<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 SEPTEMBER 30, 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 (I.R.S. Employer
of 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)
________________________________________________________________________________
(Former name, former address and formal fiscal year, if changed
since last report)
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 NOVEMBER 14, 1995 -- 43,598,780
================================================================================
<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
Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets --
September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations --
Three and Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
(i)
<PAGE> 3
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 September 30, 1995, and the
related consolidated statements of operations and cash flows for the three
month and nine month periods ended September 30, 1995 and 1994. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews 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 reviews, 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
October 20, 1995
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,127 $ 18,872
Short-term investments 5,584 18,137
Accounts receivable - trade and other, net 9,976 15,353
Other current assets 3,542 1,020
------------ ------------
Total current assets 33,229 53,382
Property and Equipment 117,042 102,431
Less accumulated depreciation 19,610 13,010
------------ ------------
Property and equipment, net 97,432 89,421
Other assets 216 412
------------ ------------
$ 130,877 $ 143,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 500 $ --
Accounts payable and accrued expenses 6,453 4,137
Employer's liability claims, current 1,135 832
------------ ------------
Total current liabilities 8,088 4,969
Long-Term Debt 9,500 15,000
Employer's Liability Claims, non-current 2,338 2,150
Deferred Income Taxes 5,269 8,365
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000
shares; issued 44,182,143 and outstanding 43,573,014
shares as of September 30, 1995; issued and outstanding
43,917,766 shares as of December 31, 1994 442 439
Common stock restricted (638) (804)
Treasury stock, at cost (609,129 shares in 1995) (2,271) --
Additional paid-in capital 92,787 92,143
Retained earnings from January 1, 1993 15,362 20,953
Accumulated deficit of $49,572 as of December 31, 1992
eliminated in quasi-reorganization -- --
------------ ------------
Total shareholders' equity 105,682 112,731
------------ ------------
$ 130,877 $ 143,215
============ ============
</TABLE>
See notes to consolidated financial statements and accompanying accountants'
review report.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------------
1995 1994 1995 1994
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 15,490 $ 17,393 $ 39,860 $ 52,438
Costs and Expenses:
Contract drilling 12,893 13,112 38,335 38,052
Depreciation and amortization 2,471 1,953 6,773 5,727
General and administrative 1,201 962 4,085 2,817
------------ ------------- ------------ ------------
16,565 16,027 49,193 46,596
------------ ------------- ------------ ------------
Operating income (loss) (1,075) 1,366 (9,333) 5,842
------------ ------------- ------------ ------------
Other Income (Expense):
Interest expense (199) -- (657) --
Interest income 321 427 1,258 781
Other income (expense) 36 (60) 130 21
------------ ------------- ------------ ------------
158 367 731 802
------------ ------------- ------------ ------------
Income (loss) before income taxes (917) 1,733 (8,602) 6,644
Income tax expense (benefit) (320) 606 (3,011) 2,325
------------ ------------- ------------ ------------
Net income (loss) $ (597) $ 1,127 $ (5,591) $ 4,319
============ ============= ============ ============
Income (loss) per common share $ (.01) $ .03 $ (.13) $ .10
============ ============= ============ ============
Weighted average common shares
outstanding 43,656,282 43,829,717 43,880,936 43,797,028
============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements and accompanying accountants'
review report.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (5,591) $ 4,319
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 6,773 5,727
Deferred income taxes (3,096) 2,196
Tax benefits related to common stock issued pursuant to
long-term incentive plan 85 --
Gain on disposition of equipment (163) (476)
Accrual of compensation expense, net 270 306
Issuance of common stock to the employee retirement plan
and the Non-Employee Directors' Plan 667 605
Changes in operating assets and liabilities:
Receivables 5,377 5,271
Other current assets (2,522) (237)
Payables, accrued expenses and employer's liability claims 2,807 (5,331)
Other 158 (1,154)
------------ ------------
Net cash provided by operating activities 4,765 11,226
------------ ------------
Cash Flows From Investing Activities:
Proceeds from maturities of short-term investments 12,553 --
Purchase of short-term investments, net -- (17,394)
Purchase of equipment (14,867) (2,076)
Proceeds from disposition of equipment 284 552
------------ ------------
Net cash used in investing activities (2,030) (18,918)
------------ ------------
Cash Flows From Financing Activities:
Payments of debt (5,000) --
Proceeds from exercise of stock options 177 --
Purchase of treasury stock (2,657) --
------------ ------------
Net cash used in financing activities (7,480) --
------------ ------------
Net decrease in cash and cash equivalents (4,745) (7,692)
Cash and cash equivalents at beginning of period 18,872 21,969
------------ ------------
Cash and cash equivalents at end of period $ 14,127 $ 14,277
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 743 $ --
Income taxes paid (refunded) $ (1) $ 416
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of 53,500 and 83,000 shares in 1995 and 1994,
respectively, of restricted common stock $ 148 $ 415
Forfeitures of 7,500 and 11,250 shares in 1995, and 1994,
respectively, of restricted common stock $ 44 $ 37
</TABLE>
See notes to consolidated financial statements and accompanying accountants'
review report.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine months ended September 30, 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 nine months ended September 30, 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) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
U.S. federal . . . . . . . . . . . . . $ -- $ 47 $ -- $ 128
State . . . . . . . . . . . . . . . . 1 -- -- 1
---------- ---------- ----------- ------------
1 47 -- 129
---------- ---------- ----------- ------------
Other:
U.S. federal - deferred . . . . . . . (321) 559 (3,096) 2,196
Tax benefits related to common
stock issued pursuant to long-
term incentive plan . . . . . . . . -- -- 85 --
---------- ---------- ----------- ------------
(321) 559 (3,011) 2,196
---------- ---------- ----------- ------------
Total tax provision (benefit) . . . . . $ (320) $ 606 $ (3,011) $ 2,325
========== ========== =========== ============
</TABLE>
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
For the nine months ended September 30, 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 September
30, 1995 and December 31, 1994 are presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . $ 32,759 $ 28,804
Investment tax, general business and foreign tax
credit carryforwards . . . . . . . . . . . . . . . . . . . . 13,410 13,410
Employer's liability claims . . . . . . . . . . . . . . . . . . 1,216 1,044
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . -- 1
------------ -------------
Total gross deferred tax assets . . . . . . . . . . . . . . . . 47,385 43,259
Less valuation allowance . . . . . . . . . . . . . . . . . . . . (38,825) (38,649)
------------ -------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 8,560 4,610
------------ -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation . . . . . . . . . . . . . . . . . . . . . . . 12,365 11,273
Deferred intercompany gains and losses . . . . . . . . . . . . . 1,464 1,702
------------ -------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . 13,829 12,975
------------ -------------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 5,269 $ 8,365
============ =============
</TABLE>
(4) SHORT-TERM INVESTMENTS
Short-term investments are carried at amortized cost, which
approximates market as of September 30, 1995. They primarily consist of U.S.
government or agency issues which are generally held to maturity.
(5) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the nine months ended September
30, 1995 and 1994 excludes the effect of outstanding stock options inasmuch as
the potential dilution from their exercise is less than three percent.
(6) 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Demand for offshore drilling services is primarily driven by the
economics of oil and gas exploration, development and production, which in
turn, are closely linked to current and projected oil and gas prices. Since
the mid-1980's, oil and gas prices have been unstable and generally lower than
prices experienced during the early 1980's, resulting in volatile and generally
reduced demand for offshore drilling services. In addition, during the early
1980's, the industry built a substantial number of new offshore drilling rigs.
Since 1993, the worldwide jack-up market has shown general improvement compared
to the 1986-1992 period. This improvement can be generally attributed to
improved jack-up rig demand and a continuing reduction in jack-up rig supply.
Although this period can be characterized as showing general improvement,
certain significant jack-up markets have experienced short periods of reduced
rig demand and/or excess rig supply. During those periods of low rig
utilization, day rates were adversely impacted and drilling contractors
competing in those markets suffered poorer financial results until rig demand
improved or rigs left those markets for other markets.
DRILLING MARKETS AND UTILIZATION
General
Historically, the Company has derived substantially all of its revenues
from offshore drilling in the U.S. Gulf of Mexico and in the Bay of Campeche.
Three of the Company's rigs, MARINE 300, MARINE 304 and MARINE 201, are
configured to work in international markets outside the U.S. Gulf of Mexico and
the Bay of Campeche. The Company's other rigs could, if applicable
modifications were made and certifications obtained, operate in certain areas
outside of the U.S. Gulf of Mexico and the Bay of Campeche. The Company's rigs
are not, however, suitable for areas, such as the North Sea, that require
hostile environment operating capabilities. The Company is marketing certain
of its rigs in selected international markets in order to diversify its
operations.
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. Day rates can and have fluctuated significantly on relatively
small changes in the rig supply and demand situation in this market.
Throughout the period from late 1992 through 1994, jack-up operations
in the U.S. Gulf of Mexico were characterized by improving rig demand. In late
1994 and early 1995, however, the combination of reduced jack-up demand and
increased rig supply had a depressing effect on U.S. Gulf of Mexico operations.
During this period of reduced utilization, day rate levels fell and contractors
experienced reduced levels of earnings. Since mid-1995, a combination of
improved jack-up rig demand and mobilizations of rigs to improving
international markets has resulted in improved jack-up day rates and
utilization.
7
<PAGE> 10
With 12 of its 13 rigs located in the U.S. Gulf of Mexico, the Company
is well positioned to benefit from any upturn in that market. The improved
utilization of jack-up rigs in the U.S. Gulf of Mexico during the third quarter
appears to be continuing in the fourth quarter. The industry wide utilization
of jack-up rigs in the U.S. Gulf of Mexico as of November 7, 1995 was 83%, as
compared with an average of 72% for the first nine months of 1995.
Other Markets
Most of the world's other significant jack-up drilling markets are
currently experiencing improving rig utilization and day rates. According to
Offshore Data Services, as of November 7, 1995, worldwide jack-up utilization
outside of the U.S. Gulf of Mexico was 82% (205 rigs working out of a supply of
249 rigs) compared to 74% at the beginning of 1995.
During most of 1993 and early 1994, demand for jack-up rigs was strong
in the Bay of Campeche, offshore Mexico in the southern Gulf of Mexico. The
Bay of Campeche drilling market, however, generally deteriorated in late 1994
and early 1995. The Company contracted two of its rigs (the MARINE 301 and the
MARINE 303) into this market in late 1992 and another (the MARINE 300) 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 completed its contract and returned to the U.S. Gulf of Mexico in
May, 1995. Although Mexico has devalued its currency and is currently
experiencing a recession, the Company expects to continue to actively market
its fleet in the Bay of Campeche.
In August 1995, the Company entered into a one-year term contract for
the MARINE 201 to operate off the east coast of India. Under the contract, the
customer has options to extend the contract for up to eight three-month
extension periods. The rig reached India during the second week of November
and drilling operations commenced shortly thereafter. The cost of mobilization
of the rig from the U.S. Gulf of Mexico to India is to be substantially
reimbursed by the customer.
8
<PAGE> 11
The following table sets forth certain industry and Company historical
data for the periods indicated. Industry data includes many rigs that are
dissimilar to the Company's rigs in terms of performance capabilities, age,
operational criteria and environmental capabilities. Certain of the Company's
competitors have fleets that include rigs other than jack-up rigs that can
compete with jack-up rigs under certain circumstances.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------------- ----------------- -----------------
1995 1994 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INDUSTRY:(a)
U.S. Gulf of Mexico:
Total jack-up rigs . . . . . . . . 139.7 139.2 140.8 134.1 135.8 116.5
Working jack-up rigs . . . . . . . 108.5 105.4 101.4 99.9 102.9 90.5
Utilization . . . . . . . . . . . 78% 76% 72% 75% 76% 78%
All other markets:
Total jack-up rigs . . . . . . . . 245.2 252.4 246.5 257.2 255.5 276.6
Working jack-up rigs . . . . . . . 199.8 188.9 195.2 194.7 192.5 216.9
Utilization . . . . . . . . . . . 81% 75% 79% 76% 75% 78%
COMPANY:(b)
Total jack-up rigs . . . . . . . . 13.0 12.0 13.0 12.0 12.1 11.1
Working jack-up rigs . . . . . . . 9.5 10.2 8.3 9.5 9.8 9.9
Utilization . . . . . . . . . . . 73% 85% 64% 79% 81% 89%
Non-marketed rigs . . . . . . . . 3.0 1.0 3.5 .6 .8 .9
Utilization of marketed rigs . . . 95% 92% 88% 83% 87% 97%
Average day rates(c) . . . . . . . $17,712 $18,616 $17,564 $20,133 $19,686 $23,019
</TABLE>
- ---------------------------
(a) Average of weekly data published by Offshore Data Services.
(b) The numbers included in the table represent the average number of rigs
operated by the Company for the periods indicated.
(c) "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.
COMPETITION
The offshore contract drilling market is highly competitive with a
large number of contractors competing for available work. Drilling contracts
are generally awarded on a competitive bid basis. 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 seeks to capitalize on customer recognition of the
Company's safety record, crew quality and the quality of its service and
equipment. Many of the Company's competitors, however, are larger, or are
subsidiaries of larger companies, and have greater financial resources and more
diverse fleets than the Company, which may enable them to better withstand
industry downturns, to compete more effectively on the basis of price, to build
new rigs or to acquire existing rigs that become available for purchase.
9
<PAGE> 12
DRILLING OPERATIONS AND CUSTOMERS
The Company's existing 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. Under most
daywork contracts, the customer also pays the cost of moving the rig and
related equipment to the job site and the costs of drilling the well (other
than the costs of operating the rig, which are borne by the drilling
contractor). Daywork contracts may provide for lower rates during periods when
drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather or water conditions or other conditions beyond the control of
the Company. Historically, the Company has not marketed its rigs under fixed
price or turnkey contracts.
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.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company had working capital at September 30, 1995 of $25,141,000 as
compared to working capital of $48,413,000 at December 31, 1994. The decrease
of $23,272,000 in working capital was due primarily to the repayment of debt
under a revolving credit facility, losses from operations, capital expenditures
and common stock repurchases. Net cash provided by operating activities was
$4,765,000 for the nine months ended September 30, 1995 as compared to net cash
provided by operations of $11,226,000 for the nine months ended September 30,
1994, a decrease of $6,461,000 or 58%. Cash used in investing activities was
$2,030,000 for the nine months ended September 30, 1995 resulting primarily
from maturities of short-term investments of $12,553,000 compared to cash used
in investing activities of $18,918,000 for the nine months ended September 30,
1994. Capital expenditures for the nine months ended September 30, 1995 were
$14,867,000, of which approximately $523,000 was used to purchase drill pipe,
and the balance was primarily for rig upgrades as discussed below and the
mobilization/refurbishment of the MARINE 201. Net cash used in financing
activities was $7,480,000 consisting of (i) debt repayments of $5,000,000 and
(ii) common stock repurchases of $2,657,000, net of proceeds of $177,000
from common stock option exercises.
Outlook
In late 1994, the Company commenced a program (the "Rig Upgrade
Program") to upgrade the operational capabilities of certain of its rigs.
This program includes the following upgrades: (i) converting the power systems
of selected mechanically powered rigs, (ii) adding top drive drilling systems
to selected rigs, and (iii) other potential rig upgrades such as (a) increased
water depth ratings and (b) additions of cantilever features to slot type rigs.
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 expand,
defer or cancel portions of this program.
10
<PAGE> 13
The Company continues to pursue the acquisition of additional drilling
rigs to enhance its fleet. At this time, however, the Company has no planned
or pending rig acquisitions. Future acquisitions, if any, would likely be
funded from the Company's working capital or through debt and/or equity
financing. The Company cannot predict whether it will 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.
At this time, the Company estimates its fourth quarter 1995 capital
expenditures to be approximately $8,300,000 consisting of (i) drill pipe
expenditures ($1,700,000), (ii) a top drive installation for the MARINE 300
($2,000,000), (iii) a top drive addition, power system conversion and general
refurbishment to the MARINE 15 ($4,500,000) and (iv) other miscellaneous
expenditures.
During 1996, the Company expects to incur capital expenditures totalling
$16,500,000 consisting of (i) drill pipe purchases ($2,200,000), (ii) general
rig refurbishments ($5,200,000), (iii) the installation of a top drive drilling
system on the MARINE 200 ($2,400,000) and (iv) modification of two rigs for
international operations ($6,700,000).
On December 1, 1994, Keyes Holding Corporation ("KHC"), a wholly-owned
subsidiary of the Company, entered into a revolving credit/term loan agreement
with a U.S. financial institution pursuant to which KHC may, subject to the
conditions stated in the agreement, borrow up to the lesser of (i) $35,000,000,
or (ii) 50% of the appraised value of MARINE 300, 301 and 303. The agreement
includes an 18-month revolving credit facility which is convertible on June 1,
1996 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. The agreement provides that the amounts
borrowed will bear interest at floating rates equal to LIBOR + 2.5%. The
minimum borrowing under the revolving credit facility is $10,000,000. If, on
June 1, 1996, KHC elects to convert less than $10,000,000 into a term loan,
then it will be required to pay a non-utilization fee equal to 2% of the excess
of $10,000,000 over the amount converted. As of September 30, 1995, the
related debt outstanding was $10,000,000 and the amount available under the
line of credit 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 has guaranteed up to
$8,750,000 of the borrowings under the loan agreement. The borrowings under
the agreement are secured by a mortgage on MARINE 300, MARINE 301 and MARINE
303.
Reduced rig demand in the U.S. Gulf of Mexico drilling market in early
1995 adversely affected the Company's operations and cash flow. As a result,
the Company elected to suspend the marketing of three rigs. These rigs were
deactivated in a common offshore location and, after preparation for extended
idle time, were maintained periodically by a small maintenance crew. As of the
date of this report, all but one of those rigs has been reactivated.
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
11
<PAGE> 14
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, if made, 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 the date of this report, the Company has purchased a total of
735,000 shares of Common Stock at an average price of $3.61 per share.
The Company believes that its available funds, together with cash
generated from operations and amounts that may be borrowed under the revolving
credit/term loan facility, will be sufficient to fund its capital expenditures,
working capital and debt service for the foreseeable future. Future cash
flows, however, are subject to a number of uncertainties, particularly the
condition of the oil and gas industry. Accordingly, there can be no assurance
that these resources will continue to be sufficient to fund the Company's cash
requirements.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1994
Revenues
Revenues for the nine months ended September 30, 1995 decreased
$12,578,000 (24%) from $52,438,000 for the first nine months of 1994 to
$39,860,000. The decrease in revenues was the result of two factors: (i) a
13% decrease in average day rates from $20,133 in 1994 to $17,564 in 1995, and
(ii) a decrease in the number of marketed rigs from 11 in 1994 to 9 in 1995,
offset by an increase in utilization of marketed rigs from 83% in 1994 to 88%
in 1995. The reduction of average day rates and number of marked rigs was
caused principally by a general decline in industry wide conditions and by the
reduced level of drilling activity in Mexico's Bay of Campeche. The reduction
in the revenues derived by the Company from the Bay of Campeche during the
first nine months of 1995 was the result of the following factors: (i) the
Company had a reduced average number of rigs in this market in 1995 as compared
to 1994 and (ii) the MARINE 300 was out of service for a short time in early
1995 for required inspections. Later, in May, the MARINE 300 completed its
contract in the Bay of Campeche and returned to the U.S. Gulf of Mexico. The
Company has had no rigs in the Bay of Campeche since that time.
Costs and Expenses
Contract drilling expenses increased $283,000 (1%) from $38,052,000 for
the nine months ended September 30, 1994 to $38,335,000 for the corresponding
period in 1995. This increase is primarily the result of an increased number
of owned rigs and rig inspection costs incurred in early 1995, which was
partially offset by a reduced number of marketed rigs as compared to 1994.
Depreciation and amortization expense increased $1,046,000 (18%) from
$5,727,000 for the nine months ended September 30, 1994 to $6,773,000 for the
corresponding period in 1995. The increase resulted primarily from the
acquisition of the MARINE 3 in the fourth quarter of 1994, expenditures for the
acquisition and refurbishment of the MARINE 201, expenditures to upgrade the
MARINE 16, drill string purchases and amortization of deferred loan costs.
12
<PAGE> 15
General and administrative expenses increased $1,268,000 (45%) from
$2,817,000 for the first nine months of 1994 to $4,085,000 for the nine months
ended September 30, 1995. The increase was primarily related to the following
factors: (i) a $480,000 increase in benefit-related expenses due to credits
received in 1994 which were not received in 1995; (ii) executive bonuses of
approximately $127,000 paid in early 1995; (iii) a severance accrual of
$117,000 related to a 1995 work force reduction program; (iv) an increase in
professional services of $132,000 due to business combination discussions which
were later suspended and (v) an increase of $221,000 related to increased
marketing activities.
Interest Expense
Interest expense for the nine months ended September 30, 1995 was
$657,000 and consisted of the following: (i) interest of $712,000 based on an
average interest rate of 8.5% on an average borrowed balance of approximately
$11,100,000; (ii) credit facility fees of $45,000 and (iii) a capitalized
interest credit of approximately $100,000. The Company had no interest expense
or outstanding debt during this period in 1994.
Interest Income
Interest income for the nine months ended September 30, 1995 increased
$477,000 from $781,000 for the first nine months of 1994 to $1,258,000. The
increase was related primarily to increased cash balances and improved interest
rates on invested balances.
Income Taxes
Income taxes of $(3,011,000) for the nine months ended September 30,
1995 consisted of deferred U.S. federal tax benefits of $(3,096,000) and tax
benefits related to common stock issued pursuant to a long-term incentive plan
of $85,000.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1994
Revenues
Revenues for the third quarter of 1995 decreased $1,903,000 (11%) from
$17,393,000 to $15,490,000 compared to the same period in 1994. The decrease
in revenues was the result of three factors: (i) a 5% decrease in average day
rates from $18,616 in 1994 to $17,712 in 1995, (ii) a decrease in the number of
marketed rigs from 11 in 1994 to 10 in 1995 offset by an increase in
utilization of marketed rigs from 92% in 1994 to 95% in 1995. During the third
quarter of 1995, the Company had no rigs in the Bay of Campeche, Mexico.
Costs and Expenses
Contract drilling expenses for the third quarter of 1995 decreased
$219,000 (2%) from $13,112,000 to $12,893,000 compared to the same period in
1994. This decrease is primarily the result of a reduced number of marketed
rigs in 1995 which was partially offset by higher employer liability claims and
insurance costs.
13
<PAGE> 16
Depreciation and amortization expense for the third quarter of 1995
increased $518,000 (27%) from $1,953,000 to $2,471,000 compared to the same
period in 1994. The increase resulted primarily from the activation of the
MARINE 201, the acquisition of the MARINE 3 in the fourth quarter of 1994, the
MARINE 16 upgrades, drill string additions and, to a lesser extent, the
amortization of deferred loan costs.
General and administrative expenses increased $239,000 (25%) from
$962,000 for the third quarter of 1994 to $1,201,000 for the same period in
1995. The increase in the third quarter of 1995 was primarily due to a
$253,000 increase in health care coverage expenses resulting from credits
received in 1994 but not in 1995.
Interest Expense
Interest expense for the third quarter of 1995 was $199,000 and
consisted of the following: (i) interest of $211,000 based on an average rate
of 8.4% with an average balance of $10,000,000; (ii) interest of $16,000 based
on a .25% rate with an average unused balance of $25,000,000 and (iii) offset
by capitalized interest of approximately $28,000.
Interest Income
Interest income decreased $106,000 from $427,000 for the third quarter
of 1994 to $321,000 for the same period in 1995. The decrease was related
primarily to a decrease in cash balances.
Income Taxes
Income taxes for the third quarter of 1995 consisted of deferred U.S.
federal tax benefits of $(321,000) and state tax expense of $1,000.
14
<PAGE> 17
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on August
17, 1995. At the meeting, nine directors were elected by a vote of holders of
Common Stock, as outlined in the Company's Proxy Statement related to the
meeting. With respect to the election of directors, (i) proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, (ii) there was no solicitation in opposition to the management's
nominees as listed in the Proxy Statement, and (iii) all of such nominees were
elected. The following numbers of votes were cast as to the director nominees:
<TABLE>
<CAPTION>
In Favor Withheld Broker Non-Votes Abstaining
------------------- ------------------ ------------------ ----------------
Nominee Votes Cast Votes % Votes % Votes % Votes %
- -------------- ---------- ----------- ----- --------- ----- --------- ---- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Barbanell 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Brown 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Bull 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Flores 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Gregory 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Keyes 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Libowitz 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Linneman 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
Mr. Newman 30,964,656 30,868,072 99.7% 96,584 0.3% -- -- -- --
</TABLE>
The second item voted upon at the meeting was ratification of the adoption of
the Marine Drilling Companies, Inc. 1995 Non-Employee Directors' Plan, with
votes cast as follows:
<TABLE>
<CAPTION>
In Favor Against Broker Non-Votes Abstaining
------------------- ----------------- ------------------ ------------------
Votes Cast Votes % Votes % Votes % Votes %
---------- ----------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30,964,656 30,351,634 98.0% 170,064 0.5% 188,140 0.6% 254,818 0.9%
</TABLE>
The final item voted upon at the meeting was ratification of the appointment of
KPMG Peat Marwick LLP as independent certified public accountants of the Company
and its subsidiaries for 1995, with votes cast as follows:
<TABLE>
<CAPTION>
In Favor Against Broker Non-Votes Abstaining
------------------- ----------------- ------------------ ------------------
Votes Cast Votes % Votes % Votes % Votes %
---------- ----------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30,964,656 30,917,496 99.85% 35,742 0.1% -- -- 11,419 0.05%
</TABLE>
15
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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.)
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the third quarter of 1995.
16
<PAGE> 19
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.
<TABLE>
<S> <C> <C>
MARINE DRILLING COMPANIES, INC.
(Registrant)
Date: November 14, 1995 By /s/ William H. Flores
----------------------------------------------------------------
William H. Flores
Senior Vice President -
Chief Financial Officer and Director
(Principal Financial Officer)
Date: November 14, 1995 By /s/ Joan R. Smith
----------------------------------------------------------------
Joan R. Smith
Vice President, Controller and Secretary
(Principal Accounting Officer)
</TABLE>
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------- -------- ------------
<S> <C> <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 January 11, 1993
No. 33-54909 on Form S-3 dated August 3, 1994
No. 33-55981 on Form S-3 dated October 11, 1994
No. 33-61901 on Form S-8 dated August 17, 1995
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 20, 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
November 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 14,127
<SECURITIES> 5,584
<RECEIVABLES> 9,976
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,229
<PP&E> 117,042
<DEPRECIATION> 19,610
<TOTAL-ASSETS> 130,877
<CURRENT-LIABILITIES> 8,088
<BONDS> 0
<COMMON> 442
0
0
<OTHER-SE> 105,240
<TOTAL-LIABILITY-AND-EQUITY> 130,877
<SALES> 39,860
<TOTAL-REVENUES> 39,860
<CGS> 38,335
<TOTAL-COSTS> 38,335
<OTHER-EXPENSES> 6,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 657
<INCOME-PRETAX> (8,602)
<INCOME-TAX> (3,011)
<INCOME-CONTINUING> (5,591)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,591)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
