<PAGE> 1
===============================================================================
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 MARCH 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER: 0-18309
-------------
MARINE DRILLING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2558926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS, 77478-3556
(Address of principal executive offices and zip code)
(713) 243-3000
Registrant's telephone number, including area code:
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 .
--- ---
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MAY 10, 1995 -- 43,922,841
===============================================================================
<PAGE> 2
MARINE DRILLING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements
Consolidated Balance Sheets --
March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations --
Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 4
Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
(i)
<PAGE> 3
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
------------ ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 29,229 $ 18,872
Short-term investments 2,003 18,137
Accounts receivable - trade and other, net 11,763 15,353
Other current assets 357 1,020
------------ ------------
Total current assets 43,352 53,382
Property and Equipment 106,549 102,431
Less accumulated depreciation 15,037 13,010
------------ ------------
Property and equipment, net 91,512 89,421
Other assets 355 412
------------ ------------
$ 135,219 $ 143,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,531 $ 4,137
Employer's liability claims, current 1,400 832
------------ ------------
Total current liabilities 6,931 4,969
Long-Term Debt 10,000 15,000
Employer's Liability Claims, non-current 2,194 2,150
Deferred Income Taxes 6,537 8,365
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000
shares; issued and outstanding 43,999,643 and
43,917,766 shares as of March 31, 1995 and
December 31, 1994, respectively 442 439
Common stock restricted (794) (804)
Treasury stock, at cost (170,000 shares in 1995) (522) --
Additional paid-in capital 92,715 92,143
Retained earnings from January 1, 1993 17,716 20,953
Accumulated deficit of $49,572 as of December 31, 1992
eliminated in quasi-reorganization -- --
------------ ------------
Total shareholders' equity 109,557 112,731
------------ ------------
$ 135,219 $ 143,215
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues $ 12,545 $ 18,814
Costs and Expenses:
Contract drilling 13,875 13,085
Depreciation and amortization 2,144 1,873
General and administrative 1,752 944
------------ ------------
17,771 15,902
------------ ------------
Operating income (loss) (5,226) 2,912
Other Income (Expense): ------------ ------------
Interest expense (299) --
Interest income 458 136
Other income (expense) 86 166
------------ ------------
245 302
------------ ------------
Income (loss) before income taxes (4,981) 3,214
Income tax expense (benefit) (1,744) 1,126
------------ ------------
Net income (loss) $ (3,237) $ 2,088
============ ============
Income (loss) per common share $ (0.07) $ 0.05
============ ============
Weighted average common shares
outstanding 44,033,448 43,749,623
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (3,237) $ 2,088
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,144 1,873
Deferred income taxes (1,828) 1,069
Tax benefits related to common stock issued pursuant to
long-term incentive plan 85 --
Gain on disposition of equipment (115) (321)
Accrual of compensation expense, net 118 91
Changes in operating assets and liabilities:
Receivables 3,590 5,729
Other current assets 663 534
Payables, accrued expenses and employer's liability
claims 2,236 (3,845)
Other 30 (11)
------------ ------------
Net cash provided by operating activities 3,686 7,207
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturities of short-term investments 16,150 --
Purchase of short-term investments, net -- (17,034)
Purchase of equipment (4,325) (334)
Proceeds from disposition of equipment 218 344
------------ ------------
Net cash provided by (used in) investing activities 12,043 (17,024)
------------ ------------
Cash Flows From Financing Activities:
Payments of debt (5,000) --
Proceeds from exercise of stock options 150 --
Purchase of treasury stock (522) --
------------ ------------
Net cash used in financing activities (5,372) --
------------ ------------
Net increase (decrease) in cash and cash equivalents 10,357 (9,817)
Cash and cash equivalents at beginning of period 18,872 21,719
------------ ------------
Cash and cash equivalents at end of period $ 29,229 $ 11,902
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 299 $ --
Income taxes paid (refunded) $ (1) $ 1
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of 43,500 and 83,000 shares in 1995 and 1994,
respectively, of restricted common stock $ 108 $ 415
Issuance of 88,700 and 27,208 shares in 1995 and 1994,
respectively, to employee retirement plan $ 230 $ 152
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
(1) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of Marine Drilling
Companies, Inc. (the "Company" or the "Registrant") presented herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and notes required by
generally accepted accounting principles for complete financial statements have
been condensed or omitted. In the opinion of management, these statements
include all adjustments (all of which consist of normal recurring adjustments
except as otherwise noted herein) necessary to present fairly the Company's
financial position and results of operations for the interim periods presented.
The financial data for the three months ended March 31, 1995 included herein has
been subjected to a limited review by KPMG Peat Marwick LLP, the Registrant's
independent public accountants, whose report is included herein. These
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994. The results of operations for the three months
ended March 31, 1995 are not necessarily indicative of the results of operations
that may be expected for the year.
(2) RECLASSIFICATION OF ACCOUNTS
Certain reclassifications have been made to the 1994 consolidated
financial statements to conform with the 1995 presentation.
(3) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement 121"). Statement 121 requires companies to review all assets for
impairment based upon an evaluation of the recoverability of the carrying
amounts. A new cost basis is to be established at fair value and any impairment
adjustment is to be reported within continuing operations in the period in which
the recognition criteria is first applied and met. Statement 121 is effective
for financial statements for fiscal years beginning after December 15, 1995,
however, earlier application is encouraged. The Company plans to adopt
Statement 121 during 1995 and it anticipates that it will have no effect on the
Company's financial statements.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
(4) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1995 1994
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current:
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 56
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1
----------- ------------
(1) 57
----------- ------------
Other:
U.S. federal - deferred . . . . . . . . . . . . . . . . . . . . (1,828) 1,069
Tax benefits related to common stock issued
pursuant to long-term incentive plan . . . . . . . . . . . . 85 --
----------- ------------
(1,743) 1,069
----------- ------------
Total tax provision (benefits) . . . . . . . . . . . . . . . . . . $ (1,744) $ 1,126
=========== ============
</TABLE>
For the three months ended March 31, 1995, the effective tax rate for
financial reporting purposes approximates the U.S. federal statutory rate of
35%.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1995 and December 31, 1994 are presented below.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . $ 30,076 $ 28,804
Investment tax, general business and foreign tax
credit carryforwards . . . . . . . . . . . . . . . . . . . . 12,896 13,410
Employer's liability claims . . . . . . . . . . . . . . . . . . 1,258 1,044
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . 1 1
------------ -------------
Total gross deferred tax assets . . . . . . . . . . . . . . . . 44,231 43,259
Less valuation allowance . . . . . . . . . . . . . . . . . . . . (37,923) (38,649)
------------ -------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 6,308 4,610
------------ -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation . . . . . . . . . . . . . . . . . . . . . . . 11,223 11,273
Deferred intercompany gains and losses . . . . . . . . . . . . . 1,622 1,702
------------ -------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . 12,845 12,975
------------ -------------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 6,537 $ 8,365
============ =============
</TABLE>
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
(5) SHORT-TERM INVESTMENTS
Short-term investments are carried at amortized cost, which approximates
market as of March 31, 1995. They primarily consist of Eurodollars which are
generally held to maturity.
(6) NET INCOME PER COMMON SHARE
Net income (loss) per common share for the three months ended March 31,
1995 and 1994 excludes the effect of outstanding stock options inasmuch as the
potential dilution from their exercise is less than three percent.
(7) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain claims and litigation arising out
of operations in the normal course of business. In the opinion of management,
uninsured losses, if any, will not be material to the Company's financial
position or results of operations.
6
<PAGE> 9
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Marine
Drilling Companies, Inc. and subsidiaries as of March 31, 1995, and the related
consolidated statements of operations and cash flows for the three months ended
March 31, 1995 and 1994. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Marine Drilling Companies,
Inc. and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended (not presented here); and in our report dated February 3, 1995, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1994, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Houston, Texas
April 21, 1995
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Marine Drilling Companies, Inc. (collectively with its subsidiaries, the
"Company") was incorporated in Texas in January 1990. Since 1966, the Company or
its predecessors has been engaged in offshore contract drilling of oil and gas
wells for independent and major oil and gas companies. As of the date of this
report, the Company owned and operated a fleet of thirteen mobile offshore
jack-up drilling rigs, consisting of four independent leg cantilever jack-ups
and nine mat supported jack-ups. On that date, twelve of the Company's thirteen
rigs were located in the U.S. Gulf of Mexico and one was in transit to the U.S.
Gulf of Mexico from the Bay of Campeche. The Company currently derives
substantially all of its revenues from offshore drilling in the U.S. Gulf of
Mexico and in the Bay of Campeche. The Company's rigs could, with certain
modifications, work in other areas, however, the Company's rigs are not suitable
for those areas, such as the North Sea, that require hostile environment
operating capabilities.
The Company's strategy is to strive to maintain its position as a
significant provider of offshore drilling services in its present markets and to
continue to diversify, insofar as financially and operationally practicable,
into other international offshore drilling markets. The Company also intends to
seek business combinations and to make acquisitions of additional drilling rigs
which, over the long term, the Company believes will benefit its shareholders.
INDUSTRY CONDITIONS AND COMPETITION
Demand for offshore drilling services is primarily driven by the
economics of oil and gas exploration, development and production, which in turn,
are closely tied to oil and gas prices. Since the mid-1980's oil and gas prices
have been volatile and generally lower than prices experienced during the early
1980's. As a result, demand for offshore drilling services has been volatile and
generally lower than during the early 1980's. In addition, during the late
1970's and early 1980's, the industry built a substantial number of new offshore
drilling rigs. The combination of (i) generally lower oil and gas prices, (ii)
increased rig supply and (iii) lower demand for offshore drilling services has
resulted in many periods of depressed pricing and utilization for most of the
world's offshore drilling markets.
Pricing and rig water depth capabilities are generally the most
important competitive factors in the drilling industry. Other competitive
factors include the technical capabilities of specialized drilling equipment and
personnel, operational experience, rig suitability, efficiency, equipment
condition, safety record, reputation and customer relations. The Company
believes that it competes favorably with respect to these factors.
The magnitude of the Company's contract drilling revenues is dependent
upon rig utilization and pricing. These variables are affected by competitive
conditions and the amount of exploration and development activity conducted by
oil and gas companies. As previously stated, this activity is strongly
influenced by the current and projected prices of oil and natural gas.
8
<PAGE> 11
Worldwide Offshore Market Conditions
As discussed later in this section, there was a significant movement of
jack-up rigs during 1993 and 1994 into the U.S. Gulf of Mexico from other
worldwide drilling markets. These mobilizations generally occurred for two
reasons -- (i) strong natural gas prices throughout 1993 and early 1994 led to
increased demand for jack-ups in the U.S. Gulf of Mexico and (ii) oil prices
were generally weak during the latter half of 1993 and the first quarter of 1994
which had a depressing effect on the demand for drilling services in many
jack-up markets outside the U.S. Gulf of Mexico.
The tendency of the offshore drilling industry to "over-mobilize" rigs
among markets has been exacerbated by the volatile nature of oil and gas prices
since the mid-1980's. As the prices of these commodities fluctuate, oil and gas
companies quickly adjust their drilling budgets to reflect the changed economics
of exploration and production. Thus, a drilling market which is driven primarily
by the exploration and production of only one of those commodities will
generally see a change in the demand for drilling services triggered by the
change in the price of the underlying commodity. These changes in demand for
drilling services often occur quickly and can have significant magnitude. For
example, the weak price of natural gas during most of 1991 and early 1992 had a
significant depressing effect on jack-up demand during 1991 and early 1992.
During the periods discussed herein, the Company operated primarily in
the U.S. Gulf of Mexico and the Bay of Campeche, offshore Mexico. These markets
are further discussed below. The profitability of offshore drilling in these
markets, as well as most of the world's offshore drilling markets, has been
volatile since the mid-1980's and is expected to remain volatile until the
supply of jack-up rigs and demand therefor move closer to equilibrium levels.
The Company is unable to predict future oil and gas prices or future levels of
offshore drilling activity.
U.S. Gulf of Mexico
The jack-up drilling market in the U.S. Gulf of Mexico is highly
competitive. A significant number of offshore drilling companies have rigs in
this market and, as a result, no one contractor is able to materially affect
pricing levels. Indeed, day rates can and have exhibited major changes on
relatively small changes in the rig supply and demand situation in this market.
Since 1992, demand for jack-up rigs in this market has shown general
improvement. Day rates during this period generally increased until late 1993,
however, they began to decline thereafter. The decline in day rates during 1994
was due primarily to the supply of marketed jack-up rigs growing faster than the
rate of growth of jack-up rig demand. The growth in the marketed jack-up rig
supply was due to two factors -- (i) net rig mobilizations into this market and
(ii) reactivations (primarily during 1993) of previously noncompetitive rigs.
In late 1994 and early 1995, the price of natural gas deteriorated
due to a mild winter in the U.S. As a result, jack-up rig demand in the
U.S. Gulf of Mexico has shown a decline compared to 1994. According to
Offshore Data Services, as of May 9, 1995, there were 142 jack-up rigs
in the U.S. Gulf of Mexico of which 101 were contracted (a 71% utilization
rate). Day rates during early 1995 have also deteriorated and may decline
further. Moreover, as previously discussed, jack-up rigs are mobile and
competitors could move additional rigs from other markets to the
U.S. Gulf of Mexico. In addition, there are additional non-marketed rigs
9
<PAGE> 12
stacked in the U.S. Gulf of Mexico which, subject to some expenditure, have
been or could be reactivated. Such movement or reactivation could further
depress pricing levels.
Bay of Campeche, Offshore Mexico
The Bay of Campeche drilling market experienced rapid growth in rig
demand during the period from late 1992 to mid-1993. Since that time, the market
has shown general deterioration. The Company was able to contract two of its
rigs (the MARINE 301 and MARINE 303) into this market in late 1992 and another
in mid-1993. The first two rigs completed their contracts in late 1993 and early
1994, respectively, and subsequently returned to the U.S. Gulf of Mexico. The
third rig (the MARINE 300) recently completed its contract, pursuant to
extensions of the initial contract, and is returning to the U.S. Gulf of Mexico
as of the date of this report.
All rigs in the Bay of Campeche are performing drilling services for
Petroleos Mexicanos ("Pemex"), the national oil company of the Republic of
Mexico. Of the rigs working for Pemex in the Bay of Campeche, some are subject
to contracts between the respective drilling contractors and Pemex and the other
rigs are working for turnkey companies which, in turn, have entered into turnkey
drilling contracts with Pemex. The MARINE 300 was contracted to Industrial
Perforadora, S.A. de CV ("IPC") which, in turn, supplied the rig and its
services to Pemex pursuant to a contract between Pemex and IPC.
Recently, Mexico's currency, the peso, has suffered a significant
devaluation. If this devaluation were to adversely affect Pemex's drilling
programs, the demand for jack-up rigs in this market could further deteriorate.
The Company is unable at this time to predict the effect of this occurrence on
the Company's operations.
According to Offshore Data Services, as of April 6, 1995, there were 12
contracted jack-up rigs in the Bay of Campeche compared to 11 contracted jack-up
rigs in early December 1992 and 18 in December 1993. These rigs are operated by
a variety of U.S.-based and Mexico-based drilling contractors. The Company
considers the Bay of Campeche to be a potentially lucrative market and continues
to actively market its fleet in this area.
10
<PAGE> 13
The following table sets forth certain industry and Company historical
data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------- -------------------
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
INDUSTRY(1):
U.S. Gulf of Mexico:
Total jack-up rigs . . . . . . . . . . . . . . 141 127 136 116
Working jack-up rigs . . . . . . . . . . . . . 94 92 103 91
Utilization . . . . . . . . . . . . . . . . . 67% 72% 76% 77%
All other markets:
Total jack-up rigs . . . . . . . . . . . . . . 249 270 255 277
Working jack-up rigs . . . . . . . . . . . . . 192 203 192 217
Utilization . . . . . . . . . . . . . . . . . 77% 75% 75% 78%
COMPANY(2):
Total jack-up rigs . . . . . . . . . . . . . . 13 12 12 11
Working jack-up rigs . . . . . . . . . . . . . 8 9 10 10
Utilization . . . . . . . . . . . . . . . . . 62% 76% 83% 91%
Non-marketed rigs . . . . . . . . . . . . . . 3 -- 1 1
Utilization of marketed rigs . . . . . . . . . 75% 76% 87% 97%
Average day rates(3) . . . . . . . . . . . . . $18,357 $22,791 $19,686 $23,019
</TABLE>
- -------------------
(1) Average of weekly data published by Offshore Data Services.
(2) The numbers included in the table represent the average number of rigs
(rounded to the nearest whole number) operated by the Company for the
periods indicated.
(3) "Average day rate" is determined by dividing the total gross revenue earned
by the Company's rigs during a given period by the total number of days
that the Company's rigs were under contract and working during that period.
DRILLING OPERATIONS AND CUSTOMERS
Most of the Company's drilling contracts provide for compensation on a
"daywork" basis. Under daywork contracts, the Company receives a fixed amount
per day for providing drilling services using the rigs it operates. The Company
does not market its rigs under fixed price or turnkey contracts. In recent
years, the Company's rigs have generally been contracted on a well-to-well basis
due to highly competitive conditions. In early 1993, however, the Company
obtained longer term contracts in Mexico which positively affected the Company's
results of operations in 1993. To the extent available, the Company will
continue to focus upon obtaining, both foreign and domestic, additional term
contracts in the future.
11
<PAGE> 14
FINANCIAL CONDITION -- GENERAL
The following is a discussion of the Company's financial condition, results
of operations, historical financial resources and working capital. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in Item 1 of this
report.
Prior to 1993, the Company derived most of its revenues from contract
drilling in the U.S. Gulf of Mexico. During 1993, the Company operated two to
three rigs in the Bay of Campeche and received a significant amount of revenues
therefrom. During 1994, the Company operated one rig in the Bay of Campeche. As
of the date of this report, the Company had no rigs operating in the Bay of
Campeche.
During 1992 and the first quarter of 1993, the Company completed a series
of related transactions which significantly restructured and recapitalized the
Company (the "Recapitaliza-tion"). Primarily as a result of the
Recapitalization, between January 1, 1992 and early 1993, the Company eliminated
preferred stock obligations of approximately $64,000,000 and indebtedness of
approximately $148,000,000.
The Company's financial results improved markedly during the fourth quarter
of 1992 and throughout 1993 due to the improvements in business conditions noted
above and the effects of the Recapitalization.
The Company remained profitable throughout 1994, although profits were
lower than comparable 1993 results due to the effects of (i) increased
competition in the U.S. Gulf of Mexico which adversely affected utilization and
rig pricing in that market, as well as (ii) lower activity levels in the Bay of
Campeche.
During the first quarter of 1995, the Company posted its first loss after
nine consecutive quarters of profitable operations. This loss was primarily the
result of lower revenues arising from (i) reduced jack-up rig demand and (ii)
increased jack-up rig supply in the U.S. Gulf of Mexico. The Company's expenses
also reflected a small increase (12%) due to an increased number of owned rigs.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company had working capital at March 31, 1995 of $36,421,000 as
compared to working capital of $48,413,000 at December 31, 1994. The decrease in
working capital was due primarily to the repayment of debt under a revolving
credit facility, the net loss from operations and capital expenditures. Net cash
provided by operating activities was $3,686,000 for the three months ended March
31, 1995 as compared to net cash provided by operations of $7,207,000 for the
three months ended March 31, 1994, a decrease of $3,521,000 or 49%. Cash
provided by investing activities was $12,043,000 for the three months ended
March 31, 1995 which resulted primarily from the maturities of short-term
investments compared to cash used in investing activities of $17,024,000 for the
three months ended March 31, 1994. Capital expenditures for the three months
ended March 31, 1995 were $4,325,000, of which approximately $222,000 was used
to purchase drill pipe, and the balance was primarily for rig upgrades and
mobilization of the MARINE 201 as discussed below. Net cash used in financing
activities was $5,372,000 consisting of (i) debt repayments of $5,000,000 and
(ii) Common Stock repurchases of $522,000 net of (iii) proceeds of $150,000
from Common Stock option exercises.
12
<PAGE> 15
Outlook
In late 1994, the Company commenced a program (the "Rig Upgrade Program")
to upgrade the operational capabilities of ten of its rigs during 1995 and 1996
at an aggregate cost of approximately $30,000,000. This program includes the
following upgrades: (i) converting the power systems of seven mechanically
powered rigs, (ii) adding top drive drilling systems to the Company's seven
mechanically powered rigs, (iii) adding a top drive drilling system to the
MARINE 303, (iv) increasing the water depth rating and adding a cantilever
feature to the MARINE 304 and (v) increasing the water depth rating of the
MARINE 300. At the present time, the Company has committed and/or expended
approximately $7,009,000 in connection with this program. During these projects,
the affected rigs will be taken out of service in order to complete the
modifications. At the present time, the Company anticipates that most of the
projects will involve approximately two to three weeks of downtime per affected
rig except for the MARINE 304 which could require up to four months downtime.
The MARINE 304 modifications, however, could be split into two or three phases,
each of which could be separately completed. The Company may elect to complete
these modifications in this manner in order to manage its working capital and
mitigate rig downtime. The Company's profitability could be reduced during these
periods due to lost revenues. Future expenditures for the Rig Upgrade Program
will be subject to the Company's outlook for drilling market conditions, as well
as changes in the Company's financial condition. Accordingly, the Company may
elect to defer or cancel substantial portions of this program.
The Company continues to pursue the acquisition of additional drilling rigs
to enhance its fleet. As of the date of this report, the Company has no planned
or pending rig acquisitions. Future acquisitions, if any, would likely be funded
from the Company's working capital resources, or through debt and/or equity
financing. The Company cannot predict whether it would be successful in
acquiring additional rigs, and obtaining financing therefor, on acceptable
terms. Depending upon the Company's success in acquiring rigs in the future, as
well as future industry conditions, the Company may elect to defer or suspend
portions of the Rig Upgrade Program discussed in the preceding paragraph in
order to preserve its working capital and financial resources.
As of the date of this report, the Company estimates its 1995 capital
expenditures to be as follows:
<TABLE>
<CAPTION>
EXPENDED EXPENDED 1995 EXPENDITURES
FIRST QTR. THROUGH -----------------------------
PROJECT 1995 MARCH 31, 1995 COMMITTED PLANNED*
- ------------------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Rig Upgrade Program $ 1,253,000 $ 2,215,000 $ 4,794,000 $18,574,000
MARINE 201 Acquisition,
Modifications and
Mobilization 2,758,000 9,694,000 3,577,000 3,577,000
Drill String and Other 314,000 314,000 1,519,000 1,519,000
----------- ----------- ----------- -----------
$ 4,325,000 $12,223,000 $ 9,890,000 $23,670,000
=========== =========== =========== ===========
</TABLE>
* Planned expenditures include committed amounts and are subject
to adjustment based upon industry conditions as described herein.
Additional expenditures related to the Rig Upgrade Program, to the extent
completed, would be disbursed subsequent to 1995.
13
<PAGE> 16
On December 1, 1994, Keyes Holding Corporation ("KHC"), a wholly-owned
subsidiary of the Company, entered into a revolving/term loan agreement (the
"Loan") with a U.S. financial institution for $35,000,000. That agreement
includes an eighteen-month revolving credit facility which is convertible at the
end of that period into a three-year term loan facility. The term loan is
amortized monthly at the rate of 20% of the initial term loan amount per year
with a balloon payment for the remaining principal (40% of the initial term loan
amount) due at the maturity of the term loan. As of March 31, 1995, the related
debt outstanding was $10,000,000 and the amount of unused line of credit subject
to the Loan was $25,000,000. Loan proceeds may be used to purchase additional
jack-up drilling rigs or to make capital improvements to the Company's existing
drilling rig fleet. The Company guarantees up to $8,750,000 of the borrowings
under the loan agreement. The Company anticipates that it may borrow additional
amounts from this facility in 1995 to fund capital expenditures.
Recent substantial weakness in the U.S. Gulf of Mexico drilling market
has adversely affected the Company's operations and cash flow. As a result, the
Company has elected to suspend the marketing of certain rigs. These rigs will
generally be deactivated in a common offshore location and, after preparation
for extended idle time, will be maintained periodically by a small maintenance
crew. The Company believes that these actions will benefit cash flow and working
capital during periods of depressed market conditions. The Company anticipates
that additional rigs could be deactivated if industry conditions remain
depressed. The remaining rigs will be aggressively marketed to maximize cash
flow. In addition to the foregoing, the Company will continue to aggressively
control and/or reduce its cost structure.
Recently, Mexico's currency, the peso, has suffered a significant
devaluation. If this devaluation were to adversely affect Pemex's drilling
programs, the Company's business could be adversely impacted. The Company is
unable to predict at this time the effect of this occurrence on the Company's
operations.
On March 7, 1995, the Company announced that its Board of Directors had
authorized the repurchase of up to 4,000,000 shares of the Company's Common
Stock. The action reflects the Company's view that its remaining shareholders
will benefit from such repurchases. The repurchases may be effected, from time
to time, in accordance with applicable securities laws, through solicited or
unsolicited transactions in the market or in privately negotiated transactions.
No limit was placed on the duration of the repurchase program. Subject to
applicable securities laws, such repurchases shall be at such time and in such
amounts as the Company deems appropriate. The Company will fund such repurchases
from working capital. As of March 31, 1995, the Company repurchased 170,000
shares and as of the date of this report, has repurchased an additional 100,000
shares.
The Company believes that its projected cash flows and current working
capital resources are sufficient to meet its working capital, debt service,
Common Stock repurchase program and capital expenditure requirements for the
foreseeable future.
14
<PAGE> 17
On November 2, 1994, the Company and Falcon Drilling Company, Inc.
("Falcon") signed a letter of intent to merge. On February 15, 1995, Falcon and
the Company agreed to terminate the letter of intent and related discussions
because then current market conditions led both parties to conclude that a
definitive agreement could not be reached at that time. From time to time, the
Company has had discussions, and anticipates that such discussions will continue
in the future, with other parties regarding rig acquisitions and business
combinations. The Company cannot predict the outcome of such discussions.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1994
Revenues
Revenues for the three months ended March 31, 1995 decreased $6,269,000
(33%) from $18,814,000 to $12,545,000 compared to the same period in 1994. The
decrease in revenues was the result of three factors -- (i) a 19% decrease in
average day rates from $22,791 in 1994 to $18,357 in 1995, (ii) a decrease in
the number of marketed rigs from 12 in 1994 to 10 in 1995 and (iii) a
decrease in utilization of marketed rigs from 76% in 1994 to 75% in 1995. The
decrease in utilization was due to increased competition in the U.S. Gulf of
Mexico as previously discussed. See " -- Industry Conditions and Competition."
As of March 31, 1995, the Company had one rig in the Bay of Campeche, Mexico.
Revenues from the Bay of Campeche market decreased $733,000 (35%) from
$2,117,000 during the 1994 period to $1,384,000 for the same period in 1995.
Revenues from the Bay of Campeche market accounted for 11% of the Company's
revenues in 1995 and 1994. Operating income from this market decreased $679,000
(83%) from $818,000 in the 1994 period to $139,000 compared to 1995. This
decrease is the result of (i) the Company having a reduced average number of
rigs in this market in 1995 as compared to 1994 and (ii) the MARINE 300 was out
of service during early 1995 for required inspections.
Costs and Expenses
Contract drilling expenses for the three months ended March 31, 1995
increased $790,000 (6%) from $13,085,000 to $13,875,000 compared to the same
period in 1994. This increase is primarily the result of an increased number of
owned rigs and rig inspection costs incurred during the first quarter of 1995.
Depreciation and amortization expense for the three months ended March
31, 1995 increased $271,000 (14%) from $1,873,000 to $2,144,000 compared to the
same period in 1994. The increase resulted primarily from the acquisition of the
MARINE 3 in the fourth quarter of 1994, drill string additions and, to a lesser
extent, the amortization of deferred loan costs.
General and administrative expenses for the three months ended March 31,
1995 increased $808,000 (86%) from $944,000 to $1,752,000 compared to the same
period in 1994. The increase in the first quarter of 1995 was primarily due to
the following factors: (i) a $252,000 increase in health care coverage expenses
due to credits received in 1994 which were not received in 1995; (ii) executive
bonuses of approximately $119,000 in 1995; (iii) a severance accrual of $113,000
related to a work force reduction program; (iv) an increase of $60,000 in
personnel related to the rig upgrade program; (v) an increase in professional
services of $91,000 due to business combination proposals and (vi) an increase
of $120,000 related to increased marketing activities.
15
<PAGE> 18
Interest Expense
Interest expense for the three months ended March 31, 1995 was $299,000.
There was no interest expense for the three months ended March 31, 1994 as the
Company had no debt during that period.
Interest Income
Interest income for the three months ended March 31, 1995 increased
$322,000 from $136,000 to $458,000 compared to the same period in 1994. The
increase was related primarily to an increase in cash balances and improved
interest rates.
Income Taxes
Income taxes of $(1,744,000) for the three months ended March 31, 1995
consisted of an adjustment to U.S. federal deferred taxes of $(1,828,000), tax
benefits related to Common Stock issued pursuant to a long term incentive plan
of $85,000 and a state tax refund of $1,000.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has various claims filed against its subsidiaries in the
ordinary course of business, particularly claims alleging personal injuries. It
is the belief of management that the Company has established adequate reserves
for any liabilities which may reasonably be expected to result from these
claims. In the opinion of management, no pending claims, actions or proceedings
against the Company would have a material adverse effect on its financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------
15 Letter regarding unaudited interim financial
information
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 U.S.
Securities and Exchange Commission.)
(b) Reports on Form 8-K:
One report on Form 8-K was filed during the first quarter of 1995.
(1) Report of the Company dated February 23, 1995 regarding the
Company's announcement of a mutual agreement with Falcon
Drilling Companies, Inc. to terminate their letter of
intent that had contemplated a combination of the two
companies.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARINE DRILLING COMPANIES, INC.
(Registrant)
Date: May 15, 1995 By /s/ William H. Flores
-----------------------------------------
William H. Flores
Senior Vice President --
Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 15, 1995 By /s/ Joan R. Smith
-----------------------------------------
Joan R. Smith
Vice President, Controller and Secretary
(Principal Accounting Officer)
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------ -------- ------------
<S> <C>
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
Re: Registration Statement No. 33-56920 on Form S-8 dated Jan. 11, 1993
No. 33-54909 on Form S-3 dated Aug. 3, 1994
No. 33-55981 on Form S-3 dated Oct. 11, 1994
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 21, 1995, related to our
review of interim financial information. Pursuant to Rule 436(c) under the
Securities Act of 1933, such report is not considered part of a registration
statement prepared or certified by an accountant within the meanings of
Sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
Houston, Texas
April 21, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 29,229
<SECURITIES> 2,003
<RECEIVABLES> 11,763
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,352
<PP&E> 106,549
<DEPRECIATION> 15,037
<TOTAL-ASSETS> 135,219
<CURRENT-LIABILITIES> 6,931
<BONDS> 0
<COMMON> 442
0
0
<OTHER-SE> 109,115
<TOTAL-LIABILITY-AND-EQUITY> 135,219
<SALES> 12,545
<TOTAL-REVENUES> 12,545
<CGS> 13,875
<TOTAL-COSTS> 13,875
<OTHER-EXPENSES> 2,144
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299
<INCOME-PRETAX> (4,981)
<INCOME-TAX> (1,744)
<INCOME-CONTINUING> (3,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,237)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
