrease in net income is primarily due to the following:
revenues decreased $30.1 million due to a decrease in daywork drilling as a
result of lower utilization of international land rigs and barges and a decrease
in engineering services resulting from a decrease in the number of international
turnkey wells completed in the period offset partially by an increase in the
number of domestic turnkey wells completed in the period. The Company completed
six international turnkey wells for the nine months ended September 30, 2000
compared to 15 for the same period in 1999 and the Company completed 34 domestic
turnkey wells for the nine months ended September 30, 2000 compared to 14 for
the same period in 1999. International turnkey wells generally produced higher
revenues than domestic turnkey wells. Operating expenses decreased $10.0 million
primarily due to a decrease in daywork drilling as a result of lower utilization
of international land rigs and barges offset by an increase in engineering
services due to an increase in the number of turnkey wells completed in the
period. Depreciation expense increased $3.0 million primarily due to the
purchase of four jack-ups in the second quarter of 2000 (see Note C of Notes to
Interim Consolidated Financial Statements). General and administrative expenses
increased $3.4 million despite reduced overhead costs as a result of the merger
with R&B Falcon Corporation primarily due to a $12.1 million overhead allocation
from R&B Falcon Corporation for the nine months ended September 30, 2000. Income
tax expense decreased $4.9 million primarily due to the Company incurring a
pretax loss in 2000.
Three Months Ended September 30, 2000 and 1999
The Company recognized net income of $1.0 million for the three months
ended September 30, 2000 compared to net income of $.1 million for the same
period in 1999. Such increase in net income is primarily due to the following:
revenues increased $18.1 million due to an increase in daywork drilling as a
result of higher utilization of the jack-up fleet and an increase in engineering
services resulting from an increase in the number of turnkey wells completed in
the period. The Company completed 17 turnkey wells for the three months ended
September 30, 2000 compared to nine for the same period in 1999. Operating
expenses increased $10.6 million primarily due to the increase in the number of
turnkey wells completed in the period. Depreciation expense increased $1.6
million primarily due to the purchase of four jack-ups in the second quarter of
2000 (see Note C of Notes to Interim Consolidated Financial Statements). Income
tax expense increased $4.1 million primarily due to the Company earning pretax
income in 2000.
OTHER
On August 19, 2000, the Company's parent company, R&B Falcon
Corporation, entered into an agreement and plan of merger with Transocean Sedco
Forex Inc. in an all stock transaction. Under the terms of the definitive
agreement, unanimously approved by the board of directors of both companies,
common stockholders of R&B Falcon Corporation will receive a fixed ratio of 0.5
shares of newly issued Transocean Sedco Forex Inc. ordinary shares for each R&B
Falcon Corporation share. Closing of the transaction is expected to occur by the
end of the first quarter of 2001, subject to the approval of stockholders from
both companies, certain regulatory approvals, the sale of all vessels involved
in the coastwise trade before the effective time of the merger, and other
closing conditions. In addition, R&B Falcon Corporation will incur an expense in
connection with the merger as a result of the acceleration of vesting of certain
stock options and restricted stock grants immediately prior to the merger, which
will be based on unvested options and stock prices shortly before the merger. A
portion of this expense will be allocated to the Company based on a method
similar to the overhead allocation received from R&B Falcon Corporation (see
Note A of Notes to Interim Consolidated Financial Statements).
In the third quarter of 2000, one of the Company's turnkey wells
encountered downhole problems, and the Company took a charge against earnings of
$.4 million in the third quarter of 2000 relating to this well. Since September
30, 2000, the Company has encountered additional downhole problems with this
well, and the Company expects to take a charge, currently estimated at $5.2
million, against earnings in the fourth quarter of 2000 relating to this well.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates with respect to its
debt obligation. The Company's debt obligation as of September 30, 2000 consists
of Senior Notes in the aggregate principal amount of $199.7 million and debt
premium, net of amortization, of $1.7 million at a fixed rate of 10.25% due
2003. The estimated fair value of the Company's debt obligation at September 30,
2000 was $205.9 million.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1997, an action was filed by Mobil Exploration and Producing
U.S. Inc. and affiliates, St. Mary Land & Exploration Company and affiliates and
Samuel Geary and Associates, Inc. against the Company, its underwriters and
insurance broker in the 16th Judicial District Court of St. Mary Parish,
Louisiana. The plaintiffs alleged damages amounting to in excess of $50.0
million in connection with the drilling of a turnkey well in 1995 and 1996. The
case was tried before a jury in January and February 2000, and a judgment has
been entered based on the jury verdict awarding the plaintiffs damages of
approximately $30.0 million for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. The Company has filed motions for a
new trial and a judgment notwithstanding the verdict in contemplation of
perfecting its appeal of such judgment and believes it will be successful upon
appeal. The Company further believes all but the portion of the verdict
representing excess drilling costs of approximately $4.7 million is covered by
relevant primary and excess liability insurance policies of the Company;
however, the insurers and underwriters have denied coverage. The Company has
instituted litigation against those insurers and underwriters to enforce its
rights under the relevant policies. At this time the Company believes adequate
reserves have been established in order to avoid any ultimate outcome having a
material adverse effect on the Company's consolidated financial position or
results of operations.
In August 2000, an action was filed by Raymond Verdin (formerly an
employee of R&B Falcon Drilling USA, Inc., a subsidiary of R&B Falcon
Corporation), on behalf of himself and those similarly situated, against R&B
Falcon Drilling USA, Inc., Nabors Drilling USA, Inc., Parker Drilling Company,
Pride Offshore, Inc., Diamond Offshore (USA) Inc., Noble Drilling Corporation,
Global Marine Drilling Company, Marine Drilling International, Inc., Horizon
Offshore, Inc., Santa Fe Drilling Company, Santa Fe International Corporation,
Cliffs Drilling Company, Transocean Offshore, Inc., Rowan Companies, Ensco
Offshore Company, Ensco International Incorporated, Chiles Offshore, L.L.C.,
Atwood Oceanics, Inc., Diamond Offshore Drilling, Inc., Marine Drilling
Companies, Pride International, and R&B Falcon Corporation. The action was filed
in the U. S. District Court, Southern District, Galveston Division, seeking to
have the court certify a nationwide class and to recover damages to be proved,
as well as treble damages, attorneys' fees, expenses, costs and other relief
deemed appropriate, for alleged violations of federal and state antitrust laws
and for engaging in alleged unfair trade practices by suppressing wages and
benefits of offshore workers. By agreement of the parties plaintiff's counsel
was allowed to amend the action by substituting a new plaintiff, Thomas Bryant,
who has not been previously employed by R&B Falcon Corporation or any of its
subsidiary or affiliated companies and who purports to represent the class
relief being sought, and in the amended complaint three new defendants, Parker
Drilling Offshore USA, L.L.C., Helmerich & Payne International Drilling Company
and Helmerich & Payne, Inc. were added. The Company and R&B Falcon Corporation
and its subsidiary believe that they have valid defenses in this matter, intend
to defend their interest vigorously with respect to same and do not believe,
based on information currently available, the ultimate outcome of this matter
will have a material adverse effect on the business or financial condition of
the Company.
The Company is involved in various other legal actions arising in the
normal course of business. After taking into consideration the evaluation of
such actions by counsel for the Company, management is of the opinion that the
outcome of all known and potential claims and litigation will not have a
material adverse effect on the Company's business or consolidated financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 - Agreement and Plan of Merger dated August 19, 2000, by and
among Transocean Sedco Forex Inc., Transocean Holdings
Inc., TSF Delaware Inc. and R&B Falcon Corporation.
27 - Financial Data Schedule. (Exhibit 27 is being submitted as
an exhibit only in the electronic format of this Quarterly
Report on Form 10-Q being submitted to the Securities and
Exchange Commission.)
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the three
months ended September 30, 2000.
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SIGNATURE
---------
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: November 9, 2000 By: /s/T. W. Nagle
--------------------------------------
T. W. Nagle
Vice President
(Principal Accounting and Financial
Officer)
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