-----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, Mko7RxDe4JOJpbV2s4RC3uZzRKiEEJvMpeBsxW3GvGTms43YHq5xLReZyHj9ye0d JGsdThuohezP/4QmMcpU2Q== 0000950129-00-002280.txt : 20000511 0000950129-00-002280.hdr.sgml : 20000511 ACCESSION NUMBER: 0000950129-00-002280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 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: SEC FILE NUMBER: 001-14389 FILM NUMBER: 625016 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. - DATED 3/31/2000 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, 2000 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: 1-14389 MARINE DRILLING COMPANIES, INC. (Exact name of registrant as specified in its charter) TEXAS 74-2558926 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556 (Address of principal executive offices and zip code) (281) 243-3000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and formal fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MAY 2, 2000-- 58,313,028 ================================================================================ 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, 2000 (unaudited) and December 31, 1999........................................ 2 Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 2000 and 1999.............................................. 3 Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2000 and 1999.............................................. 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.................................... 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................................................. 16 Item 6. Exhibits and Reports on Form 8-K.............................................................. 16 SIGNATURES.............................................................................................. 17
(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, 2000, the related consolidated statements of operations for the three-month periods ended March 31, 2000 and 1999, and the related consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999. 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, 1999, 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 25, 2000, 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, 1999 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 26, 2000 1 4 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
MARCH 31, December 31, 2000 1999 --------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 4,097 $ 4,664 Accounts receivable - trade and other, net 36,005 29,332 Income tax receivable -- 18,904 Prepaid expenses and other 726 2,091 Inventory 440 402 --------- ------------ Total current assets 41,268 55,393 Property and equipment 723,106 705,351 Less accumulated depreciation 107,969 97,511 --------- ------------ Property and equipment, net 615,137 607,840 Other 2,508 2,909 --------- ------------ $ 658,913 $ 666,142 ========= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,658 $ 13,919 Accrued expenses 10,776 9,998 Employer's liability claims, current 991 660 --------- ------------ Total current liabilities 20,425 24,577 Long-term debt 150,000 180,000 Other non-current liabilities 3,383 4,406 Deferred income taxes 46,997 44,414 Shareholders' equity: Common stock, par value $.01. Authorized 200,000,000 shares; issued and outstanding 58,307,892 and 57,199,489 shares, as of March 31, 2000 and December 31, 1999, respectively 583 572 Common stock restricted (912) (1,073) Additional paid-in capital 283,732 263,319 Retained earnings from January 1, 1993 154,705 149,927 --------- ------------ Total shareholders' equity 438,108 412,745 --------- ------------ Commitments and contingencies -- -- --------- ------------ $ 658,913 $ 666,142 ========= ============
See notes to consolidated financial statements and accompanying auditors' review report. 2 5 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 -------- -------- Revenues $ 52,480 $ 19,827 Costs and Expenses: Contract drilling 27,620 17,572 Depreciation and amortization 10,803 4,728 General and administrative 3,452 3,475 -------- -------- 41,875 25,775 -------- -------- Operating income (loss) 10,605 (5,948) -------- -------- Other Income (expense): Interest expense (3,433) (113) Interest income 196 143 Other income (expense) 355 (45) -------- -------- (2,882) (15) -------- -------- Income (loss) before income taxes 7,723 (5,963) Income tax expense (benefit) 2,945 (1,195) -------- -------- Net income (loss) $ 4,778 $ (4,768) ======== ======== Earnings (loss) per share: Basic $ 0.08 $ (0.09) Diluted $ 0.08 $ (0.09) Average common shares: Basic 58,136 52,402 Diluted 58,957 52,402
See notes to consolidated financial statements and accompanying auditors' review report. 3 6 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 ---------- ---------- Cash Flows From Operating Activities: Net income (loss) $ 4,778 $ (4,768) Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 2,583 (1,927) Tax benefits related to common stock issued pursuant to long-term incentive plan -- 127 Depreciation and amortization 10,803 4,728 Changes in operating assets and liabilities: Receivables (6,673) 9,119 Income tax receivable 18,904 -- Other current assets 1,327 2,187 Payables, accrued expenses and employer's liability claims (5,175) 6,412 Other 1,172 1,211 ---------- ---------- Net cash provided by operating activities 27,719 17,089 ---------- ---------- Cash Flows From Investing Activities: Purchase of equipment (18,150) (70,407) Proceeds from disposition of equipment 313 7 ---------- ---------- Net cash used in investing activities (17,837) (70,400) ---------- ---------- Cash Flows From Financing Activities: Proceeds from long-term debt -- 70,000 Payments on long-term debt (30,000) -- Proceeds from sale of common stock 18,461 -- Proceeds from exercise of stock options 1,090 -- ---------- ---------- Net cash provided by (used in) financing activities (10,449) 70,000 ---------- ---------- Net increase (decrease) in cash and cash equivalents (567) 16,689 Cash and cash equivalents at beginning of period 4,664 12,576 ---------- ---------- Cash and cash equivalents at end of period $ 4,097 $ 29,265 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 3,388 $ 967 Income taxes paid 146 3,011 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of 0 and 500 shares in 2000 and 1999 respectively, of restricted common stock $ -- $ 8 Forfeitures of 600 and 3,875 shares in 2000 and 1999 respectively, of restricted common stock (10) (34)
See notes to consolidated financial statements and accompanying auditors' review report. 4 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, 2000 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, 1999. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results of operations that may be expected for the year. (2) EARNINGS PER SHARE The Company's basic earnings (loss) per share, which is based upon the weighted average common shares outstanding - without the dilutive effects of common stock equivalents (options, warrants, etc.), for the quarters ended March 31, 2000 and 1999 is $0.08 and $(0.09), respectively. Common stock equivalents with a weighted average of 820,139 is reflected in the calculation of diluted earnings per share for the quarter ended March 31, 2000. For the quarter ended March 31, 2000, there were 205,000 stock options outstanding which were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common shares. For the 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. No adjustment to net income was made in calculating diluted earnings per share for the quarters ended March 31, 2000 and 1999. (3) CREDIT FACILITY On August 12, 1998, the Company entered into a credit agreement (the "Credit Facility") with a consortium of domestic and international banks providing financing of up to $200 million to be used for rig acquisitions and upgrades as well as for general corporate purposes. The Credit Facility is a five-year revolving credit facility and is secured by substantially all of the Company's assets, including its rig fleet. The Company and its subsidiaries are required to comply with various covenants and restrictions, including, but not limited to, the maintenance of financial ratios and the restriction on payments of dividends. Interest accrues at a rate of (i) London Interbank Offered Rate ("LIBOR") plus a margin determined pursuant to a debt to EBITDA calculation or (ii) prime rate if a Base Rate Loan. On September 21, 1999, the Company amended the Credit Facility. The significant elements of the amendment include (i) an increase in the maximum permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1, (ii) a modification to the definition of EBITDA to give pro forma effect to certain newly acquired assets or long-term contracts, and (iii) a change to the definition of working capital to include any available commitments under the Credit Facility for purposes of satisfying the positive working capital requirement. Also, the margin over LIBOR that the Company pays under the Credit Facility was increased from a range of 75 to 125 basis points to 100 to 250 basis points. As of March 31, 2000, $150 million was outstanding under the Credit Facility. Subsequent to March 31, 2000, the Company has made $5 million in principal payments, reducing the outstanding debt balance under the Credit Facility to $145 million as of May 2, 2000. 5 8 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the quarter ended March 31, 2000, the Company incurred $3.4 million of interest expense, including amortization of deferred financing costs related to the Credit Facility. Interest expense for the construction and refurbishment of qualifying assets is capitalized. Accordingly, $1.0 million of interest expense was capitalized during the quarter ended March 31, 1999. There was no capitalized interest expense for the three months ended March 31, 2000. (4) COMMITMENTS AND CONTINGENCIES India Lawsuit -- Jagson International Limited ("Jagson"), an Indian entity, has brought suit against Marine Drilling Companies, Inc. and one of its subsidiaries, 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. Other 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. Marketing Agreement for NANHAI VI. In August 1998, the Company entered into an agreement effective through October 1, 1999, with the Peoples Republic of China's Southern Drilling Company to market the 1,500-foot water depth rated semi-submersible NANHAI VI outside China. The agreement has been extended through December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling rig, which was built in 1982 and modified and refurbished in 1995. 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 rig is technically and economically suitable to be upgraded to 5,000-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. Pursuant to the marketing agreement, 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 will be made available by Southern Drilling Company upon consummation of a mutually agreeable drilling contract. (5) RIG ACQUISITION In January 2000, the Company acquired a jack-up rig, the Baruna V, for $13.5 million. The rig is a Bethlehem mat cantilever capable of working in up to 200 feet of water. The rig was built in 1980 and is currently located in Southeast Asia. The rig was renamed the MARINE 202 and will be mobilized to the Gulf of Mexico during the second quarter, along with the MARINE 201, currently located in the United Arab Emirates. To fund the acquisition, upgrade and mobilization of the Baruna V drilling rig, the Company completed an offering of one million shares of its common stock in January 2000. The offering was an underwritten offering at a net price of $18.50 per share, or $18.5 million. (6) SEGMENT REPORTING For reporting purposes the Company defines its segments as shallow water drilling (jack-up rigs) and deepwater drilling (semi-submersibles). The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in the Company's annual report on 6 9 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Form 10-K. The Company evaluates the performance of its operating segments based on income before taxes and non-recurring items. Operating income consists of revenues less the related operating costs and expenses, including depreciation and allocated operation support, excluding interest and unallocated corporate expenses. Identifiable assets by operating segment include assets directly identified with those operations. The following table sets forth consolidated financial information with respect to the Company and its subsidiaries by operating segment (in thousands):
JACK-UP SEMI CORPORATE & OPERATIONS OPERATIONS OTHER TOTAL ----------- ----------- ----------- ----------- AS OF AND FOR THE THREE MONTHS ENDED: MARCH 31, 2000 Revenues $ 24,904 $ 27,576 $ -- $ 52,480 Operating Income (Loss) 1,400 13,438 (4,233) 10,605 Identifiable Assets 165,407 479,239 14,267 658,913 Capital Expenditures 16,337 945 868 18,150 Depreciation & Amortization 4,097 5,925 781 10,803 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
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):
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ Revenues: United States $ 34,178 $ 19,827 Australia 14,189 -- Southeast Asia 3,106 -- Other Foreign 1,007 -- Long-Lived Assets: United States 380,392 303,667 Australia 167,354 -- Southeast Asia 14,239 159,232 Other Foreign 53,152 34,391
7 10 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2000 and 1999, sales to customers that represented 10% or more of consolidated drilling revenues were as follows (in thousands):
2000 1999 ------------------------- ------------------------- % OF TOTAL % OF TOTAL REVENUE REVENUE REVENUE REVENUE ------------ ------------ ------------ ------------ Semi Operations: Western Australian Petroleum Pty., Ltd $ 14,154 27% $ -- -- Esso Exploration, Inc. 12,096 23% -- -- Jack-up Operations: Applied Drilling Technology, Inc. 7,239 14% 6,578 33% Premier Oil Natuna Sea Ltd. * * 2,494 13% Ocean Energy, Inc. * * 2,208 11%
* less than 10% 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 have a material adverse effect on the Company's profitability. 8 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. Oil and gas prices are volatile and somewhat unpredictable, which results in significant fluctuations in oil and gas drilling expenditures. Many factors influence oil and gas prices, including world economic conditions, worldwide oil and gas production and the activities of the Organization of Petroleum Exporting Countries ("OPEC"). The rates that the industry can charge for drilling services is a function of not only demand for services but the supply of drilling rigs available in the market to provide service. During the early 1980's when oil and gas prices were high and significant demand for drilling services existed, the industry built a significant number of offshore drilling rigs. In the mid-1980's when oil and gas prices declined significantly and the corresponding demand for drilling services declined, the supply of drilling rigs was significantly greater than the industry needed. This resulted in an imbalance of supply and demand causing low utilization with dayrates declining to virtually cash operating costs. During 1996 and early 1997, oil and gas prices rose to a level that stimulated significant oil and gas drilling activity resulting in improved utilization and dayrates for the drilling industry. However, oil and gas prices declined significantly beginning in October 1997, and reached multi-year lows in various markets in early 1999. As a result of oil price declines in 1998 and early 1999, oil and gas companies made significant cutbacks in their drilling programs. This reduced industry-wide rig utilization including the U.S. Gulf of Mexico, where the Company operates most of its rigs, which not only sharply reduced dayrates, but also shortened the average length of drilling contracts primarily to a well-by-well basis. Oil and gas prices improved during 1999 and continued to improve during the first quarter of 2000, resulting in recent increases in rig utilization and dayrates in the Gulf of Mexico jack-up market. The following table sets forth rig utilization rates, according to Offshore Data Services:
AVERAGE FOR THE THREE MONTHS ENDED MARCH 31, AS OF ------------------------------------------ MAY 2, 2000 2000 1999 ----------- ------------------- -------------------- Gulf of Mexico jack-up rigs 82% 82% 60% Gulf of Mexico semi-submersible rigs 50% 51% 68% Worldwide jack-up rigs 75% 67% 68% Worldwide semi-submersible rigs 64% 62% 67%
As of May 2, 2000, twelve of the Company's 16 jack-up rigs were working under short-term contracts that expire during the second or third quarter of 2000 and four rigs are currently idle. All four idle rigs are located outside the U.S. Gulf of Mexico, including the MARINE 201 and MARINE 202, which will be transported back to the U.S. Gulf of Mexico during the second quarter of 2000. The Company's two semi-submersible rigs, the MARINE 500 and MARINE 700 are currently operating under long-term contracts. 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. 9 12 The Company provides drilling services to a customer base that includes independent and major foreign and domestic oil and gas companies. As is typical in the industry, the Company does business with a relatively small number of customers at any given time. During the first three months of 2000, the Company performed services for approximately 33 different customers. For the period ended March 31, 2000, Western Australian Petroleum Pty., Ltd. accounted for approximately 27% of revenues, Esso Exploration, Inc. accounted for approximately 23% of revenues and Applied Drilling Technology, Inc., a subsidiary of Global Marine Inc., accounted for approximately 14% of the Company's total consolidated revenues. The loss of any one of the Company's customers could have a material adverse effect on the Company's profitability. See Note 6 of Notes to Consolidated Financial Statements for further information regarding the Company's major customers. MARINE 700 Drilling Contract. On August 5, 1999, the Company began operating the MARINE 700 under a five-year contract with Esso Exploration, Inc. ("Esso"), an affiliate of Exxon Mobil Corporation, at an initial dayrate of $130,000 per day plus approximately $4,300 per day for certain construction and equipment changes requested by Esso during the construction process. The initial dayrate is subject to a potential increase in years two through five of the contract to the market dayrate for comparable rigs such that total revenue from the contract could range from $237 million to $302 million depending on drilling market conditions. In years two and three of the contract, the dayrate cannot be greater than $165,000 and in years four and five, the dayrate cannot be greater than the amount that would make the cumulative revenue greater than $302 million. Dayrates are subject to adjustments for changes in indexed operating cost elements, changes in cost arising from moving the rig outside the U.S. Gulf of Mexico, or changes in personnel requirements. MARINE 500 Drilling Contract. In July 1997, the Company entered into a drilling contract with a drilling consortium led by West Australian Petroleum Pty., Ltd. ("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 expires on December 31, 2001. The contract provides that the consortium can terminate the contract at any time after January 1, 2001 in exchange for a termination payment of $95,890 for each day remaining in the term of the contract, subject to offset if the rig is otherwise employed. During the term of this contract, the MARINE 500 will work predominately in Western Australia, although the consortium members may use the rig in Southeast Asia, the Pacific Rim, and/or 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 to 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 was a two-well contract with up to three option wells to be drilled at an operating dayrate of $150,000 per day and was completed on January 5, 2000. The WAPET drilling contract provides for a dayrate of $168,600 for an unspecified number of wells. When the rig departed the shipyard in Singapore on July 5, 1999, the Company, in accordance with the consortium drilling contract, received a fee of $6 million for performing the upgrade to enable the rig to work in water depths up to 5,000 feet with 15,000 psi drilling equipment. This $6 million fee is being recognized as revenue over the term of the drilling contract. Marketing Agreement for NANHAI VI. In August 1998, the Company entered into an agreement effective through October 1, 1999, with the Peoples Republic of China's Southern Drilling Company to market the 1,500-foot water depth rated semi-submersible NANHAI VI outside China. The agreement has been extended through December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling rig, which was built in 1982 and modified and refurbished in 1995. 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 rig is technically and economically suitable to be upgraded to 5,000-foot water depth capability. Estimated total lead time required to secure the equipment 10 13 needed for the upgrade, complete the project and move the rig to first drilling location is one year. Pursuant to the marketing agreement, 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 will 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 or contracts 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. 11 14 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):
FOR THE THREE MONTHS ENDED MARCH 31, -------------------------------------------- 2000 1999 ----------------- --------------- (dollars in thousands except per day data) JACK-UPS: Operating days 1,134 809 Utilization (1) 83% 60% Average revenue per operating day $ 21,961 $ 24,508 Revenues 24,904 19,827 Contract drilling expense(2) 19,407 16,686 Depreciation 4,097 3,929 Operating income (loss) 1,400 (788) SEMI-SUBMERSIBLES: Operating days 182 - Utilization (1) 100% 0% Average revenue per operating day $ 151,519 $ - Revenue 27,576 - Contract drilling expense(2) 8,213 886 Depreciation 5,925 1 Operating income (loss) 13,438 (887) TOTAL COMPANY: Operating days 1,316 809 Utilization (1) 85% 56% Average revenue per operating day $ 39,879 $ 24,508 Revenues 52,480 19,827 Contract drilling expense(2) 27,620 17,572 Depreciation and amortization 10,803 4,728 General and administrative expense 3,452 3,475 Operating income (loss) 10,605 (5,948)
(1) Based on the number of actively marketed rigs. Excluding rigs under construction or in the process of substantial upgrading, the Company had no non-marketed rigs during the first quarter of 2000 and 1999, respectively. (2) Excludes depreciation and amortization and general and administrative expenses. Revenues. The Company's drilling revenues increased $32,653,000 or 165%, during the first quarter ended March 31, 2000, as compared to the same period in 1999. The increase in revenues was primarily due to higher average daily revenue and rig utilization. Average daily revenue and rig utilization increased to $39,879 and 85% for the quarter ended March 31, 2000 as compared to $24,508 and 56% for the same period in 1999. The higher average daily revenue and increased utilization were due to the MARINE 500 and MARINE 700 semi-submersible rigs that began operating in the third quarter of 1999, coupled with improved market conditions in the Gulf of Mexico jack-up market. Contract Drilling Expense. Contract drilling expenses during the first three months of 2000 increased $10,048,000 or 57% compared to 1999. The increase was primarily a result of the MARINE 500 and MARINE 700 that began operating in the third quarter of 1999 and higher utilization rates in the Gulf of Mexico jack-up market. Depreciation and Amortization. Depreciation and amortization expense for the first quarter of 2000 increased $6,075,000 compared to the same period in 1999. The increase was due to depreciation associated with the upgrade cost of the MARINE 500 which was placed back in service in July 1999 and the construction cost of the MARINE 700, which was placed in service in August 1999. 12 15 General and Administrative. General and administrative expenses for the first quarter of 2000 of $3,452,000 were consistent with the first quarter of 1999. Interest Expense. Interest expense for the first three months of 2000 was $3,433,000 compared to $113,000 for the same period in 1999. The increase was primarily the result of increased borrowings under the Amended Credit Facility, net of $1,000,000 in capitalized interest associated with construction of the MARINE 500 and MARINE 700 in the first quarter of 1999. Interest Income. Interest income increased $53,000 or 37% for the three months ended March 31, 2000 from the comparable prior-year period. The increase was related primarily to increased cash balances during the quarter as a result of higher dayrates and utilization coupled with collection of a $19,297,000 income tax refund during the quarter. Other Income. Other income of $355,000 was generated primarily from the sale of drill pipe during the first quarter of 2000. Income Taxes. Income tax expense increased for the first quarter of 2000 compared to the same period in 1999, primarily due to an increase in the Company's pretax income. FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES Liquidity. At March 31, 2000, the Company had working capital of $20,843,000 compared to working capital of $30,816,000 at December 31, 1999. Net cash provided by operating activities for the three months ended March 31, 2000 increased by $10,630,000 to $27,719,000 compared to $17,089,000 for the same period in the prior year. The increase is primarily attributable to the increased dayrates and rig operating activity coupled with the collection of a $19,297,000 income tax refund. Cash used in investing activities decreased $52,563,000 during the first three months of 2000 to $17,837,000 from $70,400,000 during the same period in 1999 due to completion of the MARINE 500 upgrade and construction of the MARINE 700 during the third quarter of 1999 partially offset by the purchase of the MARINE 202 (formerly Baruna V) in January 2000. Net cash used in financing activities during the first three months ended March 31, 2000 was attributable to $30,000,000 in debt repayments, partially offset by $18,461,000 in net proceeds from the sale of 1,000,000 shares of common stock in January 2000. The proceeds of the stock offering were used to purchase the MARINE 202. On August 12, 1998, the Company entered into a credit agreement (the "Credit Facility") with a consortium of domestic and international banks providing financing of up to $200,000,000 to be used for rig acquisitions and upgrades, as well as for general corporate purposes. The Credit Facility is a five-year revolving credit facility and is secured by substantially all of the Company's assets, including its rig fleet. The Company and its subsidiaries are required to comply with various covenants and restrictions, including, but not limited to, the maintenance of financial ratios and the restriction on payments of dividends. Interest accrues at a rate of (i) London Interbank Offered Rate ("LIBOR") plus a margin determined pursuant to a debt to EBITDA calculation or (ii) prime if a Base Rate Loan. On September 21, 1999, the Company amended the Credit Facility. The significant elements of the amendment include (i) an increase in the maximum permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1, (ii) a modification to the definition of EBITDA to give pro forma effect to certain newly acquired assets or long-term contracts, and (iii) a change to the definition of working capital to include any available commitments under the Credit Facility for purposes of satisfying the positive working capital requirement. Also, the margin over LIBOR that the Company pays under the Credit Facility was increased from a range of 75 to 125 basis points to 100 to 250 basis points. As of March 31, 2000, $150,000,000 was outstanding under the Credit Facility. Subsequent to March 31, 2000, the Company made $5,000,000 in principal payments, reducing the outstanding debt balance under the Credit Facility to $145,000,000 as of May 2, 2000. 13 16 During 1997, the improvement in the offshore drilling market allowed the Company to place some of its offshore rigs under longer-term contracts. The MARINE 500 and MARINE 700 are both operating under long-term contracts that will generate contract revenues in excess of $300,000,000 over the remaining life of the contracts. The MARINE 500 contract expires on December 31, 2001 and the MARINE 700 is under contract until August 5, 2004. Capital Resources. During the quarter ended March 31, 2000 the Company spent $18,150,000 in capital expenditures consisting primarily of disbursements for the acquisition, upgrade and mobilization of the MARINE 202 in January 2000. On January 10, 2000, the Company completed an offering of 1,000,000 shares of its Common Stock in an underwritten offering at a net price of $18.50 per share, or $18,500,000. The proceeds of the offering were used to acquire, upgrade and mobilize the Baruna V drilling rig. The Company will continue to pursue acquisitions of additional drilling rigs and related equipment and/or businesses. Future acquisitions, if any, would likely be funded from the Company's working capital, the Credit Facility, or through the issuance of debt and/or equity securities. The Company cannot predict whether it will be successful in acquiring additional rigs, and obtaining financing therefore, on acceptable terms. In addition, it is currently anticipated that the Company will continue the upgrading of rigs to enhance their capability to obtain longer-term contracts. The timing and actual amounts expended by the Company in connection with its plans to upgrade and refurbish selected rigs, as well as the type of rig modification comprising each program, is subject to the discretion of the Company and will depend on the Company's view of market conditions, the Company's cash flow, whether other acquisitions are made, and other factors. The Company anticipates that its available funds, together with cash generated from operations and amounts that may be borrowed under the Credit Facility 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. Accordingly, there can be no assurance that these resources will be sufficient to fund the Company's cash requirements. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting for and disclosure of derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material effect on its reported results. FORWARD-LOOKING STATEMENTS This Form 10-Q, particularly the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts concerning, among other things, market conditions, the demand for offshore drilling services, future acquisitions and fleet expansion, future financings, future rig contracts, future capital expenditures including rig construction, upgrades and refurbishments, and future results of operations. Actual results may differ materially from those included in the forward-looking statements, and no assurance can be given that the Company's expectations will be realized or achieved. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include (i) a prolonged period of low oil or gas prices; (ii) the inadequacy of insurance and indemnification to protect the Company against liability from all consequences of well disasters, fire damage or environmental damage; (iii) the inability of the Company to obtain insurance at reasonable rates; (iv) a decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of Mexico; (v) the risks attendant with operations in foreign countries including actions that may be taken by foreign countries and actions that may be taken by the United States against foreign countries; (vi) the failure of the Company to successfully compete with the Company's competitors that are larger and have a greater diversity of 14 17 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 continuation of market and other conditions similar to those in which the Company incurred net losses for the six months ended June 30, 1999; (ix) the loss of key management personnel or the inability of the Company to attract and retain sufficient qualified personnel to operate its rigs; (x) the re-negotiation or cancellation of the long-term contracts for the MARINE 700 or the MARINE 500, whether as a result of rig performance or because of some other reason; (xi) 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; (xii) 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; (xiii) adverse uninsured litigation results; (xiv) adverse tax consequences with respect to operations; and (xv) adequacy of the Company's cash resources in the future. 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 Credit Facility. Interest on borrowings under the Credit Facility is at either the prime interest rate or LIBOR plus a pre-agreed upon percentage point spread. The Company may, at its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to 6 months, with longer periods requiring bank approval. On May 28, 1999, the Company elected to lock in $100 million of outstanding debt at a fixed LIBOR rate of 5.5% plus a margin for one year. On November 24, 1999, the Company locked in $50 million of outstanding debt at a fixed LIBOR rate of 6.1% plus a margin for six months. The margin on these borrowings can range from 1.0% to 2.5% determined pursuant to a quarterly debt to EBITDA calculation. As of March 31, 2000, the margin for all borrowings was 2.0% and the Company had $150 million outstanding under its Credit Facility. Effective April 18, 2000, the margin for all borrowings is 1.75%. On the $150 million balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $1.5 million on an annual basis. The Company's objective in fixing the interest rate on these borrowings was to protect itself against rising interest rates. Foreign Currency Exchange Rate Risk. The Company conducts business in several foreign countries. Predominately all of its foreign operations are denominated in U.S. dollars. The Company structures its drilling contracts in U.S. dollars to mitigate its exposure to fluctuations in foreign currencies. Other than some limited trade payables the Company does not currently have financial instruments that are sensitive to foreign currency exchange rates. 15 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Jagson International Limited ("Jagson"), an Indian entity, has brought suit against Marine Drilling Companies, Inc. and one of its subsidiaries, 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 2000. 16 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARINE DRILLING COMPANIES, INC. (Registrant) Date: May 9, 2000 By /s/ T. Scott O'Keefe ------------------------------------- T. Scott O'Keefe Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 9, 2000 By /s/ Dale W. Wilhelm ------------------------------------- Dale W. Wilhelm Vice President and Controller (Principal Accounting Officer) 17 20 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.)
EX-15 2 LETTER REGARDING UNAUDITED INTERIM FINANCIAL 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 26, 2000 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 May 10, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-2000 DEC-31-1999 MAR-31-2000 MAR-31-1999 4,097 29,265 0 0 36,005 14,057 0 0 440 484 41,268 45,004 723,106 570,843 107,969 73,553 658,913 546,504 20,425 39,782 0 0 0 0 0 0 583 525 438,108 357,398 658,913 546,504 52,480 19,827 52,480 19,827 27,620 17,572 27,620 17,572 10,803 4,728 0 0 3,433 113 7,723 (5,963) 2,945 (1,195) 4,778 (4,768) 0 0 0 0 0 0 4,778 (4,768) 0.08 (0.09) 0.08 (0.09)
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