<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, 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
----------------------
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, 1999 -- 52,488,194
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MARINE DRILLING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements
Independent Auditors' Review Report.......................... 1
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998............. 2
Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 1999 and 1998................... 3
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 1999 and 1998................... 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
SIGNATURES................................................................. 19
</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, 1999, and the related
consolidated statements of operations and cash flows for the three-month
periods ended March 31, 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
April 27, 1999
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 29,265 $ 12,576
Accounts receivable - trade and other, net 14,057 23,176
Prepaid expenses and other 1,198 3,290
Inventory 484 579
--------- ---------
Total current assets 45,004 39,621
Property and equipment 570,843 500,510
Less accumulated depreciation 73,553 68,881
--------- ---------
Property and equipment, net 497,290 431,629
Other 4,210 4,434
--------- ---------
$ 546,504 $ 475,684
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,712 $ 8,927
Accrued expenses 24,207 20,667
Current tax liability -- 2,558
Employer's liability claims, current 863 770
--------- ---------
Total current liabilities 39,782 32,922
Long-term debt 120,000 50,000
Employer's liability claims, non-current and other 1,598 2,046
Deferred income taxes 27,201 29,128
Shareholders' equity:
Common stock, par value $.01. Authorized 200,000,000 shares;
issued and outstanding 52,471,042 and 52,365,537 shares,
as of March 31, 1999 and December 31, 1998, respectively 525 524
Common stock restricted (1,408) (1,596)
Additional paid-in capital 207,517 206,603
Retained earnings from January 1, 1993 151,289 156,057
--------- ---------
Total shareholders' equity 357,923 361,588
--------- ---------
Commitments and contingencies -- --
--------- ---------
$ 546,504 $ 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
MARCH 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 19,827 $ 57,464
Costs and Expenses:
Contract drilling 17,572 24,053
Depreciation and amortization 4,728 5,033
General and administrative 3,475 2,900
-------- --------
25,775 31,986
-------- --------
Operating income (loss) (5,948) 25,478
-------- --------
Other Income (Expense):
Interest expense (113) (86)
Interest income 143 537
Other income (expense) (45) 270
-------- --------
(15) 721
-------- --------
Income (loss) before income taxes (5,963) 26,199
Income tax expense (benefit) (1,195) 9,441
-------- --------
Net income (loss) $ (4,768) $ 16,758
======== ========
Earnings (loss) per share:
Basic $ (0.09) $ 0.32
Diluted $ (0.09) $ 0.32
Average common shares:
Basic 52,402 51,987
Diluted 52,402 52,600
</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,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (4,768) $ 16,758
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes (1,927) 3,670
Tax benefits related to common stock issued pursuant to
long-term incentive plan 127 1,919
Depreciation and amortization 4,728 5,033
Changes in operating assets and liabilities:
Receivables 9,119 2,034
Other current assets 2,187 2,286
Payables, accrued expenses, current taxes and
employer's liability claims 6,412 18,435
Other 1,211 450
-------- --------
Net cash provided by operating activities 17,089 50,585
-------- --------
Cash Flows From Investing Activities:
Purchase of equipment (70,407) (24,210)
Proceeds from disposition of equipment 7 174
-------- --------
Net cash used in investing activities (70,400) (24,036)
-------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options -- 654
Proceeds from long-term debt 70,000 --
-------- --------
Net cash provided by financing activities 70,000 654
-------- --------
Net increase in cash and cash equivalents 16,689 27,203
Cash and cash equivalents at beginning of period 12,576 15,619
-------- --------
Cash and cash equivalents at end of period $ 29,265 $ 42,822
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 967 $ 75
Income taxes paid $ 3,011 $ 2,437
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 500 and 62,300 shares in 1999 and 1998
respectively, of restricted common stock $ 8 $ 958
Forfeiture of 3,875 shares of restricted common stock in 1999 $ (34) $ --
</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, 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 three months ended March
31, 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 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
March 31, 1999 and 1998 is ($0.09) and $0.32, respectively. Common stock
equivalents with a weighted average of 613,000 are reflected in the calculation
of diluted earnings per share for the quarter ended March 31, 1998. For the
quarter ended March 31, 1999, there were 2,388,505 stock options outstanding
that were not included in the computation of diluted earnings per share. For
the quarter ended March 31, 1998, there were no stock options outstanding that
were not included in the computation of diluted earnings per share. No
adjustment to net income was made in calculating diluted earnings per share for
the quarters ended March 31, 1999 and 1998.
(3) CREDIT FACILITY
In March 1997, the Company entered into a credit agreement ("Credit
Facility") with certain banks providing financing up to $100 million to be used
for rig acquisitions and upgrades. This agreement included a revolving credit
facility available through December 31, 1999, at which point it converted into
a four-year term loan. The Credit Facility called for interest and facility
fees to be paid quarterly during the terms of both facilities. The term loan
facility provided for principal payments quarterly in equal installments
beginning March 31, 2000. Interest accrued at a rate of (i) London Interbank
Offered Rate ("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 were secured by all of the Company's rig fleet,
except for the MARINE 700, as well as certain other assets.
On August 12, 1998, the Company entered into an agreement (the
"Amended Credit Facility") with a consortium of domestic and international
banks, which amends the Credit Facility to a five-year revolver, eliminates the
term loan conversion feature and increases the credit line to $200 million. The
Amended Credit Facility is secured by substantially all of the Company's
assets, including its rig fleet. The Company and its subsidiaries will be
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) 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 March 31, 1999, $120 million was outstanding
under the Amended Credit Facility.
If currently depressed market conditions continue, the Company expects
that it will incur losses and substantially reduced EBITDA in 1999 until the
MARINE 700 and the MARINE 500 begin operations. In addition, the Company has
been substantially increasing its indebtedness under the Amended Credit
Facility to fund construction costs on the MARINE 700 and the MARINE 500. As a
result, unless there is a significant near-term improvement in market
conditions, the Company, following the second quarter of 1999, will likely be
unable to satisfy the ratio of indebtedness to EBITDA financial covenant in the
Amended Credit Facility. This covenant
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
requires the ratio of indebtedness to EBITDA for the twelve-month period ending
on any given date, to be no greater than 3.0 to 1.0. Under the Amended Credit
Facility, the Company's failure to satisfy this covenant would give the banks
the right to accelerate any outstanding amounts. The Company anticipates that
the banks will, if needed, grant the Company a limited waiver from this covenant
in part due to the Company's expectation of satisfying this covenant after the
MARINE 700 and MARINE 500 are generating revenues under their existing contracts
for several quarters. There cannot be any assurance, however, that the Company
will be able to obtain any necessary bank waivers, or that any such breach of
this financial covenant will not have a material adverse effect on the Company's
liquidity.
During the three months ended March 31, 1999, the Company incurred
$1.1 million of interest expense, including amortization of deferred financing
costs related to the Amended Credit Facility. Interest expense for the
construction and refurbishment of qualifying assets is capitalized.
Accordingly, $1.0 million of interest expense was capitalized during the
quarter ended March 31, 1999. There was no capitalized interest expense for the
quarter ended March 31, 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. ("HAM") 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 HAM 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. Construction
of the rig has progressed since the signing of the shipyard contract and
through March 31, 1999, the Company has paid HAM approximately $82 million in
progress payments and incurred approximately $90 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, the expected completion date for the MARINE 700 is now
late second quarter 1999. Additionally, due to the delays, the anticipated
construction and outfitting cost has increased to approximately $220 million.
Included in the increase over the original cost estimate is the cost of change
orders initiated by Esso, the Company's customer. Current estimates for the
cost of these change orders is approximately $6.3 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 $5,000 per day.
6
<PAGE> 9
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $48 million. In addition to this $48
million, the Company currently estimates that the OFE will cost approximately
$77 million, including capitalized interest and project management costs,
resulting in a total estimated cost to upgrade the drilling rig of
approximately $125 million. Through March 31, 1999, the Company has paid Jurong
approximately $18 million in progress payments and incurred approximately $67
million for OFE and other related construction costs. The contract anticipated
that the rig would arrive in the Singapore shipyard on July 15, 1998 and be
completed by December 31, 1998. Since the MARINE 500 did not arrive in the
shipyard until October 13, 1998 due to an extension of work under its previous
drilling contract, the Company now expects to complete construction of the
MARINE 500 during the second quarter of 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 require us
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 MARINE 510 is
currently idle in Singapore. In January 1999, the Company reached a letter
agreement with SBMGS, subject to a definitive agreement, to amend the Charter.
This amendment will allow for a variable charter hire fee equal to 60% of rig
operating profit (dayrate revenue less operating expenses) and provides an
option for the Company to extend the Charter for up to five years beyond the
original five year term. To date, the Company and SBMGS have been unable to
agree on final terms for the amendment.
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 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.
(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.
7
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MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1999
Revenues $ 19,827 $ - $ - $ 19,827
Operating Income (Loss) (788) (887) (4,273) (5,948)
Identifiable Assets 157,296 348,454 40,754 546,504
Capital Expenditures 594 69,582 231 70,407
Depreciation & Amortization 3,929 1 798 4,728
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
</TABLE>
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
MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
United States $ 19,827 $ 43,919
India - 1,299
Southeast Asia - 12,246
Long-Lived Assets:
United States 303,667 256,205
India - 13,588
Southeast Asia 159,232 106,196
Other Foreign 34,391 156
</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, 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 $ 6,578 33% $ 11,652 20%
Customer B - Jack-up Operations 2,494 13% - -
Customer C - Jack-up Operations $ 2,208 11% 1,261 2%
Customer D - Jack-up Operations - - 6,458 11%
Customer E - Semi-Operations - - 5,656 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.
8
<PAGE> 11
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 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 is increased.
The following table sets forth current rig utilization rates and
average utilization rates for the three months ended March 31, 1999 and 1998,
according to Offshore Data Services:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
AS OF ------------------------------------------
APRIL 27, 1999 1999 1998
-------------- ----------------- ----------------------
<S> <C> <C> <C>
Gulf of Mexico jack-up rigs 63% 60% 91%
Worldwide jack-up rigs 64% 68% 88%
Worldwide semi-submersible rigs 64% 67% 78%
</TABLE>
As of April 27, 1999, nine of the Company's 15 jack-up rigs are
committed under short-term contracts that will expire in the second or third
quarter of 1999, one rig is under contract for one year, and the remaining 5
rigs are idle. All of the currently committed rigs are in the U.S. Gulf of
Mexico. The Company currently has no international rigs working. In addition to
the recent declines in rig utilization, current dayrates for 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 and likely
resulting in losses in 1999 until the MARINE 700 and the MARINE 500 begin
operations.
9
<PAGE> 12
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 quarter of 1999, the
Company performed services for approximately 15 different customers. For the
quarter ended March 31, 1999, Applied Drilling Technology, Inc., a subsidiary of
Global Marine Inc., accounted for approximately 33% of the Company's total
consolidated revenues, Premier Oil Natana Sea Ltd. accounted for approximately
13% of revenues and Seagull Energy E&P, Inc. accounted for approximately 11% 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 4 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 $5,000 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 is expected to
generate aggregate dayrate revenues of approximately $298 million, 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 specific design for the MARINE 700 has not been used before
although it is a variation of a design used in a number of currently operating
rigs. In addition, the MARINE 700 is the first new-build project for the HAM
Marine, Inc. ("HAM") shipyard in Pascagoula, Mississippi constructing the rig
although HAM's parent company (Friede Goldman International, Inc.) has
significant experience and has allocated experienced supervisors to the
project.
The MARINE 700 contract requires that the rig meet certain design
specifications and construction quality standards. In addition to the design
specifications being met, the rig must be delivered by July 15, 1999. If the
Company does not deliver the rig by July 15, 1999 or fails to meet the
contractual design specifications, then Esso may cancel the contract unless the
delay is caused by Esso or its' subcontractors.
The shipyard contract for the MARINE 700 initially contemplated a
delivery date of February 17, 1999. The MARINE 700 project encountered
substantial construction, engineering, weather and other delays during the
fourth quarter of 1998 and during the beginning of 1999. In an effort to
minimize any further delays and to address significant timing and quality
concerns regarding the project raised by Esso and the Company, the shipyard and
the Company substantially increased the personnel working on the project which
has significantly increased the project's completion pace. The costs of the
increased personnel are included in the Company's current budgets for the
project. In addition, the shipyard, working together with the Company and Esso,
has enhanced, and attempted to tailor to Esso's preferences, the quality
assurance and quality control programs applicable to the project.
In the first quarter of 1999, the Company formally revised the
scheduled delivery date for the MARINE 700 to late in the second quarter of
1999 or more particularly late May 1999 or early June 1999. The Company
believes that significant construction progress on the MARINE 700 was made
during April and during May to the date of this report. However the Company's
expected delivery date has slipped further to a currently expected
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delivery date of late June 1999. Although the Company continues to believe that
the rig will be delivered by the July 15, 1999 deadline, there is a significant
risk that the Company will not meet this deadline in light of the complexity
inherent in this type of large construction project, the history of delays to
the scheduled delivery date and the relatively short time of only a few weeks
between the Company's current expected delivery date and the deadline. The
Company could encounter future weather delays, construction delays or unexpected
equipment failures and/or malfunctions during the commissioning process that
could cause a delay in rig delivery. In addition, long-term contracts for a
number of rigs owned by other contractors have been cancelled in recent months
by their customers. Those customers have cited quality problems and other
reasons to justify the cancellations, and some of those cancellations are being
contested.
The Company believes that if it were required to find an alternative
customer for the MARINE 700 under current market conditions or renegotiate with
Esso the terms of the contract based on current market conditions, then the
contract dayrate and other terms would be substantially less favorable to the
Company than the current Esso contract. In addition, there could be significant
delays in finding an alternative customer. Thus the loss of, or a renegotiation
based on current market conditions of, the Esso contract would materially
adversely affect the Company's future results of operations.
The Company has begun discussions with Esso regarding a possible
extension of the July 15, 1999 deadline and/or amendment of contract terms in
the event the rig is not delivered by July 15, 1999. These discussions are very
preliminary and have not yet resulted in an agreement or amendment to the Esso
contract. In one of these preliminary and non-binding discussions, one of
Esso's representatives raised the possibility of extending the contract
deadline in exchange for a substantial reduction of the dayrate. To date, the
Company has indicated to Esso that it is willing to agree to a significantly
smaller decrease in the current contract dayrate in return for an extension of
the deadline. There is no assurance that the Company will be able to reach
agreement with Esso on the terms of an extension, especially in light of the
fact that Esso purports to believe that there is a substantially greater
probability that the Company will miss the July 15, 1999 deadline than the
Company believes. On the other hand, there is no assurance that the Company
will not enter into an agreement with Esso that substantially reduces the
contract dayrate, in which the reduction might apply even if the Company
ultimately meets the July 15, 1999 deadline.
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 requires 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 Company does not expect the rig
to be available to commence drilling until the second quarter of 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 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, will begin when the rig leaves the shipyard in Singapore, at which time
the Company will also be entitled under the consortium drilling contract to
receive an upfront mobilization fee of $6 million. 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
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<PAGE> 14
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 require 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 MARINE 510 is
currently idle in Singapore. In January 1999, the Company reached a letter
agreement with SBMGS, subject to a definitive agreement, to amend the Charter.
This amendment will allow for a variable charter hire fee equal to 60% of rig
operating profit (dayrate revenue less operating expenses) and provides an
option for the Company to extend the Charter for up to five years beyond the
original five year term. To date, the Company and SBMGS have been unable to
agree on final terms for the amendment.
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 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.
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.
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<PAGE> 15
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,
----------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Jack-ups
Operating days 809 1,233
Utilization(1) 60% 100%
Average revenue per day $ 24,508 $ 42,024
Revenue 19,827 51,808
Contract drilling expense 16,686 21,709
Depreciation 3,929 3,409
Operating income (loss) (788) 26,690
Semi-submersibles
Operating days - 90
Utilization(1) 0% 100%
Average revenue per day $ - $ 62,839
Revenue - 5,656
Contract drilling expense 886 2,344
Depreciation 1 987
Operating income (loss) (887) 2,325
Total Company:
Operating days 809 1,323
Utilization(1) 56% 100%
Average revenue per day $ 24,508 $ 43,440
Revenue 19,827 57,464
Contract drilling expense 17,572 24,053
Depreciation and amortization 4,728 5,033
General and administrative expense 3,475 2,900
Operating income (loss) (5,948) 25,478
</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 0.0 and 0.3 non-marketed rigs during the first quarter of
1999 and 1998, respectively.
Revenues. The Company's drilling revenues decreased $37,637,000 or
65%, during the first quarter of 1999 compared to the same period in 1998. The
decrease in revenues was primarily due to decreased average daily revenue and
rig utilization for the quarter ended March 31, 1999 to $24,508 per operating
day and 56%, respectively compared to $43,440 per operating day and 100%,
respectively for the first quarter of 1998.
Contract Drilling Expenses. Contract drilling expenses during the
first three months of 1999 decreased $6,481,000 or 27% compared to the first
three months of 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 first quarter of 1999 decreased $305,000 compared to the same period 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 first quarter of 1999 increased $575,000 or 20% to $3,475,000 from
$2,900,000 in the first quarter of 1998. The increase was attributed to
non-recurring severance costs and professional service fees incurred in 1999.
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<PAGE> 16
Interest Expense. Interest expense for the first three months of 1999
was $113,000 compared to $86,000 during the first three months of 1998. The
increase was primarily the result of increased borrowings on the Amended Credit
Facility, net of capitalized interest.
Interest Income. Interest income decreased $394,000 or 73% to $143,000
in the first three months of 1999 from $537,000 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 first quarter of
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 March 31, 1999, the Company had working capital of
$5,222,000 as compared to working capital of $6,699,000 at December 31, 1998.
Net cash provided by operating activities for the three months ended March 31,
1999 decreased by $33,496,000 to $17,089,000 compared to $50,585,000 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 $46,364,000 during the first three months of 1998 to
$70,400,000 from $24,036,000 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 first
three months of 1999 consisted of $70,000,000 in proceeds from long-term debt
borrowings.
In March 1997, the Company entered into a credit agreement ("Credit
Facility") with certain banks providing financing up to $100,000,000 to be used
for rig acquisitions and upgrades. This agreement included a revolving credit
facility available through December 31, 1999 at which point, it converted into
a four-year term loan. The Credit Facility called for interest and facility
fees to be paid quarterly during the terms of both facilities. The term loan
facility provided for equal quarterly principal payments beginning March 31,
2000. Interest accrues at a rate of (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 were secured by all of the
Company's rig fleet, except for the MARINE 700, as well as certain other
assets.
On August 12, 1998, the Company entered into an agreement (the
"Amended Credit Facility") with a consortium of domestic and international
banks, which amends the Credit Facility to a five-year revolver maturing August
2003, eliminates the term loan conversion feature and increases the credit line
to $200,000,000. The Amended Credit Facility is now secured by substantially
all of the Company's assets, including its rig fleet. The Company and its
subsidiaries are required to satisfy customary lending conditions and 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) 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. The Company drew down $70,000,000 on the facility during the
first quarter of 1999, increasing total borrowings outstanding as of March 31,
1999 to $120,000,000.
If currently depressed market conditions continue, the Company expects
that it will incur losses and substantially reduced EBITDA in 1999 until the
MARINE 700 and the MARINE 500 begin operations. In addition, the Company has
been substantially increasing its indebtedness under the Amended Credit Facility
to fund construction costs on the MARINE 700 and the MARINE 500. As a result,
unless there is a significant near-term improvement in market conditions, the
Company, following the second quarter of 1999, will likely be unable to satisfy
the ratio of indebtedness to EBITDA financial covenant in the Amended Credit
Facility. This covenant requires the ratio of indebtedness to EBITDA for the
twelve-month period ending on any given date, to be no greater than 3.0 to 1.0.
Under the Amended Credit Facility, the Company's failure to satisfy this
covenant would give the banks the right to accelerate any outstanding amounts.
The Company anticipates that the banks will, if needed, grant the Company a
limited waiver from this covenant in part due to the Company's expectation of
satisfying this covenant after the MARINE 700 and MARINE 500 are generating
revenues under their existing contracts for several quarters. There cannot be
any assurance, however, that the Company will be able to obtain any necessary
bank waivers, or that any such breach of this financial covenant will not have a
material adverse effect on the Company's liquidity.
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<PAGE> 17
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
$154,000,000 beginning May 1999, upon completion of a $125,000,000 upgrade to
enable the rig to operate in water depths up to 5,000 feet.
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 provides for aggregate dayrate revenues of approximately $298,000,000
over its five-year term, which is scheduled to begin late in the second quarter
of 1999 upon completion of the construction of MARINE 700. The contract also
allows the customer to terminate the contract if the rig is not available by
July 15, 1999, unless such delay is caused by the customer or any of its
subcontractors. (See "Contracts and Customers - MARINE 700 Drilling Contract".)
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 under which HAM would
complete construction of the MARINE 700 semi-submersible drilling rig for
$87,000,000. The shipyard contract calls for HAM 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).
Construction of the rig has progressed since the signing of the shipyard
contract and through March 31, 1999, the Company has paid HAM approximately
$82,000,000 in progress payments and incurred approximately $90,000,000 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, the Company now expects to complete construction of the MARINE 700 late
in the second quarter of 1999. Additionally, the anticipated construction and
outfitting cost has increased to approximately $220,000,000. Included in the
increase over the original cost estimate is the cost of change orders initiated
by Esso, the Company's customer. Current estimates for the cost of these change
orders is approximately $6,300,000, which the Company will recover through an
increase in the dayrate during the term of the five-year drilling contract of
approximately $5,000 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 $48,000,000. In addition
to this $48,000,000, the Company currently estimates that the OFE will cost
approximately $77,000,000, including capitalized interest and project
management costs, resulting in a total estimated cost to complete the drilling
rig of approximately $125,000,000. Through March 31, 1999, the Company has paid
Jurong approximately $18,000,000 in progress payments and paid approximately
$67,000,000 for OFE and other related construction costs. The contract
anticipated that the rig would arrive in the Singapore shipyard on July 15,
1998 and be completed by December 31, 1998. Since the MARINE 500 did not arrive
in the shipyard until October 13, 1998 due to an extension of work under its
previous drilling contract, the Company now expects to complete construction of
the MARINE 500 during the second quarter of 1999.
Capital Resources. During the first quarter of 1999 the Company
expended $70,400,000 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.
In December 1998, the Company acquired the MARINE 306 (formerly the
"Maersk Explorer"), a jack-up rig currently configured as an accommodation unit
for approximately $23,000,000. Currently, the rig is idle and is located in
Rotterdam. The Company anticipates marketing the rig as an accommodation unit.
If market conditions warrant, the rig can be upgraded to competitive drilling
status for approximately $50,000,000. An upgrade could be completed in
approximately nine months. If upgraded, the rig will be outfitted with the
drilling equipment removed from the MARINE 500 during its upgrade and will be
capable of operating in the North Sea.
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<PAGE> 18
The Company expects to spend approximately $160,000,000 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 Amended
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 Amended
Credit Facility 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 expects,
as discussed above, to need a waiver under the Amended Credit Facility.
Accordingly, there can be no assurance that these resources will be sufficient
to fund the Company's cash requirements.
YEAR 2000 ISSUE
Currently, the Company utilizes third party software in all of its
computer applications. The Company's information systems personnel worked with
the third party vendors to resolve the potential problems associated with the
year 2000 and the processing of date sensitive information by its computers and
other systems. Based upon an evaluation and working with software vendors, the
Company determined that upgrading its existing accounting software to a current
version would enable the computer systems to function properly with respect to
dates in the year 2000 and thereafter, with minimal cost to the Company. This
upgrade has been completed. The Company is still evaluating the effect of the
Year 2000 on non-information technology systems, including telephone systems,
office and rig-based electronic equipment and devices with embedded
microprocessors. Additionally, the Company is currently contacting all key
vendors and suppliers 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. The Company anticipates completion of its evaluation of
non-information technology equipment, key vendors and suppliers and any
remedial action and/or a contingency plan, if necessary, by mid-1999. 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 completed on time or if the Company's Year 2000 issues are
more complicated or costly than the Company currently estimates, the Year 2000
issue could have a material adverse impact on 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 on the Company's
financial position, results of operations or cash flows in future periods.
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 is effective for fiscal years beginning after June 15, 1999. The Company
does not expect SFAS No. 133 to have a material effect on its reported results.
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<PAGE> 19
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 three months ended March 31,
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 the Company's failure to deliver the
rig on time and in accordance with contract specifications 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.
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 Amended Credit Facility. Interest
on borrowings under the Amended 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. At March 31, 1999, the Company had $120 million outstanding
under its Amended Credit Facility. Based upon this balance, an immediate change
of one percent in the interest rate would cause a change in interest expense of
approximately $1.2 million on an annual basis. The Company's objective in
maintaining these variable rate borrowings is the flexibility obtained
regarding early repayment without penalties and lower overall cost as compared
with fixed-rate borrowings.
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.
17
<PAGE> 20
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 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:
No reports on Form 8-K were filed during the first quarter of 1999
18
<PAGE> 21
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 10, 1999 By /s/ T. Scott O'Keefe
----------------------------------------
T. Scott O'Keefe
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1999 By /s/ Dale W. Wilhelm
----------------------------------------
Dale W. Wilhelm
Vice President and Controller
(Principal Accounting Officer)
19
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER 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.)
<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 April 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
April 27, 1999
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