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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12797
CLIFFS DRILLING COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0248934
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
901 Threadneedle, Houston, Texas 77079
(Address of principal executive offices)(Zip code)
(281) 496-5000
(Registrant's telephone number, including area code)
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this Form with the reduced disclosure format.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
================================================================
Forward-Looking Statements and Assumptions
This Quarterly Report on Form 10-Q may contain or
incorporate by reference certain forward-looking statements,
including by way of illustration and not of limitation,
statements relating to liquidity, revenues, expenses, margins and
contract rates and terms. The Company strongly encourages
readers to note that some or all of the assumptions, upon which
such forward-looking statements are based, are beyond the
Company's ability to control or estimate precisely, and may in
some cases be subject to rapid and material changes. Such
assumptions include the contract status of the Company's drilling
units, general market conditions prevailing in the contract
drilling industry (including daily rates and utilization) and
various other trends affecting the contract drilling industry,
including world oil and gas prices, the exploration and
development programs of the Company's customers, the actions of
the Company's competitors and economic conditions generally.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
Cliffs Drilling Company
The financial statements for the three and six month periods
ended June 30, 2000 and 1999, include, in the opinion of the
Company, all adjustments (which only consist of normal recurring
adjustments) necessary to present fairly the financial position
and results of operations for such periods. The financial data
for the interim periods presented herein have been prepared in
accordance with generally accepted accounting principles for
interim financial information. Results of operations for the
three and six month periods ended June 30, 2000 are not
necessarily indicative of results of operations which will be
realized for the year ending December 31, 2000. The financial
statements should be read in conjunction with the Company's Form
10-K for the year ended December 31, 1999.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 100,015 $ 103,730
Accounts receivable:
Trade, net 24,113 38,734
Other 6,879 10,013
Materials and supplies inventory 10,120 7,684
Drilling contracts in progress 6,778 16,674
Other current assets 12,166 7,744
--------- ---------
Total current assets 160,071 184,579
--------- ---------
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED INVESTEES 4,933 4,657
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 630,695 558,286
Other 4,455 4,171
--------- ---------
Total property and equipment 635,150 562,457
Accumulated depreciation, depletion and
amortization since December 1, 1998 (86,694) (49,617)
--------- ---------
Net property and equipment 548,456 512,840
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 86,680 84,795
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 7,355 6,755
--------- ---------
TOTAL ASSETS $ 807,495 $ 793,626
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 13,987 14,211
Accrued liabilities 63,116 75,466
--------- ---------
Total current liabilities 77,103 89,677
LONG-TERM OBLIGATIONS 201,601 201,936
OTHER NONCURRENT LIABILITIES 447 1,957
DEFERRED INCOME TAXES 20,727 43,050
PAYABLE TO PARENT 105,338 28,585
--------- ---------
Total liabilities 405,216 365,205
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - -
Capital in excess of par value 405,069 405,069
Retained earnings (deficit)
since December 1, 1998 (2,790) 23,352
--------- ---------
Total stockholder's equity 402,279 428,421
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 807,495 $ 793,626
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
OPERATING REVENUES $ 48,227 $ 87,768 $ 124,051 $ 172,238
-------- -------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 40,654 66,253 102,637 123,148
Depreciation, depletion and
amortization 10,059 10,112 20,659 19,363
General and administrative 2,818 2,389 8,775 4,776
-------- -------- --------- ---------
Total costs and expenses 53,531 78,754 132,071 147,287
-------- -------- --------- ---------
OPERATING INCOME (LOSS) (5,304) 9,014 (8,020) 24,951
-------- -------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (5,174) (5,207) (10,346) (10,485)
Interest income 1,350 672 2,906 1,138
Income from equity investees 11 60 11 220
Other, net 668 (46) 454 (50)
-------- -------- --------- ---------
Total other income (expense) (3,145) (4,521) (6,975) (9,177)
-------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (8,449) 4,493 (14,995) 15,774
INCOME TAX EXPENSE (BENEFIT) (3,948) 1,181 (4,114) 4,876
-------- -------- --------- ----------
NET INCOME (LOSS) $ (4,501) $ 3,312 $ (10,881) $ 10,898
======== ======== ========= ==========
The accompanying notes are an integral part of the interim consolidated
financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) (unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,881) $ 10,898
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 20,659 19,363
Deferred income taxes (14,106) 5,594
Loss (gain) on disposition of assets 1,031 (191)
Income from equity investees (11) (220)
Amortization of debt issue costs 458 462
Amortization of debt premium (335) (335)
Other (1,840) (1,723)
Changes in assets and liabilities:
Accounts receivable 17,755 8,232
Materials and supplies inventory (2,436) 1,139
Drilling contracts in progress 9,896 11,099
Prepaid insurance and other prepaid expenses (4,422) (999)
Accounts payable and other accrued liabilities (17,084) (3,339)
--------- ---------
Net cash provided by (used in)
operating activities (1,316) 49,980
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55,445) (6,900)
Proceeds from sale of property and equipment 35 547
Acquisition of rigs and related equipment,
net of cash acquired - 436
Investments in and advances to
unconsolidated investees (265) (2,639)
--------- ---------
Net cash used in investing activities (55,675) (8,556)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings - (328)
Payable to parent 53,276 (1,324)
--------- ---------
Net cash provided by (used in) financing activities 53,276 (1,652)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,715) 39,772
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 103,730 36,276
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 100,015 $ 76,048
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY CONDITIONS/LIQUIDITY - Activity in the contract
drilling industry and related oil and gas service businesses
deteriorated significantly in 1999 due primarily to decreased
worldwide demand for drilling rigs and related services resulting
from a substantial decline in crude oil prices experienced in
1998 through the first quarter of 1999. In mid 1999, crude oil
prices began a recovery, and demand for drilling services started
to recover as well. However, there can be no assurance that
demand for drilling rigs and related services will reach
utilization and dayrate levels of 1996-1998. To date, while
certain markets have improved substantially, taken as a whole,
demand for drilling rigs has not recovered to the levels
experienced in 1996-1998. Oil and gas companies' demand for
offshore drilling services are a function of: 1) current and
projected oil and gas prices, 2) government taxation and
concession/leasing policies, 3) the oil and gas company's lease
inventory and existing drilling commitments on leases held, 4)
the oil and gas company's free cash flow and general funding
availability, 5) the oil and gas company's internal reserve
replacement requirements, 6) geopolitical factors (e.g., the
drive for national hydrocarbons self sufficiency). The first
factor is generally the most important. In particular, the
domestic shallow water market tends to be primarily driven by the
price of natural gas. Continued strength in natural gas prices
has recently bolstered this market.
Changes in demand for exploration and production services can
impact the Company's liquidity as supply and demand factors
directly affect utilization and dayrates, which are the primary
determinants of cash flow from the Company's operations. In late
1998 and early 1999, lower crude oil and gas prices reduced
exploration and production spending, which led to significantly
lower dayrates and utilization for offshore drilling companies,
particularly in the U.S. Gulf of Mexico. While there has been
some improvement in utilization and dayrates in certain segments
of drilling activity in which the Company participates since the
beginning of 2000, if crude oil and/or gas prices were to decline
substantially from current levels, there could be a deterioration
in rig utilization and dayrates which could have a material
adverse effect on the Company's liquidity, financial position and
results of operations.
The ability of the Company to fund working capital, capital
expenditures and debt service in excess of cash on hand will
depend upon the success of the Company's operations. The Company
believes its projected level of cash flows from operations, which
assumes an industry recovery in 2000, and cash on hand will be
sufficient to satisfy the Company's short-term and long-term
liquidity requirements. However, if the Company requires
additional funds, R&B Falcon Corporation, who is the parent
company of the Company, will provide such funds through
additional investments in the Company, and the Company's
management believes such funds would be available if needed.
GOODWILL - Goodwill was recorded as a result of the merger of
the Company and R&B Falcon Corporation in December 1998. Goodwill
has increased $3.0 million since December 31, 1999 as the result
of an income tax contingency incurred by the Company prior to
December 1998. For the three months ended June 30, 2000 and 1999
amortization of goodwill was $.6 million and $.5 million,
respectively. For the six months ended June 30, 2000 and 1999
amortization of goodwill was $1.1 million and $.9 million,
respectively.
OVERHEAD ALLOCATIONS - As of July 1, 1999, R&B Falcon
Corporation provided substantially all of the Company's general
and administrative services including personnel. General and
administrative expenses including payroll costs of R&B Falcon
Corporation are allocated to the Company and other subsidiaries
of R&B Falcon Corporation based on revenues. For the three and
six month periods ended June 30, 2000 general and administrative
expenses allocated to the Company were $2.6 million and $7.9
million, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS - In December 1999, SEC
Staff Accounting Bulletin: No. 101 - Revenue Recognition in
Financial Statements ("SAB 101") was issued. SAB 101 summarizes
certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial
statements. SAB 101 has been amended allowing the Company to
extend its implementation of SAB 101 until the fourth quarter of
2000. The Company is currently reviewing its accounting
practices and if any necessary adjustments are needed to comply,
such adjustments will be made in the fourth quarter of 2000.
RECLASSIFICATION - Certain prior period amounts in the
consolidated financial statements have been reclassified for
comparative purposes. Such reclassifications had no effect on
net income or the overall financial condition of the Company.
B) CONTINGENCIES
In March 1997, an action was filed by Mobil Exploration and
Producing U.S. Inc. and affiliates, St. Mary Land & Exploration
Company and affiliates and Samuel Geary and Associates, Inc.
against the Company, its underwriters and insurance broker in the
16th Judicial District Court of St. Mary Parish, Louisiana. The
plaintiffs alleged damages amounting to in excess of $50.0
million in connection with the drilling of a turnkey well in 1995
and 1996. The case was tried before a jury in January and
February 2000, and a judgment has been entered based on the jury
verdict awarding the plaintiffs damages of approximately $30.0
million for excess drilling costs, loss of insurance proceeds,
loss of hydrocarbons and interest. The Company has filed motions
for a new trial and a judgment notwithstanding the verdict in
contemplation of perfecting its appeal of such judgment and
believes it will be successful upon appeal. The Company further
believes all but the portion of the verdict representing excess
drilling costs of approximately $4.7 million is covered by
relevant primary and excess liability insurance policies of the
Company; however, the insurers and underwriters have denied
coverage. The Company has instituted litigation against those
insurers and underwriters to enforce its rights under the
relevant policies. At this time the Company believes adequate
reserves have been established to protect the interests of the
Company in this matter.
C) PURCHASE OF DRILLING BARGES
In the second quarter of 2000, the Company purchased four
barge drilling rigs at fair market value from a wholly-owned
subsidiary of R&B Falcon Corporation for $71.0 million in cash.
However, for accounting purposes, such drilling units were
recorded at their net book value of $47.5 million and the Company
recorded a deferred tax asset of $8.2 million and a dividend of
$15.3 million.
D) LONG-TERM OBLIGATIONS
Long-term debt at June 30, 2000 consists solely of 10.25%
Senior Notes due 2003 (the "Senior Notes") in the aggregate
principal amount of $199.7 million and debt premium, net of
amortization, of $1.9 million. Interest on the Senior Notes is
payable semi-annually during each May and November. The Senior
Notes do not require any payments of principal prior to their
stated maturity on May 15, 2003, but the Company is required to
make offers to purchase Senior Notes upon the occurrence of
certain events as defined in the indenture, such as asset sales
or a change of control of the Company.
The Senior Notes are senior unsecured obligations of the
Company, ranking pari passu in right of payment with all senior
indebtedness and senior to all subordinated indebtedness. The
Senior Notes are unconditionally guaranteed (the "Subsidiary
Guarantees") on a senior unsecured basis by the Company's
principal subsidiaries (the "Subsidiary Guarantors"). Each
Subsidiary Guarantor is 100% owned by the Company. R&B Falcon
Corporation is not a guarantor of the Senior Notes.
Separate financial statements and other disclosures
concerning the Subsidiary Guarantors are not presented because
management has determined such financial statements and other
disclosures are not material to investors. The assets, equity,
income and cash flows of the non-guarantor subsidiaries on an
individual and combined basis are less than 1% of the
consolidated assets, equity, income and cash flows, respectively,
of the Company and are inconsequential. The combined condensed
financial information of the Company's Subsidiary Guarantors is
as follows (in thousands):
June 30, December 31,
2000 1999
-------- --------
Current assets $ 8,524 $ 9,677
Noncurrent assets 85,728 75,584
-------- --------
Total assets $ 94,252 $ 85,261
======== ========
Current liabilities $ 2,722 $ 2,046
Noncurrent liabilities 80,071 71,131
Equity 11,459 12,084
-------- --------
Total liabilities and equity $ 94,252 $ 85,261
======== ========
Six Months Ended
June 30,
----------------------
2000 1999
-------- --------
Revenues $ 4,633 $ 10,011
Operating income (loss) $ (538) $ 2,666
Net income (loss) $ (11) $ 1,529
E) SEGMENT INFORMATION
The Company's operating results by business segment are as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Revenues:
Daywork drilling $ 24,911 $ 36,469 $ 51,428 $ 81,161
Engineering services 25,546 59,366 82,509 108,358
MOPU operations 1,232 1,232 2,465 2,453
Oil and gas 2 63 56 129
Corporate office - - - -
Eliminations (1) (3,464) (9,362) (12,407) (19,863)
-------- -------- --------- ---------
Consolidated $ 48,227 $ 87,768 $ 124,051 $ 172,238
======== ======== ========= =========
Operating income (loss):
Daywork drilling $ (6,095) $ 434 $ (12,481) $ 6,269
Engineering services 3,831 11,137 13,561 23,876
MOPU operations 439 437 909 792
Oil and gas (28) - 26 1
Corporate office (3,451) (2,994) (10,035) (5,987)
-------- -------- --------- ---------
Consolidated $ (5,304) $ 9,014 $ (8,020) $ 24,951
======== ======== ========= =========
(1) Eliminations consist of intersegment sales between the
daywork drilling and engineering services business segments.
In April 1998, the Company entered into a turnkey contract
with PDVSA Exploration and Production ("PDVSA") to drill 60
turnkey wells in Venezuela. The drilling program commenced in
March 1998 and the program was expected to extend over
approximately three and one-half years and to utilize seven of
the Company's land drilling rigs. However, during the first
quarter of 1999, in response to the downturn in the market and
changes in both PDVSA's management and its operating policies,
PDVSA and the Company renegotiated prices at reduced margins and
in the fourth quarter of 1999, renegotiations were made at
further reduced margins. By the end of the second quarter of
2000, the Company had completed 35 of the 60 wells. In February
2000, PDVSA cancelled the turnkey contract for the remaining 25
wells. Although PDVSA cancelled its turnkey contract, three of
the land drilling rigs that were working on a turnkey basis have
been subsequently contracted to work for PDVSA on a dayrate
basis. Also, in December 1999, the Company commenced work under a
new one-year dayrate drilling contract with PDVSA utilizing Rig
55 which had been previously stacked and has obtained drilling
contracts with PDVSA for two jointly owned land drilling rigs.
The Company is currently bidding on other dayrate contracts with
PDVSA.
For the three months ended June 30, 2000 and 1999, revenues
from PDVSA of $11.6 million ($7.8 million reported in the
engineering services segment and $3.8 million reported in the
daywork drilling segment) and $42.9 million ($37.4 million
reported in the engineering services segment and $5.5 million
reported in the daywork drilling segment), respectively,
accounted for 24.0% and 48.9%, respectively, of the Company's
consolidated operating revenues. For the six months ended June
30, 2000 and 1999, revenues from PDVSA of $44.1 million ($38.1
million reported in the engineering services segment and $6.0
million reported in the daywork drilling segment) and $90.9
million ($80.3 million reported in the engineering services
segment and $10.6 million reported in the daywork drilling
segment), respectively, accounted for 35.5% and 52.8%,
respectively, of the Company's consolidated operating revenues.
Total assets by segment were as follows (in thousands):
June 30, December 31,
2000 1999
--------- ---------
Daywork drilling $ 681,741 $ 624,233
Engineering services 11,506 52,831
MOPU operations 27,152 28,192
Oil and gas 416 423
Corporate office 86,680 87,947
--------- ---------
Consolidated $ 807,495 $ 793,626
========= =========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Industry Conditions and Liquidity
Activity in the contract drilling industry and related oil
and gas service businesses deteriorated significantly in 1999 due
primarily to decreased worldwide demand for drilling rigs and
related services resulting from a substantial decline in crude
oil prices experienced in 1998 through the first quarter of 1999.
In mid 1999, crude oil prices began a recovery, and demand for
drilling services started to recover as well. However, there can
be no assurance that demand for drilling rigs and related
services will reach utilization and dayrate levels of 1996-1998.
To date, while certain markets have improved substantially, taken
as a whole, demand for drilling rigs has not recovered to the
levels experienced in 1996-1998. Oil and gas companies' demand
for offshore drilling services are a function of: 1) current and
projected oil and gas prices, 2) government taxation and
concession/leasing policies, 3) the oil and gas company's lease
inventory and existing drilling commitments on leases held, 4)
the oil and gas company's free cash flow and general funding
availability, 5) the oil and gas company's internal reserve
replacement requirements, 6) geopolitical factors (e.g., the
drive for national hydrocarbons self sufficiency). The first
factor is generally the most important. In particular, the
domestic shallow water market tends to be primarily driven by the
price of natural gas. Continued strength in natural gas prices
has recently bolstered this market.
Changes in demand for exploration and production services
can impact the Company's liquidity as supply and demand factors
directly affect utilization and dayrates, which are the primary
determinants of cash flow from the Company's operations. In late
1998 and early 1999, lower crude oil and gas prices reduced
exploration and production spending, which led to significantly
lower dayrates and utilization for offshore drilling companies,
particularly in the U.S. Gulf of Mexico. While there has been
some improvement in utilization and dayrates in certain segments
of drilling activity in which the Company participates since the
beginning of 2000, if crude oil and/or gas prices were to decline
substantially from current levels, there could be a deterioration
in rig utilization and dayrates which could have a material
adverse effect on the Company's liquidity, financial position and
results of operations.
In addition, the Company is subject to risks inherent in
foreign operations, principally in Venezuela. In April 1998, the
Company entered into a turnkey contract with PDVSA Exploration
and Production ("PDVSA") to drill 60 turnkey wells in Venezuela.
The drilling program commenced in March 1998 and the program was
expected to extend over approximately three and one-half years
and to utilize seven of the Company's land drilling rigs.
However, during the first quarter of 1999, in response to the
downturn in the market and changes in both PDVSA's management and
its operating policies, PDVSA and the Company renegotiated prices
at reduced margins and in the fourth quarter of 1999,
renegotiations were made at further reduced margins. By the end
of the second quarter of 2000, the Company had completed 35 of
the 60 wells. In February 2000, PDVSA cancelled the turnkey
contract for the remaining 25 wells. Although PDVSA cancelled its
turnkey contract, three of the land drilling rigs that were
working on a turnkey basis have been subsequently contracted to
work for PDVSA on a dayrate basis. Also, in December 1999, the
Company commenced work under a new one-year dayrate drilling
contract with PDVSA utilizing Rig 55 which had been previously
stacked and has obtained drilling contracts with PDVSA for two
jointly owned land drilling rigs. The Company is currently
bidding on other dayrate contracts with PDVSA.
The ability of the Company to fund working capital, capital
expenditures and debt service in excess of cash on hand will
depend upon the success of the Company's operations. The Company
believes its projected level of cash flows from operations, which
assumes an industry recovery in 2000, and cash on hand will be
sufficient to satisfy the Company's short-term and long-term
liquidity requirements. However, if the Company requires
additional funds, R&B Falcon Corporation, who is the parent
company of the Company, will provide such funds through
additional investments in the Company, and the Company's
management believes such funds would be available if needed.
Results of Operations
Six Months Ended June 30, 2000 and 1999
The Company recognized a net loss of $10.9 million for the
six months ended June 30, 2000 compared to net income of $10.9
million for the same period in 1999. Such decrease in net income
is primarily due to the following: revenues decreased $48.2
million due to a decrease in daywork drilling resulting from
lower utilization and dayrates and a decrease in engineering
services resulting from a decrease in the number of international
turnkey wells completed in the period offset partially by an
increase in the number of domestic turnkey wells completed in the
period. The Company completed six international turnkey wells
for the six months ended June 30, 2000 compared to ten for the
same period in 1999 and the Company completed 17 domestic turnkey
wells for the six months ended June 30, 2000 compared to ten for
the same period in 1999. Operating expenses decreased $20.5
million primarily due to the decrease in the number of
international turnkey wells completed in the period and lower
operating expenses for daywork drilling due to lower utilization.
General and administrative expenses increased $4.0 million
despite reduced overhead costs as a result of the merger with R&B
Falcon Corporation primarily due to a $7.9 million overhead
allocation from R&B Falcon Corporation for the six months ended
June 30, 2000. Income tax expense decreased $9.0 million
primarily due to the Company incurring a pretax loss in 2000
offset by the lack of creditability of certain foreign tax
credits and other revised foreign tax estimates.
Three Months Ended June 30, 2000 and 1999
The Company recognized a net loss of $4.5 million for the
three months ended June 30, 2000 compared to net income of $3.3
million for the same period in 1999. Such decrease in net income
is primarily due to the following: revenues decreased $39.5
million due to a decrease in daywork drilling resulting from
lower utilization and dayrates and a decrease in engineering
services resulting from a decrease in the number of turnkey wells
completed in the period. The Company completed nine turnkey
wells for the three months ended June 30, 2000 compared to 14 for
the same period in 1999. Operating expenses decreased $25.6
million primarily due to the decrease in the number of turnkey
wells completed in the period and lower operating expenses for
daywork drilling due to lower utilization. Income tax expense
decreased $5.1 million primarily due to the Company incurring a
pretax loss in 2000 offset by the lack of creditability of
certain foreign tax credits and other revised foreign tax
estimates.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company is exposed to changes in interest rates with
respect to its debt obligation. The Company's debt obligation as
of June 30, 2000 consists of Senior Notes in the aggregate
principal amount of $199.7 million and debt premium, net of
amortization, of $1.9 million at a fixed rate of 10.25% due 2003.
The estimated fair value of the Company's debt obligation at June
30, 2000 was $201.2 million.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In March 1997, an action was filed by Mobil Exploration and
Producing U.S. Inc. and affiliates, St. Mary Land & Exploration
Company and affiliates and Samuel Geary and Associates, Inc.
against the Company, its underwriters and insurance broker in the
16th Judicial District Court of St. Mary Parish, Louisiana. The
plaintiffs alleged damages amounting to in excess of $50.0
million in connection with the drilling of a turnkey well in 1995
and 1996. The case was tried before a jury in January and
February 2000, and a judgment has been entered based on the jury
verdict awarding the plaintiffs damages of approximately $30.0
million for excess drilling costs, loss of insurance proceeds,
loss of hydrocarbons and interest. The Company has filed motions
for a new trial and a judgment notwithstanding the verdict in
contemplation of perfecting its appeal of such judgment and
believes it will be successful upon appeal. The Company further
believes all but the portion of the verdict representing excess
drilling costs of approximately $4.7 million is covered by
relevant primary and excess liability insurance policies of the
Company; however, the insurers and underwriters have denied
coverage. The Company has instituted litigation against those
insurers and underwriters to enforce its rights under the
relevant policies. At this time the Company believes adequate
reserves have been established to protect the interests of the
Company in this matter.
The Company is involved in various other legal actions
arising in the normal course of business. After taking into
consideration the evaluation of such actions by counsel for the
Company, management is of the opinion that the outcome of all
known and potential claims and litigation will not have a
material adverse effect on the Company's business or consolidated
financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule. (Exhibit 27 is being
submitted as an exhibit only in the electronic format
of this Quarterly Report on Form 10-Q being submitted
to the Securities and Exchange Commission.)
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the
three months ended June 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CLIFFS DRILLING COMPANY
Date: August 11, 2000 By /s/T. W. Nagle
-----------------
T. W. Nagle
Vice President
(Principal Accounting
and Financial Officer)
