<PAGE> 1
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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, 1998
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)
<TABLE>
<S> <C>
TEXAS 74-2558926
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556
(Address of principal executive offices and zip code)
(281) 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 APRIL 28, 1998 -- 52,235,006
==============================================================================
<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 -
March 31, 1998 and December 31, 1997................... 2
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997............. 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997............. 4
Notes to Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 15
Item 6. Exhibits and Reports on Form 8-K........................ 15
SIGNATURES............................................................... 16
</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 March 31, 1998, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1998 and 1997. 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, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 20, 1998, 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, 1997 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 28, 1998
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 42,822 $ 15,619
Restricted cash 5,000 5,000
Accounts receivable - trade and other, net 44,646 46,680
Prepaid expenses and other 2,762 5,048
--------- ---------
Total current assets 95,230 72,347
Property and equipment 334,207 310,122
Less accumulated depreciation 54,563 49,635
--------- ---------
Property and equipment, net 279,644 260,487
Other 1,271 1,348
--------- ---------
$ 376,145 $ 334,182
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 20,044 $ 6,367
Accrued expenses 11,657 7,824
Current tax liability 3,000 2,113
Employer's liability claims, current 992 571
--------- ---------
Total current liabilities 35,693 16,875
Employer's liability claims, non-current and other 1,393 1,776
Deferred income taxes 21,760 18,090
Minority interest in subsidiary 1,672 1,699
Shareholders' equity:
Common stock, par value $.01. Authorized 200,000,000 shares;
issued and outstanding 52,221,637 and 51,890,444 shares,
as of March 31, 1998 and December 31, 1997, respectively 522 519
Common stock restricted (2,042) (1,249)
Additional paid-in capital 205,153 201,236
Retained earnings from January 1, 1993 111,994 95,236
--------- ---------
Total shareholders' equity 315,627 295,742
--------- ---------
Commitments and contingencies -- --
--------- ---------
$ 376,145 $ 334,182
========= =========
</TABLE>
See notes to consolidated financial statements and accompanying auditors'
review report.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
----------- ---------
<S> <C> <C>
Revenues $ 57,464 $ 36,750
Costs and Expenses:
Contract drilling 24,053 16,476
Depreciation and amortization 5,033 3,581
General and administrative 2,900 1,781
-------- --------
31,986 21,838
-------- --------
Operating income 25,478 14,912
-------- --------
Other Income (Expense):
Interest expense (86) (350)
Interest income 537 1,057
Other income 270 40
-------- --------
721 747
-------- --------
Income before income taxes 26,199 15,659
Income tax expense 9,441 5,481
-------- --------
Net income $ 16,758 $ 10,178
======== ========
Earnings per share:
Basic $ 0.32 $ 0.20
Diluted $ 0.32 $ 0.19
Average common shares:
Basic 51,987 51,330
Diluted 52,600 52,494
</TABLE>
See notes to consolidated financial statements and accompanying auditors'
review report.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 16,758 $ 10,178
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income taxes 3,670 575
Pre-quasi-reorganization net operating loss carryforward -- 2,952
Tax benefits related to common stock issued pursuant to
long-term incentive plan 1,919 842
Depreciation and amortization 5,033 3,581
Changes in operating assets and liabilities:
Receivables 2,034 (11,394)
Other current assets 2,286 1,132
Payables, accrued expenses, current taxes and
employer's liability claims 18,435 6,156
Other 450 (947)
-------- --------
Net cash provided by operating activities 50,585 13,075
-------- --------
Cash Flows From Investing Activities:
Purchase of short-term investments -- (19,514)
Maturity of short-term investments -- 10,000
Purchase of equipment (24,210) (12,926)
Proceeds from disposition of equipment 174 45
-------- --------
Net cash used in investing activities (24,036) (22,395)
-------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 654 297
Payment of debt -- (10,000)
Increase in restricted cash -- (2,000)
-------- --------
Net cash provided by (used in) financing activities 654 (11,703)
-------- --------
Net increase (decrease) in cash and cash equivalents 27,203 (21,023)
Cash and cash equivalents at beginning of period 15,619 69,761
-------- --------
Cash and cash equivalents at end of period $ 42,822 $ 48,738
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 75 $ 392
Income taxes paid $ 2,437 $ 118
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 62,300 and 62,000 shares in 1998 and 1997
respectively, of restricted common stock $ 958 $ 1,081
</TABLE>
See notes to consolidated financial statements and accompanying auditors'
review report.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1998 included herein has
been subjected to a limited review by KPMG Peat Marwick LLP, the Registrants'
independent auditors, 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, 1997. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results of operations that may be expected
for the year.
(2) EARNINGS PER SHARE
Effective December 1997 the Company was required to adopt Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 introduces the concept of basic earnings per share, which represents net
income divided by the weighted average common shares outstanding - without the
dilutive effects of common stock equivalents (options, warrants, etc). Basic EPS
for the quarters ended March 31, 1998 and 1997 is $0.32 and $0.20, respectively.
Diluted earnings per share, giving effect for common stock equivalents, for the
quarters ended March 31, 1998 and 1997 is $0.32 and $0.19, respectively. Common
stock equivalents with a weighted average of 613,000 and 1,164,000 are reflected
in the calculation of diluted earnings per share for the quarters ended March
31, 1998 and 1997, respectively. No adjustment to net income was made in
calculating diluted earnings per share for the quarters ended March 31, 1998 and
1997.
(3) COMMITMENTS AND CONTINGENCIES
India Lawsuit -- Jagson International Limited, an Indian entity, has
brought suit against Marine Drilling Companies, Inc. and Marine 300 Series, Inc.
in Bombay, India. The plaintiff has alleged that the Company agreed to charter
two jack-up rigs to the plaintiff during 1992 and that it breached the agreement
by failing to charter the rigs resulting in damages in excess of $14,500,000.
The Company disputes the existence of the agreement and intends to vigorously
defend the suit. Although the lawsuit has recently been filed and the litigation
is in an early stage, based on a number of substantive and procedural defenses
that the Company believes are available to it, the Company does not believe the
ultimate resolution of this dispute will have a material adverse effect on the
Company's results of operations or financial condition.
Legal Proceedings -- The Company is involved in various other claims
and legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
Shipyard Contracts -- In December 1997 Marine Drilling Companies
(Norway) ASA ("Owner") entered into an agreement with HAM Marine, Inc. ("HAM")
to complete construction of the MARINE 700. The shipyard contract is for
$87,000,000 and the project is expected to be completed during the first quarter
of 1999. Payments are to be made monthly based upon the percentage complete.
Subject to certain exceptions, if the construction is not complete by the
scheduled delivery date per the contract, HAM is obligated to pay the Owner
$100,000 for every day late not to exceed $6,000,000. Likewise, if delivery of
the completed rig is early, then the Owner is obligated to pay HAM $100,000 per
day up to $6,000,000. The shipyard is located in Pascagoula, Mississippi.
Additional expenditures of approximately $99,000,000 will be required to equip
the MARINE 700.
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 19, 1997 the Company signed a contract with Jurong Shipyard
Limited ("Jurong") in Singapore to upgrade the MARINE 500. The contract is for
approximately $38,000,000 and is expected to take approximately six months. As
in all construction projects there can be no guarantee that delays will not
prevent the upgrade from being completed on schedule. The contract makes
provisions for such delays. If the rig does not arrive at the shipyard on
schedule, by July 15, 1998, then the Company is obligated to pay Jurong $5,000
per day for a maximum period of thirty days. Once the upgrade begins if it is
completed early then Jurong will be entitled to receive $30,000 per day for each
day ahead of schedule up to $2,000,000. On the other hand, if the work is
delayed beyond the scheduled completion date, December 31, 1998, due to events
that are within the control of Jurong then the Company shall be entitled to
$60,000 per day for each day late up to a maximum of $4,000,000.
Charter Agreement -- The Company entered into a Charter Agreement with
Shanghai Bureau of Marine Geological Survey to charter the MARINE 510, a
semi-submersible, for a period of five years. The Charter Agreement begins when
the rig commences operations under a drilling contract that is expected to be
May 1998. The charter and related fees, which average $29,500 per day, are only
payable during the time the rig is earning a daily rate. The charter rate goes
to zero when the rig is not employed. In the first two years the Agreement
cannot be terminated. In years three through five the agreement can only be
terminated in the event the rig does not have a contract within 50 days of a
completed contract with at least 10 days written notice prior to termination.
(4) SEGMENT REPORTING
For segment reporting purposes the Company defines its segments as
shallow water drilling (jack-up rigs) and deepwater drilling
(semi-submersibles). Operating income consists of revenues less the related
operating costs and expenses, including depreciation and allocated operation
support, excluding interest and unallocated corporate expenses. Identifiable
assets by operating segment include assets directly identified with those
operations.
The following table sets forth consolidated financial information with
respect to the Company and its subsidiaries by operating segment (in thousands):
<TABLE>
<CAPTION>
JACK-UP SEMI CORPORATE &
OPERATIONS OPERATIONS OTHER TOTAL
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
MARCH 31, 1998
Revenues $ 51,808 $ 5,656 $ - $ 57,464
Operating Income (Loss) 26,690 2,325 (3,537) 25,478
Identifiable Assets 174,096 143,328 58,721 376,145
Capital Expenditures 1,650 21,901 659 24,210
Depreciation & Amortization 3,409 987 637 5,033
MARCH 31, 1997
Revenues $ 34,340 $ 2,410 $ - $ 36,750
Operating Income (Loss) 17,252 153 (2,493) 14,912
Identifiable Assets 143,273 41,279 81,813 266,365
Capital Expenditures 10,440 1,086 1,400 12,926
Depreciation & Amortization 2,546 323 712 3,581
</TABLE>
6
<PAGE> 9
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company also provides services in both domestic and foreign
locations. The following table sets forth financial information with respect to
the Company and its subsidiaries by geographic area (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
United States $ 43,919 $ 32,980
India 1,299 1,360
Southeast Asia 12,246 2,410
Other Foreign - -
Operating Income:
United States 20,758 14,731
India 88 56
Southeast Asia 4,632 153
Other Foreign - (28)
Identifiable Assets:
United States 256,205 190,492
India 13,588 14,955
Southeast Asia 106,196 41,279
Other Foreign 156 19,639
</TABLE>
The Company negotiates drilling contracts with a number of customers
for varying terms, and management believes it is not dependent upon any single
customer. For the three months ending March 31, 1998 and 1997, sales to
customers that represented 10% or more of consolidated drilling revenues were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -------------------------------
% OF TOTAL % OF TOTAL
REVENUE REVENUE REVENUE REVENUE
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A $ 11,652 20% $ 10,344 28%
Customer B 1,261 2% 5,410 15%
Customer C 6,458 11% - -
Customer D 5,598 10% - -
</TABLE>
As is typical in the industry, the Company does business with a
relatively small number of customers at any given time. The loss of any one of
such customers could, at least on a short-term basis, have a material adverse
effect on the Company's profitability. Management believes, however, that at
current levels of drilling activity, the Company would have alternative
customers for its services if it lost any single customer and that the loss of
any one customer would not have a material adverse effect on the Company on a
long-term basis.
7
<PAGE> 10
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) SUBSEQUENT EVENTS
In April 1998 the Company signed a memorandum of agreement to acquire
the "Maersk Explorer", a jack-up drilling rig capable of operating in 205 feet
of water that is currently being utilized as an accommodation unit in the Danish
sector of the North Sea. Subject to the satisfaction of customary conditions the
Company is expected to take delivery of the rig between June 1 and October 31,
1998 at a total cost of $22,900,000. The rig will be upgraded to competitive
drilling status for approximately $50,000,000 and will take approximately nine
months. This rig will be outfitted with drilling equipment removed from the
MARINE 500 and will be capable of operating in the North Sea.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INDUSTRY 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 volatile and generally lower than
prices experienced during the early 1980's, resulting in volatile and, until
recently, 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. The oversupply of rigs and lower oil and gas prices caused
decreased demand and utilization resulting in significantly lower day rates.
Since 1993 activity in the contract drilling industry has improved due to
increased worldwide demand stemming from higher levels of pricing for oil and
natural gas. The supply of offshore drilling rigs has declined while the demand
for such rigs has increased resulting in higher day rates and worldwide
utilization rates. During 1996, both jack-up and deep water drilling markets
showed substantial improvement that continued throughout most of 1997. However,
oil prices have declined substantially since October 1997 and no assurance can
be given that such improved drilling market conditions will be sustained in the
future.
During the first quarter of 1998 there has been a slight decline in
worldwide utilization for jack-up rigs. According to Offshore Data Services, as
of April 28, 1998, worldwide jack-up utilization was 86% (327 rigs working out
of a supply of 380 rigs) compared to 88% average utilization experienced during
the first quarter of 1997. Worldwide semi-submersible rig utilization has
declined slightly during 1998, and as of April 28, 1998 was 80% (120 rigs
working out of a supply of 150 rigs) compared to 81% average utilization during
the first quarter of 1997.
DRILLING MARKETS
Gulf of Mexico. The jack-up drilling market in the 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.
Since mid-1995, a combination of improved jack-up rig demand and rig
mobilizations to other markets has resulted in improved jack-up utilization and
day rates. Utilization of jack-up rigs in this market as of April 28, 1998 was
88% (114 rigs working out of a supply of 129 rigs), a slight decline, as
compared with an average of 89% for the first quarter of 1997. The company has
12 of its 14 jack-up rigs located in the Gulf of Mexico.
During January 1998, the Company signed a contract with Esso
Exploration Inc., an affiliate of Exxon Corporation for the MARINE 700. This
contract is expected to begin the first quarter of 1999 and generate aggregate
day rate revenues of approximately $207 million over the three year primary term
of the contract, unless Esso elects, prior to July 1, 1998, to extend the
contract to a five year term in which event the contract would be expected to
generate aggregate day rate revenues of approximately $302 million over the five
year term.
India. In 1995, the Company entered into a one-year term contract for
the MARINE 201 to operate off the east coast of India. The rig commenced
operations under this contract in mid-November 1995. Under the contract, the
customer had options to extend the contract for up to eight three-month periods.
All of the options have been exercised ensuring the rig's employment through
November 1998.
Southeast Asia. In January 1997, the Company entered into a one-year
contract with a major oil company for the MARINE 305 to begin work in Southeast
Asia. The contract began in August 1997 and is expected to generate total
revenues of approximately $28,000,000. This contract includes options that
could, if exercised, extend its term for up to an additional year at mutually
agreed rates.
9
<PAGE> 12
In December 1996, the Company acquired the MARINE 500, a
second-generation semi-submersible rig. The rig began operating in late February
drilling offshore Indonesia on a short-term contract. In April 1997, the Company
entered into a three-well contract for the MARINE 500 to operate in the Gulf of
Thailand offshore Malaysia. This contract included three option wells, which
were exercised and will extend the contract until mid-1998. In July 1997, the
Company entered into a three-year contract for the MARINE 500 to commence on or
before January 1, 1999 and includes operations in Southeast Asia, the Pacific
Rim, offshore Australia and New Zealand. Before this contract can commence, the
MARINE 500 will be upgraded to work in water depths up to 5,000 feet with 15,000
psi drilling equipment. The upgrade is expected to take four to six months.
In December 1997 the Company signed a nine-month contract to operate
the MARINE 510, a bareboat charter, in Southeast Asia which is scheduled to
commence in May 1998.
CONTRACTS AND CUSTOMERS
The Company obtains most of its contracts through competitive bidding
against other contractors in response to oil and gas companies' solicitations of
bids. The Company's current drilling contracts, both foreign and domestic,
provide for payment in U.S. Dollars.
The Company provides drilling services to a customer base that includes
independent and major foreign and domestic oil and gas companies. As is typical
in the industry, the Company does business with a relatively small number of
customers at any given time. During the first three months of 1998, the Company
performed services for approximately 20 different customers. For the three
months ended March 31, 1998, one customer, Applied Drilling Technology, Inc.,
accounted for approximately 20% of the Company's total consolidated revenues.
The loss of any one of the Company's customers could, at least on a short-term
basis, have a material adverse effect on the Company's profitability. Management
believes, however, that at current levels of activity, the Company would have
alternative customers for its services if it lost any single customer, and that
the loss of any one customer would not have a material adverse effect on the
Company on a long-term basis. See Note 4 of Notes to Consolidated Financial
Statements for further information regarding the Company's major customers.
RESULTS OF OPERATIONS
Operating results are primarily a function of day rates and
utilization. The number of rigs the Company has available for service and the
demand for contract drilling services by energy companies affect the utilization
rates and day rates of the Company's active rigs. Operating costs include all
direct costs and expenditures associated with operating the Company's rigs.
These costs include rig labor, repair, maintenance and supply expenditures,
insurance costs, mobilization costs and other costs related to operations.
Operating expenses do not necessarily fluctuate in proportion to changes in
operating revenues due to the continuation of personnel on board and equipment
maintenance when the rigs are stacked. Labor costs increase primarily due to
higher salary levels, rig staffing requirements and inflation. Equipment
maintenance expenses fluctuate depending upon the type of activity the rig is
performing and the age and condition of the equipment. Inflation is another
contributing factor in the fluctuation of operating expenses.
The changes in operating income are more directly affected by revenue
factors than expense factors. Changes in day rates directly impact revenues but
not expenses. Utilization rate changes have a significant impact on revenues,
but in the short-term do not impact expenses. Over a long period significant
changes in utilization may cause the Company to adjust the level of its actively
marketed rig fleet and labor force to match anticipated levels of demand, thus
changing the level of operating expenses. General and administrative expenses do
not vary significantly unless the Company materially expands its asset base.
Depreciation, which is affected by the Company's level of capital expenditures
and depreciation practices is another major determinant of operating income, and
is not affected by changes in day rates or utilization.
10
<PAGE> 13
The following table sets forth the average rig utilization rates,
operating days, average day rates, revenues and operating expenses of the
Company by operating segments for the periods indicated (dollars in thousands
except per day data):
<TABLE>
<CAPTION>
---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Jack-ups
Operating days 1,233 1,080
Utilization (1) 100% 100%
Average revenue per day $ 42,024 $ 31,796
Revenue 51,808 34,340
Contract drilling expense 21,709 14,542
Depreciation 3,409 2,546
Operating income 26,690 17,252
Semi-submersibles
Operating days 90 42
Utilization (1) 100% 100%
Average revenue per day $ 62,839 $ 58,043
Revenue 5,656 2,410
Contract drilling expense 2,344 1,934
Depreciation 987 323
Operating income 2,325 153
Total Company:
Operating days 1,323 1,122
Utilization (1) 100% 100%
Average revenue per day $ 43,440 $ 32,768
Revenue 57,464 36,750
Contract drilling expense 24,053 16,476
Depreciation and amortization 5,033 3,581
General and administrative expense 2,900 1,781
Operating income 25,478 14,912
</TABLE>
(1) Based on the number of actively marketed rigs. Excluding rigs under
construction or in the process of substantial upgrading, the Company had an
average of 0.3 and 1.5 non-marketed rigs during the first quarter of 1998
and 1997, respectively.
Three Months Ended March 31, 1998 and 1997
Revenues. The Company's drilling revenues for the first quarter of 1998
increased $20,714,000, or 56%, compared to the same period in 1997. Revenue
increases from jack-up drilling operations accounted for $17,468,000 of the
increase. This increase was mainly attributable to increased day rates in 1998
compared to 1997 and the activation of the MARINE 305 during August 1997 in
Southeast Asia that contributed $6,591,000 to the increase. The remaining
$3,246,000 increase in revenues was from placing the MARINE 500, the Company's
first semi-submersible, into service in late February 1997.
Contract Drilling Expenses. Contract drilling expenses during the first
three months of 1998 increased $7,577,000, or 46% compared to contract drilling
expenses during the first three months of 1997. Of the $7,577,000 increase,
$7,167,000 can be attributed to jack-up drilling operations, which was
attributable to the 153 day increase in operating days for the first quarter of
1998 versus 1997 and to increased international operations. In particular the
11
<PAGE> 14
addition of the MARINE 305 was responsible for 90 additional operating days at a
cost of $3,494,000 for the first quarter of 1998, which reflects higher than
average operating costs because of its foreign location. The remaining increase
in operating costs of $410,000 is due to the operation of the Company's
semi-submersible rig the MARINE 500 which began operating during February, 1997.
Depreciation and Amortization. Depreciation and amortization expense
for the first quarter of 1998 increased $1,452,000, or 41% over the first
quarter of 1997. The increase was due to depreciation associated with
expenditures for the acquisition of the MARINE 500 and MARINE 305.
General and Administrative. General and administrative expenses for the
first quarter of 1998 increased $1,119,000, or 63% from $1,781,000 in the first
quarter of 1997 to $2,900,000. The increase was attributed to an increase in
professional services and increased personnel costs consistent with the
increased level of operations.
Interest Expense. Interest expense for the first three months of 1998
was $86,000. The Company had interest expense of $350,000 for the first three
months in 1997. The decrease was primarily the result of the prepayment and
termination of the Company's old $35 million credit facility in February 1997.
Interest Income. Interest income decreased $520,000 or 49% from
$1,057,000 for the first quarter of 1997 to $537,000 for the first quarter of
1998. The decrease was related primarily to decreased cash balances throughout
the first quarter of 1998.
Income Taxes. Income tax expense increased for the three months ended
March 31, 1998 as compared to the same period in 1997, primarily due to an
increase in the Company's pretax income.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity. At March 31, 1998, the Company had working capital of
$59,537,000 as compared to working capital of $55,472,000 at December 31, 1997.
Net cash provided by operating activities for the three months ended March 31,
1998 increased by $37,510,000 to $50,585,000 compared to $13,075,000 for the
same period in the prior year. The increase is primarily attributable to the
increased rig operating activity coupled with the timing of cash receipts and
payments. Cash used in investing activities increased $1,641,000 during the
first three months of 1998 to $24,036,000 from $22,395,000 during the same
period in 1997 due primarily to increased capital expenditures related to
completion of the MARINE 700 and the upgrade of the MARINE 500. Net cash
provided by financing activities during the first three months of 1998 was
$654,000 consisting of proceeds from the exercise of common stock options.
In March 1997, the Company entered into a credit agreement, the "Credit
Facility" with Bankers Trust Company ("BTCo"), Christiania Bank og Kreditkasse
("CBK"), and certain other banks providing financing up to $100 million to be
used for rig acquisitions and upgrades. This agreement includes a revolving
credit facility available through December 31, 1999 that can be converted into a
four-year term loan. Interest and facility fees are generally payable quarterly
during the terms of both facilities. Principal during the term loan facility is
payable quarterly in equal installments beginning March 31, 2000. Interest
accrues at (i) LIBOR plus a margin of .75% to 1.25% or (ii) prime plus a margin
of 0% to .50%, with margins determined pursuant to a debt to capital
calculation. The borrowings are secured by all of the Company's current rig
fleet, except for the MARINE 700, as well as certain other collateral
assignments. The Company has no borrowings outstanding under this agreement at
March 31, 1998. The Credit Facility restricts the payment of dividends by the
Company. In connection with the consummation of the Credit Facility, the Company
repaid and terminated its prior $35 million credit facility with a U.S.
financial institution.
During 1997, the improvement in the offshore drilling market allowed
the Company to place some of its offshore rigs under term contracts ranging from
one to three years in duration. In January 1997, the MARINE 305 was contracted
to operate in Southeast Asia for one year and is expected to generate revenues
of approximately $28 million during the term of the contract which began in
August 1997. A three-year contract for the MARINE 500 was signed in July 1997
and is expected to produce total revenues of $164 million to $188 million
beginning the first quarter of 1999 upon completion of a $100 million upgrade to
enable the rig to operate in water depths up to 5,000 feet. In December 1997,
the Company entered into a nine-month contract for the MARINE 510 that is
12
<PAGE> 15
expected to commence mid-May 1998 and generate revenues of $23 million. The
MARINE 510 is being chartered from Shanghai Bureau of Marine Geological Survey
for a period of five years. Charter fees are payable only when the rig is under
contract. In January 1998, the MARINE 700 obtained a three-year contract that is
scheduled to begin the second quarter of 1999 and generate revenues of
approximately $207 million, unless the customer elects, prior to July 1, 1998,
to extend the contract to a five year term in which event the contract would be
expected to generate aggregate day rate revenues of approximately $302 million
over the five year term.
Capital Resources. During the first quarter of 1998 the Company
expended $24.2 million in capital expenditures consisting of disbursements for
(i) the completion of the MARINE 700, (ii) the upgrade of the MARINE 500 and
(iii) purchase of drill pipe and other rig machinery.
In April 1998 the Company signed a memorandum of agreement to acquire
the "Maersk Explorer" a jack-up drilling rig capable of operating in 205 feet of
water that is currently being utilized as an accommodation unit in the Danish
sector of the North Sea. The Company should take delivery of the rig between
June 1 and October 31, 1998 at a total cost of $22.9 million. The rig will be
upgraded to competitive drilling status for approximately $50 million and will
take approximately nine months. This rig will be outfitted with the drilling
equipment removed from the MARINE 500 and will be capable of operating in the
North Sea.
Excluding expenditures for the Maersk Explorer, the Company expects to
spend approximately $292 million in 1998 for capital expenditures, consisting
primarily of expenditures of $257 million to upgrade and complete the MARINE 500
and MARINE 700. The MARINE 500 will be upgraded to work in water depths up to
5,000 feet at a projected cost of approximately $100 million. In December 1997,
the Company signed a contract with Jurong Shipyard Limited in Singapore to
perform the upgrade. The MARINE 700 will require expenditures of approximately
$186 million to complete its construction and equip it for service. Construction
will take place in Pascagoula, Mississippi at HAM Marine, Inc. shipyard and
should be completed during the first quarter of 1999.
The Company will continue to pursue acquisitions of additional drilling
rigs and related equipment and/or businesses. Future acquisitions, if any, would
likely be funded from the Company's working capital, the Credit Facility or
through the issuance of debt and/or equity securities. The Company cannot
predict whether it will be successful in acquiring additional rigs, and
obtaining financing therefor, on acceptable terms. In addition, it is currently
anticipated that the Company will continue the upgrading of rigs to enhance
their capability to obtain longer-term contracts. The timing and actual amounts
expended by the Company in connection with its plans to upgrade and refurbish
selected rigs, as well as the type of rig modification comprising each program,
is subject to the discretion of the Company and will depend on the Company's
view of market conditions, the Company's cash flow, whether other acquisitions
are made, and other factors.
The Company anticipates that its available funds, together with cash
generated from operations and amounts that may be borrowed under the Credit
Facility and other potential funding sources, such as increased credit
facilities or private or public debt offerings, will be sufficient to fund its
required capital expenditures, working capital and debt service requirements for
the foreseeable future. Future cash flows, however, are subject to a number of
uncertainties, especially the condition of the oil and gas industry.
Accordingly, there can be no assurance that these resources will be sufficient
to fund the Company's cash requirements. In particular, the potential sources of
funding (i) to complete and equip the MARINE 700 for operations and (ii) to
upgrade the MARINE 500 may not be available at the time or in sufficient amounts
to allow the Company to successfully complete these projects.
YEAR 2000 ISSUE
Currently, the Company utilizes third party software in all of its
computer applications. The Company's information systems personnel are
currently working with the third party vendors to resolve the potential
problems associated with the year 2000 and the processing of date sensitive
information by the Company's computer and other systems. Based on a recent
assessment, the Company has determined that it will be required to replace
portions of its accounting software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. With
modifications to existing software and conversions to new software the Year
2000 issue is not expected to pose significant operational problems for the
Company's computer systems. However, if such modifications or conversions are
not made or are not completely timely, the Year 2000 issue could have a material
adverse impact on operations of the Company. The Company believes that it will
be able to implement successfully the changes necessary to address the Year
2000 issues with reliance on its third party vendors and does not expect the
cost of such changes to have a material impact of the Company's financial
position, results of operations or cash flows in future periods.
13
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This Form 10-Q particularly the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that are not historical facts concerning,
among other things, market conditions, the demand for offshore drilling
services, future acquisitions and fleet expansion, future financings, future rig
contracts, future capital expenditures including rig construction, upgrades and
refurbishments, and future results of operations. Actual results may differ
materially from those included in the forward-looking statements, and no
assurance can be given that the Company's expectations will be realized or
achieved. Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include (i)
a prolonged period of low oil or gas prices; (ii) the inadequacy of insurance
and indemnification to protect the Company against liability from all
consequences of well disasters, fire damage or environmental damage; (iii) the
inability of the Company to obtain insurance at reasonable rates; (iv) a
decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of
Mexico or for slot jack-up rigs; (v) the risks attendant with operations in
foreign countries including actions that may be taken by foreign countries and
actions that may be taken by the United States against foreign countries; (vi)
the failure of the Company to successfully compete with the Company's
competitors that are larger and have a greater diversity of rigs and greater
financial resources than the Company; (vii) a decrease in rig utilization
resulting from reactivation of currently inactive non-marketed rigs or new
construction of rigs; (viii) the risks of delay and cost overruns attendant to
large construction projects such as the upgrade and refurbishment of certain of
the Company's rigs, including shortages of material or skilled labor,
engineering problems, latent defects or damage to current equipment, work
stoppages, weather interference and inability to obtain requisite permits or
approvals; (ix) the return of market and other conditions similar to those in
which the Company incurred net losses before extraordinary items for each of the
years ended December 31, 1991, 1992 and 1995; (x) the loss of key management
personnel or the inability of the Company to attract and retain sufficient
qualified personnel to operate its rigs; (xi) the risk that labor shortages
could result in material wage increases; (xii) the adoption of additional laws
or regulations that limit or reduce drilling opportunities or that increase the
cost of drilling or increase the potential liability of the Company; (xiii) the
occurrence of risks attendant to contract drilling operations including
blowouts, cratering, fires and explosions, capsizing, grounding or collision
involving rigs while in operation, mobilization or otherwise or damage to rigs
from weather, sea conditions or unsound location; (xiv) adverse uninsured
litigation results; and (xv) adverse tax consequences with respect to
operations. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jagson International Limited, an Indian entity, has brought suit
against Marine Drilling Companies, Inc. and Marine 300 Series, Inc. in Bombay,
India. The plaintiff has alleged that the Company agreed to charter two jack-up
rigs to the plaintiff during 1992 and that it breached the agreement by failing
to charter the rigs resulting in damages in excess of $14.5 million. The Company
disputes the existence of the agreement and intends to vigorously defend the
suit. Although the lawsuit has recently been filed and the litigation is in an
early stage, based on a number of substantive and procedural defenses that the
Company believes are available to it, the Company does not believe the ultimate
resolution of this dispute will have a material adverse effect on the Company's
results of operations or financial condition.
Various other claims have been filed against the Company and its
subsidiaries in the ordinary course of business, particularly claims alleging
personal injuries. Management believes that the Company has adequate insurance
coverage and has established adequate reserves for any liabilities that may
reasonably be expected to result from these claims. In the opinion of
management, no pending claims, actions or proceedings against the Company or its
subsidiaries are expected to have a material adverse effect on its financial
position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibits No. Description
- ----------- -----------
<S> <C>
10.9 Severance Agreement between Marine Drilling Companies,
Inc. and V. G. Bounds, dated April 8, 1998.
10.10 Severance Agreement between Marine Drilling Companies,
Inc. and Dale W. Wilhelm, dated May 1, 1998.
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 first quarter of 1998
15
<PAGE> 18
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 13, 1998 By /s/ T. Scott O'Keefe
---------------------------------------
T. Scott O'Keefe
Senior Vice President
Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 13, 1998 By /s/ Dale W. Wilhelm
---------------------------------------
Dale W. Wilhelm
Vice President and Controller
(Principal Accounting Officer)
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<S> <C>
10.9 Severance Agreement between Marine Drilling Companies,
Inc. and V. G. Bounds, dated April 8, 1998.
10.10 Severance Agreement between Marine Drilling Companies,
Inc. and Dale W. Wilhelm, dated May 1, 1998.
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>
<PAGE> 1
EXHIBIT 10.9
SEVERANCE AGREEMENT
AGREEMENT between MARINE DRILLING COMPANIES, INC., a Texas corporation
(the "Company"), and VINCENT G. BOUNDS ("Executive"),
W I T N E S S E T H:
WHEREAS, the Company desires to attract and retain certain key employee
personnel and, accordingly, the Board of Directors of the Company (the "Board")
has approved the Company entering into a severance agreement with Executive in
order to encourage his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Company and Executive agree as follows:
1. DEFINITIONS.
(a) "ANNUAL COMPENSATION" shall mean an amount equal to
the greater of:
(i) Executive's annual base salary at the annual
rate in effect at the date of his Involuntary Termination; or
(ii) Executive's annual base salary at the annual
rate in effect immediately prior to a Change-in-Control if Executive's
employment shall be subject to a Change-in-Control Involuntary
Termination.
(b) "CHANGE-IN-CONTROL" shall have the meaning ascribed to
such term in Section 9(b) of The Marine Drilling 1992 Long-Term Incentive Plan
(the "Incentive Plan").
(c) "CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall mean any
termination of Executive's employment with the Company which:
(i) results from a resignation by Executive within 12
months after the date upon which a Change-in-Control occurs if such
resignation occurs within 30 days after Executive receives notice from
the Company that Executive will be subject to a Material Change in
Employment Terms; or
(ii) results from a termination by the Company within
12 months after the date upon which a Change-in-Control occurs;
<PAGE> 2
provided, however, the term "CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall
not include a Termination for Cause or any termination as a result of death,
Disability, or Retirement.
(d) "COMPENSATION COMMITTEE" shall mean the Compensation
Committee of the Board.
(e) "DISABILITY" shall mean that, as a result of Executive's
incapacity due to physical or mental illness, he shall have been absent from the
full-time performance of his duties for at least 90 consecutive days or for a
period of 120 days during any 12-month period and he shall not have returned to
full-time performance of his duties within 30 days after written notice of
termination is given to Executive by the Company (provided, however, that such
notice may not be given prior to 30 days before the expiration of either such
period).
(f) "INVOLUNTARY TERMINATION" shall mean any
Non-Change-in-Control Termination or any Change-in-Control Involuntary
Termination.
(g) "MATERIAL CHANGE IN COMPENSATION" shall mean any one or
more of the following:
(i) a reduction in Executive's annual base salary
from that provided to him immediately prior to the effective date of
this Agreement; or
(ii) a significant diminution in Executive's
eligibility to participate in bonus, stock option, incentive award and
other compensation plans under which Executive is participating
immediately prior to the effective date of this Agreement.
(h) "MATERIAL CHANGE IN EMPLOYMENT TERMS" shall mean any one
or more of the following:
(i) a material diminution in the nature or scope of
Executive's authorities, powers, functions or duties from those
applicable to him immediately prior to the date on which a
Change-in-Control occurs;
(ii) a reduction in Executive's annual base salary
from that provided to him immediately prior to the date on which a
Change-in-Control occurs;
(iii) a significant diminution in Executive's
eligibility to participate in bonus, stock option, incentive award and
other compensation plans under which Executive is participating
immediately prior to the date on which a Change-in-Control occurs; or
<PAGE> 3
(iv) a change in the location of Executive's
principal place of employment by the Company by more than 50 miles from
the location where he was principally employed immediately prior to the
date on which a Change-in-Control occurs.
(i) "NON-CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall mean
any termination of Executive's employment with the Company which:
(i) results from a resignation by Executive if but
only if such resignation occurs within 30 days after Executive receives
notice from the Company that (A) Executive's principal place of
employment will be moved by more than 50 miles from the location where
he was principally employed immediately prior to the date of such
notice or (B) Executive will be subject to a Material Change in
Compensation; or
(ii) results from a termination by the Company;
provided, however, the term "NON-CHANGE-IN-CONTROL INVOLUNTARY TERMINATION"
shall not include a Termination for Cause, a Change-in-Control Involuntary
Termination or any termination as a result of death, Disability, or Retirement.
(j) "RETIREMENT" shall mean termination of Executive's
employment for any reason on or after the date Executive reaches age sixty-five.
(k) "SEVERANCE AMOUNT" shall mean an amount equal to
Executive's Annual Compensation.
(l) "SEVERANCE PERIOD" shall mean the period commencing on the
date of an Involuntary Termination and continuing for 12 months.
(m) "TERMINATION FOR CAUSE" shall mean termination of
Executive's employment by the Company for any of the following reasons:
(i) Executive has engaged in gross negligence or
willful misconduct in the performance of the duties required of him;
(ii) Executive has been convicted of a felony or a
misdemeanor involving moral turpitude;
(iii) Executive has willfully refused without proper
legal reason to perform the duties and responsibilities required of
him;
(iv) Executive has materially breached any material
corporate policy or code of conduct established by the Company; or
<PAGE> 4
(v) Executive has willfully engaged in conduct that
he knows or should know is materially injurious to the Company or any
of its affiliates.
2. SERVICES. Executive agrees that he will render services to the
Company (as well as any subsidiary thereof or successor thereto) during the
period of his employment to the best of his ability and in a prudent and
businesslike manner and that he will devote substantially the same time, efforts
and dedication to his duties as heretofore devoted.
3. TERMINATION. Subject to the provisions of Paragraph 5(i) hereof, if
Executive's employment by the Company or any subsidiary thereof or successor
thereto shall be subject to an Involuntary Termination, then the Company will,
as additional compensation for services rendered to the Company (including its
subsidiaries), pay to Executive the following amounts (subject to any applicable
payroll or other taxes required to be withheld and any employee benefit
premiums) and take the following actions:
(a) Pay Executive a lump sum cash payment in an amount equal
to the Severance Amount on or before the tenth day after the last day of
Executive's employment with the Company; provided, however, if such Involuntary
Termination is a Change-in-Control Involuntary Termination, then such lump sum
cash payment shall be in an amount equal to twice the Severance Amount.
(b) Immediately cause Executive and those of his dependents
(including his spouse) who were covered under the Company's medical and dental
benefit plans on the day prior to Executive's Involuntary Termination to
continue to be covered under such plans throughout the Severance Period, without
any cost to Executive; provided, however, that (i) such coverage shall terminate
if and to the extent Executive becomes eligible to receive medical and dental
coverage from a subsequent employer (and any such eligibility shall be promptly
reported to the Company by Executive) and (ii) if Executive (and/or his spouse)
would have been entitled to retiree medical and/or dental coverage under the
Company's plans had he voluntarily retired on the date of such Involuntary
Termination, then such coverages shall be continued as provided under such
plans.
(c) Immediately cause any and all outstanding options to
purchase common stock of the Company held by Executive, which options were
granted prior to December 31, 1995, to become immediately exercisable in full
and to remain exercisable during the period of three months following such
termination (or such greater period as the Committee (as such term is defined in
the Incentive Plan) may determine), or by Executive's estate (or the person who
acquires such options by will or the laws of descent and distribution or
otherwise by reason of the death of Executive) during a period of one year
following Executive's death if Executive dies during such three-month period (or
such greater period as the Committee may determine), but in no event shall any
such
<PAGE> 5
option be exercisable after the tenth anniversary of the grant of such
option.
4. PARACHUTE PAYMENT LIMITATION. Notwithstanding anything to the
contrary in this Agreement, the amount of any benefits provided by this
Agreement shall be reduced or eliminated to the extent necessary so that no
payment made under this Agreement will subject Executive to an excise tax, as a
result of the Golden Parachute payment provisions contained in Sections 280G and
4999 of the Internal Revenue Code of 1986, as amended (ignoring, for purposes of
such excise tax calculation, payments under other agreements which will be made
after the payment to be made pursuant to this Agreement and which are subject to
a provision similar to this paragraph). Notwithstanding the foregoing, if
payments which are not made as a result of the preceding sentence ("Cutback
Payment"), when combined with payments under other agreements sponsored by the
Company which have not been paid as a result of a provision similar to this
paragraph ("Prior Cutback Payments"), would, if paid, result in Executive being
in a better net after-tax position (taking into account any applicable excise
tax under Section 4999 of the Internal Revenue Code of 1986, as amended, and any
income tax applicable to payments made under this Agreement or under such other
agreements) than he would have been had such reduction or elimination not been
made pursuant to the preceding sentence and provisions similar to this paragraph
in other agreements, then the Cutback Payment shall then be paid notwithstanding
the preceding sentence and all Prior Cutback Payments shall also then be paid
notwithstanding any provisions similar to this paragraph applicable to such
Prior Cutback Payments. Prior to the date any payment is to be made to Executive
pursuant to this Agreement (without regard to this paragraph), the Company shall
provide Executive with its calculations relevant to this paragraph and such
supporting materials as are reasonably necessary for Executive to evaluate the
Company's calculations. If Executive objects to the Company's calculations, the
Company shall pay Executive such portion of the Cutback Payment and Prior
Cutback Payments (in each case, up to 100% thereof) as Executive determines is
necessary to comply with the intent of this paragraph.
5. GENERAL.
(a) TERM. The effective date of this Agreement is April 8,
1998, and this Agreement shall have an initial term (the "Initial Term") of two
years beginning on such effective date. The term of this Agreement shall be
extended automatically for an additional successive one-year period as of the
last day of the Initial Term and as of the last day of each such successive
one-year period of time thereafter that this Agreement is in effect; provided,
however, that if, prior to 90 days before the last day of the Initial Term or
any such successive one-year term, the Compensation Committee (excluding any
member of the Compensation Committee who is covered by this Agreement or by a
similar agreement with the Company) shall give written notice to Executive that
no such automatic extension shall occur, then this Agreement shall terminate on
the last day of the Initial Term or such successive one-year term, as
applicable, during which such notice is given. Notwithstanding anything to the
contrary contained in this "sunset provision," it is agreed that if a
Change-in-Control occurs while this Agreement is in effect, then this
<PAGE> 6
Agreement shall not be subject to termination under this "sunset provision," and
shall remain in force for a period of 12 months after such Change-in-Control,
and if within said 12 months the contingency factors occur which would entitle
Executive to the benefits as provided herein, this Agreement shall remain in
effect in accordance with its terms. If, within such 12 months after a
Change-in-Control, the contingency factors that would entitle Executive to said
benefits do not occur, thereupon this "sunset provision" shall again be
applicable with the 90-day time period for Compensation Committee action to
thereafter commence 90 days prior to the first anniversary of such
Change-in-Control and 90 days prior to each one-year anniversary date
thereafter.
(b) INDEMNIFICATION. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce or interpret any provision contained herein,
the Company, to the fullest extent permitted by applicable law, hereby
indemnifies Executive for his reasonable attorneys' fees and disbursements
incurred in such litigation.
(c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to
pay (or cause one of its subsidiaries to pay) Executive the amounts and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Company
(including its subsidiaries) may have against him or anyone else. All amounts
payable by the Company (including its subsidiaries hereunder) shall be paid
without notice or demand. Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and, except as provided in Paragraphs 3(b) hereof,
the obtaining of any such other employment shall in no event effect any
reduction of the Company's obligations to make (or cause to be made) the
payments and arrangements required to be made under this Agreement.
(d) SUCCESSORS. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor of the Company, by merger or
otherwise. This Agreement shall also be binding upon and inure to the benefit of
Executive and his estate. If Executive shall die prior to full payment of
amounts due pursuant to this Agreement, such amounts shall be payable pursuant
to the terms of this Agreement to his estate.
(e) SEVERABILITY. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction by reason of applicable law
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(f) NON-ALIENATION. Executive shall not have any right to
pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or
<PAGE> 7
the laws of descent and distribution.
(g) NOTICES. Any notices or other communications provided for
in this Agreement shall be sufficient if in writing. In the case of Executive,
such notices or communications shall be effectively delivered if hand delivered
to Executive at his principal place of employment or if sent by registered or
certified mail to Executive at the last address he has filed with the Company.
In the case of the Company, such notices or communications shall be effectively
delivered if sent by registered or certified mail to the Company at its
principal executive offices.
(h) CONTROLLING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas.
(i) RELEASE. As a condition to the receipt of any benefit
under Paragraph 3 hereof, Executive shall first execute a release, in the form
established by the Company, releasing the Company, its shareholders, partners,
officers, directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character, including but not limited to
all claims or causes of action arising out of Executive's employment with the
Company or the termination of such employment.
(j) FULL SETTLEMENT. If Executive is entitled to and receives
the benefits provided hereunder, performance of the obligations of the Company
hereunder will constitute full settlement of all claims that Executive might
otherwise assert against the Company on account of his termination of
employment. Executive hereby acknowledges that the Company has heretofore
rescinded and terminated the Company's Executive Severance Policy, as amended
from time to time, which policy was originally adopted on January 1, 1994, and
Executive hereby waives any and all rights Executive may have under such policy.
(k) UNFUNDED OBLIGATION. The obligation to pay amounts under
this Agreement is an unfunded obligation of the Company, and no such obligation
shall create a trust or be deemed to be secured by any pledge or encumbrance on
any property of the Company (including its subsidiaries).
(l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment, nor shall any provision hereof
affect (a) the right of the Company (or its subsidiaries) to discharge Executive
at will or (b) the terms and conditions of any other agreement between the
Company and Executive except as provided herein.
(m) NUMBER AND GENDER. Wherever appropriate herein, words used
in the singular shall include the plural and the plural shall include the
singular. The masculine gender where appearing herein shall be deemed to include
the feminine gender.
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 8th day of April, 1998.
"EXECUTIVE"
/s/ VINCENT G. BOUNDS
-------------------------------------
VINCENT G. BOUNDS
"COMPANY"
MARINE DRILLING COMPANIES, INC.
BY: /s/ JAN RASK
---------------------------------
JAN RASK
CHIEF EXECUTIVE OFFICER
<PAGE> 1
EXHIBIT 10.10
SEVERANCE AGREEMENT
AGREEMENT between MARINE DRILLING COMPANIES, INC., a Texas corporation
(the "Company"), and DALE W. WILHELM ("Executive"),
W I T N E S S E T H :
WHEREAS, the Company desires to attract and retain certain key employee
personnel and, accordingly, the Board of Directors of the Company (the "Board")
has approved the Company entering into a severance agreement with Executive in
order to encourage his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Company and Executive agree as follows:
1. DEFINITIONS.
(a) "ANNUAL COMPENSATION" shall mean an amount equal to
the greater of:
(i) Executive's annual base salary at the annual
rate in effect at the date of his Involuntary Termination; or
(ii) Executive's annual base salary at the annual
rate in effect immediately prior to a Change-in-Control if Executive's
employment shall be subject to a Change-in-Control Involuntary
Termination.
(b) "CHANGE-IN-CONTROL" shall have the meaning ascribed to
such term in Section 9(b) of The Marine Drilling 1992 Long-Term Incentive Plan
(the "Incentive Plan").
(c) "CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall mean any
termination of Executive's employment with the Company which:
(i) results from a resignation by Executive within 12
months after the date upon which a Change-in-Control occurs if such
resignation occurs within 30 days after Executive receives notice from
the Company that Executive will be subject to a Material Change in
Employment Terms; or
(ii) results from a termination by the Company within
12 months after the date upon which a Change-in-Control occurs;
<PAGE> 2
provided, however, the term "CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall
not include a Termination for Cause or any termination as a result of death,
Disability, or Retirement.
(d) "COMPENSATION COMMITTEE" shall mean the Compensation
Committee of the Board.
(e) "DISABILITY" shall mean that, as a result of Executive's
incapacity due to physical or mental illness, he shall have been absent from the
full-time performance of his duties for at least 90 consecutive days or for a
period of 120 days during any 12-month period and he shall not have returned to
full-time performance of his duties within 30 days after written notice of
termination is given to Executive by the Company (provided, however, that such
notice may not be given prior to 30 days before the expiration of either such
period).
(f) "INVOLUNTARY TERMINATION" shall mean any
Non-Change-in-Control Termination or any Change-in-Control Involuntary
Termination.
(g) "MATERIAL CHANGE IN COMPENSATION" shall mean any one or
more of the following:
(i) a reduction in Executive's annual base salary
from that provided to him immediately prior to the effective date of
this Agreement; or
(ii) a significant diminution in Executive's
eligibility to participate in bonus, stock option, incentive award and
other compensation plans under which Executive is participating
immediately prior to the effective date of this Agreement.
(h) "MATERIAL CHANGE IN EMPLOYMENT TERMS" shall mean any one
or more of the following:
(i) a material diminution in the nature or scope of
Executive's authorities, powers, functions or duties from those
applicable to him immediately prior to the date on which a
Change-in-Control occurs;
(ii) a reduction in Executive's annual base salary
from that provided to him immediately prior to the date on which a
Change-in-Control occurs;
(iii) a significant diminution in Executive's
eligibility to participate in bonus, stock option, incentive award and
other compensation plans under which Executive is participating
immediately prior to the date on which a Change-in-Control occurs; or
(iv) a change in the location of Executive's
principal place of employment by the Company by more than 50 miles from
the location where he was principally employed immediately prior to the
date on which a Change-in-Control occurs.
-2-
<PAGE> 3
(i) "NON-CHANGE-IN-CONTROL INVOLUNTARY TERMINATION" shall mean
any termination of Executive's employment with the Company which:
(i) results from a resignation by Executive if but
only if such resignation occurs within 30 days after Executive receives
notice from the Company that (A) Executive's principal place of
employment will be moved by more than 50 miles from the location where
he was principally employed immediately prior to the date of such
notice or (B) Executive will be subject to a Material Change in
Compensation; or
(ii) results from a termination by the Company;
provided, however, the term "NON-CHANGE-IN-CONTROL INVOLUNTARY TERMINATION"
shall not include a Termination for Cause, a Change-in-Control Involuntary
Termination or any termination as a result of death, Disability, or Retirement.
(j) "RETIREMENT" shall mean termination of Executive's
employment for any reason on or after the date Executive reaches age sixty-five.
(k) "SEVERANCE AMOUNT" shall mean an amount equal to
Executive's Annual Compensation.
(l) "SEVERANCE PERIOD" shall mean the period commencing on the
date of an Involuntary Termination and continuing for 12 months.
(m) "TERMINATION FOR CAUSE" shall mean termination of
Executive's employment by the Company for any of the following reasons:
(i) Executive has engaged in gross negligence or
willful misconduct in the performance of the duties required of him;
(ii) Executive has been convicted of a felony or a
misdemeanor involving moral turpitude;
(iii) Executive has willfully refused without proper
legal reason to perform the duties and responsibilities required of
him;
(iv) Executive has materially breached any material
corporate policy or code of conduct established by the Company; or
(v) Executive has willfully engaged in conduct that
he knows or should know is materially injurious to the Company or any
of its affiliates.
2. SERVICES. Executive agrees that he will render services to the
Company (as well as any subsidiary thereof or successor thereto) during the
period of his employment to the best of
-3-
<PAGE> 4
his ability and in a prudent and businesslike manner and that he will devote
substantially the same time, efforts and dedication to his duties as heretofore
devoted.
3. TERMINATION. Subject to the provisions of Paragraph 5(i) hereof, if
Executive's employment by the Company or any subsidiary thereof or successor
thereto shall be subject to an Involuntary Termination, then the Company will,
as additional compensation for services rendered to the Company (including its
subsidiaries), pay to Executive the following amounts (subject to any applicable
payroll or other taxes required to be withheld and any employee benefit
premiums) and take the following actions:
(a) Pay Executive a lump sum cash payment in an amount equal
to the Severance Amount on or before the tenth day after the last day of
Executive's employment with the Company; provided, however, if such Involuntary
Termination is a Change-in-Control Involuntary Termination, then such lump sum
cash payment shall be in an amount equal to the Severance Amount.
(b) Immediately cause Executive and those of his dependents
(including his spouse) who were covered under the Company's medical and dental
benefit plans on the day prior to Executive's Involuntary Termination to
continue to be covered under such plans throughout the Severance Period, without
any cost to Executive; provided, however, that (i) such coverage shall terminate
if and to the extent Executive becomes eligible to receive medical and dental
coverage from a subsequent employer (and any such eligibility shall be promptly
reported to the Company by Executive) and (ii) if Executive (and/or his spouse)
would have been entitled to retiree medical and/or dental coverage under the
Company's plans had he voluntarily retired on the date of such Involuntary
Termination, then such coverages shall be continued as provided under such
plans.
(c) Immediately cause any and all outstanding options to
purchase common stock of the Company held by Executive, which options were
granted prior to December 31, 1995, to become immediately exercisable in full
and to remain exercisable during the period of three months following such
termination (or such greater period as the Committee (as such term is defined in
the Incentive Plan) may determine), or by Executive's estate (or the person who
acquires such options by will or the laws of descent and distribution or
otherwise by reason of the death of Executive) during a period of one year
following Executive's death if Executive dies during such three-month period (or
such greater period as the Committee may determine), but in no event shall any
such option be exercisable after the tenth anniversary of the grant of such
option.
4. PARACHUTE PAYMENT LIMITATION. Notwithstanding anything to the
contrary in this Agreement, the amount of any benefits provided by this
Agreement shall be reduced or eliminated to the extent necessary so that no
payment made under this Agreement will subject Executive to an excise tax, as a
result of the Golden Parachute payment provisions contained in Sections 280G and
4999 of the Internal Revenue Code of 1986, as amended (ignoring, for purposes of
such excise tax calculation, payments under other agreements which will be made
after the payment to be made pursuant to this Agreement and which are subject to
a provision
-4-
<PAGE> 5
similar to this paragraph). Notwithstanding the foregoing, if payments which are
not made as a result of the preceding sentence ("Cutback Payment"), when
combined with payments under other agreements sponsored by the Company which
have not been paid as a result of a provision similar to this paragraph ("Prior
Cutback Payments"), would, if paid, result in Executive being in a better net
after-tax position (taking into account any applicable excise tax under Section
4999 of the Internal Revenue Code of 1986, as amended, and any income tax
applicable to payments made under this Agreement or under such other agreements)
than he would have been had such reduction or elimination not been made pursuant
to the preceding sentence and provisions similar to this paragraph in other
agreements, then the Cutback Payment shall then be paid notwithstanding the
preceding sentence and all Prior Cutback Payments shall also then be paid
notwithstanding any provisions similar to this paragraph applicable to such
Prior Cutback Payments. Prior to the date any payment is to be made to Executive
pursuant to this Agreement (without regard to this paragraph), the Company shall
provide Executive with its calculations relevant to this paragraph and such
supporting materials as are reasonably necessary for Executive to evaluate the
Company's calculations. If Executive objects to the Company's calculations, the
Company shall pay Executive such portion of the Cutback Payment and Prior
Cutback Payments (in each case, up to 100% thereof) as Executive determines is
necessary to comply with the intent of this paragraph.
5. GENERAL.
(a) TERM. The effective date of this Agreement is May 1, 1998,
and this Agreement shall have an initial term (the "Initial Term") of one year
beginning on such effective date. The term of this Agreement shall be extended
automatically for an additional successive one-year period as of the last day of
the Initial Term and as of the last day of each such successive one-year period
of time thereafter that this Agreement is in effect; provided, however, that if,
prior to 90 days before the last day of the Initial Term or any such successive
one-year term, the Compensation Committee (excluding any member of the
Compensation Committee who is covered by this Agreement or by a similar
agreement with the Company) shall give written notice to Executive that no such
automatic extension shall occur, then this Agreement shall terminate on the last
day of the Initial Term or such successive one-year term, as applicable, during
which such notice is given. Notwithstanding anything to the contrary contained
in this "sunset provision," it is agreed that if a Change-in-Control occurs
while this Agreement is in effect, then this Agreement shall not be subject to
termination under this "sunset provision," and shall remain in force for a
period of 12 months after such Change-in-Control, and if within said 12 months
the contingency factors occur which would entitle Executive to the benefits as
provided herein, this Agreement shall remain in effect in accordance with its
terms. If, within such 12 months after a Change-in-Control, the contingency
factors that would entitle Executive to said benefits do not occur, thereupon
this "sunset provision" shall again be applicable with the 90-day time period
for Compensation Committee action to thereafter commence 90 days prior to the
first anniversary of such Change-in-Control and 90 days prior to each one-year
anniversary date thereafter.
(b) INDEMNIFICATION. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce
-5-
<PAGE> 6
or interpret any provision contained herein, the Company, to the fullest extent
permitted by applicable law, hereby indemnifies Executive for his reasonable
attorneys' fees and disbursements incurred in such litigation.
(c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to
pay (or cause one of its subsidiaries to pay) Executive the amounts and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Company
(including its subsidiaries) may have against him or anyone else. All amounts
payable by the Company (including its subsidiaries hereunder) shall be paid
without notice or demand. Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and, except as provided in Paragraphs 3(b) hereof,
the obtaining of any such other employment shall in no event effect any
reduction of the Company's obligations to make (or cause to be made) the
payments and arrangements required to be made under this Agreement.
(d) SUCCESSORS. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor of the Company, by merger or
otherwise. This Agreement shall also be binding upon and inure to the benefit of
Executive and his estate. If Executive shall die prior to full payment of
amounts due pursuant to this Agreement, such amounts shall be payable pursuant
to the terms of this Agreement to his estate.
(e) SEVERABILITY. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction by reason of applicable law
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(f) NON-ALIENATION. Executive shall not have any right to
pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or the laws of descent and distribution.
(g) NOTICES. Any notices or other communications provided for
in this Agreement shall be sufficient if in writing. In the case of Executive,
such notices or communications shall be effectively delivered if hand delivered
to Executive at his principal place of employment or if sent by registered or
certified mail to Executive at the last address he has filed with the Company.
In the case of the Company, such notices or communications shall be effectively
delivered if sent by registered or certified mail to the Company at its
principal executive offices.
(h) CONTROLLING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas.
(i) RELEASE. As a condition to the receipt of any benefit
under Paragraph 3 hereof, Executive shall first execute a release, in the form
established by the Company, releasing
-6-
<PAGE> 7
the Company, its shareholders, partners, officers, directors, employees and
agents from any and all claims and from any and all causes of action of any kind
or character, including but not limited to all claims or causes of action
arising out of Executive's employment with the Company or the termination of
such employment.
(j) FULL SETTLEMENT. If Executive is entitled to and receives
the benefits provided hereunder, performance of the obligations of the Company
hereunder will constitute full settlement of all claims that Executive might
otherwise assert against the Company on account of his termination of
employment. Executive hereby acknowledges that the Company has heretofore
rescinded and terminated the Company's Executive Severance Policy, as amended
from time to time, which policy was originally adopted on January 1, 1994, and
Executive hereby waives any and all rights Executive may have under such policy.
(k) UNFUNDED OBLIGATION. The obligation to pay amounts under
this Agreement is an unfunded obligation of the Company, and no such obligation
shall create a trust or be deemed to be secured by any pledge or encumbrance on
any property of the Company (including its subsidiaries).
(l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment, nor shall any provision hereof
affect (a) the right of the Company (or its subsidiaries) to discharge Executive
at will or (b) the terms and conditions of any other agreement between the
Company and Executive except as provided herein.
(m) NUMBER AND GENDER. Wherever appropriate herein, words used
in the singular shall include the plural and the plural shall include the
singular. The masculine gender where appearing herein shall be deemed to include
the feminine gender.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 1st day of May, 1998.
"EXECUTIVE"
/s/ DALE W. WILHELM
------------------------------------
DALE W. WILHELM
"COMPANY"
MARINE DRILLING COMPANIES, INC.
BY: /s/ JAN RASK
---------------------------------
NAME: JAN RASK
TITLE: CHIEF EXECUTIVE OFFICER
-8-
<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. 33-61901 on Form S-8 dated August 17, 1995
No. 333-6997 on Form S-3 dated June 27, 1996,
as amended
No. 333-6995 on Form S-4 dated June 27, 1996,
as amended
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 28, 1998, 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 28, 1998
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