10-Q 1 h89936e10-q.txt MARINE DRILLING COMPANIES INC - JUNE 30, 2001 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 JUNE 30, 2001 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 (I.R.S. Employer of incorporation or organization) Identification Number) ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556 (Address of principal executive offices and zip code) (281) 243-3000 (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and formal fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT AUGUST 6, 2001 -- 58,710,948 ================================================================================ 2 MARINE DRILLING COMPANIES, INC. FORM 10-Q TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION Item 1. Index to Financial Statements Independent Accountants' Review Report........................... 1 Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000.................. 2 Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2001 and 2000................ 3 Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2001 and 2000.......................... 4 Notes to Consolidated Financial Statements (unaudited)........... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................. 16 Item 4 Submission of Matters to a Vote of Security Holders................ 17 Item 6. Exhibits and Reports on Form 8-K................................... 18 SIGNATURES................................................................. 19
(i) 3 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Shareholders Marine Drilling Companies, Inc.: We have reviewed the accompanying consolidated balance sheet of Marine Drilling Companies, Inc. and subsidiaries as of June 30, 2001, the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2001 and 2000, and the related consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 2000, 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 23, 2001, 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, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Houston, Texas July 24, 2001 1 4 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
JUNE 30, December 31, 2001 2000 --------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 4,902 $ 4,190 Accounts receivable - trade and other, net 69,336 49,771 Income tax receivable 1,284 1,041 Prepaid expenses and other 3,098 1,826 Inventory 534 510 --------- --------- Total current assets 79,154 57,338 Property and equipment 749,965 741,795 Less accumulated depreciation 163,966 140,553 --------- --------- Property and equipment, net 585,999 601,242 Other 896 2,125 --------- --------- $ 666,049 $ 660,705 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 10,376 $ 7,396 Accrued expenses 19,927 17,568 Income tax payable 4,124 947 Employer's liability claims, current 501 435 --------- --------- Total current liabilities 34,928 26,346 Long-term debt -- 75,000 Other non-current liabilities 1,421 1,275 Deferred income taxes 87,455 71,748 Shareholders' equity: Common stock, par value $.01. Authorized 200,000,000 shares; issued and outstanding 58,712,270 and 58,561,785 shares, as of June 30, 2001 and December 31, 2000, respectively 587 586 Common stock restricted (343) (538) Additional paid-in capital 291,247 288,096 Retained earnings from January 1, 1993 250,754 198,192 --------- --------- Total shareholders' equity 542,245 486,336 --------- --------- Commitments and contingencies -- -- --------- --------- $ 666,049 $ 660,705 ========= =========
See notes to consolidated financial statements and accompanying independent accountants' review report. 2 5 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Revenues $ 97,765 $ 58,962 $ 182,639 $ 111,442 Costs and Expenses: Contract drilling 32,651 29,567 64,354 57,187 Depreciation and amortization 11,798 10,897 23,506 21,700 General and administrative 3,948 3,560 7,682 7,012 --------- --------- --------- --------- 48,397 44,024 95,542 85,899 --------- --------- --------- --------- Operating income 49,368 14,938 87,097 25,543 --------- --------- --------- --------- Other Income (expense): Interest expense (447) (2,963) (1,615) (6,396) Interest income 127 95 238 291 Other income (expense) (4,872) 677 (4,542) 1,032 --------- --------- --------- --------- (5,192) (2,191) (5,919) (5,073) --------- --------- --------- --------- Income before income taxes 44,176 12,747 81,178 20,470 Income tax expense 15,573 4,834 28,616 7,779 --------- --------- --------- --------- Net income $ 28,603 $ 7,913 $ 52,562 $ 12,691 ========= ========= ========= ========= Earnings per share: Basic $ 0.49 $ 0.14 $ 0.90 $ 0.22 Diluted $ 0.48 $ 0.13 $ 0.88 $ 0.21 Average common shares outstanding: Basic 58,698 58,399 58,663 58,268 Diluted 59,529 59,318 59,536 59,105
See notes to consolidated financial statements and accompanying independent accountants' review report. 3 6 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share data) (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------- 2001 2000 -------- -------- Cash Flows From Operating Activities: Net income $ 52,562 $ 12,691 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 15,707 6,282 Tax benefits related to common stock issued pursuant to long-term incentive plan 1,084 1,786 Depreciation and amortization 23,506 21,700 Changes in operating assets and liabilities: Receivables (19,565) (3,945) Income tax receivable (243) 18,904 Other current assets (1,296) (982) Payables, accrued expenses and employer's liability claims 8,728 (1,379) Other 1,564 275 -------- -------- Net cash provided by operating activities 82,047 55,332 -------- -------- Cash Flows From Investing Activities: Purchase of equipment (8,327) (30,739) Proceeds from disposition of equipment 303 939 -------- -------- Net cash used in investing activities (8,024) (29,800) -------- -------- Cash Flows From Financing Activities: Proceeds from long-term debt -- 2,000 Payments on long-term debt (75,000) (47,000) Proceeds from sale of common stock -- 18,461 Proceeds from exercise of stock options 1,689 2,945 -------- -------- Net cash used in financing activities (73,311) (23,594) -------- -------- Net increase in cash and cash equivalents 712 1,938 Cash and cash equivalents at beginning of period 4,190 4,664 -------- -------- Cash and cash equivalents at end of period $ 4,902 $ 6,602 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 1,538 $ 7,214 Income taxes paid 8,790 124 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of no shares in 2001 and 5,000 shares in 2000, of restricted common stock $ -- $ 137 Forfeitures of 425 and 1,200 shares in 2001 and 2000 respectively, of restricted common stock (7) (19)
See notes to consolidated financial statements and accompanying independent accountants' 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 accounting principles generally accepted in the United States of America for complete financial statements have been condensed or omitted. In the opinion of management, these statements include all adjustments (all of which consist of normal recurring adjustments except as otherwise noted herein) necessary to present fairly the Company's financial position and results of operations for the interim periods presented. The financial data for the six months ended June 30, 2001 included herein has been subjected to a limited review by KPMG LLP, the Registrants' independent 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, 2000. The results of operations for the six months ended June 30, 2001 are not necessarily indicative of the results of operations that may be expected for the year. (2) EARNINGS PER SHARE The Company's basic earnings per share, which is based upon the weighted average common shares outstanding - without the dilutive effects of common stock equivalents (options, warrants, etc.), for the quarters ended June 30, 2001 and 2000 is $0.49 and $0.14, respectively. Common stock equivalents with a weighted average of 830,904 and 873,465 are reflected in the calculation of diluted earnings per share for the three and six-month periods ended June 30, 2001, respectively. For the three and six-month periods ended June 30, 2001, there were 986,000 and 906,000 stock options outstanding, respectively, which were not included in the computation of diluted earnings per share. For the three and six-month periods ended June 30, 2000, there were 40,000 and 115,000 stock options outstanding, respectively, that 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. No adjustment to net income was made in calculating diluted earnings per share for the three and six-month periods ended June 30, 2001 and 2000. (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 a majority of 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 June 30, 2001 there was no amount outstanding under the Credit Facility. 5 8 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the six months ended June 30, 2001, the Company incurred $1.6 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, there was no capitalized interest expense for the six months ended June 30, 2001 and 2000. (4) COMMITMENTS AND CONTINGENCIES Jagson International Limited ("Jagson"), an Indian entity, had brought suit against Marine Drilling Companies, Inc. and one of its subsidiaries, Marine 300 Series, Inc. The plaintiff had 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 and in July 2001, the Bombay High Court dismissed the third lawsuit. An offshore worker brought a class action suit against the Company and certain of its subsidiaries, and a number of offshore drilling contractors. The suit, Verdin vs. R&B Falcon Drilling USA Inc., et al Civil Action No. G-00-488 in the United States District court for the Southern District of TX, Galveston Division, was filed in August 2000. The plaintiff, previously employed by another defendant in the action, purports to be an "offshore worker" and alleges that a number of offshore drilling contractors have acted in concert to depress wages and benefits paid to their offshore employees. Plaintiff contends that this is a violation of federal and state antitrust laws and seeks an unspecified amount of treble damages, attorney's fees and costs on behalf of himself and an alleged class of offshore workers. The Company has reached a preliminary agreement with the plaintiff's counsel to settle all claims, pending Court approval. As a result of this agreement the Company recorded a $5.1 million provision in June 2001 for this pending litigation. The Company will have to pay an additional $5.0 million if the proposed merger with Pride International, Inc. is not consummated by January 1, 2002. The Company can give no assurance that the court will approve this agreement. The Company began operating the MARINE 700 on August 5, 1999 under a five-year contract with Esso, an affiliate of Exxon Mobil Corporation, at an initial dayrate of $130,000 per day plus certain dayrate adjustments. The initial dayrate is subject to a potential increase in years two through five of the contract to the market dayrate for comparable rigs. In years two and three of the contract, the dayrate cannot be greater than $165,000, plus adjustments, 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. Because the Company and Esso were not able to agree on what increases, if any, the Company would receive for the second year of the contract beginning August 5, 2000 of the MARINE 700 Drilling Contract, the parties agreed to pursue arbitration to determine any increases in the dayrate pursuant to the drilling contract. An arbitration hearing occurred in June 2001, and the arbitrators awarded the Company an increase of $9,000 per day to the base dayrate. A $2.9 million adjustment for the cumulative effect retroactive to August 5, 2000 is included in the second quarter 2001 operating results. The Company and Esso have recently began discussions regarding the dayrate adjustment for the third year of the contact which began August 5, 2001. 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. 6 9 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (5) MERGER AGREEMENT On May 23, 2001, Marine Drilling Companies, Inc. ("Marine") and Pride International, Inc. ("Pride") entered into an Agreement and Plan of Merger, (the "Merger Agreement"), which sets forth the terms and conditions of the proposed merger of Marine and Pride. Pursuant to the Merger Agreement, Marine will merge (the "Marine Merger"), with and into AM Merger, Inc., a wholly owned subsidiary of Pride ("Merger Sub"), with Merger Sub surviving and Pride will merge with and into PM Merger, Inc., a Delaware corporation and wholly owned subsidiary of Pride (the "Reincorporation Merger"). As a result of the aforementioned mergers, Pride will reincorporate from Louisiana to Delaware, Marine will become a wholly owned subsidiary of Pride, and each outstanding share of common stock of Marine (other than shares owned by Marine or Pride) will be converted into the right to receive one share of common stock of Pride. The mergers are intended to constitute reorganizations under the Internal Revenue Code of 1986, as amended, and to be accounted for as a "pooling of interests". Consummation of the mergers are subject to approval by the shareholders of both Marine and Pride. A Form S-4 registration statement was filed August 3, 2001 and a special shareholders meeting is scheduled for September 12, 2001 to vote on the mergers. (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 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. 7 10 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table sets forth consolidated financial information with respect to the Company and its subsidiaries by operating segment (in thousands):
JACK-UP SEMI CORPORATE & OPERATIONS OPERATIONS OTHER TOTAL ---------- ---------- --------- -------- THREE MONTHS ENDED: JUNE 30, 2001 Revenues $ 63,905 $ 33,860 $ -- $ 97,765 Operating Income (Loss) 34,861 19,213 (4,706) 49,368 Identifiable Assets 191,879 458,049 16,121 666,049 Capital Expenditures 4,864 496 55 5,415 Depreciation & Amortization 5,068 5,972 758 11,798 JUNE 30, 2000 Revenues $ 28,964 $ 29,998 $ -- $ 58,962 Operating Income (Loss) 2,272 17,010 (4,344) 14,938 Identifiable Assets 173,780 471,295 17,591 662,666 Capital Expenditures 8,805 3,508 276 12,589 Depreciation & Amortization 4,170 5,943 784 10,897 SIX MONTHS ENDED: JUNE 30, 2001 Revenues $119,745 $ 62,894 $ -- $182,639 Operating Income (Loss) 61,384 34,858 (9,145) 87,097 Identifiable Assets 191,879 458,049 16,121 666,049 Capital Expenditures 6,577 914 836 8,327 Depreciation & Amortization 10,103 11,939 1,464 23,506 JUNE 30, 2000 Revenues $ 53,868 $ 57,574 $ -- $111,442 Operating Income (Loss) 3,672 30,448 (8,577) 25,543 Identifiable Assets 173,780 471,295 17,591 662,666 Capital Expenditures 25,142 4,453 1,144 30,739 Depreciation & Amortization 8,267 11,868 1,565 21,700
8 11 MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company also provides services in both domestic and foreign locations. The following table sets forth financial information with respect to the Company and its subsidiaries by geographic area (in thousands):
AS OF AND FOR THE THREE AS OF AND FOR THE SIX MONTHS MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ---------------------------- 2001 2000 2001 2000 --------- --------- ----------- ----------- Revenues: United States $ 76,372 $ 43,223 $ 142,107 $ 77,401 Australia 422 15,732 16,306 29,921 Southeast Asia 3,488 91 6,743 3,197 India 6,525 -- 6,525 -- Other Foreign 10,958 (84) 10,958 923 Long-Lived Assets: United States 374,284 388,966 374,284 388,966 Australia -- 164,978 -- 164,978 Southeast Asia 40,873 43,366 40,873 43,366 India 152,810 -- 152,810 -- Other Foreign 18,032 19,504 18,032 19,504
The Company negotiates drilling contracts with a number of customers for varying terms, and management believes it is not dependent upon any single customer. For the six months ended June 30, 2001 and 2000, sales to customers that represented 10% or more of consolidated drilling revenues were as follows (in thousands):
2001 2000 ------------------------ ------------------------ % OF TOTAL % OF TOTAL REVENUE REVENUE REVENUE REVENUE ------- ---------- ------- ---------- Semi Operations: Chevron Australia Pty., Ltd. $24,921 14% $31,483 28% Esso Exploration, Inc. 29,105 16% 26,112 23% Jack-up Operations: Applied Drilling Technology, Inc. 36,203 20% 20,167 18%
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. (7) SUBSEQUENT EVENTS On July 13, 2001 the Company reported that its MARINE 4 jack-up rig had a well control incident at Brazos Block #417 in the Gulf of Mexico resulting in an uncontrolled flow of natural gas and salt water from the well bore. One employee of Marine's customer was killed in the incident. The MARINE 304 began drilling a relief well in an attempt to plug the uncontrolled well, however, on August 4, 2001 the well naturally bridged over and is no longer flowing gas. Damage to the MARINE 4 will be assessed once the well is secured and personnel can board the rig. Repair costs are expected to be covered by insurance subject to a $250,000 deductible, plus a loss of hire insurance of $30,000 per day for a maximum of 180 days after a 14 day waiting period. 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDUSTRY OVERVIEW Demand for the Company's offshore drilling services is primarily driven by the worldwide expenditures for oil and gas drilling which is closely linked to the underlying economics of oil and gas exploration, development and production. The economics of oil and gas business activities is impacted by current and projected oil and gas prices. 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. 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 2000 oil and gas prices rose to a level that stimulated oil and gas drilling activity resulting in improved utilization and higher dayrates for the drilling industry, especially in the U.S. Gulf of Mexico. The Company operates most of its jack-up rigs in this market and benefited significantly from these developments through increased utilization and higher dayrates. The Company's U.S. Gulf of Mexico fleet for 2000, averaged 98% utilization compared to 83% in 1999 and average dayrates increased approximately $5,000 per quarter for 2000. These improved market conditions have continued and rig utilization remained high at 99% for the first quarter of 2001 and 100% for the second quarter of 2001. Average dayrates for the Gulf of Mexico jack-up rigs increased marginally for the second quarter of 2001. Presently, crude oil and natural gas prices have declined creating a softer drilling market particularly in the Gulf of Mexico. Utilization rates have began to decline (as illustrated in the table below) and as a result dayrates for the Company's Gulf of Mexico jack-up fleet are beginning to decline. The Company believes that while there has been some recent softening of demand and dayrates in the Gulf of Mexico, long term rig supply and natural gas fundamentals remain positive. The following table sets forth industry wide working rig utilization rates, according to Offshore Data Services:
AVERAGE FOR THE SIX MONTHS ENDED JUNE 30, AS OF ------------------------- AUGUST 6, 2001 2001 2000 -------------- -------- --------- Gulf of Mexico jack-up rigs 75% 88% 83% Gulf of Mexico semi-submersible rigs 69% 73% 55% Worldwide jack-up rigs 77% 81% 73% Worldwide semi-submersible rigs 72% 71% 62%
As of August 6, 2001, thirteen of the Company's 16 jack-up rigs were working under short-term contracts that expire during the third or fourth quarter of 2001, one of the jack-up rigs, the MARINE 17, has been taken out of service to install a new top drive drilling system, one international jack-up rig is under contract until the fourth quarter of 2001, and the remaining international rig, configured as an accommodation unit, started a contract July 25, 2001 for a 30 day project. The Company has two semi-submersible rigs, the MARINE 500 and MARINE 700. The MARINE 500 is working under a contract that provides a subsidy to protect a $127,500 per day operating margin through mid-December 2001 and the MARINE 700 is under long-term contract until August 2004. CONTRACTS AND CUSTOMERS The Company provides drilling services to a customer base that includes independent and major foreign and domestic oil and gas companies. As is typical in the industry, the Company does business with a relatively small number of customers at any given time. During the first six months of 2001, the Company performed services for approximately 28 different customers. For the period ended June 30, 2001, Applied Drilling Technology, Inc., a subsidiary of Global Marine Inc., accounted for approximately 20% of the Company's revenues, Esso Exploration, Inc. ("ESSO") accounted for approximately 16% of the Company's revenues and Chevron Australia Pty., Ltd. ("CAPL") accounted for approximately 14% of the Company's revenues. The loss of any one of the Company's 10 13 customers could, at least on a short-term basis, have a material adverse effect on the Company's profitability. See Note 6 of Notes to Consolidated Financial Statements (unaudited) for further information regarding the Company's major customers. MARINE 305 Drilling Contract. On July 8, 2000, the MARINE 305 began operating in Malaysia at a dayrate of approximately $36,400 per day for Sarawak Shell Berhad/Sabah Shell Petroleum Company. The contract is for a term of 486-days with termination provisions after the first nine months that includes the payment of certain unrecovered contract costs. The contract allows for a contract extension for up to eight wells or up to two platforms with multiple wells on each platform at rates to be mutually agreed at the time the contract is extended. MARINE 700 Drilling Contract. On August 5, 1999, the Company began operating the MARINE 700 under a five-year contract with Esso, an affiliate of Exxon Mobil Corporation, at an initial dayrate of $130,000 per day plus certain dayrate adjustments as allowed by the contract for additional labor costs and construction and equipment changes requested by Esso during the construction process. Currently, these adjustments to the initial dayrate total approximately $12,000 per day. 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, plus adjustments, 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. Because the Company and Esso were not able to agree on what increases, if any, the Company would receive for the second year of the contract beginning August 5, 2000 of the MARINE 700 Drilling Contract, the parties agreed to pursue arbitration to determine any increases in the dayrate pursuant to the drilling contract. An arbitration hearing occurred in June 2001, and the arbitrators awarded the Company an increase of $9,000 per day to the base dayrate. A $2.9 million adjustment for the cumulative effect retroactive to August 5, 2000 is included in the second quarter 2001 operating results. The Company and Esso have recently began discussions regarding the dayrate adjustment for the third year of the contact which began August 5, 2001. 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 consisted of WAPET, Indonesia Petroleum, Ltd. and Mobil Exploration and Producing Australia. Effective March 2000, WAPET assigned all of its rights and obligations under the contract to CAPL. Upon cancellation, CAPL is obligated to subsidize future contracts and idle rig time up to $95,890 per day, if necessary, to insure that the operating margin on the MARINE 500 reaches $127,500 per day for the remaining term of the contract or until December 31, 2001. On September 1, 2000, the Company received the 90-day notice from CAPL that current plans were to utilize the MARINE 500 through February 2001 after which they intended to exercise their termination rights under the drilling contract unless the rig could be assigned to other oil companies. As CAPL was unable to employ the rig beyond March 22, 2001, they exercised their termination right and on March 2, 2001, the Company received the 30 days written notice of intent for early termination. In April 2001, the Company signed a contract with Cairn Energy India Pty. Ltd. for one well and two one-well options in India, this contract has subsequently been extended through the end of 2001. The contract for the work in India is expected to result in the Company realizing a daily operating margin of $127,500 per day through mid-December 2001. When the MARINE 500 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. 11 14 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. 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 FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (dollars in thousands except per day data) Jack-ups Operating days 1,365 1,076 2,703 2,210 Utilization (1) 94% 79% 93% 81% Average revenue per day $ 46,817 $ 26,931 $ 44,301 $ 24,378 Revenue 63,905 28,964 119,745 53,868 Contract drilling expense (2) 23,976 22,522 48,258 41,929 Depreciation 5,068 4,170 10,103 8,267 Operating income 34,861 2,272 61,384 3,672 Semi-submersibles Operating days 182 182 362 364 Utilization (1) 100% 100% 100% 100% Average revenue per day $ 186,044 $ 164,823 $ 173,740 $ 158,171 Revenue 33,860 29,998 62,894 57,574 Contract drilling expense (2) 8,675 7,045 16,096 15,258 Depreciation 5,972 5,943 11,939 11,868 Operating income 19,213 17,010 34,859 30,448 Total Company: Operating days 1,547 1,258 3,065 2,574 Utilization (1) 94% 81% 94% 83% Average revenue per day $ 63,197 $ 46,870 $ 59,589 $ 43,295 Revenue 97,765 58,962 182,639 111,442 Contract drilling expense (2) 32,651 29,567 64,354 57,187 Depreciation and amortization 11,798 10,897 23,506 21,700 General and administrative expense 3,948 3,560 7,682 7,012 Operating income 49,368 14,938 87,097 25,543
(1) Based on the number of actively marketed rigs. Excluding rigs under construction or in the process of substantial upgrading. (2) Excludes depreciation and amortization and general and administrative expenses. 12 15 Revenues. The Company's drilling revenues increased $38,803,000 or 66%, and $71,197,000 or 64% during the three and six-month periods ended June 30, 2001, respectively, as compared to the same periods in 2000. The increase in revenues was primarily due to higher average daily revenue and rig utilization in the Gulf of Mexico, and a $2.9 million adjustment for the cumulative effect of a base dayrate adjustment for the MARINE 700. Average daily revenue and rig utilization increased to $63,197 and 94%, respectively, for the quarter ended June 30, 2001 as compared to $46,870 and 81%, respectively, for the same period in 2000. For the six months ended June 30, 2001 the average daily revenue and rig utilization increased to $59,589 and 94%, respectively, from average daily revenue of $43,295 and rig utilization of 83%, respectively, for the same period in 2000. The higher average daily revenue and increased utilization were due to the MARINE 202 and MARINE 305 rigs that began operating in the third quarter of 2000, a $2.9 million adjustment for the cumulative effect of a base dayrate adjustment for the MARINE 700, coupled with improved market conditions in the Gulf of Mexico jack-up market. Contract Drilling Expense. Contract drilling expenses for the three and six months ended June 30, 2001 increased $3,084,000 or 10% and $7,167,000 or 13%, respectively, as compared to the same periods in 2000. The increase is primarily a result of the MARINE 202 and MARINE 305 that began operating in the third quarter of 2000 and higher utilization rates in the Gulf of Mexico jack-up market. Depreciation and Amortization. Depreciation and amortization expense for the three month and six months ended June 30, 2001 increased $901,000 and $1,806,000, respectively, compared to the same periods in 2000. The increase was principally due to depreciation associated with the purchase and upgrade of the MARINE 202, which was placed in service in August 2000. General and Administrative. General and administrative expenses for the three and six-month periods ended June 30, 2001 increased $388,000 or 11% and $670,000 or 10%, respectively, compared to the same periods in 2000. The increase was primarily due to legal fees related to the wage related anti-trust lawsuit and the MARINE 700 arbitration. Interest Expense. Interest expense for the three and six months ended June 30, has decreased $2,516,000 or 85% and $4,781,000 or 75% during the three and six month periods ended June 30, 2001, respectively, as compared to the same periods in 2000. The decreases are primarily the result of decreased borrowings under the Amended Credit Facility. Interest Income. Interest income increased $32,000 or 34% and decreased $53,000 or 18% for the three and six months ended June 30, 2001, respectively, from the comparable prior-year periods. The changes were due primarily to fluctuations in cash balances. Other Income (Expense). Other expense of $4,872,000 and $4,542,000 for the three and six-month periods in 2001 represents a $5.1 million charge for the settlement of a wage related anti-trust lawsuit partially offset by income generated by the sale of drill pipe compared to income of $677,000 and $1,032,000 for the three and six-month periods in 2000 which is primarily generated by the sale of drill pipe. Income Taxes. Income tax expense increased for the three and six-month periods ended June 30, 2001 compared to the same period in 2000, primarily due to an increase in the Company's pretax income. The Company's effective tax rate of 35% for 2001 is less than the effective tax rate of 38% for 2000, which was more than the U.S. federal statutory rate of 35% because of foreign tax payments for which the Company did not receive U.S. federal tax benefits in 2000. 13 16 FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES Liquidity. At June 30, 2001, the Company had working capital of $44,226,000 compared to working capital of $30,992,000 at December 31, 2000. The increase in working capital is primarily the result of increased accounts receivable due to improved pricing of the Company's services in the Gulf of Mexico. Net cash provided by operating activities for the six months ended June 30, 2001 increased by $26,715,000 to $82,047,000 compared to $55,332,000 for the same period in the prior year. The increase is primarily attributed to the increased dayrates and rig operating activity. Cash used in investing activities decreased $21,776,000 during the first six months of 2001 to $8,024,000 from $29,800,000 during the same period in 2000 due to the acquisition and upgrade of the MARINE 202 during the first six months of 2000. Net cash used in financing activities of $73,311,000 during the six months ended June 30, 2001 was attributed primarily to $75,000,000 in debt repayments. 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 a majority of 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 June 30, 2001 there were no amounts outstanding under the Credit Facility. The MARINE 700 is under a long-term contract until August 2004, which is expected to generate contract revenues between $144,000,000 and $183,000,000 over the remaining life of the contract, based on the provisions of the MARINE 700 contract. Capital Resources. During the six months ended June 30, 2001 the Company spent $8,327,000 in capital expenditures consisting primarily of the purchase of drill pipe and other rig machinery. Future acquisitions of additional drilling rigs and related equipment, 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 marketability. 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. 14 17 MERGER AGREEMENT On May 23, 2001, Marine Drilling Companies, Inc. ("Marine") and Pride International, Inc. ("Pride") entered into an Agreement and Plan of Merger, (the "Merger Agreement"), which sets forth the terms and conditions of the proposed merger of Marine and Pride. Pursuant to the Merger Agreement, Marine will merge (the "Marine Merger"), with and into AM Merger, Inc., a wholly owned subsidiary of Pride ("Merger Sub"), with Merger Sub surviving and Pride will merge with and into PM Merger, Inc., a Delaware corporation and wholly owned subsidiary of Pride (the "Reincorporation Merger"). As a result of the aforementioned mergers, Pride will reincorporate from Louisiana to Delaware, Marine will become a wholly owned subsidiary of Pride, and each outstanding share of common stock of Marine (other than shares owned by Marine or Pride) will be converted into the right to receive one share of common stock of Pride. The mergers are intended to constitute reorganizations under the Internal Revenue Code of 1986, as amended, and to be accounted for as a "pooling of interests". Consummation of the mergers are subject to approval by the shareholders of both Marine and Pride. A Form S-4 registration statement was filed August 3, 2001 and a special shareholders meeting is scheduled for September 12, 2001 to vote on the mergers. SUBSEQUENT EVENTS On July 13, 2001 the Company reported that its MARINE 4 jack-up rig had a well control incident at Brazos Block #417 in the Gulf of Mexico resulting in an uncontrolled flow of natural gas and salt water from the well bore. One employee of Marine's customer was killed in the incident. The MARINE 304 began drilling a relief well in an attempt to plug the uncontrolled well, however, on August 4, 2001 the well naturally bridged over and is no longer flowing gas. Damage to the MARINE 4 will be assessed once the well is secured and personnel can board the rig. Repair costs are expected to be covered by insurance subject to a $250,000 deductible, plus a loss of hire insurance of $30,000 per day for a maximum of 180 days after a 14 day waiting period. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. At June 30, 2001, the Company does not have any intangible assets with indefinite useful lives. The mergers, as discussed in footnote 5 to the unaudited consolidated financial statements included elsewhere herein, are intended to be accounted for as a pooling-of-interests initiated prior to June 30, 2001. Consummation of the mergers are subject to approval by the shareholders of both Marine and Pride. 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) whether the Company's proposed merger with Pride International, Inc. is completed, (ii) a prolonged period of low oil or gas prices; (iii) the inadequacy of insurance and indemnification to protect the Company against liability from all consequences of well disasters, fire damage or environmental damage; (iv) uninsured costs of litigation; (v) the inability of the Company to obtain insurance at reasonable rates; (vi) a decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of Mexico; (vii) 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; (viii) the failure of the Company to successfully compete with the Company's competitors that are larger and have a greater diversity of rigs and greater financial resources than the Company; (ix) a decrease in rig utilization resulting from reactivation of currently inactive non-marketed rigs or new construction of rigs; (x) 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; (xi) the loss of key management personnel or the inability of the Company to attract and retain sufficient qualified personnel to operate its rigs; (xii) 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; (xiii) 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; (xiv) 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; (xv) adverse uninsured litigation results; (xvi) adverse tax consequences with respect to 15 18 operations; and (xvii) 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 update or revise 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 LIBOR plus a pre-agreed margin percentage point spread or the prime interest rate. The LIBOR incremental margin on these borrowings can range from 1.0% to 2.5% determined pursuant to a debt to EBITDA calculation. The Company may, at its option, fix the interest rate for certain borrowings utilizing the LIBOR pricing option for 30 days to 6 months, with longer periods requiring bank approval. As of June 30, 2001, the LIBOR incremental margin for all borrowings was 1.00% and the Company had no amount outstanding under its Credit Facility. 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Jagson International Limited ("Jagson"), an Indian entity, had brought suit against Marine Drilling Companies, Inc. and one of its subsidiaries, Marine 300 Series, Inc. The plaintiff had 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 and in July 2001, the Bombay High Court dismissed the third lawsuit. An offshore worker brought a class action suit against the Company and certain of its subsidiaries, and a number of offshore drilling contractors. The suit, Verdin vs. R&B Falcon Drilling USA Inc., et al Civil Action No. G-00-488 in the United States District court for the Southern District of TX, Galveston Division, was filed in August 2000. The plaintiff, previously employed by another defendant in the action, purports to be an "offshore worker" and alleges that a number of offshore drilling contractors have acted in concert to depress wages and benefits paid to their offshore employees. Plaintiff contends that this is a violation of federal and state antitrust laws and seeks an unspecified amount of treble damages, attorney's fees and costs on behalf of himself and an alleged class of offshore contract workers. The Company has reached a preliminary agreement with the plaintiff's counsel to settle all claims, pending Court approval. As a result of this agreement the Company recorded a $5.1 million provision in June 2001 for this pending litigation. The Company will have to pay an additional $5.0 million if the proposed merger with Pride International, Inc. is not consummated by January 1, 2002. The Company can give no assurance that the court will approve this agreement. The Company began operating the MARINE 700 on August 5, 1999 under a five-year contract with Esso, an affiliate of Exxon Mobil Corporation, at an initial dayrate of $130,000 per day plus certain dayrate adjustments. The initial dayrate is subject to a potential increase in years two through five of the contract to the market dayrate for comparable rigs. In years two and three of the contract, the dayrate cannot be greater than $165,000, plus adjustments, and in years four and five, the dayrate cannot be greater than the amount that would make the 16 19 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. Because the Company and Esso were not able to agree on what increases, if any, the Company would receive for the second year of the contract beginning August 5, 2000 of the MARINE 700 Drilling Contract, the parties agreed to pursue arbitration to determine any increases in the dayrate pursuant to the drilling contract. An arbitration hearing occurred in June 2001, and the arbitrators awarded the Company an increase of $9,000 per day to the base dayrate. A $2.9 million adjustment for the cumulative effect retroactive to August 5, 2000 is included in the second quarter 2001 operating results. The Company and Esso have recently began discussions regarding the dayrate adjustment for the third year of the contact which began August 5, 2001. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on May 17, 2001. At the meeting, seven directors were elected by a vote of holders of Common Stock, as outlined in the company's Proxy Statement related to the meeting. With respect to the election of directors, (i) proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, (ii) there was no solicitation in opposition to the management's nominees as listed in the Proxy Statement, and (iii) all of such nominees were elected. The following numbers of votes were cast as to the director nominees:
VOTES CAST --------------------------------------------------------------------- BROKER NOMINEE TOTAL IN FAVOR AGAINST NON-VOTES ABSTAINING ------------- ---------- ---------- ------- --------- ---------- Mr. Barbanell 51,864,961 51,487,630 377,331 -- -- Mr. Brown 51,864,961 51,487,630 377,331 -- -- Mr. Bull 51,864,961 51,487,630 377,331 -- -- Mr. Burton 51,864,961 51,487,630 377,331 -- -- Mr. Rask 51,864,961 51,486,431 378,530 -- -- Mr. Robson 51,864,961 51,487,630 377,331 -- -- Mr. Thomas 51,864,961 51,487,630 377,331 -- -- ------------------------------------------------------------------------------------------
The second item voted upon at the meeting was to approve the Marine Drilling 2001 Stock Incentive Plan with votes cast as follows:
IN FAVOR AGAINST BROKER NON-VOTES ABSTAINING VOTES CAST VOTES VOTES VOTES VOTES 51,865,476 42,414,477 9,373,387 -- 77,612 --------------------------------------------------------------------------------
17 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibits No. Description ------------ ----------- 15 Letter regarding unaudited interim financial information (b) Reports on Form 8-K: (1) The Company filed a report under Item 9 of Form 8-K dated April 17, 2001. (2) The Company filed a report under Item 5 of Form 8-K dated May 25, 2001. 18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARINE DRILLING COMPANIES, INC. (Registrant) Date: August 14, 2001 By /s/ T. Scott O'Keefe ----------------------------------------- T. Scott O'Keefe Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 14, 2001 By /s/ Dale W. Wilhelm ----------------------------------------- Dale W. Wilhelm Vice President and Controller (Principal Accounting Officer) 19 22 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 15 Letter regarding unaudited interim financial information