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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________.
Commission File No. 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 Number)
901 Threadneedle, Houston, TX 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 496-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
The registrant meets the conditions set forth in Section I of the General
Instructions of Form 10-K and is therefore filing this Form 10-K with a
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 __
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 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. [x]
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TABLE OF CONTENTS
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Page
PART I
------
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
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Item 14. Exhibits, Financial Statements and Reports on Form 8-K
Signatures
________________________________________
FORWARD LOOKING STATEMENTS AND ASSUMPTIONS
This Annual Report on Form 10-K 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 offshore units, general market conditions prevailing in the
marine drilling industry (including daily rates and utilization) and
various other trends affecting the marine drilling industry, including
world oil prices, the exploration and development programs of the Company's
customers, the actions of the Company's competitors and economic conditions
generally.
PART I
Item 1. Business and Item 2. Properties
The following information has been provided in accordance with the
reduced disclosure format as permitted by General Instruction I (2)(d) of
Form 10-K.
The Company
Cliffs Drilling Company, a Delaware corporation (the "Company"), is an
international contract drilling and engineering company. Effective December
1, 1998, a change in control of the Company occurred as a result of the
merger of RBF Cliffs Acquisition Corp. ("Merger Sub"), a wholly-owned
subsidiary of R&B Falcon Corporation ("R&B Falcon"), with and into the
Company (the "Merger"). The Merger was effected pursuant to an Agreement
and Plan of Merger dated August 21, 1998 among R&B Falcon, Merger Sub and
the Company. As a result of the Merger, each outstanding share of common
stock, $0.01 par value, of the Company was converted into 1.7 shares of R&B
Falcon common stock. The Company is now a wholly-owned subsidiary of R&B
Falcon.
Business - General
The Company's primary business is providing marine and land contract
drilling services (daywork and turnkey basis), engineering services, and to
a lesser extent, the development and operation of mobile offshore
production units ("MOPUs"). The Company's domestic operations are
concentrated in the Texas/Louisiana Gulf Coast region and its foreign
operations are concentrated in Venezuela, Trinidad and the Middle East.
Significant Developments During 1999 and Early 2000
The most significant development for the Company during 1999 was the
continued decline in demand for contract drilling services. Such decline
began in mid-1998 and continued throughout 1999. The decline has been
particularly dramatic in the domestic barge rig and jack-up markets, where
the Company is one of the largest contractors. In response to these
conditions, the Company has implemented cost-cutting measures, primarily
reducing its labor force and taking rigs off the market. In addition to
cost-cutting measures, the Company will try to expand its turnkey drilling
activities as a means of generating additional opportunities for its idle
rigs to be put to work.
The following are other significant developments that occurred in 1999
and early 2000:
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 for the next 14 wells to be drilled under
this program. In the fourth quarter of 1999, negotiations were completed
for the following seven wells to be drilled under this program at further
reduced margins. As of December 31, 1999, the Company had completed 29
wells with six wells in progress, which are expected to be completed by the
end of April 2000. In February 2000, PDVSA cancelled the turnkey contract
for the remaining 25 wells. Although PDVSA cancelled its turnkey contract,
some of the rigs that were working on a turnkey basis are expected to
obtain work with PDVSA or other operators on either a dayrate or integrated
services contract basis. The Company is currently bidding on dayrate
contracts with PDVSA which could utilize up to four rigs. 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.
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 the jury returned a verdict of approximately $30.0 million in
favor of the plaintiffs for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. However, the trial court has
not entered a judgment on the verdict, as there are a number of matters to
be ruled upon before doing so. If a judgment is entered on such verdict,
the Company intends to appeal and believes its efforts to do so will be
successful. The Company 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, one insurer has denied coverage and the others have reserved their
rights. If necessary, the Company intends to take appropriate legal action
to enforce its rights with respect to such policies. At this time the
Company believes adequate reserves have been established to protect the
interests of the Company in this matter.
The Company's Fleet
The following sets forth a brief description of the types and
capabilities of the rigs operated by the Company. Rigs described as
"operating" are under contract (including rigs being mobilized under
contract). Rigs described as "warm stacked" are ready for service and are
being actively marketed. Rigs described as "cold stacked" are not being
actively marketed but are capable of being returned to service with little
or no refurbishment unless otherwise noted.
The following table provides certain information regarding the Company's
fleet as of February 29, 2000.
Year Water Drilling
Delivered/ Depth Depth
Equipment Rig Description Refurbished Capability Capability Location Status
- --------- --------------- ----------- ---------- ---------- -------- ------
Jack-Up Drilling Rigs (expressed in feet)
- ---------------------
Cantilevered Independent
Leg Jack-up Rigs
LaSALLE DMI 200-IC 1982/1997 190 25,000 Qatar Cold
Stacked
CLIFFS MLT 150-44-C 1979/1998 150 20,000 U.S.Gulf Operat-
DRILLING 150 ing
CLIFFS BMC 150-H 1981/1993 150 25,000 U.S.Gulf Cold
DRILLING 151 Stacked
CLIFFS MLT 150-44-C 1979/1996 150 20,000 U.S.Gulf Cold
DRILLING 154 Stacked
(1)
CLIFFS Levingston 011-C 1980/1998 150 22,000 U.S.Gulf Operat-
DRILLING 155 ing
CLIFFS BMC 150-H 1983/1998 150 25,000 U.S. Gulf Operat-
DRILLING 156 ing
CLIFFS BMC 150-IC 1980/1998 160 20,000 Qatar Cold
DRILLING 160 Stacked
Slot type Mat-Supported
Jack-up Rig
CLIFFS BMC 250-MS 1978 184 25,000 U.S.Gulf Cold
DRILLING 180 Stacked
Cantilevered Mat-Supported
Jack-up Rigs
CLIFFS Bethlehem JU- 1982/1993 100 25,000 U.S.Gulf Cold
DRILLING 100 100MC Stacked
CLIFFS McDermott 87-C 1973/1991 100 15,000 Trinidad Operat-
DRILLING 101 ing
CLIFFS Bethlehem JU- 1982/1996 110 25,000 Trinidad Operat-
DRILLING 110 100MC ing
CLIFFS Bethlehem JU- 1980/1993 150 25,000 U.S. Gulf Operat-
DRILLING 152 150MC ing
CLIFFS Bethlehem JU- 1980/1994 150 25,000 U.S.Gulf Operat-
DRILLING 153 150MC ing
CLIFFS Bethlehem JU- 1979/1998 200 25,000 U.S.Gulf Operat-
DRILLING 200 200MC ing
CLIFFS Bethlehem JU- 1980/1996 200 20,000 Brazil Operat-
DRILLING 201 200MC ing
CLIFFS Bethlehem JU- 1980/1998 200 25,000 Venezuela Warm
DRILLING 202 200MC Stacked
Platform Drilling Rigs
- ----------------------
CLIFFS - 1988/1998 - 18,000 China Operat-
DRILLING 1 ing
CLIFFS - 1993/1998 - 25,000 Trinidad Warm
DRILLING 3 Stacked
CLIFFS - 1996 - 12,000 Brazil Operat-
DRILLING 17 ing
Land Drilling Rigs
- -------------------
CLIFFS National 1320 1977/1994 - 25,000 Venezuela Warm
DRILLING 28 Stacked
CLIFFS Oilwell E-2000 1980/1998 - 18,000 Venezuela Operat-
DRILLING 34 ing
CLIFFS Oilwell E-2000 1980/1997 - 18,000 Venezuela Warm
DRILLING 35 Stacked
CLIFFS Oilwell E-2000 1982/1998 - 18,000 Venezuela Warm
DRILLING 36 Stacked
CLIFFS Oilwell E-2000 1982/1998 - 18,000 Venezuela Operat-
DRILLING 37 ing
CLIFFS National 1320 1980/1998 - 25,000 Venezuela Warm
DRILLING 40 -UE Stacked
CLIFFS National 1320 1981/1994 - 25,000 Venezuela Warm
DRILLING 41 Stacked
CLIFFS National 1320 1981/1994 - 25,000 Venezuela Operat-
DRILLING 42 -UE ing
CLIFFS National 1320 1981/1991 - 25,000 Venezuela Warm
DRILLING 43 -UE Stacked
CLIFFS National 1320 1981/1995 - 30,000 Venezuela Operat-
DRILLING 54 -UE ing
CLIFFS National 1320 1983/1997 - 35,000 Venezuela Operat-
DRILLING 55 -UE ing
Barge Rigs
- ----------
RIG 40 Oilwell/EMD 1980/1994 150 25,000 Venezuela Warm
Stacked
RIG 42 National/EMD 1982/1994 150 25,000 Venezuela Warm
Stacked
RIG 43 National/EMD 1982/1994 150 25,000 Venezuela Warm
Stacked
Mobile Offshore Production Units
- --------------------------------
CLIFFS - 1967/1995 150 - U.S.Gulf Operat-
DRILLING 4 ing
CLIFFS - 1977/1993 250 - U.S.Gulf Operat-
DRILLING 8 ing
CLIFFS - 1979/1993 250 - Qatar Cold
DRILLING 10 Stacked
LANGLEY - 1965/1996 150 - Nigeria Operat-
___________ ing
(1) This rig is also in need of substantial refurbishment to be activated.
Item 3. Legal Proceedings
On August 26, 1998, the Company received notice that a class action
complaint against the Company and each member of the Board of Directors was
filed by a stockholder, on behalf of all of the stockholders of the
Company, on August 12, 1998 in the Court of Chancery of the State of
Delaware. The complaint alleges that the directors of the Company did not
act in accordance with their fiduciary duties to protect the interests of
the stockholders in connection with the Merger. The plaintiff seeks damages
as well as injunctive relief. The Company believes the allegations in the
complaint are wholly without merit and intends to vigorously defend the
lawsuit.
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 the jury returned a verdict of approximately $30.0 million in
favor of the plaintiffs for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. However, the trial court has
not entered a judgment on the verdict, as there are a number of matters to
be ruled upon before doing so. If a judgment is entered on such verdict,
the Company intends to appeal and believes its efforts to do so will be
successful. The Company 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, one insurer has denied coverage and the others have reserved their
rights. If necessary, the Company intends to take appropriate legal action
to enforce its rights with respect to such policies. At this time the
Company believes adequate reserves have been established to protect the
interests of the Company in this matter.
The Company is party to a number of other 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
None
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The common stock of the Company was traded on the New York Stock
Exchange under the symbol "CDG" from April 3, 1997 through November 30,
1998. The following table sets forth the range of high and low sales
prices per share of common stock for each calendar quarter as reported by
the New York Stock Exchange through November 30, 1998, the last trading
date for the common stock. As a result of the Merger which became effective
on December 1, 1998, R&B Falcon owns all of the outstanding common stock of
the Company, and the Company's common stock is no longer publicly traded.
Sales Price
-------------------
High Low
1998 ------- -------
1st Quarter $ 51.81 $ 32.38
2nd Quarter 57.31 31.75
3rd Quarter 33.38 13.25
4th Quarter (a) 27.94 13.75
(a) For the period through November 30, 1998, the last trading date for the
common stock.
The Company has never paid cash dividends on its common stock. Under the
Company's 10.25% Senior Notes due 2003, the Company is restricted from
declaring, making or paying cash dividends on its common stock.
Item 6. Selected Financial Data
Under the reduced disclosure format permitted by General Instruction I
(2)(a) of Form 10-K, the information otherwise required by this item has
been omitted.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information has been provided in accordance with the
reduced disclosure format as permitted by General Instruction I(2)(a) of
Form 10-K.
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. Effective September 30, 1999, Falcon Drilling de Venezuela,
Inc. ("Falcon Venezuela"), a wholly-owned subsidiary of R&B Falcon, was
merged with the Company. The primary assets of Falcon Venezuela were three
barge rigs located in Venezuela. The merger was accounted for similar to a
pooling of interests. See Note A of Notes to Consolidated Financial
Statements.
Results of Operations
The Company recognized a net loss of $8.7 million in 1999 compared to
net income of $51.1 million in 1998. Such decrease in net income is
primarily due to a $74.9 million decrease in operating income due to the
following: revenues decreased $7.0 million due to a decrease in daywork
drilling due to lower utilization and dayrates, offset by an increase in
engineering services due to an increase in the number of turnkey wells
completed in 1999 versus 1998. The Company completed 43 turnkey wells in
1999 versus 17 in 1998. Operating expenses increased $48.3 million
primarily due to the increase in the number of turnkey wells completed in
1999, offset partially by lower operating expenses for daywork drilling due
to lower utilization. Depreciation, depletion and amortization increased
$9.8 million primarily due to the $97.5 million increase in property and
equipment on December 1, 1998. Such increase was due to recording property
and equipment at its estimated fair value as a result of the Merger.
General and administrative expenses increased $9.8 million despite reduced
overhead costs as a result of the Merger primarily due to a $16.1 million
overhead allocation from R&B Falcon.
Industry Conditions and Liquidity
Activity in the contract drilling industry and related oil service
businesses has deteriorated significantly in the past year 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 to recover,
but there can be no assurance that demand for drilling rigs and related
services will recover proportionately. To date, demand for drilling rigs
has not recovered to the levels experienced in 1996-1998. Oil 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 company's lease inventory and existing drilling
commitments on leases held, 4) the oil company's free cash flow and general
funding availability, 5) the oil company's internal reserve replacement
requirements, and 6) geopolitical factors (e.g., the drive for national
hydrocarbons self sufficiency). The first factor is by far the most
important. In particular, the domestic shallow water market tends to be
primarily driven by the price of natural gas. 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 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. Crude oil and natural gas prices have continued to fluctuate
over the last several years. If crude oil prices decline or a weakness in
crude oil prices continued for an extended period, there could be a further
deterioration in both rig utilization and dayrates which could have a
material adverse affect 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 for the next
14 wells to be drilled under this program. In the fourth quarter of 1999,
negotiations were completed for the following seven wells to be drilled
under this program at further reduced margins. As of December 31, 1999, the
Company had completed 29 wells with six wells in progress, which are
expected to be completed by the end of April 2000. In February 2000, PDVSA
cancelled the turnkey contract for the remaining 25 wells. Although PDVSA
cancelled its turnkey contract, some of the rigs that were working on a
turnkey basis are expected to obtain work with PDVSA or other operators on
either a dayrate or integrated services contract basis. The Company is
currently bidding on dayrate contracts with PDVSA which could utilize up to
four rigs. 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.
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 will provide such funds and the Company's management
believes such funds would be available if needed.
Other
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 the jury returned a verdict of approximately $30.0 million in
favor of the plaintiffs for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. However, the trial court has
not entered a judgment on the verdict, as there are a number of matters to
be ruled upon before doing so. If a judgment is entered on such verdict,
the Company intends to appeal and believes its efforts to do so will be
successful. The Company 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, one insurer has denied coverage and the others have reserved their
rights. If necessary, the Company intends to take appropriate legal action
to enforce its rights with respect to such policies. At this time the
Company believes adequate reserves have been established to protect the
interests of the Company in this matter.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates. The Company may enter into
forward exchange contracts to hedge specific commitments and anticipated
transactions but not for speculative or trading purposes. However, the
Company's contracts generally provide for payment in U.S. dollars and the
Company does not maintain significant foreign currency cash balances. See
Note A of Notes to Consolidated Financial Statements.
The Company is exposed to changes in interest rates with respect to its
debt obligation. The Company's debt obligation as of December 31, 1999
consists of senior notes in the aggregate principal amount of $199.7
million and debt premium, net of amortization, of $2.3 million at a fixed
rate of 10.25% due 2003. The estimated fair value of the Company's debt
obligation at December 31, 1999 was $204.7 million.
The Company is exposed to changes in the price of oil and natural gas.
The contract drilling industry is dependent upon the exploration and
production programs of oil and gas companies, which in turn are influenced
by the price of oil and natural gas.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder
Cliffs Drilling Company
We have audited the accompanying consolidated balance sheet of Cliffs
Drilling Company (a Delaware corporation) and subsidiaries as of December
31, 1999 and the related consolidated statements of operations, cash flows
and stockholder's equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cliffs Drilling Company and subsidiaries as of December 31, 1999 and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in
the United States.
/s/Arthur Andersen LLP
Houston, Texas
February 22, 2000
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Cliffs Drilling Company
We have audited the accompanying consolidated balance sheet of Cliffs
Drilling Company as of December 31, 1998 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of
the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standard generally
accepted in the United States. 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, 1998 and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ERNST & YOUNG LLP
Houston, Texas
February 17, 1999
CLIFFS DRILLING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999 and 1998
(in thousands, except share information)
1999 1998
--------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 103,730 $ 36,276
Accounts receivable:
Trade, net 38,734 35,670
Other 10,013 6,984
Materials and supplies inventory 7,684 10,335
Drilling contracts in progress 16,674 29,483
Other current assets 1,871 4,861
--------- ---------
Total current assets 178,706 123,609
--------- ---------
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED INVESTEES 4,657 2,580
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 558,286 504,189
Other 4,171 4,550
--------- ---------
Total property and equipment 562,457 508,739
Accumulated depreciation, depletion and
amortization since December 1, 1998 (49,617) (2,898)
--------- ---------
Net property and equipment 512,840 505,841
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 84,795 70,579
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 6,755 4,139
--------- ---------
DUE FROM PARENT - 10,508
--------- ---------
TOTAL ASSETS $ 787,753 $ 717,256
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade $ 8,338 $ 11,636
Accrued liabilities 75,466 41,305
--------- ---------
Total current liabilities 83,804 52,941
LONG-TERM OBLIGATIONS 201,936 202,935
DEFERRED INCOME TAXES 43,050 55,094
OTHER NONCURRENT LIABILITIES 1,957 1,797
PAYABLE TO PARENT 28,585 -
--------- ---------
Total liabilities 359,332 312,767
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 30,000,000
shares authorized and 1,100 and 1,000
shares issued and outstanding at
December 31, 1999 and 1998, respectively - -
Capital in excess of par value 405,069 405,069
Retained earnings (deficit) since
December 1, 1998 23,352 (580)
--------- ---------
Total stockholder's equity 428,421 404,489
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 787,753 $ 717,256
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
CLIFFS DRILLING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING REVENUES $ 328,225 $ 335,239 $ 261,887
--------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 246,394 198,087 145,182
Depreciation, depletion and amortization 38,491 28,701 20,443
General and administrative 22,215 12,455 8,731
--------- --------- ---------
307,100 239,243 174,356
--------- --------- ---------
OPERATING INCOME 21,125 95,996 87,531
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (20,973) (20,443) (17,838)
Interest income 3,442 2,080 1,941
Income (loss) from equity investees (1,041) 585 1,745
Other, net (405) (584) (1,596)
--------- --------- ---------
Total other income (expense) (18,977) (18,362) (15,748)
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 2,148 77,634 71,783
INCOME TAX EXPENSE 10,887 26,545 25,124
--------- --------- ---------
NET INCOME (LOSS) $ (8,739) $ 51,089 $ 46,659
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic N/A N/A $ 3.06
========= ========= =========
Diluted N/A N/A $ 3.01
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic N/A N/A 15,237
========= ========= =========
Diluted N/A N/A 15,493
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
CLIFFS DRILLING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Years Ended December 31,
------------------------------
1999 1998 1997
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,739) $ 51,089 $ 46,659
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and amortization 38,491 28,701 20,443
Deferred income taxes (3,392) 6,621 9,307
Mobilization expense amortization - 770 447
Gain on disposition of assets (166) (257) (3,150)
Amortization of debt issue costs 924 927 822
Amortization of restricted stock - 2,212 430
Amortization of debt premium (671) (671) (269)
Tax benefit associated with exercise
of stock options - 214 2,930
Loss (income) from equity investees 1,041 (585) (1,745)
Other (2,322) 1,055 1,465
Changes in assets and liabilities:
Accounts receivable, net 1,320 21,157 (29,743)
Materials and supplies inventory 1,527 (2,498) (1,744)
Drilling contracts in progress 13,533 (12,960) 1,169
Prepaid insurance and other prepaid
expenses 2,921 2,456 4,943
Accounts payable and other accrued
liabilities 10,321 (11,535) 24,277
Other (2,272) - -
--------- -------- --------
Net cash provided by operating
activities 52,516 86,696 76,241
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,376) (69,882) (84,535)
Acquisition of rigs and related
equipment, net of cash acquired 436 - (61,969)
Proceeds from sale of property and
equipment 497 1,836 5,627
(Increase) decrease in investments in
and advances to unconsolidated investees (3,118) (167) 353
Collection of notes receivable - - 3,696
--------- -------- --------
Net cash used in investing activities (19,561) (68,213) (136,828)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - - 60,375
Payments on borrowings (328) - (12,184)
Proceeds from exercise of stock options - 211 2,260
Debt issuance costs - (32) (923)
Due from/payable to parent 34,827 (10,508) -
--------- -------- --------
Net cash (used in) provided
by financing activities 34,499 (10,329) 49,528
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 67,454 8,154 (11,059)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 36,276 28,122 39,181
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 103,730 $ 36,276 $ 28,122
========= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid, net of capitalized interest $ 20,652 $ 20,188 $ 16,406
Income taxes paid $ 3,622 $ 18,688 $ 11,508
The accompanying notes are an integral part of the consolidated financial
statements.
CLIFFS DRILLING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1999
(in thousands, except share amounts)
Notes
Receivable
from
Common Stock Officers
---------------- Retained for Res-
Par Paid-In Earnings Restricted tricted Treasury
Shares Value Capital (Deficit) Stock Stock Stock
---------- ----- --------- -------- ------ ------- -------
Balance at
December 31, 1996
(Pre-Acquisition) 15,133,008 $ 80 $ 153,513 $ (5,717) $ (186) $ (223) $(5,299)
Net income 46,659
Stock split 76 (76)
Common stock
issued in
connection
with offshore
rig acquisition 437,939 4 20,496
Restricted stock
issuances 90,600 1 3,165 (3,166)
Restricted stock
cancellations (17,800) (492) 492
Collection of
officers'
notes receivable 186
Amortization of
restricted stock 430
Exercise of stock
options 243,900 2 2,258
Tax benefit
associated
with exercise
of stock options 2,930
Employer
contributions
to 401(k)
saving plan 19,233 626 170
---------- ----- --------- -------- ------ ------- -------
Balance at
December 31, 1997
(Pre-Acquisition) 15,906,880 163 182,420 40,942 - (2,467) (5,129)
Net income 51,089
Deferred stock
issuances 4,200 172
Restricted stock
cancellations (30,193) (809) 255
Amortization of
restricted stock 2,212
Exercise of
stock options 26,550 210
Tax benefit
associated with
exercise of
stock options 214
Employer
contributions
to 401(k)
savings plan 39,437 611 478
Common stock
issued in
connection
with merger 1,000
Merger
adjustments (15,946,874) (163) 222,251 (92,611) 4,651
----------- ----- --------- -------- ------- ------- -------
Balance at
December 31, 1998
(Post-Acquisition) 1,000 - 405,069 (580) - - -
Merger with
Falcon Venezuela 100 32,671
Net loss (8,739)
---------- ------ --------- -------- ------- ------- ------
Balance at
December 31, 1999
(Post-Acquisition) 1,100 $ - $ 405,069 $ 23,352 $ - $ - $ -
========== ====== ========= ======== ======= ======= ======
The accompanying notes are an integral part of the consolidated financial
statements.
CLIFFS DRILLING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) INDUSTRY CONDITIONS, LIQUIDITY AND 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 international activities which are organized
as foreign branches. Effective December 1, 1998, a change in control of
the Company occurred. The Company is now a wholly-owned subsidiary of R&B
Falcon Corporation ("R&B Falcon") (see Note B). All significant
intercompany balances and transactions have been eliminated.
Effective September 30, 1999, Falcon Drilling de Venezuela, Inc.
("Falcon Venezuela"), a wholly-owned subsidiary of R&B Falcon, was merged
with the Company. The primary assets of Falcon Venezuela were three barge
rigs located in Venezuela with a net book value of approximately
$28,607,000. As the merger was between two wholly-owned subsidiaries of R&B
Falcon, the merger was accounted for similar to a pooling of interests. The
financial results of Falcon Venezuela were combined with those of the
Company for the period prior to September 30, 1999 from the time the
entities were under common control. The 1998 information was not combined
because the impact on the consolidated financial statements for the month
ended December 31, 1998 was not material.
The Company uses the equity method to account for affiliates in which it
does not have control. On May 23, 1996, the Company acquired the stock of
Viking Trinidad Limited (renamed Cliffs Drilling Trinidad Limited), which
owned a 50% interest in the West Indies Drilling Joint Venture (the
"WINDJV"). The WINDJV was a joint venture between Cliffs Drilling Trinidad
Limited and Well Services (Marine) Limited ("Well Services"), which owned a
jack-up drilling rig. On August 1, 1997, Cliffs Drilling Trinidad Limited
acquired an additional 49% interest in the WINDJV from Well Services. On
December 29, 1997, the Company acquired the remaining 1% interest in the
WINDJV from Well Services. In 1996, the Company became a 50% joint venture
partner with Perforadora Central, S.A. de C.V. by forming Cliffs Central
Drilling International ("CCDI") for the marketing of drilling services in
Mexico. In 1996, the Company became a 33 1/3% owner of Servicios Integrados
Petroleros C.C.I., S.A. ("CCI") and in 1999, the Company became a 66 2/3%
owner of CCI. CCI is a joint venture company between the Company and
Inepetrol, S.A., which markets drilling services in Venezuela.
INDUSTRY CONDITIONS/LIQUIDITY - Activity in the contract drilling
industry and related oil service businesses has deteriorated significantly
in the past year 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 to recover, but there can be no assurance that
demand for drilling rigs and related services will recover proportionately.
To date, demand for drilling rigs has not recovered to the levels
experienced in 1996-1998. Oil 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 company's
lease inventory and existing drilling commitments on leases held, 4) the
oil company's free cash flow and general funding availability, 5) the oil
company's internal reserve replacement requirements, and 6) geopolitical
factors (e.g., the drive for national hydrocarbons self sufficiency). The
first factor is by far the most important. In particular, the domestic
shallow water market tends to be primarily driven by the price of natural
gas. 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
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. Crude oil and natural
gas prices have continued to fluctuate over the last several years. If
crude oil prices decline or a weakness in crude oil prices continued for an
extended period, there could be a further deterioration in both rig
utilization and dayrates which could have a material adverse affect 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 for the next
14 wells to be drilled under this program. In the fourth quarter of 1999,
negotiations were completed for the following seven wells to be drilled
under this program at further reduced margins. As of December 31, 1999, the
Company had completed 29 wells with six wells in progress, which are
expected to be completed by the end of April 2000. In February 2000, PDVSA
cancelled the turnkey contract for the remaining 25 wells. Although PDVSA
cancelled its turnkey contract, some of the rigs that were working on a
turnkey basis are expected to obtain work with PDVSA or other operators on
either a dayrate or integrated services contract basis. The Company is
currently bidding on dayrate contracts with PDVSA which could utilize up to
four rigs. 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.
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 will provide such funds and the Company's management
believes such funds would be available if needed.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid cash
investments purchased with an original maturity of three months or less to
be cash equivalents.
MATERIALS AND SUPPLIES INVENTORY - Materials and supplies are stated at
the lower of average cost or market.
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 upon
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.
The Company's Daywork Drilling business segment frequently leases its
jack-up and land drilling rigs to the Engineering Services business segment
for turnkey drilling operations. Revenues, expenses and profits generated
by the drilling rigs operating under turnkey contracts are deferred until
the contract is completed. While the turnkey contract is in progress, the
rig operating profit is offset against drilling contracts in progress. Rig
operating losses are recognized when incurred and are not deferred.
PROPERTY AND EQUIPMENT - Property and equipment are carried at original
cost, at adjusted net realizable value, as applicable or at market (see
Note B). Major renewals and improvements are capitalized in the property
accounts, while the cost of repairs and maintenance is charged to operating
expenses in the period incurred. Acquisitions of rigs and related equipment
have been accounted for under the purchase method of accounting and
therefore, the results of the acquired assets are combined with the
Company's results only from the acquisition date forward. 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 Statement of
Operations. Gain (loss) on disposal of properties is credited (charged) to
income. The Company's management periodically evaluates the carrying value
of its property and equipment based upon the estimated undiscounted future
net cash flows of the related asset compared to the carrying amount of that
asset.
Prior to November 30, 1998, depreciation of property and equipment was
provided on the straight-line basis at rates based upon expected useful
lives of the various classes of assets as follows:
Rigs and related equipment:
Jack-up drilling rigs 15 Years
Platform drilling rigs 15 Years
Land drilling rigs 16 Years
MOPUs 10 Years
Drill pipe 5 Years
Other (excluding oil and gas properties) 3 - 5 Years
Prior to November 30, 1998, no depreciation expense was recorded during
periods of refurbishment. To provide for any deterioration that may have
occurred while the rigs were 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.
Effective December 1, 1998, depreciation of property and equipment is
provided on the straight-line basis at rates based upon adjusted expected
useful lives of the various classes of assets as follows:
Rigs and related equipment:
Jack-up drilling rigs 17 Years
Platform drilling rigs 17 - 26 Years
Land drilling rigs 15 Years
MOPUs 8 - 17 Years
Drill pipe 3 Years
Effective December 1, 1998, depreciation expense is recorded during
refurbishment and stacked periods.
GAIN ON ASSET DISPOSITION - In May 1997, a long-term note receivable of
the Company was repaid in connection with the Company's disposition of the
various oil and gas related interests underlying such long-term note
receivable. As a result, the Company recorded a net gain of $2,718,000
related to the disposition of the oil and gas related interests.
OIL AND GAS ACCOUNTING - The successful efforts method of accounting is
used for oil and gas exploration and production activities. Under this
method, acquisition costs for proved and unproved properties are
capitalized when incurred. Exploration costs, including geological and
geophysical costs and costs of carrying and retaining unproved properties,
are charged to expense as incurred. The costs of drilling exploratory
wells are capitalized pending determination of whether each well had
discovered proven reserves. If proved reserves are not discovered, such
drilling costs are charged to expense. Costs incurred to drill and equip
development wells, including unsuccessful development wells, 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
proven reserves. Lease and well equipment and intangible drilling costs
associated with productive wells are amortized based on proved developed
reserves.
GOODWILL - Goodwill was created in the Merger which was effective on
December 1, 1998 (see Note B). The purchase price adjustments have been
"pushed down" to the consolidated financial statements of the Company. The
excess of the purchase price over the estimated fair value of net assets
acquired is accounted for as goodwill and is amortized on a straight-line
basis over 40 years (the period when benefits are expected to be derived).
The Company's management periodically evaluates recorded goodwill balances,
net of accumulated amortization, for impairment based on the undiscounted
cash flows associated with the asset compared to the carrying amount of
that asset. Management believes that there have been no events or
circumstances which warrant revision to the remaining useful life or affect
the recoverability of its recorded goodwill.
INCOME TAXES - Deferred income taxes are provided on items recognized in
different periods for financial and tax reporting purposes. Taxable income
(loss) of the Company for taxable periods ended prior to December 1, 1998
were included in the consolidated U.S. federal income tax return of the
Company. Thereafter, the taxable income (loss) of the Company is included
in the consolidated U.S. federal income tax return of R&B Falcon. See Note
G.
REVENUE RECOGNITION - The Company recognizes revenues from its daywork
drilling and MOPU operations as services are rendered. 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. In
addition, when a unit's mobilization revenue exceeds the cost of the
mobilization by a significant amount, the Company recognizes the excess as
contract revenue during the contract preparation and mobilization period on
a dayrate basis. If there is revenue that has not been recognized by the
time the unit has arrived on location, the remaining amount is recognized
over the primary term of the contract.
OVERHEAD ALLOCATION - Since July 1, 1999, R&B Falcon provides
substantially all of the Company's general and administrative services
including personnel. General and administrative expenses including payroll
costs of R&B Falcon are allocated to the Company and other subsidiaries of
R&B Falcon based on revenues. General and administrative expenses allocated
to the Company were $16,144,000 for the year ended December 31, 1999.
CAPITALIZED INTEREST - The Company capitalizes interest applicable to
significant upgrades of its marine equipment as a cost of such assets.
There was no interest capitalized for the year ended December 31, 1999 and
interest capitalized for the years ended December 31, 1998 and 1997 was
$501,000 and $629,000, respectively. Capitalized interest is included as a
reduction of interest expense in the Consolidated Statement of Operations.
FOREIGN CURRENCY TRANSACTIONS - 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 Statement of Operations during the
period incurred.
COMPREHENSIVE INCOME - For the years ended December 31, 1999, 1998 and
1997, the Company did not have any non-owner changes in equity.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances with
commercial banks throughout the world. The Company's cash equivalents
generally consist of commercial paper, money-market mutual funds and
interest-bearing deposits with strong credit rated financial institutions,
therefore, bearing minimal risk. No losses were incurred during 1999, 1998
and 1997.
Revenues can be generated from a relatively small number of customers,
which are primarily major and independent foreign and domestic oil and gas
companies, as well as foreign state-owned oil and gas companies. The
Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral from its customers. The
Company's allowance for doubtful accounts at December 31, 1999 and 1998 was
$3,579,000 and $472,000, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS - In June 1998, Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") was issued. SFAS 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 133, as
amended, is effective for fiscal quarters of fiscal years beginning after
June 15, 2000. The Company has not yet quantified the impacts of adopting
SFAS 133 on its financial statements. The Company did not early adopt SFAS
133, therefore it will be adopted in 2001.
In November 1999, SEC Staff Accounting Bulletin: No. 100 - Restructuring
and Impairment Charges ("SAB 100") was issued. SAB 100 expresses views of
the staff regarding the accounting for and disclosure of certain expenses
commonly reported in connection with exit activities and business
combinations. The Company's accounting practices are consistent with this
rule.
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. The
Company believes its accounting practices are consistent with this rule but
will complete its evaluation in the first quarter of 2000.
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
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATION - Certain prior period amounts in the consolidated
financial statements have been reclassified for comparative purposes. Such
reclassifications had no effect on the net income (loss) or the overall
financial condition of the Company.
(B) 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. ("Merger Sub"), a
wholly-owned subsidiary of R&B Falcon, with and into the Company (the
"Merger"). The Merger was effected pursuant to an Agreement and Plan of
Merger dated August 21, 1998 (the "Merger Agreement") among R&B Falcon,
Merger Sub and the Company. The Company is now a wholly-owned subsidiary of
R&B Falcon.
The purchase price of $405,069,000 consisted of $385,296,000 of R&B
Falcon common stock issued to Company shareholders, outstanding stock
options of the Company valued at $6,215,000 that were assumed by R&B Falcon
and $13,558,000 of direct acquisition costs. The value of the common stock
issued to Company shareholders was calculated based on the average of the
closing prices of R&B Falcon common stock from August 4, 1998 through
August 17, 1998. The combination was announced on August 10, 1998.
In connection with the Merger, the Company recorded merger costs of
$1,512,000 associated with waiver and release payments, in addition to
incremental restricted stock amortization of $1,806,000 related to the
accelerated vesting of restricted stock. These costs are reported as
general and administrative expense in the Consolidated Statement of
Operations in 1998.
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 purchase price allocation to the Company
consisted of an increase to property and equipment of $97,537,000 and an
increase in the deferred tax liability of $34,138,000, which reflects the
increase in the difference in the basis for tax and financial reporting
purposes of property and equipment. The excess of the purchase price over
the estimated fair value of net assets acquired of $86,797,000 has been
accounted for as goodwill. Goodwill has increased $16,068,000 since
December 31, 1998 and represents revisions to estimates used in the initial
purchase price allocation, primarily related to various contingencies,
offset by $1,852,000 of 1999 amortization. Amortization expense for 1998
was $150,000.
The accompanying Consolidated Statement of Operations include the
effects of the Merger from December 1, 1998 to December 31, 1998. Unaudited
pro forma consolidated operating results of the Company for the year ended
December 31, 1998, assuming the Merger was effective as of January 1, 1998,
are summarized as follows (in thousands):
Revenues $ 335,824
Operating income $ 90,608
Net income $ 46,389
The pro forma information for the year ended December 31, 1998 includes
adjustments for additional depreciation of $5,122,000 based on the fair
market values of the drilling rigs and other property and equipment,
goodwill amortization of $2,020,000 and a reduction in income taxes of
$2,442,000. 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.
(C) PROPERTY AND EQUIPMENT ACQUISITIONS
On January 24, 1997, the Company completed the acquisition of the stock
of a subsidiary of Andrade Gutierrez Perfuracao Ltda., which owned 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
purchase price was $28,500,000 in cash.
On August 1, 1997, the Company acquired an additional 49% interest in
the WINDJV. The purchase price was $8,371,000 consisting of $6,000,000 of
cash and $2,371,000 of debt assumed, net of various working capital
amounts acquired. On December 29, 1997, the Company acquired the remaining
1% interest in the WINDJV from Well Services.
Effective October 1, 1997, the Company exercised an option to purchase
a platform drilling rig for $4,250,000.
On December 29, 1997, the Company completed the acquisition of two
offshore platform drilling rigs, one self propelled jack-up
drilling/workover rig and substantially all of the assets used in the
offshore contract drilling business in Trinidad previously operated by Well
Services. The purchase price totaled $44,000,000, consisting of cash of
$23,500,000 and the issuance by the Company of 437,939 shares of common
stock.
Effective September 30, 1999, Falcon Drilling de Venezuela, Inc.
("Falcon Venezuela"), a wholly-owned subsidiary of R&B Falcon, was merged
with the Company. The primary assets of Falcon Venezuela were three barge
rigs located in Venezuela with a net book value of approximately
$28,607,000. As the merger was between two wholly-owned subsidiaries of
R&B Falcon, the merger was accounted for similar to a pooling of interests.
The financial results of Falcon Venezuela were combined with those of the
Company for the period prior to September 30, 1999 from the time the
entities were under common control. The 1998 information was not combined
because the impact on the consolidated financial statements for the month
ended December 31, 1998 was not material.
(D) ACCRUED LIABILITIES
The components of "Accrued liabilities" at December 31, 1999 and 1998
were as follows (in thousands):
1999 1998
-------- --------
Expenses-general $ 54,462 $ 28,183
Income taxes 12,572 4,085
Payroll 5,732 6,364
Interest expense 2,700 2,673
-------- --------
$ 75,466 $ 41,305
======== ========
(E) LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1999 consists solely of 10.25%
Senior Notes due 2003 (the "Senior Notes") in the aggregate principal
amount of $199,672,000 and debt premium, net of amortization, of
$2,264,000. In addition to the $150,000,000 of Senior Notes sold during
1996, the Company sold $50,000,000 of Senior Notes on August 7, 1997 at a
premium of $3,875,000. Considering the premium, the effective interest rate
on the $50,000,000 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 $328,000 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.
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"), 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. 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. 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 pay dividends or make
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 (in
thousands):
At December 31,
-----------------------
1999 1998
-------- --------
Current assets $ 9,677 $ 7,133
Noncurrent assets 75,584 68,766
-------- --------
Total assets $ 85,261 $ 75,899
======== ========
Current liabilities $ 2,046 $ 3,794
Noncurrent liabilities 71,131 63,089
Equity 12,084 9,016
-------- --------
Total liabilities and equity $ 85,261 $ 75,899
======== ========
Year Ended December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
Revenues $ 16,854 $ 24,650 $ 96,166
Operating income $ 2,051 $ 5,969 $ 41,400
Net income (loss) $ (268) $ 3,593 $ 19,650
Effective May 31, 1998, three Subsidiary Guarantors were merged into the
Company.
The Senior Notes had a fair value of approximately $204,664,000 at
December 31, 1999, or a 2.5% premium to carrying value, based upon the
quoted market price of the debt.
The Company formerly maintained a $35,000,000 revolving line of credit
("Revolving Credit Facility"). The Revolving Credit Facility was subject to
certain borrowing base limitations. All advances to the Company from the
Revolving Credit Facility bore interest at the greater of the prevailing
Federal Funds Rate plus .5% or a referenced average prime rate; or at the
adjusted LlBOR rate plus a margin ranging from 1% to 1 5/8% per annum,
based on certain financial ratios. The Company was also obligated to pay
(i) a commitment fee ranging from 3/8% to 1/2% per annum, based on certain
financial ratios, on the average daily unadvanced portion of the
commitments and (ii) a letter of credit fee ranging from 1% to 1 5/8% per
annum, based on certain financial ratios, on the average daily undrawn and
unexpired amount of each letter of credit during the period that sum
remains outstanding. At December 31, 1998, $417,000 in letters of credit
were outstanding, thereby leaving $34,583,000 available under this
facility. At December 31, 1999, there were no amounts outstanding and on
January 3, 2000 such facility was terminated by the Company.
(F) COMMITMENTS AND CONTINGENT LIABILITIES
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 for the next 14 wells to be drilled under
this program. In the fourth quarter of 1999, negotiations were completed
for the following seven wells to be drilled under this program at further
reduced margins. As of December 31, 1999, the Company had completed 29
wells with six wells in progress, which are expected to be completed by the
end of April 2000. In February 2000, PDVSA cancelled the turnkey contract
for the remaining 25 wells. Although PDVSA cancelled its turnkey contract,
some of the rigs that were working on a turnkey basis are expected to
obtain work with PDVSA or other operators on either a dayrate or integrated
services contract basis. The Company is currently bidding on dayrate
contracts with PDVSA which could utilize up to four rigs. 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.
The Company leases office space, 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 $4,531,000, $1,956,000 and $1,534,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Minimum future
obligations under non-cancelable operating leases at December 31, 1999 for
subsequent years are $357,000 for 2000, $46,000 for 2001, $3,000 for 2002
and none thereafter.
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 the jury returned a verdict of approximately $30.0 million in
favor of the plaintiffs for excess drilling costs, loss of insurance
proceeds, loss of hydrocarbons and interest. However, the trial court
has not entered a judgment on the verdict, as there are a number of matters
to be ruled upon before doing so. If a judgment is entered on such verdict,
the Company intends to appeal and believes its efforts to do so will be
successful. The Company 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, one insurer has denied coverage and the others have reserved their
rights. If necessary, the Company intends to take appropriate legal action
to enforce its rights with respect to such policies. At this time the
Company believes adequate reserves have been established to protect the
interests of the Company in this matter.
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.
(G) INCOME TAXES
The Company provided for $10,887,000 and $26,545,000 of income taxes for
the years ended December 31, 1999 and 1998, respectively. This represents
an effective tax rate of 507% and 34% for the years 1999 and 1998,
respectively. Current taxes consist of federal income taxes and taxes paid
in foreign jurisdictions.
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 (in thousands):
December 31,
---------------------
1999 1998
-------- --------
Deferred tax liabilities:
Depreciation $ 71,462 $ 55,741
Certain prepaid expenses - 787
-------- --------
Total deferred tax liabilities 71,462 56,528
-------- --------
Deferred tax assets:
Accounts receivable reserves - (165)
Deferred compensation - (624)
Tax benefit carryforwards (36,981) (643)
Valuation allowance 10,487 1,026
Other (1,918) (1,028)
-------- --------
Total deferred tax assets (28,412) (1,434)
-------- --------
Net deferred tax liabilities $ 43,050 $ 55,094
======== ========
Valuation allowance reflects the possible expiration of tax benefits
(primarily foreign tax credit carryforwards) prior to their utilization.
Tax benefits of $214,000 and $2,930,000 associated with the exercise of
non-qualified stock options during the years ended December 31, 1998 and
1997, respectively, were reflected as a component of shareholders' equity
prior to the Merger.
For financial reporting purposes, income (loss) before income taxes
includes the following components (in thousands):
For the Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Income (loss) before income taxes:
United States $(50,325) $ 14,099 $ 15,778
Foreign 52,473 63,535 56,005
-------- -------- --------
Total $ 2,148 $ 77,634 $ 71,783
======== ======== ========
Significant components of the provision for income taxes attributable to
continuing operations are as follows (in thousands):
For the Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Current:
Federal $ - $ 12,109 $ 10,907
Foreign 14,528 7,815 4,910
State 30 - -
-------- -------- --------
Total Current 14,558 19,924 15,817
-------- -------- --------
Deferred:
Federal (3,671) 6,994 7,908
Foreign - (373) 1,399
-------- -------- --------
Total Deferred (3,671) 6,621 9,307
-------- -------- --------
$ 10,887 $ 26,545 $ 25,124
======== ======== ========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
For the Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Tax at U.S. statutory rates $ 752 $ 27,172 $ 25,124
Foreign tax provision 14,528 7,442 6,308
Foreign tax credits available (14,528) (7,442) (4,909)
Merger costs deductible for tax purposes - (1,173) -
Other non-deductible items 674 228 176
Change in valuation allowance 9,461 - (1,589)
Other, net - 318 14
-------- -------- --------
Income tax expense $ 10,887 $ 26,545 $ 25,124
======== ======== ========
(H) EMPLOYEE BENEFIT PLANS
SAVINGS PLAN - Effective April 1, 1999, the Company's defined
contribution plan ("401(k) Plan") was merged into the R&B Falcon U.S.
Savings Plan. Under the 401(k) Plan (prior to April 1, 1999), an employee
who had reached age 18 and completed 90 days of service was eligible to
participate in the plan through contributions that ranged in one percent
multiples up to 16% of their base salary (subject to certain limitations).
Through November 30, 1998, the Company contributed (or "matched") on behalf
of each participant shares of common stock equal to 100% of the portion of
each participant's contribution up to 6% of the participant's annual
salary. Effective December 1, 1998, employer contributions were made in
cash. Employee contributions were 100% vested and non-forfeitable.
Employer contributions were subject to a graded vesting schedule, with
participants becoming fully vested upon completion of five years employment
service with the Company. Contributions to the 401(k) Plan by the Company
were $475,000, $1,160,000 and $737,000 for the years 1999, 1998 and 1997,
respectively.
STOCK PLANS - The Company had a 1988 Incentive Equity Plan and a 1998
Incentive Equity Plan under which stock options, stock appreciation rights,
restricted stock and deferred stock awards of the Company's common stock
were available for award to officers, directors and key employees. The
Company's incentive equity plans were designed to attract and reward key
executive personnel.
Stock Options
Stock options granted pursuant to the 1988 and 1998 Incentive Equity
Plans expire not more than ten years from the date of grant and typically
vested over three years, with 50% vesting after one year and 25% vesting in
each of the succeeding two 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. All outstanding stock options vested on
August 21, 1998, the date the Company signed the Merger Agreement, pursuant
to change of control provisions in the related incentive equity plans and
on December 1, 1998 all of the outstanding stock options were converted
into R&B Falcon options.
Changes in the number of outstanding options on the Company's common
stock through December 31, 1998 are summarized as follows:
Weighted
Number of Average
Options Price
--------- --------
Outstanding Options at December 31, 1996 571,450 $ 11.24
Granted 86,500 33.39
Exercised (243,900) 9.27
Canceled (80,000) 14.00
--------
Outstanding Options at December 31, 1997 334,050 17.76
Granted 312,000 50.50
Exercised (26,550) 7.90
Canceled (500) 14.00
Converted into R&B Falcon options (619,000) 34.69
-------- -------
Outstanding Options at December 31, 1998 - -
========
Exercisable at December 31, 1997 103,550 $ 10.27
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation ("SFAS 123"), and was determined as if the
Company had accounted for its employee stock options under the fair value
method of that statement. For the year ended December 31, 1997, the fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions: weighted
average risk-free interest rate of 6.5%, a dividend yield of zero, a
weighted average stock price volatility factor of 60.1% and an expected
life of the options of four years.
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 values of options granted during 1997 was $17.41.
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 (in thousands,
except per share amounts):
Year Ended
December 31,
1997
--------
Pro forma net income $ 45,965
Pro forma net income per common share:
Basic $ 3.02
Diluted $ 2.95
Restricted Stock
Effective December 31, 1992, 35,000 shares of restricted common stock
were made available to certain key executives for purchase at a price of
$6.63 per share. The Company extended full recourse, interest-bearing
loans to the key executives in the aggregate amount of $232,000. Interest
was calculated at 7 1/2% per annum payable quarterly and accrued on the
last day of March, June, September and December until the notes were due on
December 31, 1997. All such loans were paid by December 31, 1997. In
connection with the restricted stock sale, the Company executed deferred
stock agreements with the executives which provided for a share match in
the event certain performance criteria were achieved over the five-year
period ending December 31, 1997. The performance measures were attained by
the Company, resulting in an award of 14,400 additional shares of common
stock on February 18, 1998. Compensation expense of $590,000 related to the
deferred stock awards was accrued during 1997 when it became probable that
the Company performance criteria would be met.
In 1997, a restricted stock award of 90,600 shares was awarded to the
Company's officers and key employees. Restrictions on such awards lapsed
with respect to either 33 1/3% of the entire award after one year and after
each of the succeeding two years or 25% of the entire award after one year
and after each of the succeeding three years. All restricted stock vested
on August 21, 1998, the date the Company signed the Merger Agreement,
pursuant to change of control provisions in the incentive equity plans.
Expense related to amortization of restricted stock was $2,212,000 and
$430,000 for the years 1998 and 1997, respectively. Prior to August 21,
1998, deferred compensation expense relative to non-vested shares of
restricted stock, measured by the market value of the stock on the date of
grant, was amortized on a straight-line basis over the restriction period.
(I) RIG MANAGEMENT AGREEMENT
Effective April 1, 1999, the Company entered into a rig management
agreement to lease 10 of its jack-up drilling rigs operating in the U.S.
Gulf of Mexico to R&B Falcon Drilling USA, Inc. ("RBF USA") (the
"Management Agreement"). Based upon the terms of the Management Agreement,
RBF USA managed these rigs for a fixed daily rate and earned 20% of the net
profit and bore 20% of the net loss generated by each rig. The Company
recognized the remaining 80% of the net profit or loss from each rig. The
Company recognized revenues of $14,809,000 and operating expenses of
$19,184,000 associated with the Management Agreement for the year ended
December 31, 1999. The Management Agreement was terminated on December 31,
1999.
(J) EXECUTIVE TERMINATIONS
Certain executive officers of the Company were terminated during the
period from May to July of 1999 as a result of the Merger. Certain
executive officers of R&B Falcon have assumed the responsibilities
previously performed by these individuals.
As a result of the termination of Mr. Douglas E. Swanson as President
and Chief Executive Officer of the Company, the Company entered into a
termination agreement and a non-competition agreement contract with Mr.
Swanson. The related termination contract expense of $2.6 million will be
amortized over three years. Amortization for 1999 amounted to $.4 million
and is included in other, net per the Consolidated Statement of Operations.
Mr. Swanson remains a Director of R&B Falcon.
(K) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the year ended December 31, 1997 (in thousands
except per share amounts):
Numerator for basic and diluted earnings per share:
Net income $ 46,659
========
Denominator:
Weighted average common shares outstanding - basic 15,237
--------
Effect of dilutive securities:
Stock options 196
Restricted stock 56
Contingent deferred stock 4
--------
Dilutive potential common shares 256
--------
Weighted average common shares outstanding and
assumed conversions - diluted 15,493
========
Net income per common share:
Basic $ 3.06
========
Diluted $ 3.01
========
(L) BUSINESS SEGMENTS
Description of the types of products and services from which each
reportable segment derives its revenues
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.
The following table sets forth financial information with respect to the
Company on a business segment basis (in thousands).
Operating Segment
Revenues Income Assets
--------- -------- ---------
December 31, 1999
Daywork drilling $ 143,693 $ 3,537 $ 624,233
Engineering services 216,017 40,864 46,958
MOPU operations 4,942 1,820 28,192
Oil and gas 172 (401) 423
Corporate office - (24,695) 87,947
Eliminations (1) (36,599) - -
--------- -------- ---------
Consolidated $ 328,225 $ 21,125 $ 787,753
========= ======== =========
December 31, 1998
Daywork drilling $ 221,470 $ 70,736 $ 567,456
Engineering services 133,366 35,252 46,101
MOPU operations 8,676 3,331 32,360
Oil and gas 272 (215) 760
Corporate office - (13,108) 70,579
Eliminations (1) (28,545) - -
--------- -------- ---------
Consolidated $ 335,239 $ 95,996 $ 717,256
========= ======== =========
December 31, 1997
Daywork drilling $ 171,848 $ 72,906 $ 422,587
Engineering services 91,732 20,394 40,685
MOPU operations 8,663 3,582 34,866
Oil and gas 410 (330) 2,013
Corporate office - (9,021) -
Eliminations (1) (10,766) - -
--------- -------- ---------
Consolidated $ 261,887 $ 87,531 $ 500,151
========= ======== =========
------------
(1) Eliminations consist of intersegment sales between the daywork
drilling and engineering services business segments.
The Company derived a significant amount of its revenues from a few
customers in each of the three years in the period ended December 31, 1999.
For the years ended December 31, 1999, 1998 and 1997, revenues from PDVSA
(and its predecessors) accounted for 49%, 33% and 31%, respectively, of the
Company's total operating revenues. Such revenues were reported in the
daywork drilling and engineering services segments.
The following table sets forth financial information with respect to the
Company on a consolidated basis by geographical area (in thousands).
Long-Lived
Revenues (a) Assets (b)
----------- ---------
December 31, 1999 (Post-Acquisition)
United States $ 87,711 $ 218,764
Venezuela 209,555 142,676
Qatar 8,125 47,457
Trinidad 16,682 72,000
Other 6,152 31,943
--------- ---------
Total $ 328,225 $ 512,840
========= =========
December 31, 1998 (Post-Acquisition)
United States $ 111,902 $ 237,727
Venezuela 160,155 111,419
Qatar 28,156 57,570
Trinidad 23,792 66,306
Other 11,234 32,819
--------- ---------
Total $ 335,239 $ 505,841
========= =========
December 31, 1997 (Pre-Acquisition)
United States $ 97,199 $ 145,859
Venezuela 124,242 94,074
Qatar 26,448 50,626
Trinidad 3,797 59,561
Other 10,201 19,107
--------- ---------
Total $ 261,887 $ 369,227
========= =========
(a) Revenues are attributed to countries based on the location of the
drilling operations.
(b) The Merger 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 the Company, which affects the
comparability of the post-acquisition and pre-acquisition long-
lived assets. See Note B.
(M) QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data for the two years ended December 31,
1999, are as follows:
Quarter
-------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- ---------
(in thousands except for per share amounts)
1999 (1):
Revenues $ 84,470 $ 87,768 $ 68,128 $ 87,859 $ 328,225
Operating income (loss) 15,937 9,014 2,955 (6,781) 21,125
Net income (loss) 7,586 3,312 129 (19,766) (8,739)
1998:
Revenues $ 97,636 $ 77,106 $ 94,497 $ 66,000 $ 335,239
Operating income 27,563 25,809 27,166 15,458 95,996
Net income 14,972 13,846 14,577 7,694 51,089
Net income per common
share (2):
Basic $ 0.95 $ 0.87 $ 0.92 N/A N/A
Diluted $ 0.93 $ 0.86 $ 0.91 N/A N/A
- ----------------
(1) The first, second and third quarters of 1999 have been restated to
include the accounts of Falcon Venezuela which merged with the Company
effective September 30, 1999. See Note A.
(2) As a result of the Merger, each outstanding share of common stock of
the Company was converted into 1.7 shares of R&B Falcon common stock
and cash in lieu of fractional shares on December 1, 1998. The Company
is now a wholly-owned subsidiary of R&B Falcon.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Under the reduction disclosure format permitted by General Instruction
I(2)(c) of Form 10-K, the information otherwise required by Part III of
Form 10-K has been omitted.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a)Financial Statements and Exhibits
1. Financial Statements:
Reports of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended December
31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Consolidated Statement of Stockholder's Equity for the years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Exhibits
2.1 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 (incorporated by reference to Exhibit 2.3 to the
Company's Form 10-K for the year ended December 31, 1996).
2.1.1 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
(incorporated by reference to Exhibit 2.3.1 to the Company's Form
10-K for the year ended December 31, 1996).
2.1.2 Amendment No. 2 dated as of April 24, 1997 to Stock Purchase
Agreement dated as of December 6, 1996 by and among Delavney-
Gestao E Consultadoria LDA., Construtora Andrade Gutierrez S.A.,
Andrade Gutierrez Perfuracao LTDA., Driltech Inc. and the Company
(incorporated by reference to Exhibit 2.3.2 to the Company's Form
10-Q for the quarter ended March 31, 1997).
2.2 Asset Purchase Agreement dated as of December 29, 1997 by and
among Cliffs Drilling Trinidad Offshore Limited, Well Services
(Marine) Ltd., Charles A. Brash and Philip A. Pollonais
(incorporated by reference to Exhibit 2.4 to the Company's Form 8-
K dated December 29, 1997).
2.3 Agreement and Plan of Merger dated as of August 21, 1998, among
R&B Falcon Corporation, RBF Cliffs Acquisition Corp. and Cliffs
Drilling Company (incorporated by reference from Exhibit 2.1 to
the Company's Form 8-K dated August 20, 1998).
3.1 Certificate of Merger merging RBF Cliffs Acquisition Corp. with
and into Cliffs Drilling Company effective December 1, 1998, filed
November 25, 1998 (incorporated by reference from Exhibit 3.1.1 to
the Company's Form 10-K for the year ended December 31, 1998).
3.2 Amended and Restated Certificate of Incorporation of Cliffs
Drilling Company filed February 5, 1999 (incorporated by reference
to Exhibit 3.1.2 to the Company's Form 10-K for the year ended
December 31, 1998).
3.3 By-Laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1, Registration
No. 33-23508, filed August 4, 1988).
4.1 Indenture dated as of May 15, 1996 among the Company, as issuer,
Cliffs Drilling Asset Acquisition Company, Cliffs Drilling Merger
Company, Cliffs Drilling International, Inc. and Cliffs Oil and
Gas Company, as subsidiary guarantors, and Fleet National Bank,
predecessor of State Street Bank and Trust Company, as trustee,
including a Form of the Company's 10.25% Senior Notes due 2003
(incorporated by reference to Exhibit 4.3 to the Company's Form 8-
K dated May 23, 1996).
4.1.1 First 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, Cliffs Drilling International, Inc., Cliffs Oil and Gas
Company and DRL, Inc., as subsidiary guarantors, and Fleet
National Bank, predecessor of State Street Bank and Trust Company,
as trustee (incorporated by reference to Exhibit 4.3.1 to the
Company's Registration Statement on Form S-4, Registration No. 333-
08273, filed July 17, 1996).
4.1.2 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, Cliffs Drilling International, Inc., Cliffs Oil and Gas
Company, DRL, Inc. and Greenbay Drilling Company Ltd., as
subsidiary guarantors, and Fleet National Bank, predecessor of
State Street Bank and Trust Company, as trustee (incorporated by
reference to Exhibit 4.6.2 to the Company's Form 10-K for the year
ended December 31, 1996).
4.1.3 Third Supplemental Indenture dated as of August 29, 1997 among the
Company, as issuer, Southwestern Offshore Corporation (f/k/a
Cliffs Drilling Asset Acquisition Company), Cliffs Drilling Merger
Company, Cliffs Drilling International, Inc., Cliffs Oil and Gas
Company, DRL, Inc., Cliffs Drilling Trinidad Limited and West
Indies Drilling Joint Venture, as subsidiary guarantors, and State
Street Bank and Trust Company, successor to Fleet National Bank,
as trustee (incorporated by reference to Exhibit 4.3.3 to the
Company's Registration Statement on Form S-4, Registration No. 333-
36325, filed September 24, 1997).
4.1.4 Fourth Supplemental Indenture dated as of March 2, 1998 among the
Company, as issuer, Southwestern Offshore Corporation (f/k/a
Cliffs Drilling Asset Acquisition Company), Cliffs Drilling Merger
Company, Cliffs Drilling International, Inc., Cliffs Oil and Gas
Company, DRL, Inc., Cliffs Drilling Trinidad Limited, West Indies
Drilling Joint Venture, Cliffs Drilling (Barbados) Holdings ESRL,
Cliffs Drilling (Barbados) SRL and Cliffs Drilling Trinidad
Offshore Limited, as subsidiary guarantors, and State Street Bank
and Trust Company, successor to Fleet National Bank, as trustee
(incorporated by reference to Exhibit 4.3.4 to the Company's Form
10-K for the year ended December 31, 1997).
4.2 Rights Agreement dated effective June 17, 1997 between the Company
and Harris Trust and Savings Bank, which includes as Exhibit B
thereto the Form of Right Certificate (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form 8-
A filed June 6, 1997).
4.2.1 Amendment No. 1 to Rights Agreement dated as of August 20, 1998,
between Cliffs Drilling Company and Harris Trust and Savings Bank
(incorporated by reference from Exhibit 4.3.1 to the Company's
Form 8-K dated August 20, 1998).
4.3 Indenture dated as of August 7, 1997 among the Company, as issuer,
Southwestern Offshore Corporation, Cliffs Drilling Merger Company,
Cliffs Drilling International, Inc., Cliffs Oil and Gas Company
and DRL, Inc., as subsidiary guarantors, and State Street Bank and
Trust Company, as trustee, including a form of the Company's
10.25% Senior Notes due 2003 (incorporated by reference to Exhibit
4.4 to the Company's Registration Statement on Form S-4,
Registration No. 333-36325, filed September 24, 1997).
4.3.1 First Supplemental Indenture dated as of August 29, 1997 among the
Company, as issuer, Southwestern Offshore Corporation, Cliffs
Drilling Merger Company, Cliffs Drilling International, Inc.,
Cliffs Oil and Gas Company, DRL, Inc., Cliffs Drilling Trinidad
Limited and the West Indies Drilling Joint Venture, as subsidiary
guarantors, and State Street Bank and Trust Company, as trustee,
(incorporated by reference to Exhibit 4.4.1 to the Company's
Registration Statement on Form S-4, Registration No. 333-36325,
filed September 24, 1997).
4.3.2 Second Supplemental Indenture dated as of March 2, 1998 among the
Company, as issuer, Southwestern Offshore Corporation, Cliffs
Drilling Merger Company, Cliffs Drilling International, Inc.,
Cliffs Oil and Gas Company, DRL, Inc., Cliffs Drilling Trinidad
Limited, West Indies Drilling Joint Venture, Cliffs Drilling
(Barbados) Holdings ESRL, Cliffs Drilling (Barbados) SRL and
Cliffs Drilling Trinidad Offshore Limited, as subsidiary
guarantors, and State Street Bank and Trust Company, as trustee
(incorporated by reference to Exhibit 4.7.2 to the Company's Form
10-K for the year ended December 31, 1997).
10.1 Cliffs Drilling Company 1988 Incentive Equity Plan (incorporated
by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Registration No. 33-23508, filed under the
Securities Act).
10.1.1 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 year ended December 31,
1993).
10.1.2 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 year ended December 31,
1993).
10.1.3 Amendment No. 3 dated May 22, 1996 to the Cliffs Drilling Company
1988 Incentive Equity Plan (incorporated by reference to Exhibit
10.7.3 to the Company's Form 10-K for the year ended December 31,
1996).
10.2 Cliffs Drilling Company Incentive Bonus Plan (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1, Registration No. 33-23508, filed under the Securities
Act).
10.3 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, Registration No. 33-23508,
filed under the Securities Act).
10.3.1 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 year ended
December 31, 1993).
10.3.2 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 year ended
December 31, 1993).
10.4 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, Registration
No. 33-23508, filed under the Securities Act).
10.5 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, Registration No. 33-23508, filed under the Securities
Act).
10.6 Exploration and Development Agreement dated as of May 25, 1988
among the Company, Mosbacher Offshore, Inc. and Cliffs Oil and Gas
Company (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Registration No. 33-
23508, filed under the Securities Act).
10.6.1 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 year ended December 31,
1990).
10.7 Third Restated Credit Agreement dated as of July 29, 1998 by and
among Cliffs Drilling Company, Cliffs Oil and Gas Company, Cliffs
Drilling International, Inc. and ING (U.S.) Capital Corporation.
(incorporated by reference to Exhibit 10.13.5 to the Company's
Form 10-Q for the quarter ended June 30, 1998).
10.8 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 quarter ended June 30, 1994).
10.9 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 Form 8-K dated May
23, 1996).
10.9.1 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 Form 8-K dated May 23, 1996).
10.9.2 Purchase and Sale and Joint Venture Amendment Agreement dated as
of July 23, 1997 by and between Well Services (Marine) Limited and
Cliffs Drilling Trinidad Limited (f/k/a Viking Trinidad Limited)
(incorporated by reference to Exhibit 10.20.2 to the Company's
Form 10-K for the year ended December 31, 1997).
10.10 Cliffs Drilling Company Compensation Deferral Plan (incorporated
by reference to Exhibit 10.23 to the Company's Form 10-K for the
year ended December 31, 1997).
10.10.1 Amendment No. 1 to Cliffs Drilling Company Compensation Deferral
Plan dated as of August 20, 1998 (incorporated by reference from
Exhibit 10.23.1 to the Company's Form 8-K dated August 20, 1998).
10.10.2 Amendment No. 2 to Cliffs Drilling Company Compensation Deferral
Plan dated as of November 20, 1998 (incorporated by reference from
Exhibit 10.23.2 to the Company's Form 8-K dated December 1, 1998).
10.11 Cliffs Drilling Company 1998 Incentive Equity Plan (incorporated
by reference to Exhibit 10.24 to the Company's Form 10-Q for the
quarter ended June 30, 1998).
10.11.1 Amendment No. 1 dated May 13, 1998 to the Cliffs Drilling Company
1998 Incentive Equity Plan (incorporated by reference to Exhibit
10.24.1 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.12 Form of Non-Qualified Stock Option Agreement for non-employee
members of the Board of Directors (incorporated by reference to
Exhibit 10.25 to the Company's Form 10-Q for the quarter ended
June 30, 1998).
10.13 Form of Non-Qualified Stock Option Agreement for key employees and
officers (incorporated by reference to Exhibit 10.26 to the
Company's Form 10-Q for the quarter ended June 30, 1998).
10.14 Cliffs Drilling Company Savings Plan (As Amended and Restated
Effective June 21, 1988) (incorporated by reference to Exhibit
10.27 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.14.1 Amendment No. 1 to the Cliffs Drilling Company Savings Plan (As
Amended and Restated Effective June 21, 1988) (incorporated by
reference to Exhibit 10.27.1 to the Company's Form 10-Q for the
quarter ended June 30, 1998).
10.15 Cliffs Drilling Company Savings Trust (As Amended and Restated
Effective January 1, 1998) (incorporated by reference to Exhibit
10.28 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.16 Termination Agreement dated as of July 31, 1999 between Douglas E.
Swanson and Cliffs Drilling Company.
21 Subsidiaries of the Registrant (not included as permitted by
General Instruction I(2)(b) of Form 10-K).
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the three months
ended December 31, 1999.
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 on March
30, 2000.
CLIFFS DRILLING COMPANY
By: /s/ Paul B. Loyd, Jr.
-------------------------------
Paul B. Loyd, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2000.
/s/ Paul B. Loyd, Jr.
-----------------------------
Paul B. Loyd, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Andrew Bakonyi
-----------------------------
Andrew Bakonyi
Director and President
/s/ Tim W. Nagle
-----------------------------
Tim W. Nagle
Director and Vice President
(Principal Accounting and
Financial Officer)
EXHIBIT 10.16
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement"), entered into and
effective as of July 31, 1999 (the "Effective Date"), is between
Douglas E. Swanson ("Swanson") and Cliffs Drilling Company
("CDC").
In consideration of the mutual obligations set out below and in
that agreement of the same effective date between Swanson and CDC
and substantially in the form attached as Exhibit "A" hereto (the
"Non-Compete Agreement"), the parties agree as follows:
1. As of the Effective Date Swanson tenders his
resignation as President, Chief Executive Officer and
Director of CDC and as a director, officer and/or
employee of all direct and indirect subsidiaries and
affiliated companies of CDC [other than R&B Falcon
Corporation ("RBF") of which Swanson shall continue to
be a director], as the case may be, which CDC accepts
on its behalf and on behalf of RBF, such subsidiaries
and affiliated companies.
2. Upon execution of this Agreement and subject to the
payment and other obligations of CDC and RBF set out in
this Agreement and in the Non-Compete Agreement, this
Agreement and the Non-Compete Agreement constitute full
satisfaction of all obligations of CDC under and
pursuant to Section 4 of that Employment Agreement
dated as of December 1, 1998 between Swanson and CDC
(the "Employment Agreement").
3. Notwithstanding anything to the contrary in (i) this
Agreement, (ii) Section 7 of the Employment Agreement,
or (iii) the Non-Compete Agreement, Swanson shall not
be entitled to, and CDC shall have no obligation to
make to Swanson, any Gross-Up Payment (as defined in
Section 7 of the Employment Agreement) with respect to
any Excise Tax (as defined in Section 7 of the
Employment Agreement) imposed on or with respect to the
stock options held by Swanson under the Stock Option
Agreements, which are referred to in Section 4 of the
Non-Compete Agreement, provided, however, the remaining
obligations of CDC in Section 7 of the Employment
Agreement shall continue to be in full force and
effect.
4. Swanson shall have the option, exercisable if at all
only by written notice to CDC given within 60 days
following the Effective Date, to acquire full ownership
of those certain split dollar insurance policies, being
Policy No. 13905796 dated January 1, 1997 and Policy
No. 13347465 dated January 1, 1995, each issued by The
Northwestern Mutual Life Insurance Company, together
with a release of the collateral assignments granted in
favor of CDC under and pursuant to the two Split Dollar
Insurance Agreements dated January 1, 1995 between
Swanson and CDC (the "Insurance Agreements"), upon
payment by Swanson of the Company's Policy Interest (as
defined in the Insurance Agreements). If such option
is exercised and upon payment of the sum referred in
the preceding sentence by Swanson and release of the
collateral assignments by CDC, neither Swanson nor the
Company shall thereafter have any obligation to the
other under the Insurance Agreements.
For purposes of this Section 4, such notice, if given,
shall be addressed as follows and sent via registered
or certified mail:
Cliffs Drilling Company
901 Threadneedle, Suite 200
Houston, Texas 77079
Attention: Mr. Paul B. Loyd, Jr.
5. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to CDC's directors,
officers and employees and to Swanson's heirs,
executors, administrators, legal and personal
representatives and assigns.
6. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
7. This Agreement and the Non-Compete Agreement
constitutes the complete and entire agreement between
the parties. Subject to Sections 4, 5 and 7 (as
modified by Section 3 of this Agreement) of the
Employment Agreement, this Agreement supersedes and
cancels all prior or contemporaneous representations,
promises or agreements between the parties. This
Agreement cannot be amended or modified except by
written agreement signed by each of the parties hereto.
8. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
This Agreement is signed in Houston, Texas on July , 1999.
Douglas E. Swanson
CLIFFS DRILLING COMPANY
By:
Its duly authorized
officer
EXHIBIT "A"
AGREEMENT
This Agreement (the "Agreement"), entered into and effective as
of July 31, 1999 (the "Effective Date"), is among Douglas E.
Swanson ("Swanson"), Cliffs Drilling Company ("CDC") and R&B
Falcon Corporation ("RBF").
In consideration of the mutual obligations set out below,
Swanson, CDC and RBF agree as follows:
1. Within two business days following the execution of
this Agreement CDC agrees to pay to Swanson a lump sum
in cash, less deductions required by law, of
$2,587,500.
2. From the Effective Date and continuing until December
1, 2001 CDC agrees to provide Swanson and his family,
at the expense of CDC, all benefits under (or
substantially equivalent benefits to) RBF's welfare
benefit plans, practices, policies and programs
(including, without limitation, medical, prescription,
dental, vision, disability, salary continuance, group
life and supplemental group life and accidental death
insurance plans and programs), to the extent generally
applicable to other RBF executives.
3. For a period of three (3) years following the Effective
Date (the "Restricted Period") Swanson agrees:
(a) Not to engage in Competition with CDC. For
purposes of this Section 3(a), "Competition" shall
mean Swanson engaging in or otherwise being a
director, officer, employee, principal, agent,
stockholder, member, owner or partner of, or
permitting his name to be used in connection with
the activities of any corporation or other
business organization in the offshore contract
drilling industry in direct or indirect
competition with CDC, its parent, subsidiary or
affiliated companies, but shall not preclude
Swanson from being or becoming the registered or
beneficial owner of up to five (5%) of any class
of capital voting stock (or equivalent voting
interest) of any corporation or other business
organization in the offshore contract drilling
industry, provided Swanson does not participate
actively in such business until the end of the
Restricted Period.
(b) Not to disclose to any third party not a member of
the Company Group (as hereinafter defined), its or
their legal counsel or independent auditors,
Confidential Information (as hereinafter defined)
or Trade Secrets (as hereinafter defined), except
any of the Confidential Information or Trade
Secrets which shall be or become in the public
domain other than by breach by Swanson of his
obligations set out in this Section 3(b) or shall
be required to be disclosed by applicable laws or
regulations, any judicial or administrative
authority or stock exchange rule or regulation.
For purposes of this Section 3(b): "Company
Group" shall mean CDC, its parent corporation,
subsidiaries and affiliates; "Confidential In-
formation" shall mean (r) internal policies and
procedures, (s) financial information, (t)
marketing strategies, (u) secret discoveries,
inventions, formulae, designs, methods, processes
and know-how not constituting Trade Secrets, and
(v) other non-public information relating to the
Company Group's business, the disclosure of which
would materially adversely affect the Company
Group's business or financial condition; and
"Trade Secrets" shall mean all secret discoveries,
inventions, formulae, designs, methods, processes
and know-how entitled to protection as trade
secrets under the laws of the state of Texas.
4. (a) The Stock Option Agreements between Swanson
and CDC referred to below are respectively
amended: (i) to revise the number of option
shares covered by each such agreement and to
revise the option exercise price per share to
reflect the adjustments necessary to take into
account the conversion of CDC shares to shares of
RBF effected as a result of the merger transaction
between CDC and RBF concluded December 1,1998, and
(ii) to extend the period of time within which
Swanson shall be entitled to exercise the
outstanding stock options granted to him
thereunder, notwithstanding the provisions of such
Stock Option Agreements, as follows:
Option
Date of Agreement No. of Options Exercise Price Period of Time
(per share) to Exercise
May 22, 1996 47,600 $ 8.24 May 21, 2006
May 21, 1997 34,000 19.27 May 20, 2007
May 13, 1998 85,000 29.71 May 12, 2008
(b) The Stock Option Agreement between Swanson and RBF
dated December 1, 1998 is amended to remove the
restrictions on vesting and extend the period of
time within which Swanson shall be entitled to
exercise the outstanding stock options granted to
him thereunder to December 1, 2008,
notwithstanding the provisions of such Stock
Option Agreement.
5. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to CDC's and RBF's
directors, officers and employees and to Swanson's
heirs, executors, administrators, legal and personal
representatives and assigns.
6. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
7. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
This Agreement is signed in Houston, Texas on July ,
1999.
Douglas E. Swanson
CLIFFS DRILLING COMPANY
By:
Its duly authorized
officer
R&B FALCON CORPORATION
By:
Its duly authorized
officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and the Consolidated Balance Sheets
of Cliffs Drilling Company for the year ended December 31, 1999 and 1998
as restated for comparative purposes and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 103,730 36,276
<SECURITIES> 0 0
<RECEIVABLES> 52,326 43,125
<ALLOWANCES> 3,579 472
<INVENTORY> 7,684 10,335
<CURRENT-ASSETS> 178,706 123,609
<PP&E> 562,457 508,739
<DEPRECIATION> 49,617 2,898
<TOTAL-ASSETS> 787,753 717,256
<CURRENT-LIABILITIES> 83,804 52,941
<BONDS> 201,936 202,935
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 428,421 404,489
<TOTAL-LIABILITY-AND-EQUITY> 787,753 717,256
<SALES> 328,225 335,239
<TOTAL-REVENUES> 328,225 335,239
<CGS> 246,394 198,087
<TOTAL-COSTS> 307,100 239,243
<OTHER-EXPENSES> (1,996) (2,081)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,973 20,443
<INCOME-PRETAX> 2,148 77,634
<INCOME-TAX> 10,887 26,545
<INCOME-CONTINUING> (8,739) 51,089
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,739) 51,089
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
