<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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
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MARINE DRILLING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2558926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556
(Address of principal executive offices and zip code)
(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 JULY 27, 1999 -- 57,129,516
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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 -
June 30, 1999 (unaudited) and December 31, 1998............ 2
Consolidated Statements of Operations (unaudited) -
Three and Six Months Ended June 30, 1999 and 1998.......... 3
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 1999 and 1998.................... 4
Notes to Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 19
Item 3. Defaults Upon Indebtedness....................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
Item 6. Exhibits and Reports on Form 8-K................................. 20
SIGNATURES................................................................. 21
</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 June 30, 1999, the related
consolidated statements of operations for the three-month and six-month periods
ended June 30, 1999 and 1998, and the related consolidated statements of cash
flows for the six-month periods ended June 30, 1999 and 1998. 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, 1998, 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 26, 1999, 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, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
Houston, Texas
July 27, 1999
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 35,813 $ 12,576
Accounts receivable - trade and other, net 13,370 23,176
Prepaid expenses and other 3,742 3,290
Inventory 435 579
--------- ---------
Total current assets 53,360 39,621
Property and equipment 666,305 500,510
Less accumulated depreciation 78,316 68,881
--------- ---------
Property and equipment, net 587,989 431,629
Other 2,221 4,434
--------- ---------
$ 643,570 $ 475,684
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 150,000 $ --
Accounts payable 12,745 8,927
Accrued expenses 46,575 20,667
Current tax liability -- 2,558
Employer's liability claims, current 773 770
--------- ---------
Total current liabilities 210,093 32,922
Long-term debt -- 50,000
Employer's liability claims, non-current and other 1,771 2,046
Deferred income taxes 25,556 29,128
Shareholders' equity:
Common stock, par value $.01. Authorized 200,000,000 shares;
issued and outstanding 57,119,213 and 52,365,537 shares,
as of June 30, 1999 and December 31, 1998, respectively 571 524
Common stock restricted (1,368) (1,596)
Additional paid-in capital 262,401 206,603
Retained earnings from January 1, 1993 144,546 156,057
--------- ---------
Total shareholders' equity 406,150 361,588
--------- ---------
Commitments and contingencies -- --
--------- ---------
$ 643,570 $ 475,684
========= =========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 15,503 $ 64,141 $ 35,330 $ 121,605
Costs and Expenses:
Contract drilling 15,722 25,153 33,294 49,206
Depreciation and amortization 4,763 5,134 9,491 10,167
General and administrative 3,422 2,990 6,897 5,890
--------- --------- --------- ---------
23,907 33,277 49,682 65,263
--------- --------- --------- ---------
Operating income (loss) (8,404) 30,864 (14,352) 56,342
--------- --------- --------- ---------
Other Income (Expense):
Interest expense (308) (153) (421) (239)
Interest income 282 551 425 1,088
Other income 4 207 (41) 477
--------- --------- --------- ---------
(22) 605 (37) 1,326
--------- --------- --------- ---------
Income (loss) before income taxes (8,426) 31,469 (14,389) 57,668
Income tax expense (benefit) (1,683) 11,360 (2,878) 20,801
--------- --------- --------- ---------
Net income (loss) $ (6,743) $ 20,109 $ (11,511) $ 36,867
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (0.12) $ 0.38 $ (0.22) $ 0.71
Diluted $ (0.12) $ 0.38 $ (0.22) $ 0.70
Average common shares outstanding:
Basic 54,313 52,240 53,363 52,114
Diluted 54,313 52,932 53,363 52,765
</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>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (11,511) $ 36,867
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes (3,572) 5,911
Tax benefits related to common stock issued pursuant to
long-term incentive plan 87 1,928
Depreciation and amortization 9,491 10,167
Changes in operating assets and liabilities:
Receivables 9,806 11,812
Other current assets (308) 792
Payables, accrued expenses, current taxes and
employer's liability claims 26,896 26,799
Other 3,436 (1,527)
--------- ---------
Net cash provided by operating activities 34,325 92,749
--------- ---------
Cash Flows From Investing Activities:
Purchase of equipment (165,870) (66,352)
Proceeds from disposition of equipment 9 574
Acquisition of remaining minority interest in consolidated subsidiary -- (2,319)
--------- ---------
Net cash used in investing activities (165,861) (68,097)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term debt 100,000 --
Proceeds from sale of common stock 54,396 --
Proceeds from exercise of stock options 377 687
--------- ---------
Net cash provided by financing activities 154,773 687
--------- ---------
Net increase in cash and cash equivalents 23,237 25,339
Cash and cash equivalents at beginning of period 12,576 20,619
--------- ---------
Cash and cash equivalents at end of period $ 35,813 $ 45,958
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,378 $ 189
Income taxes paid 3,165 10,207
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 10,500 and 62,300 shares in 1999 and 1998 respectively, of
restricted common stock $ 133 $ 958
Forfeitures of 4,175 and 1,650 shares in 1999 and 1998 respectively, of
restricted common stock (39) (25)
</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 six months ended June 30, 1999 included herein has
been subjected to a limited review by KPMG 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, 1998.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year.
(2) EARNINGS PER SHARE
The Company's basic earnings (loss) per share, which is based upon the
weighted average common shares outstanding - without the dilutive effects of
common stock equivalents (options, warrants, etc.), for the quarters ended June
30, 1999 and 1998 is $(0.12) and $0.38, respectively. For the three and six
month periods ended June 30, 1999, there were 2,644,725 stock options
outstanding that were not included in the computation of diluted earnings per
share. Common stock equivalents with a weighted average of 692,000 and 651,000
are reflected in the calculation of diluted earnings per share for the three and
six-month periods ended June 30, 1998, respectively. There were 205,000 stock
options outstanding which were not included in the computation of diluted
earnings per share because the exercise price of these options was greater than
the average market price of the common shares for the three and six month
periods ended June 30, 1998. No adjustment to net income was made in calculating
diluted earnings per share for the three and six-month periods ended June 30,
1999 and 1998.
(3) CREDIT FACILITY
On August 12, 1998, the Company entered into a credit agreement (the
"Credit Facility") with a consortium of domestic and international banks
providing financing up to $200 million to be used for rig acquisitions and
upgrades. The Credit Facility is a five-year revolver and is secured by
substantially all of the Company's assets, including its rig fleet. The Company
and its subsidiaries are required to comply with various covenants and
restrictions, including, but not limited to, the maintenance of financial ratios
and the restriction on payments of dividends. Interest accrues at a rate of (i)
London Interbank Offered Rate ("LIBOR") plus a margin of .75% to 1.25% with
margins determined pursuant to a debt to EBITDA calculation or (ii) prime if a
Base Rate Loan. As of June 30, 1999, $150 million was outstanding under the
Credit Facility. As of August 10, 1999, the Company has $175 million outstanding
under the Credit Facility.
As of June 30, 1999, the Company was unable to satisfy the positive
working capital and ratio of indebtedness to EBITDA financial covenants in the
Credit Facility. The ratio of indebtedness to EBITDA covenant requires that the
ratio of indebtedness to EBITDA for the twelve-month period ending on any given
date, be no greater than 3.0 to 1.0. Under the Credit Facility, the Company's
failure to satisfy these covenants gives the banks the right to accelerate any
outstanding amounts. As such, the $150 million outstanding under the Credit
Facility at June 30, 1999 has been reflected as a current liability in the
accompanying balance sheet. Also, as a result of the financial defaults, the
Company is currently unable to borrow, if necessary, the remaining $25 million
available under the Credit Facility as of August 10, 1999.
The Company is currently in discussions with the banks about amending
the Credit Facility and hopes to reach an agreement with the banks in the
near-term. However, there can be no assurances that the Company will be able to
amend the Credit Facility or that this breach of the financial covenants will
not have a material adverse effect on the Company's liquidity. If the banks
exercised their right to accelerate repayment of the outstanding balance, the
Company would be required to seek alternative financing. Alternatives could
include, but are not limited to,
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
another credit facility, Maritime Administration ("MARAD") financing, and public
or private debt or equity offerings.
During the six months ended June 30, 1999, the Company incurred $3.1
million of interest expense, including amortization of deferred financing costs
related to the Credit Facility. Interest expense for the construction and
refurbishment of qualifying assets is capitalized. Accordingly, $2.7 million of
interest expense was capitalized during the six months ended June 30, 1999.
There was no capitalized interest expense for the first six months of 1998.
(4) COMMITMENTS AND CONTINGENCIES
India Lawsuit -- Jagson International Limited ("Jagson"), an Indian
entity, has brought suit against Marine Drilling Companies, Inc. and Marine 300
Series, Inc. 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. In
August 1995, Jagson filed a suit against the Company in New Delhi, India that
was subsequently withdrawn and filed a second suit in New Delhi against the
Company in October 1995 that was dismissed by the court. In May 1996, Jagson
filed a third suit against the Company in Bombay, India for the same claim and
attempted to attach the MARINE 201, located in India at the time, to the claim.
In March 1998, the court dismissed the motion for attachment. Although the third
suit is still on file with the court, the MARINE 201 is no longer in India and
there have been no further proceedings in the lawsuit. The Company disputes the
existence of the agreement and intends to vigorously defend the suit. The
Company does not believe this dispute will have a material adverse effect on its
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, the company entered into an
agreement whereby HAM Marine, Inc., now Friede Goldman International, Inc.
("FGI") would complete construction of the MARINE 700 semi-submersible drilling
rig in their shipyard in Pascagoula, Mississippi for $87 million. The shipyard
contract calls for FGI to fabricate certain components of the rig and install
certain drilling equipment provided by the Company ("Owner Furnished Equipment"
or "OFE"). The shipyard contract calls for monthly progress payments based on
the percent complete.
The Company originally estimated that the OFE would cost approximately
$99 million including capitalized interest and other soft costs resulting in a
total estimated cost to complete the drilling rig of $186 million. As of June
30, 1999, the Company has paid FGI approximately $108 million in progress
payments and change orders and has incurred approximately $107 million for OFE
and other related construction costs.
The shipyard contract initially contemplated a delivery date of
February 17, 1999. However, due in part to three tropical storms along the
Mississippi Gulf Coast, including Hurricane Georges, and engineering and
construction delays, completion of the MARINE 700 was delayed. On August 5,
1999, the rig was accepted by Esso, the Company's customer and on August 9,
1999, the MARINE 700 departed for its first deep-water drilling location, where
it will continue to operate for Esso, under the parties amended five-year
drilling contract. Due to the delays, the anticipated construction and
outfitting cost has increased to approximately $237 million. Included in the
increase over the original cost estimate is the cost of change orders initiated
by Esso. Current estimates for the cost of these change orders is approximately
$6.2 million which the Company is entitled to recover through an increase in the
dayrate during the term of the five-year drilling contract of approximately
$3,500 per day.
In December 1997, the Company signed a contract with Jurong Shipyard
Limited ("Jurong") in Singapore to upgrade the MARINE 500 to fourth-generation
capabilities for approximately $38 million. Change orders have now increased the
shipyard costs to approximately $55 million. In addition to this $55 million,
OFE, capitalized interest and project management costs amount to approximately
$76 million resulting in a total cost to upgrade the drilling rig of
approximately $131 million. The contract anticipated that the rig would arrive
in the Singapore
6
<PAGE> 9
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
shipyard on July 15, 1998 and be completed by December 31, 1998. However, the
MARINE 500 did not arrive in the shipyard until October 13, 1998 due to an
extension of work under its previous drilling contract. Construction on the
MARINE 500 was completed and the rig began operations on July 5, 1999.
Charter Agreement -- In July 1997, the Company entered into a Charter
Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter
the KANTAN 3 (now referred to as the MARINE 510), a semi-submersible rig, for a
period of five years. The MARINE 510 is a 600-foot water depth rig based upon
the Pacesetter design and was built in China in 1984. The Charter Agreement
began in mid-May 1998. The Charter Agreement and related agreements required the
Company to pay approximately $26,000 per day during the first year, $23,000 per
day during the second year and $24,500 per day for the last three years of the
charter for each day that the MARINE 510 is working. The rig has not worked
since November 1998. On July 21, 1999, the Company terminated the Charter
Agreement for the MARINE 510. The termination agreement provides that if market
conditions improve and the rig becomes available to work outside of Chinese
waters, the Company and SBMGS anticipate entering into another Charter Agreement
upon mutually agreeable terms or upon the same terms as the original Charter
Agreement.
Marketing Agreement for NANHAI VI -- In August 1998, the Company
entered into an agreement effective through October 1, 1999, with China's
Southern Drilling Company to market and manage the 1500-foot water depth rated
semi-submersible NANHAI VI. The Company recently extended the agreement for an
additional six months through March 31, 2000. The NANHAI VI is a self-propelled,
semi-submersible drilling rig, which was built in 1982 and modified and
refurbished in 1995. The rig is technically and economically suitable to be
upgraded to 4,000-foot water depth capability. Estimated total lead time
required to secure the equipment needed for the upgrade, complete the project
and move the rig to first drilling location is one year. If the rig is required
to be upgraded, the cost of the upgrade will be funded by the owner. The Company
is actively marketing the rig, which is currently working, but would be made
available by Southern Drilling Company upon consummation of a mutually agreeable
drilling contract.
7
<PAGE> 10
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) 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>
THREE MONTHS ENDED:
JUNE 30, 1999
Revenues $ 15,472 $ 31 $ -- $ 15,503
Operating Income (Loss) (3,383) (791) (4,230) (8,404)
Identifiable Assets 151,018 440,821 51,731 643,570
Capital Expenditures 343 94,859 261 95,463
Depreciation & Amortization 3,954 1 808 4,763
JUNE 30, 1998
Revenues $ 54,709 $ 9,432 $ -- $ 64,141
Operating Income (Loss) 30,923 3,609 (3,668) 30,864
Identifiable Assets 159,092 182,719 64,045 405,856
Capital Expenditures 972 37,693 3,477 42,142
Depreciation & Amortization 3,479 977 678 5,134
SIX MONTHS ENDED:
JUNE 30, 1999
Revenues $ 35,299 $ 31 $ -- $ 35,330
Operating Income (Loss) (4,171) (1,678) (8,503) (14,352)
Identifiable Assets 151,018 440,821 51,731 643,570
Capital Expenditures 937 164,441 492 165,870
Depreciation & Amortization 7,883 2 1,606 9,491
JUNE 30, 1998
Revenues $ 106,517 $ 15,088 $ -- $ 121,605
Operating Income (Loss) 57,613 5,934 (7,205) 56,342
Identifiable Assets 159,092 182,719 64,045 405,856
Capital Expenditures 2,622 59,594 4,136 66,352
Depreciation & Amortization 6,888 1,964 1,315 10,167
</TABLE>
8
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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>
AS OF AND FOR THE THREE AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
United States $ 15,472 $ 46,585 $ 35,299 $ 90,504
India -- 1,340 -- 2,639
Southeast Asia 31 16,216 31 28,462
Long-Lived Assets:
United States 344,533 198,558 344,533 198,558
India -- 12,755 -- 12,755
Southeast Asia 209,837 105,851 209,837 105,851
Other Foreign 33,619 -- 33,619 --
</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 six months ending June 30, 1999 and 1998, sales to customers
that represented 10% or more of consolidated drilling revenues were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
% OF TOTAL % OF TOTAL
REVENUE REVENUE REVENUE REVENUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Customer A - Jack-up Operations $14,036 40% $26,423 22%
Customer B - Jack-up Operations -- -- 13,105 11%
Customer C - Jack-up Operations $ 3,615 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, 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.
(6) SUBSEQUENT EVENTS
On July 5, 1999, the Company delivered the MARINE 500 semi-submersible
drilling rig to West Australian Petroleum Pty, Ltd. ("WAPET"). Upon acceptance
by WAPET, the rig left Singapore for Western Australia and began operating under
its long-term contract. Also, in accordance with the MARINE 500 drilling
contract with WAPET, the Company is entitled to a $6 million fee when WAPET
accepted the rig. The MARINE 500 is currently drilling on the first well
location in Western Australia.
On July 13, 1999, the Company tendered the MARINE 700 semi-submersible
drilling rig to Esso for acceptance. Esso did not accept the rig based on their
belief that the unit was not ready. On July 23, 1999, the Company signed an
amendment to the MARINE 700 drilling contract with Esso providing an extension
of the delivery deadline and a reduction in the initial dayrate. The reduced
initial dayrate is $130,000 per day (not including approximately $3,500 per day
for recovery of the cost of Esso change orders) and is subject to annual market
escalation in years 2 through 5, such that total revenue from the contract could
range from $237 million to $302 million depending on drilling market conditions.
On August 5, 1999, the rig was accepted by Esso and on August 9, 1999, the
MARINE 700 departed for its first deep-water drilling location, where it will
continue to operate for Esso, under the parties' amended five-year drilling
contract.
On July 21, 1999, the Company terminated the charter agreement with
SBMGS for the MARINE 510. The termination agreement provides that if market
conditions improve and the rig becomes available to work outside of Chinese
waters, the Company and SBMGS anticipate entering into another charter agreement
upon mutually agreeable terms or upon the same terms as the original charter
agreement.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
Demand for the Company's offshore drilling services is primarily driven
by the worldwide expenditures for oil and gas drilling which is closely linked
to the underlying economics of oil and gas exploration, development and
production. The economics of oil and gas business activities is impacted by
current and projected oil and gas prices. Since the early 1980's, oil and gas
prices have been volatile and somewhat unpredictable, which has caused
significant fluctuations in oil and gas drilling expenditures. Many factors
influence oil and gas prices, including world economic conditions, worldwide oil
and gas production and the activities of the Organization of Petroleum Exporting
Countries ("OPEC").
The rates that the industry can charge for drilling services is a
function of not only demand for services but the supply of drilling rigs
available in the market to provide service. During the early 1980's when oil and
gas prices were high and significant demand for drilling services existed, the
industry built a significant number of offshore drilling rigs. In the mid-1980's
when oil and gas prices declined significantly and the corresponding demand for
drilling services declined, the supply of drilling rigs was significantly
greater than the industry needed. This resulted in an imbalance of supply and
demand causing low utilization with dayrates declining to virtually cash
operating costs.
During 1996 and early 1997, oil and gas prices rose to a level that
stimulated significant oil and gas drilling activity resulting in improved
utilization and dayrates for the drilling industry. However, oil and gas prices
declined significantly beginning in October 1997, and reached multi-year lows in
various markets in early 1999. As a result of oil price declines in 1998 and
early 1999, oil and gas companies have made significant cutbacks in their
drilling programs. This has reduced industry-wide rig utilization including the
U.S. Gulf of Mexico, where the Company operates most of its rigs, which has not
only sharply reduced dayrates, but also shortened the average length of drilling
contracts. Recently oil and gas prices have improved, however, some stability in
these commodity prices must be sustained before exploration and production
spending by the oil and gas companies will increase.
The following table sets forth current rig utilization rates and
average utilization rates for the six months ended June 30, 1999 and 1998,
according to Offshore Data Services:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
AS OF -------------------------
JULY 27, 1999 1999 1998
------------- ----------- ----------
<S> <C> <C> <C>
Gulf of Mexico jack-up rigs 66% 61% 90%
Worldwide jack-up rigs 65% 66% 87%
Worldwide semi-submersible rigs 65% 65% 79%
</TABLE>
As of July 27, 1999, nine of the Company's 15 jack-up rigs are
committed under short-term well-to-well contracts, one rig is under a term
contract that expires in the first quarter of 2000, and the remaining five rigs
are idle. All of the currently committed rigs are in the U.S. Gulf of Mexico.
The Company currently has no international jack-up rigs working. The MARINE 500
semi-submersible rig began operating in July 1999 in Western Australia under a
long-term drilling contract that expires December 31, 2001. On August 5, 1999,
the MARINE 700 was accepted by the customer and departed the shipyard for a U.S.
Gulf of Mexico deep-water location to conduct a mooring test. In addition to the
recent declines in rig utilization, current dayrates for jack-up drilling rigs
are substantially less than the dayrates that generally prevailed during most of
1998 and are at or near cash operating costs. These current market conditions
will adversely affect the Company's results of operations for at least the near
term, substantially reducing its revenues, cash flows and earnings.
10
<PAGE> 13
CONTRACTS AND CUSTOMERS
The Company obtains most of its drilling 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 six months of 1999, the Company
performed services for approximately 20 different customers. For the period
ended June 30, 1999, Applied Drilling Technology, Inc., a subsidiary of Global
Marine Inc., accounted for approximately 40% of the Company's total consolidated
revenues and Walter Oil & Gas Corporation accounted for approximately 10% of
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, 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 5 of Notes to Consolidated Financial Statements for further
information regarding the Company's major customers.
MARINE 700 Drilling Contract. In January 1998, the Company signed a
long-term drilling contract with Esso Exploration Inc. ("Esso"), an affiliate of
Exxon Corporation, for the MARINE 700. The contract had an initial term of three
years and gave Esso the option to extend the contract to a five-year term. In
June 1998, Esso exercised the option to extend the contract to five years, with
a normal operating dayrate of $165,410 per day ($159,910 per day during moving
and standby and $136,650 per day during force majeure events). In addition to
the normal operating dayrate, the Company will be entitled to obtain
approximately $3,500 per day cost recovery for certain construction and
equipment changes requested by Esso during the construction process. The
dayrates are also subject to adjustments for changes in indexed operating cost
elements, changes in costs arising from moving the rig outside the U.S. Gulf of
Mexico, or changes in personnel requirements. The Esso contract was expected to
generate aggregate dayrate revenues of approximately $302 million at full
utilization, not including the additional construction cost recoveries. The
contract also entitles Esso to elect up to five additional one-year extensions
of the primary term at mutually agreeable dayrates.
The MARINE 700 contract required that the rig meet certain design
specifications and construction quality standards. In addition to the design
specifications being met, the rig was to be delivered by July 15, 1999. If the
Company did not deliver the rig by July 15, 1999 or failed to meet the
contractual design specifications, then Esso had the right to cancel the
contract unless the delay was caused by Esso or its subcontractors.
On July 13, 1999, the Company tendered the rig to Esso for acceptance.
Esso did not accept the rig based on their belief that the unit was not ready.
On July 23, 1999, the Company signed an amendment to the MARINE 700 drilling
contract with Esso providing an extension of the delivery deadline and a
reduction in the initial dayrate. The reduced initial dayrate is $130,000 per
day (not including approximately $3,500 per day for recovery of the cost of Esso
change orders) and is subject to annual market escalation in years 2 through 5,
such that total revenue from the contract could range from $237 million to $302
million depending on drilling market conditions. On August 5, 1999, the rig was
accepted by Esso and on August 9, 1999, the MARINE 700 departed for its first
deep-water drilling location, where it will continue to operate for Esso, under
the parties' amended five-year drilling contract.
MARINE 500 Drilling Contract. In July 1997, the Company entered into a
drilling contract with a drilling consortium led by West Australian Petroleum
Pty. Limited ("WAPET") for the MARINE 500. The consortium consists of WAPET,
Indonesia Petroleum, Ltd. ("INPEX") and Mobil Exploration and Producing
Australia ("MEPA"). Certain other oil companies have an option to participate in
the consortium. The contract required the Company, prior to delivery of the rig,
to upgrade the rig to work in water depths up to 5,000 feet with 15,000 psi
drilling equipment, as described below. The contract was originally scheduled
for a three-year term beginning in January 1999. However, because the rig was
delayed in arriving to the shipyard for the upgrade work as a result of work
extensions for its previous customer, the rig was not delivered until July 5,
1999. This delay, however, did not extend the term of the contract, so the
contract will still expire on December 31, 2001. During the term of this
11
<PAGE> 14
contract, the MARINE 500 will work predominately in Western Australia, although
the contract entitles the consortium members to use the rig in Southeast Asia,
the Pacific Rim, and New Zealand.
The consortium drilling contract is a master agreement that
contemplates separate drilling contracts with the individual consortium members
at a base dayrate of $127,500, which is adjusted for each contract based on
operating costs in the area in which the rig is to be used. Two of the
consortium members, WAPET and INPEX, have committed drilling contracts under the
consortium agreement and have agreed under the consortium agreement to be liable
for the contract minimum payments to the Company for the initial contract term
ending December 31, 2001. The optional consortium members have made no
commitments under the agreement, and are not liable for any payments under the
consortium contract until they commit to a drilling contract. The INPEX drilling
contract is a two-well contract with up to three option wells to be drilled at
an operating dayrate of $150,000 per day. The WAPET drilling contract provides
for a dayrate of $168,600 for an unspecified number of wells. Under the
contract, a mobilization rate of $166,240, or 98.6% of the operating dayrate,
began when the rig left the shipyard in Singapore, at which time the Company was
also entitled under the consortium drilling contract to receive a fee of
$6,000,000. The rig is currently on location in Western Australia drilling the
first well for WAPET. The contract provides that the consortium can terminate
the contract at any time after January 1, 2001 in exchange for a termination
payment of $95,890 for each day remaining in the term of the contract, subject
to offset if the rig is otherwise employed. In addition, either party can
terminate the WAPET drilling contract after 20 days of certain force majeure
events and in the event of certain breaches.
MARINE 510 Charter. In July 1997, the Company entered into a Charter
Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter
the KANTAN 3 (now referred to as the MARINE 510), a semi-submersible rig, for a
period of five years. The MARINE 510 is a 600-foot water depth rig based upon
the Pacesetter design and was built in China in 1984. The Charter Agreement
began in mid-May 1998. The Charter Agreement and related agreements required the
Company to pay approximately $26,000 per day during the first year, $23,000 per
day during the second year and $24,500 per day for the last three years of the
charter for each day that the MARINE 510 is working. The rig has not worked
since November 1998. On July 21, 1999, the Company terminated the Charter
Agreement for the MARINE 510. The termination agreement provides that if market
conditions improve and the rig becomes available to work outside of Chinese
waters, the Company and SBMGS anticipate entering into another Charter Agreement
upon mutually agreeable terms or upon the same terms as the original Charter
Agreement.
Marketing Agreement for NANHAI VI. In August 1998, the Company entered
into an agreement effective through October 1, 1999, with China's Southern
Drilling Company to market the 1500-foot water depth rated semi-submersible
NANHAI VI. The Company recently extended the agreement for an additional six
months through March 31, 2000. The NANHAI VI is a self-propelled,
semi-submersible drilling rig, which was built in 1982 and modified and
refurbished in 1995. The rig is technically and economically suitable to be
upgraded to 4,000-foot water depth capability. Estimated total lead time
required to secure the equipment needed for the upgrade, complete the project
and move the rig to first drilling location is one year. If the rig is required
to be upgraded, the cost of the upgrade will be funded by the owner. Under the
agreement, the Company is to receive $3,000 per day in management fees while the
rig is operating and 50% of all rig-level profits after management fees and
amortization over a 36-month period of the costs of any upgrades to the vessel.
The Company is actively marketing the rig, which is currently working on its
owner's behalf, but would be made available by Southern Drilling Company upon
consummation of a mutually agreeable drilling contract.
RESULTS OF OPERATIONS
The number of rigs the Company has available for service and the
utilization rates and dayrates of the Company's active rigs are the most
significant factors affecting the Company's level of revenues. 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 cost of maintaining personnel on board
the rigs and equipment maintenance when the rigs are idle. 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.
12
<PAGE> 15
The changes in operating income are more directly affected by revenue
factors than expense factors since changes in dayrates 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 dayrates or utilization.
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 FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Jack-ups
Operating days 836 1,269 1,646 2,502
Utilization (1) 61% 99% 61% 99%
Average revenue per day $ 18,507 $ 43,112 $ 21,445 $ 42,573
Revenue 15,472 54,709 35,299 106,517
Contract drilling expense 14,901 20,307 31,587 42,016
Depreciation 3,954 3,479 7,883 6,888
Operating income (loss) (3,383) 30,923 (4,171) 57,613
Semi-submersibles
Operating days -- 131 -- 221
Utilization (1) 0% 100% 0% 100%
Average revenue per day $ -- $ 72,000 $ -- $ 68,271
Revenue 31 9,432 31 15,088
Contract drilling expense 821 4,846 1,707 7,190
Depreciation 1 977 2 1,964
Operating income (loss) (791) 3,609 (1,678) 5,934
Total Company:
Operating days 836 1,400 1,646 2,723
Utilization (1) 57% 99% 57% 99%
Average revenue per day $ 18,544 $ 45,815 $ 21,464 $ 44,658
Revenue 15,503 64,141 35,330 121,605
Contract drilling expense 15,722 25,153 33,294 49,206
Depreciation and amortization 4,763 5,134 9,491 10,167
General and administrative expense 3,422 2,990 6,897 5,890
Operating income (loss) (8,404) 30,864 (14,352) 56,342
</TABLE>
(1) Based on the number of actively marketed rigs. Excluding rigs under
construction or in the process of substantial upgrading, the Company had no
non-marketed rigs during the second quarter of 1999 and 1998, respectively.
For the six months ended June 30, 1999 and 1998 the Company had no
non-marketed rigs and an average of 0.2 non-marketed rigs, respectively.
Revenues. The Company's drilling revenues decreased $48,638,000 or 76%,
and $86,275,000 or 71% during the three and six-month periods ended June 30,
1999, respectively, as compared to corresponding periods in 1998. The decrease
in revenues for the three and six month periods ended June 30, 1999 was
primarily due to decreased average daily revenue and rig utilization. Average
daily revenue and rig utilization declined to $18,544 and 57% for the quarter
ended June 30, 1999 as compared to $45,815 and 99% for the same period in 1998.
For the
13
<PAGE> 16
six months ended June 30, 1999 the average daily revenue and rig utilization
decreased to $21,464 and 57% from average daily revenue of $44,658 and rig
utilization of 99% for the same period in 1998.
Contract Drilling Expenses. Contract drilling expenses for the three
and six months ended June 30, 1999 decreased $9,431,000 or 37%, and $15,912,000
or 32% compared to the same periods in 1998. The decrease was primarily a result
of lower repairs and maintenance expense and labor costs, due to low utilization
rates.
Depreciation and Amortization. Depreciation and amortization expense
for the three and six months ended June 30, 1999 decreased $371,000 and
$676,000, respectively, compared to the same periods in 1998. The decrease in
1999 was attributable to the MARINE 500 which is not being depreciated while in
the shipyard being upgraded to fourth-generation semi-submersible capabilities,
partially offset by the depreciation costs associated with the MARINE 306 which
was acquired in December 1998.
General and Administrative. General and administrative expenses for the
three and six month periods ended June 30, 1999 increased $432,000 or 14% and
$1,007,000 or 17% respectively, compared to the three and six months ended June
30, 1998. The increase was attributed to non-recurring severance costs and
professional service fees incurred in 1999.
Interest Expense. Interest expense for the six months ended June 30,
1999 was $421,000 compared to $239,000 for the same period in 1998. The increase
was primarily the result of increased borrowings on the Amended Credit Facility,
net of capitalized interest.
Interest Income. Interest income decreased $269,000 or 49% and $663,000
or 61% respectively, for the three and six months of ended June 30, 1999 from
the comparable prior-year period. The decrease was related primarily to
decreased cash balances as a result of expenditures related to the Company's two
major construction and upgrade projects.
Income Taxes. Income tax expense decreased for the three and six month
periods ended June 30, 1999 as compared to the same period in 1998, primarily
due to a decrease in the Company's pretax income.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity. At June 30, 1999, the Company had negative working capital
of $156,733,000 as compared to working capital of $6,699,000 at December 31,
1998. The large negative working capital at June 30, 1999 was primarily due to
the classification as a current liability of $150,000,000 million outstanding
under the Company's credit facility as a result of a default of certain
financial covenants in the facility. See the discussion of the credit facility
and related defaults below.
Net cash provided by operating activities for the six months ended June
30, 1999 decreased by $58,424,000 to $34,325,000 compared to $92,749,000 for the
same period in the prior year. The decrease is primarily attributable to the
decreased dayrates and rig operating activity. Cash used in investing activities
increased $97,764,000 during the first six months of 1999 to $165,861,000 from
$68,097,000 during the same period in 1998 due primarily to capital expenditures
related to the completion of the MARINE 700 and upgrade of the MARINE 500. Net
cash provided by financing activities during the six months ended June 30, 1999
consisted primarily of $100,000,000 in proceeds from long-term debt borrowings
and $54,396,000 in net proceeds from the sale of 4,600,000 shares of common
stock in May 1999.
On August 12, 1998, the Company entered into a credit agreement (the
"Credit Facility") with a consortium of domestic and international banks
providing financing up to $200,000,000 to be used for rig acquisitions and
upgrades. The Credit Facility is a five-year revolver and is secured by
substantially all of the Company's assets, including its rig fleet. The Company
and its subsidiaries are required to comply with various covenants and
restrictions, including, but not limited to, the maintenance of financial ratios
and the restriction on payments of dividends. Interest accrues at a rate of (i)
London Interbank Offered Rate ("LIBOR") plus a margin of .75% to 1.25% with
margins determined pursuant to a debt to EBITDA calculation or (ii) prime if a
Base Rate Loan. As of June 30, 1999, $150,000,000 was outstanding under the
Credit Facility. As of August 10, 1999, the Company has $175,000,000 outstanding
under the Credit Facility.
14
<PAGE> 17
As of June 30, 1999, the Company was unable to satisfy the positive
working capital and ratio of indebtedness to EBITDA financial covenants in the
Credit Facility. The ratio of indebtedness to EBITDA covenant requires that the
ratio of indebtedness to EBITDA for the twelve-month period ending on any given
date, be no greater than 3.0 to 1.0. Under the Credit Facility, the Company's
failure to satisfy these covenants gives the banks the right to accelerate any
outstanding amounts. As such, the $150 million outstanding under the Credit
Facility at June 30, 1999 has been reflected as a current liability in the
accompanying balance sheet. Also, as a result of the financial defaults, the
Company is currently unable to borrow, if necessary, the remaining $25 million
available under the Credit Facility as of August 10, 1999.
The Company is currently in discussions with the banks about amending
the Credit Facility and hopes to reach an agreement with the banks in the
near-term. However, there can be no assurances that the Company will be able to
amend the Credit Facility or that this breach of the financial covenants will
not have a material adverse effect on the Company's liquidity. If the banks
exercised their right to accelerate repayment of the outstanding balance, the
Company would be required to seek alternative financing. Alternatives could
include, but are not limited to, another credit facility, Maritime
Administration ("MARAD") financing, and public or private debt or equity
offerings.
During 1997, the improvement in the offshore drilling market allowed
the Company to place some of its offshore rigs under longer-term contracts. In
July 1997, the Company entered into a contract for the MARINE 500 that expires
on December 31, 2001 and is expected to produce total revenues of approximately
$148,000,000 beginning July 1999.
In January 1998, the Company obtained a three-year contract with an
option to extend to a five-year term for the MARINE 700. In June 1998 the
customer exercised the option and extended the contract to five years. The
contract provided for aggregate dayrate revenues of approximately $302,000,000
over its five-year term. On July 23, 1999, the Company signed an amendment to
the MARINE 700 drilling contract with Esso providing an extension of the
delivery deadline and a reduction in the initial dayrate. The reduced initial
dayrate is $130,000 per day (not including approximately $3,500 per day for
recovery of the cost of Esso change orders) and is subject to annual market
escalation in years 2 through 5, such that total revenue from the contract could
range from $237,000,000 to $302,000,000 depending on drilling market conditions.
Construction of MARINE 700. In May 1997, the Company acquired the
uncompleted hull of the MARINE 700 for approximately $55,000,000. In December
1997, the Company entered into an agreement with HAM Marine, Inc., now Friede
Goldman International, Inc. ("FGI") under which FGI would complete construction
of the MARINE 700 semi-submersible drilling rig for $87,000,000. The shipyard
contract calls for FGI to fabricate certain components of the rig and install
certain owner furnished equipment ("OFE"). The shipyard contract calls for
monthly progress payments based on the percentage of completion. The Company
originally estimated that the OFE would cost approximately $99,000,000 including
capitalized interest and project management costs resulting in a total estimated
cost to complete the drilling rig of $186,000,000 (exclusive of the $55,000,000
hull acquisition cost). As of June 30, 1999, the Company has paid FGI
approximately $108,000,000 in progress payments and change orders and has
incurred approximately $107,000,000 for OFE and other related construction
costs.
The shipyard contract initially contemplated a delivery date of
February 17, 1999. However, due to engineering, construction, weather and other
delays, completion of the MARINE 700 was delayed until July 13, 1999. On August
5, 1999, the rig was accepted by Esso, the Company's customer, under the parties
amended five-year drilling contract. Additionally, the anticipated construction
and outfitting cost has increased to approximately $237,000,000. Included in the
increase over the original cost estimate is the cost of change orders initiated
by Esso. Current estimates for the cost of these change orders is approximately
$6,200,000, which the Company will recover through an increase in the dayrate
during the term of the five-year drilling contract of approximately $3,500 per
day.
MARINE 500 Upgrade. In December 1997, the Company signed a contract
with Jurong Shipyard Limited ("Jurong") in Singapore to upgrade the MARINE 500
to fourth-generation capabilities for approximately $38,000,000. Change orders
have now increased the shipyard costs to approximately $55,000,000. In addition
to this $55,000,000, OFE, capitalized interest and project management costs
amount to approximately $76,000,000,
15
<PAGE> 18
resulting in a total estimated cost to complete the drilling rig of
approximately $131,000,000. The contract anticipated that the rig would arrive
in the Singapore shipyard on July 15, 1998 and be completed by December 31,
1998. However, the MARINE 500 did not arrive in the shipyard until October 13,
1998 due to an extension of work under its previous drilling contract.
Construction was completed and the rig began operations on July 5, 1999.
Capital Resources. During the first six months of 1999 the Company
expended $165,870,000 in capital expenditures consisting primarily of
disbursements for (i) the completion of the MARINE 700, (ii) the upgrade of the
MARINE 500, and (iii) the purchase of other rig machinery.
The Company expects to spend approximately $193,000,000 in 1999 for
capital expenditures, consisting primarily of expenditures to upgrade and
complete the MARINE 500 and MARINE 700.
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,
pending resolution of financial covenant defaults, 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 therefore, 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, pending resolution of financial covenant defaults, and other potential
funding sources, such as increased credit facilities and private or public debt
or equity offerings, will be sufficient to fund its required capital
expenditures, working capital and debt service requirements for the foreseeable
future. Future cash flows and the availability of other funding sources,
however, are subject to a number of uncertainties, especially the condition of
the oil and gas industry. The Company also is seeking, as discussed above, to
reach an agreement with the banks to amend the Credit Facility and resolve the
financial covenant defaults. Accordingly, there can be no assurance that these
resources will be sufficient to fund the Company's cash requirements.
YEAR 2000 ISSUE
In 1998 the Company began to evaluate and address potential problems
associated with the year 2000 and the processing of date sensitive information
by its computers and other systems. The Company utilizes third party software in
all of its computer applications. The Company has upgraded both the accounting
and payroll software to current versions that enable the computer systems to
function properly with respect to dates in year 2000 and thereafter. All
non-information technology office systems including the telephone system have
been verified to be year 2000 compliant.
Rig-based electronic equipment on 14 of the 17 rigs in the Company's
fleet has either been verified to be year 2000 compliant or certified by the
manufacturer as such. The evaluation of the three remaining rigs will be
completed during the third quarter of 1999. Additionally, the risk of a
disruption in drilling services due to problems associated with year 2000 issues
is further minimized by redundant systems and/or manual operation of certain
systems.
Key vendors and suppliers have been contacted to ensure that they have
a year 2000 compliance plan in an effort to minimize the Company's exposure to
their potential year 2000 problems. Additionally, to further minimize the
Company's exposure, critical spare parts and drilling supplies are stored at the
Company's warehouse and storage facility in Rosharon, Texas and/or can be
obtained from alternative vendors.
Currently the Company has spent approximately $72,000 to ensure year
2000 compliance, including hardware and software expenditures. The company does
not anticipate year 2000 compliance related expenditures to exceed $100,000.
This estimate does not include internal labor costs for the Company's
information technology
16
<PAGE> 19
personnel who spend a portion of their time working on year 2000 compliance
issues. Based upon the system upgrades and year 2000 compliance work to date,
the Company believes that the year 2000 will not pose any significant
operational problems for the Company that could have a material adverse affect
on the Company. However, there can be no assurances that the Company or its key
vendors and suppliers will not encounter any year 2000 related problems that
could result in a disruption of normal business activities and operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes standards for accounting for and
disclosure of derivative instruments and hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. The Company does not expect SFAS No. 133 to have a material effect on its
reported results.
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; (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 continuation of market and other
conditions similar to those in which the Company incurred net losses for the six
months ended June 30, 1999; (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 re-negotiation or cancellation of the long-term
contracts for the MARINE 700 or the MARINE 500, whether as a result of rig
performance or because of some other reason; (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.
17
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company is subject to market risk exposure
related to changes in interest rates on its Credit Facility. Interest on
borrowings under the Credit Facility is at a pre-agreed upon percentage point
spread from either the prime interest rate or LIBOR. The Company may, at its
option, fix the interest rate for certain borrowings based on a spread over
LIBOR for 30 days to 6 months, with longer periods requiring bank approval. On
May 28, 1999, the Company elected to lock in $100 million of outstanding debt at
a fixed LIBOR rate of 5.5% plus a margin for one year. On June 29, 1999, the
Company then locked in $30 million of outstanding debt at a fixed LIBOR rate of
5.5% plus a margin for six months. The margin on these borrowings can range from
0.75% to 1.25% determined pursuant to a quarterly debt to EBITDA calculation.
The current margin ratio for these borrowings is 0.875%. At June 30, 1999, the
Company had $150 million outstanding under its Credit Facility. On the remaining
$20 million balance an immediate change of one percent in the interest rate
would cause a change in interest expense of approximately $0.2 million on an
annual basis. The Company's objective in fixing the interest rate on these
borrowings was to protect itself against rising interest rates.
Foreign Currency Exchange Rate Risk. The Company conducts business in
several foreign countries. Predominately all of its foreign operations are
denominated in U.S. dollars. The Company structures its drilling contracts in
U.S. dollars to mitigate its exposure to fluctuations in foreign currencies.
Other than some limited trade payables the Company does not currently have
financial instruments that are sensitive to foreign currency exchange rates.
18
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jagson International Limited ("Jagson"), an Indian entity, has brought
suit against Marine Drilling Companies, Inc. and Marine 300 Series, Inc. The
plaintiff has alleged that the Company agreed to charter two jack-up rigs to the
plaintiff during 1992 and that the Company breached the agreement by failing to
charter the rigs resulting in damages in excess of $14,500,000. In August 1995,
Jagson filed a suit against the Company in New Delhi, India that was
subsequently withdrawn and filed a second suit in New Delhi against the Company
in October 1995 that was dismissed by the court. In May 1996, Jagson filed a
third suit against the Company in Bombay, India for the same claim and attempted
to attach the MARINE 201, located in India at the time, to the claim. In March
1998, the court dismissed the motion for attachment. Although the third suit is
still on file with the court, the MARINE 201 is no longer in India and there
have been no further proceedings in the lawsuit. The Company disputes the
existence of the agreement and intends to vigorously defend the suit. The
Company does not believe this dispute will have a material adverse effect on its
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 3. DEFAULTS UPON INDEBTEDNESS
As of June 30, 1999, the Company was unable to satisfy the positive
working capital and ratio of indebtedness to EBITDA financial covenants in the
Credit Facility. The ratio of indebtedness to EBITDA covenant requires that the
ratio of indebtedness to EBITDA for the twelve-month period ending on any given
date, be no greater than 3.0 to 1.0. Under the Credit Facility, the Company's
failure to satisfy these covenants gives the banks the right to accelerate any
outstanding amounts. As such, the $150 million outstanding under the Credit
Facility at June 30, 1999 has been reflected as a current liability in the
accompanying balance sheet. Also, as a result of the financial defaults, the
Company is currently unable to borrow, if necessary, the remaining $25 million
available under the Credit Facility as of August 10, 1999.
The Company is currently in discussions with the banks about amending
the Credit Facility and hopes to reach an agreement with the banks in the
near-term. However, there can be no assurances that the Company will be able to
amend the Credit Facility or that this breach of the financial covenants will
not have a material adverse effect on the Company's liquidity. If the banks
exercised their right to accelerate repayment of the outstanding balance, the
Company would be required to seek alternative financing. Alternatives could
include, but are not limited to, another credit facility, Maritime
Administration ("MARAD") financing, and public or private debt or equity
offerings.
19
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 14,
1999. At the meeting, seven 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>
VOTES CAST
-----------------------------------------------------------------
BROKER
NOMINEE TOTAL IN FAVOR WITHHELD NON-VOTES ABSTAINING
- ------------- ---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Mr. Barbanell 39,165,769 38,877,515 288,254 -- --
Mr. Brown 39,165,769 38,877,515 288,254 -- --
Mr. Bull 39,165,769 38,877,515 288,254 -- --
Mr. Burton 39,165,769 38,877,515 288,254 -- --
Mr. Rask 39,165,769 38,877,515 288,254 -- --
Mr. Robson 39,165,769 38,877,515 288,254 -- --
Mr. Thomas 39,165,769 38,877,515 288,254 -- --
- ------------------------------------------------------------------------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits No. Description
- ------------ -----------
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
(Exhibit 27 is being submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q being
submitted to the U.S. Securities and Exchange Commission.)
(b) Reports on Form 8-K:
(1) The Company filed a Form 8-K report dated June 3, 1999
regarding a status update of the MARINE 700 and MARINE 500
drilling rigs.
20
<PAGE> 23
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: August 12, 1999 By /s/ T. Scott O'Keefe
--------------------------------
T. Scott O'Keefe
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1999 By /s/ Dale W. Wilhelm
--------------------------------
Dale W. Wilhelm
Vice President and Controller
(Principal Accounting Officer)
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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>
<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
No. 333-56379 on Form S-3
dated June 9, 1998
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated July 27, 1999, 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 LLP
Houston, Texas
July 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 35,813 45,958
<SECURITIES> 0 0
<RECEIVABLES> 13,370 34,868
<ALLOWANCES> 0 0
<INVENTORY> 435 1,056
<CURRENT-ASSETS> 53,360 85,082
<PP&E> 666,305 376,570
<DEPRECIATION> 78,316 59,406
<TOTAL-ASSETS> 643,570 405,856
<CURRENT-LIABILITIES> 210,093 43,660
<BONDS> 0 0
0 0
0 0
<COMMON> 571 522
<OTHER-SE> 405,579 335,883
<TOTAL-LIABILITY-AND-EQUITY> 643,570 405,856
<SALES> 35,330 121,605
<TOTAL-REVENUES> 35,330 121,605
<CGS> 33,294 49,206
<TOTAL-COSTS> 33,294 49,206
<OTHER-EXPENSES> 9,491 10,167
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 421 239
<INCOME-PRETAX> (14,389) 57,668
<INCOME-TAX> (2,878) 20,801
<INCOME-CONTINUING> (11,511) 36,867
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,511) 36,867
<EPS-BASIC> (0.22) 0.71
<EPS-DILUTED> (0.22) 0.70
</TABLE>
