-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A8AlsIalX/3aMcMECLv9x6XxdS+6k9P80Upu0i6XxBmcGjyNLIvVMnNz88a00Kad TVoDo9NSYV5czNffvzdngA== 0000950129-96-000782.txt : 19960513 0000950129-96-000782.hdr.sgml : 19960513 ACCESSION NUMBER: 0000950129-96-000782 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960510 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINE DRILLING COMPANIES INC CENTRAL INDEX KEY: 0000860521 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 742558926 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18309 FILM NUMBER: 96558899 BUSINESS ADDRESS: STREET 1: ONE SUGAR CREEK CENTER BLVD CITY: SUGAR LAND STATE: TX ZIP: 77478-3435 BUSINESS PHONE: 7132433000 FORMER COMPANY: FORMER CONFORMED NAME: MARINE HOLDING CO DATE OF NAME CHANGE: 19910707 10-Q 1 MARINE DRILLING COMPANIES, INC. - 03/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO ----------------------- --------------------- COMMISSION FILE NUMBER: 0-18309 ------------------------------ MARINE DRILLING COMPANIES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2558926 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556 (Address of principal executive offices and zip code) (713) 243-3000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (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 30, 1996 -- 44,203,109 ================================================================================ 2 MARINE DRILLING COMPANIES, INC. FORM 10-Q TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1. Index to Financial Statements Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Balance Sheets -- March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Operations -- Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 7 PART II - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SIGNATURES
(i) 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, 1996, and the related consolidated statements of operations and cash flows for the three month periods ended March 31, 1996 and 1995. These consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented here); and in our report dated January 26, 1996, 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, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG PEAT MARWICK LLP Houston, Texas April 26, 1996 1 4 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 15,141 $ 12,260 Accounts receivable - trade and other, net 15,135 18,078 Inventory 1,269 1,272 Prepaid expenses and other 1,275 1,380 ------------ ------------ Total current assets 32,820 32,990 Property and Equipment 129,947 123,442 Less accumulated depreciation 24,759 22,090 ------------ ------------ Property and equipment, net 105,188 101,352 Other 190 203 ------------ ------------ $ 138,198 $ 134,545 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,500 $ 1,000 Accounts payable 4,627 5,721 Accrued expenses 2,456 1,927 Employer's liability claims, current 1,535 1,026 ------------ ------------ Total current liabilities 10,118 9,674 Long-Term Debt 8,500 9,000 Employer's Liability Claims, non-current 1,460 2,155 Deferred Income Taxes 6,711 6,144 Shareholders' Equity: Common stock, par value $.01. Authorized 200,000,000 shares; issued 44,217,143 and outstanding 44,021,250 shares as of March 31, 1996; issued 44,169,643 and outstanding 43,635,433 shares as of December 31, 1995 442 442 Common stock restricted (649) (505) Treasury stock, at cost (195,893 shares in 1996 and 534,210 shares in 1995) (710) (2,016) Additional paid-in capital 93,540 92,720 Retained earnings from January 1, 1993 18,786 16,931 ------------ ------------ Total shareholders' equity 111,409 107,572 ------------ ------------ Commitments and contingencies $ 138,198 $ 134,545 ============ ============
See notes to consolidated financial statements and accompanying accountants' review report. 2 5 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 1996 1995 ------------ ------------ Revenues $ 21,239 $ 12,545 Costs and Expenses: Contract drilling 13,532 13,875 Depreciation and amortization 2,697 2,144 General and administrative 1,410 1,752 ------------ ------------ 17,639 17,771 ------------ ------------ Operating income (loss) 3,600 (5,226) ------------ ------------ Other Income (Expense): Interest expense (181) (299) Interest income 192 458 Other income (expense) 58 86 ------------ ------------ 69 245 ------------ ------------ Income (loss) before income taxes 3,669 (4,981) Income tax expense (benefit) 1,357 (1,744) ------------ ------------ Net income (loss) $ 2,312 $ (3,237) ============ ============ Income (loss) per common share $ 0.05 $ (0.07) ============ ============ Weighted average common shares outstanding 43,804,288 44,033,448 ============ ============
See notes to consolidated financial statements and accompanying accountants' review report. 3 6 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 1996 1995 ------------ ------------ Cash Flows From Operating Activities: Net income (loss) $ 2,312 $ (3,237) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 567 (1,828) Tax benefits related to common stock issued pursuant to long-term incentive plan 652 85 Depreciation and amortization 2,697 2,144 Gain on disposition of equipment (57) (115) Accrual of compensation expense, net 96 118 Issuance of common stock to the employee retirement plan and the Non-Employee Directors' Plan 214 230 Changes in operating assets and liabilities: Receivables 2,943 3,590 Other current assets 108 663 Payables, accrued expenses and employer's liability claims (751) 2,006 Other -- 30 ------------ ------------ Net cash provided by operating activities 8,781 3,686 ------------ ------------ Cash Flows From Investing Activities: Proceeds from matured short-term investments -- 16,150 Purchase of equipment (6,660) (4,325) Proceeds from disposition of equipment 197 218 ------------ ------------ Net cash provided by (used in) investing activities (6,463) 12,043 ------------- ------------ Cash Flows From Financing Activities: Proceeds from exercise of stock options 563 150 Payments of debt -- (5,000) Purchase of treasury stock -- (522) ------------ ------------ Net cash provided by (used in) financing activities 563 (5,372) ------------ ------------ Net increase in cash and cash equivalents 2,881 10,357 Cash and cash equivalents at beginning of period 12,260 18,872 ------------ ------------ Cash and cash equivalents at end of period $ 15,141 $ 29,229 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 219 $ 299 Income taxes paid $ 73 $ (1) SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 47,500 and 43,500 shares in 1996 and 1995, respectively, of restricted common stock $ 240 $ 108
See notes to consolidated financial statements and accompanying accountants' review report. 4 7 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 (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, 1996 included herein has been subjected to a limited review by KPMG Peat Marwick LLP, the Registrant's independent public accountants, whose report is included herein. These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results of operations that may be expected for the year. (2) RECLASSIFICATION OF ACCOUNTS Certain reclassifications have been made to the 1995 consolidated financial statements to conform with the 1996 presentation. (3) INCOME TAXES Income taxes consist of the following:
THREE MONTHS ENDED MARCH 31, --------------------------- 1996 1995 ----------- ------------- (IN THOUSANDS) Current: U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65 $ -- State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1) Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 -- ----------- ------------ 138 (1) ----------- ------------- Other: U.S. federal - deferred . . . . . . . . . . . . . . . . . . . . . 567 (1,828) Tax benefits related to common stock issued pursuant to long- term incentive plan . . . . . . . . . . . . . . . . . . . . . . 652 85 ----------- ------------ 1,219 (1,743) ----------- ------------ Total tax provision (benefit) . . . . . . . . . . . . . . . . . . . $ 1,357 $ (1,744) =========== ============
5 8 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) For the three months ended March 31, 1996, the effective tax rate of 37% for financial reporting purposes approximates the U.S. federal statutory rate of 35%, plus the effect of foreign taxes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 1996 and December 31, 1995 are presented below.
MARCH 31, DECEMBER 31, 1996 1995 -------------- ------------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . . . $ 30,796 $ 31,361 Investment tax, general business and alternative tax credit carryforwards . . . . . . . . . . . . . . . . . . 10,465 11,356 Employer's liability claims . . . . . . . . . . . . . . . . . . 1,048 1,113 Allowance for bad debts . . . . . . . . . . . . . . . . . . . . 45 45 ------------ ------------- Total gross deferred tax assets . . . . . . . . . . . . . . . . 42,354 43,875 Less valuation allowance . . . . . . . . . . . . . . . . . . . . (35,745) (36,738) ------------- ------------- Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 6,609 7,137 ------------ ------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation . . . . . . . . . . . . . . . . . . . . . . . 12,015 11,896 Deferred intercompany gains and losses . . . . . . . . . . . . . 1,305 1,385 ------------ ------------- Total gross deferred tax liabilities . . . . . . . . . . . . . . 13,320 13,281 ------------ ------------- Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 6,711 $ 6,144 ============ =============
(4) NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share for the three months ended March 31, 1996 and 1995 excludes the effect of outstanding stock options inasmuch as the potential dilution from their exercise is less than three percent. (5) COMMITMENTS AND CONTINGENCIES The Company is a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to the Company's financial position or results of operations. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Demand for offshore drilling services is primarily driven by the economics of oil and gas exploration, development and production, which in turn, are closely linked to current and projected oil and gas prices. Since the mid-1980's, oil and gas prices have been unstable and generally lower than prices experienced during the early 1980's, resulting in volatile and generally reduced demand for offshore drilling services. In addition, during the early 1980's, the industry built a substantial number of new offshore drilling rigs. Since 1993, the worldwide jack-up market has shown general improvement compared to the 1986-1992 period. This improvement can be generally attributed to improved jack-up rig demand and a continuing reduction in jack-up rig supply. Although this period can be characterized as showing general improvement, certain significant jack-up markets have experienced short periods of reduced rig demand and/or excess rig supply. During those periods of low rig utilization, day rates were adversely impacted and drilling contractors competing in those markets suffered poorer financial results until rig demand improved or rigs left those markets for other markets. DRILLING MARKETS AND UTILIZATION General Historically, the Company has derived substantially all of its revenues from offshore drilling in the U.S. Gulf of Mexico and in the Bay of Campeche. Three of the Company's rigs, MARINE 300, MARINE 304 and MARINE 201, are configured to work in international markets outside the U.S. Gulf of Mexico and the Bay of Campeche. In addition, the Company has recently fabricated quarters for the MARINE 303 in order to facilitate that rig's use in international markets. These additions could be added to the rig in a relatively short time frame to allow that rig to obtain an international contract. The Company's other rigs could, if applicable modifications were made and certifications obtained, operate in certain areas outside of the U.S. Gulf of Mexico and the Bay of Campeche. The Company's rigs are not, however, suitable for areas, such as the North Sea, that require hostile environment operating capabilities. Most of the world's significant jack-up drilling markets have recently experienced improved rig utilization and day rates. According to Offshore Data Services, as of April 30, 1996, worldwide jack-up utilization was 84% (321 rigs working out of a supply of 384 rigs) compared to 73% (286 rigs working out of a supply of 390 rigs) during the first three months of 1995, while jack-up utilization outside of the U.S. Gulf of Mexico was 82% (203 rigs working out of a supply of 247 rigs) compared to 77% during the first three months of 1995. Due to the highly cyclical nature of the offshore drilling business, the Company is seeking to obtain longer term contracts for the employment of its rigs. These contacts help to mitigate the cycliciity of the Company's results. Historically, most longer term contracts have been available primarily in international markets. Accordingly, the Company is marketing certain of its rigs in selected international markets with a view to obtaining longer term contracts. The Company will also seek to obtain, however, longer term contracts, to the extent available, in the U.S. Gulf of Mexico. 7 10 U.S. Gulf of Mexico The jack-up drilling market in the U.S. Gulf of Mexico is highly competitive. A significant number of offshore drilling companies have rigs in this market and, as a result, no one contractor is able to materially affect pricing levels. Day rates can and have fluctuated significantly on relatively small changes in the rig supply and demand situation in this market. Throughout the period from late 1992 through 1994, jack-up operations in the U.S. Gulf of Mexico were characterized by improving rig demand. In late 1994 and early 1995, however, the combination of reduced jack-up demand and increased rig supply had a depressing effect on U.S. Gulf of Mexico operations. During this period of reduced utilization, day rate levels fell and contractors experienced reduced levels of earnings. Since mid-1995, a combination of improved jack-up rig demand and mobilizations of rigs to improving international markets has resulted in improved jack-up day rates and utilization. With 12 of its 13 rigs located in the U.S. Gulf of Mexico, the Company is well positioned to benefit from any upturn in that market. The improved utilization of jack-up rigs in the U.S. Gulf of Mexico during the third and fourth quarters of 1995 continued in the first quarter of 1996. The industry wide utilization of jack-up rigs in the U.S. Gulf of Mexico as of April 30, 1996, was 86%, as compared with an average of 67% for the first three months of 1995. Bay of Campeche During most of 1993 and early 1994, demand for jack-up rigs was strong in the Bay of Campeche, offshore Mexico in the southern Gulf of Mexico. The Bay of Campeche drilling market, however, generally deteriorated in late 1994 and early 1995. The Company contracted two of its rigs (the MARINE 301 and the MARINE 303) into this market in late 1992 and another (the MARINE 300) in mid-1993. The first two rigs completed their contracts in late 1993 and early 1994, respectively, and subsequently returned to the U.S. Gulf of Mexico. The third rig completed its contract and returned to the U.S. Gulf of Mexico in May, 1995. Although Mexico has devalued its currency and is currently experiencing a recession, the Company is continuing to actively market its fleet in the Bay of Campeche. The demand for rigs in the Bay of Campeche has dropped from a high of 22 rigs in 1993 to 7 rigs in 1995. The utilization rate in the Bay of Campeche at the end of 1995 was approximately 58% for all rigs. Recently, however, drilling activity has improved and the Company expects that jack-up rig demand and utilization will increase during the remainder of 1996. India In August 1995, the Company entered into a one-year term contract for the MARINE 201 to operate off the east coast of India. Under the contract, the customer has options to extend the contract for up to eight three-month extension periods. The rig reached India during the second week of November and drilling operations commenced shortly thereafter. Demand for jack-ups in India has generally averaged between 20 to 25 rigs during the past few years. During this time, the supply of rigs has generally been equal to demand resulting in utilization rates of 90% to 100%. The government of India recently approved investment by non-Indian energy companies. As a result of these investments, jack-up rig demand has recently increased, and most industry analysts expect that demand could increase further in the next few months. 8 11 The following table sets forth certain industry and Company historical data for the periods indicated. Industry data includes many rigs that are dissimilar to the Company's rigs in terms of performance capabilities, age, operational criteria and environmental capabilities. Certain of the Company's competitors operate rigs other than jack- up rigs that can compete with jack-up rigs under certain circumstances.
THREE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------ -------------------- 1996 1995 1995 1994 ---- ---- ---- ---- INDUSTRY:(a) U.S. Gulf of Mexico: Total jack-up rig . . . . . . . . . . . . . . 137.2 140.5 140.1 135.8 Working jack-up rigs . . . . . . . . . . . . . 113.5 94.3 104.6 102.9 Utilization . . . . . . . . . . . . . . . . . 83% 67% 75% 76% All other markets: Total jack-up rigs . . . . . . . . . . . . . . 246.7 249.5 246.7 255.5 Working jack-up rigs . . . . . . . . . . . . . 203.3 191.7 197.5 192.5 Utilization . . . . . . . . . . . . . . . . . 82% 77% 80% 75% COMPANY:(b) Total jack-up rigs . . . . . . . . . . . . . . 13 13 13.0 12.1 Working jack-up rigs . . . . . . . . . . . . . 11.1 7.6 8.9 9.8 Utilization . . . . . . . . . . . . . . . . . 85% 58% 69% 81% Non-marketed rigs . . . . . . . . . . . . . . 1.2 2.9 3.0 0.8 Utilization of marketed rigs . . . . . . . . . 94% 75% 89% 87% Average day rates(c) . . . . . . . . . . . . . $21,026 $18,357 $19,289 $19,686
- ------------------------- (a) Average of weekly data published by Offshore Data Services. (b) The numbers included in the table represent the average number of rigs operated by the Company for the periods indicated. (c) ``Average day rate'' is determined by dividing the total gross revenue earned by the Company's rigs during a given period by the total number of days that the Company's rigs were under contract and working during that period. COMPETITION The offshore contract drilling market is highly competitive with a large number of contractors competing for available work. Drilling contracts are generally awarded on a competitive bid basis. Pricing and rig water depth capabilities are generally the most important competitive factors in the drilling industry. Other competitive factors include the technical capabilities of specialized drilling equipment and personnel, operational experience, rig suitability, efficiency, equipment condition, safety record, reputation and customer relations. The Company seeks to capitalize on customer recognition of the Company's safety record, crew quality and the quality of its service and equipment. Many of the Company's competitors, however, are larger, or are subsidiaries of larger companies, and have greater financial resources and more diverse fleets than the Company, which may enable them to better withstand industry downturns, to compete more effectively on the basis of price, to build new rigs or to acquire existing rigs that become available for purchase. 9 12 DRILLING OPERATIONS AND CUSTOMERS The Company's existing drilling contracts provide for compensation on a "daywork" basis. Under daywork contracts, the Company receives a fixed amount per day for providing drilling services using the rigs it operates. Under most daywork contracts, the customer also pays the cost of moving the rig and related equipment to the job site and the costs of drilling the well (other than the costs of operating the rig, which are borne by the drilling contractor). Daywork contracts may provide for lower rates during periods when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather or water conditions or other conditions beyond the control of the Company. Historically, the Company has not marketed its rigs under fixed price or turnkey contracts. FINANCIAL CONDITION -- GENERAL The following is a discussion of the Company's financial condition, results of operations, historical financial resources and working capital. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in Item 1 of this report. FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources The Company had working capital at March 31, 1996 of $22,702,000 as compared to working capital of $23,316,000 at December 31, 1995. Net cash provided by operating activities was $8,781,000 for the three months ended March 31, 1996 compared to $3,686,000 for the three months ended March 31, 1995, an increase of $5,095,000 or 138%. Cash used in investing activities was $6,463,000 for the three months ended March 31, 1996 resulting primarily from the purchases of equipment of $6,660,000 compared to cash provided by investing activities of $12,043,000 for the three months ended March 31, 1995. Capital expenditures for the three months ended March 31, 1996 consisted of (i) drill pipe purchases, (ii) the addition of a top drive drilling system and other upgrades to the MARINE 15, (iii) the installation of a top drive drilling system and the fabrication of additional leg sections for the MARINE 300 and (iv) the fabrication of international quarters for the MARINE 303. Net cash provided by financing activities was $563,000 consisting of common stock option exercises. Outlook In late 1994, the Company commenced a program (the ''Rig Upgrade Program'') to upgrade the operational capabilities of certain of its rigs. This program includes the following upgrades: (i) converting the power systems of selected mechanically powered rigs, (ii) adding top drive drilling systems to selected rigs and (iii) other potential rig upgrades such as (a) increased water depth ratings and (b) additions of cantilever features to slot type rigs. Future expenditures for the Rig Upgrade Program will be subject to the Company's outlook for drilling market conditions, as well as changes in the Company's financial condition. 10 13 The Company continues to pursue the acquisition of additional drilling rigs to enhance its fleet. At this time, however, the Company has no planned or pending rig acquisitions. Future acquisitions, if any, would likely be funded from the Company's working capital or through debt and/or equity financing. The Company cannot predict whether it would be successful in acquiring additional rigs, and obtaining financing therefor, on acceptable terms. Depending upon the Company's success in acquiring rigs in the future, as well as future industry conditions, the Company may elect to defer or suspend portions of the Rig Upgrade Program discussed in the preceding paragraph in order to preserve its working capital resources. At this time, the Company estimates its 1996 capital expenditures to be approximately $9,400,000, including the $6,660,000 spent in the first quarter, consisting of (i) drill pipe expenditures, (ii) the addition of a top drive drilling system and the fabrication of components to increase the water depth of the MARINE 300, (iii) the fabrication of international quarters for the MARINE 303, (iv) completion of the reactivation, refurbishment, power system conversion and installation of a top drive drilling system to the MARINE 15 and (v) other miscellaneous expenditures. On December 1, 1994, Keyes Holding Corporation ("KHC"), a wholly-owned subsidiary of the Company, entered into a revolving credit/term loan agreement with a U.S. financial institution pursuant to which KHC may, subject to the conditions stated in the agreement, borrow up to the lesser of (i) $35,000,000, or (ii) 50% of the appraised value of MARINE 300, 301 and 303. The agreement includes an 18-month revolving credit facility which is convertible on June 1, 1996 into a three-year term loan facility. The term loan is amortized monthly at the rate of 20% of the initial term loan amount per year with a balloon payment for the remaining principal (40% of the initial term loan amount) due at the maturity of the term loan. The agreement provides that the amounts borrowed will bear interest at floating rates equal to LIBOR + 2.5%. The minimum borrowing under the revolving credit facility is $10,000,000. If on June 1, 1996, KHC elects to convert less than $10,000,000 into a term loan, it will be required to pay a non-utilization fee equal to 2% of the excess of $10,000,000 over the amount converted. As of March 31, 1996, the related debt outstanding was $10,000,000 and the amount available under the line of credit was $25,000,000. Loan proceeds may be used to purchase additional jack-up drilling rigs or to make capital improvements to the Company's existing drilling rig fleet. The Company has guaranteed up to $8,750,000 of the borrowings under the loan agreement. The borrowings under the agreement are secured by a mortgage on the MARINE 300, MARINE 301 and MARINE 303. Reduced rig demand in the U.S. Gulf of Mexico drilling market in early 1995 adversely affected the Company's operations and cash flow. As a result, the Company elected to suspend the marketing of three rigs. These rigs were deactivated in a common offshore location and, after preparation for extended idle time, were maintained periodically by a small maintenance crew. As of the date of this report, all of these rigs have been reactivated and are under contract. On March 7, 1995, the Company announced that its Board of Directors had authorized the repurchase of up to 4,000,000 shares of the Company's Common Stock. The action reflects the Company's view that its shareholders would benefit from such repurchases. The repurchases may be effected, from time to time, in accordance with applicable securities laws, through solicited or unsolicited transactions in the market or in privately negotiated transactions. No limit was placed on the duration of the repurchase program. Subject to applicable securities 11 14 laws, such repurchases shall be at such time and in such amounts as the Company deems appropriate. The Company will fund such repurchases from working capital. During 1995, the Company purchased 735,633 shares of its common stock at an average price of $3.61 per share (aggregate value $2,659,000) pursuant to the repurchase program. A portion of these shares (201,423 shares) were subsequently reissued (i) to fund the Company's contributions to its 401(k) plan, (ii) to provide stock for stock option exercises pursuant to its employees long term incentive plan and (iii) to remunerate certain non-employee directors pursuant to the Company's directors compensation plan. During the first quarter of 1996, no shares were repurchased by the Company; however, 338,317 shares were reissued to fund the Company's contributions to its 401(k) plan and to provide stock option exercises pursuant to the employee long term incentive plan. At March 31, 1996, the aggregate number of treasury shares held by the Company was 195,893 and the number of shares authorized for repurchase pursuant to its repurchase program was 3,804,107. The Company believes that its available funds, together with cash generated from operations and amounts that may be borrowed under the revolving credit/term loan facility, will be sufficient to fund its capital expenditure, working capital and debt service requirements for the foreseeable future. Future cash flows, however, are subject to a number of uncertainties, particularly the condition of the oil and gas industry. Accordingly, there can be no assurance that these resources will be sufficient to fund the Company's cash requirements. RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 Revenues Revenues for the first quarter of 1996 increased $8,694,000 (69%) from $12,545,000 to $21,239,000 compared to the same period in 1995. The increase in revenues was the result of three factors: (i) a 15% increase in average day rates from $18,357 in 1995 to $21,026 in 1996, (ii) an increase in the number of marketed rigs from 10.1 in 1995 to 11.8 in 1996 and (iii) an increase in utilization of marketed rigs from 75% in 1995 to 94% in 1996. The increases in utilization and average day rates resulted from increased drilling activity in the U.S. Gulf of Mexico. Costs and Expenses Contract drilling expenses for the first quarter of 1996 decreased $343,000 (2%) from $13,875,000 to $13,532,000 compared to the same period in 1995. This decrease is primarily the result of the implementation of a new operating cost structure. Other contributing factors include decreases in employers liability claims offset by increased insurance costs and decreases in major repairs and maintenance during the 1996 period. Depreciation and amortization expense for the first quarter of 1996 increased $553,000 (26%) from $2,144,000 to $2,697,000 compared to the same period in 1995. The increase resulted primarily from the costs associated with the acquisition and refurbishment of the MARINE 201, the addition of a top drive and related equipment on the MARINE 16 and other capital expenditures. 12 15 General and administrative expenses decreased $342,000 (20%) from $1,752,000 for the first quarter of 1995 to $1,410,000 for the same period in 1996. The decrease in the first quarter of 1996 was primarily the result of decreased labor costs in the first quarter of 1996 and a decrease in professional services and other administrative expenses. Interest Expense Interest expense for the first quarter of 1996 was $181,000 and consisted of the following: (i) interest of $203,000 based on an average rate of 8.1% with an average balance of $10,000,000; (ii) credit facility fees of $16,000 based on a .25% rate with an average unused balance of $25,000,000 and (iii) offset by capitalized interest of approximately $38,000. Interest expense for the first quarter of 1995 was $299,000. Interest Income Interest income decreased $266,000 from $458,000 for the first quarter of 1995 to $192,000 for the same period in 1996. The decrease was related primarily to decreases in cash balances and interest rates. Income Taxes Income taxes for the first quarter of 1996 consisted of current portion of U.S. federal alternative minimum tax, current foreign taxes of $73,000, deferred U.S. federal tax benefits of $567,000 and tax benefits related to common stock issued pursuant to the long term incentive plan of $652,000. 13 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has various claims filed against its subsidiaries in the ordinary course of business, particularly claims alleging personal injuries. It is the belief of management that the Company has established adequate reserves for any liabilities which may reasonably be expected to result from these claims. In the opinion of management, no pending claims, actions or proceedings against the Company would have a material adverse effect on its financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. Description 15 Letter regarding unaudited interim financial information 27 Financial Data Schedule (Exhibit 27 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the U.S. Securities and Exchange Commission.) (b) Reports on Form 8-K: One report on Form 8-K was filed during the first quarter of 1996. (1) Report of the Company dated March 18, 1996 regarding the retirement of William O. Keyes from its board of directors and as President, Chief Executive Officer and Chairman of the Board effective May 9, 1996. 14 17 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 9, 1996 By /s/ WILLIAM H. FLORES ------------------------------ William H. Flores Chief Operating Officer Senior Vice President - Chief Financial Officer and Director (Principal Financial Officer) Date: May 9, 1996 By /s/ Joan R. Smith Joan R. Smith Vice President, Controller and Secretary (Principal Accounting Officer) 15 18 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBITS - --------- -------- 15 Letter regarding unaudited interim financial information 27 Financial Data Schedule
EX-15 2 LETTER REGARDING UNAUDITED INTERIM FIN. INFO. 1 EXHIBIT 15 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION The Board of Directors and Shareholders Marine Drilling Companies, Inc.: Re: Registration Statement No. 33-56920 on Form S-8 dated January 11, 1993 No. 33-54909 on Form S-3 dated August 3, 1994 No. 33-61901 on Form S-8 dated August 17, 1995 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated April 26, 1996, related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered part of a registration statement prepared or certified by an accountant within the meanings of Sections 7 and 11 of the Act. KPMG PEAT MARWICK LLP Houston, Texas April 26, 1996 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 MAR-31-1996 15,141 0 15,135 0 1,269 32,820 129,947 24,759 105,188 10,118 0 442 0 0 110,967 138,198 21,239 21,239 13,532 13,532 2,697 0 181 3,669 1,357 2,312 0 0 0 2,312 .05 0
-----END PRIVACY-ENHANCED MESSAGE-----