ITEM 1. BUSINESS
GENERAL
Marine Drilling Companies, Inc. (collectively with its subsidiaries, the "Company") was incorporated in Texas in January 1990. The Company or its predecessors have been engaged since 1966 in offshore contract drilling of oil and gas wells for independent and major oil and gas companies and currently operates in the U.S. Gulf of Mexico and the Bay of Campeche offshore Mexico. As of February 17, 1994, the Company operated a fleet of twelve mobile offshore jack-up drilling rigs (all but one of which were owned by the Company), consisting of four independent leg cantilever jack-ups and eight mat supported jack-ups. As of February 17, 1994, eleven of the Company's twelve rigs were located in the U.S. Gulf of Mexico and one was in the Bay of Campeche.
The Company's strategy is to strive to maintain its position as a significant provider of offshore drilling services in its present markets and to continue to diversify, insofar as financially and operationally practicable, into other international markets. The Company also intends to seek business combinations and to make acquisitions of additional drilling rigs which the Company believes will benefit its shareholders.
The Company was significantly restructured and recapitalized in 1992 and early 1993 (the "Recapitalization"). See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Recapitalization" for further information.
INDUSTRY CONDITIONS AND COMPETITION
The Company currently derives substantially all of its revenues from offshore drilling in the U.S. Gulf of Mexico and in the Bay of Campeche. Although the Company's rigs could, with certain modifications, work in other areas, management believes that the U.S. Gulf of Mexico and the Bay of Campeche currently have greater earnings potential than other markets in which its rigs could operate. The Company's rigs are not, however, suitable for those areas, such as the North Sea, that require hostile environment operating capabilities.
Since the mid-1980's, the worldwide contract drilling industry, and particularly the drilling industry in the U.S. Gulf of Mexico, was, with limited exceptions, adversely affected by unfavorable pricing and low rig utilization. Over this period, the exploration and development budgets of the Company's customer base were reduced as a result of substantial decreases and volatility in the prices of oil and gas. These factors resulted in less exploration and developmental drilling activity and negative cash flows for many drilling contractors, including the Company. Furthermore, many energy companies have shifted more of their drilling budgets to international areas due to perceived unfavorable exploration and development economics as well as the regulatory climate in the United States. As a consequence, the supply of U.S. Gulf of Mexico drilling rigs frequently has substantially exceeded demand resulting in generally unfavorable day rates and many rigs being idle for long periods of time. During 1993, however, conditions in the Company's markets improved and the Company was able to generate significant profits and cash flows.
Pricing and rig water depth capabilities are generally the most important competitive factors in the drilling industry. Other competitive factors include the technical capabilities of specialized drilling equipment and personnel, operational experience, rig suitability, efficiency, equipment condition, safety record, reputation and customer relations. The Company believes that it competes favorably with respect to all these factors.
The Company's contract drilling revenues depend upon rig utilization and pricing. These variables are affected by competitive conditions and the amount of exploration and development activity conducted by oil and gas companies. This activity is strongly influenced by the current and projected prices of oil and natural gas. The Company believes that the outlook for natural gas prices is currently positive and such outlook is favorable for offshore drilling activity. However, oil prices have been generally weaker since October 1993 and this weakness is believed by the Company to have contributed to lower levels of offshore drilling in early 1994. The Company is unable to predict future oil or gas prices or the level of offshore drilling activity.
U.S. Gulf of Mexico
Since January 1992, the price of natural gas as reported by Natural Gas Clearinghouse has increased from its low of approximately $1.00 per thousand cubic feet ("mcf") to $2.18 per mcf in February 1994. As of January 7, 1992, there were 77 contracted jack-up rigs in the U.S. Gulf of Mexico and the number declined until early May 1992 when the number of contracted jack-up rigs reached a 1992 low of 46. Since May 1992, the number of contracted jack-up rigs has generally increased, reaching 109 in December 1993. The Company believes that the substantial improvement in natural gas prices has had a positive effect on drilling activity in the U.S. Gulf of Mexico. Overall, jack-up rig demand in the U.S. Gulf of Mexico has improved substantially since May 1992, but there can be no assurance that such improvements in drilling activity are indicative of future activity levels or that there will not be a decline in drilling activity in the future. Furthermore, jack-up rigs are mobile and competitors have moved and could move additional rigs from weaker markets to the U.S. Gulf of Mexico or offshore Mexico in the Bay of Campeche. In addition, there are additional non-marketed rigs stacked in the U.S. Gulf of Mexico which, subject to some expenditure, have been or could be reactivated to meet an increase in demand for drilling rigs in the Company's markets. Such movement or reactivation could depress pricing levels and adversely affect the supply and demand relationship in the U.S. Gulf of Mexico, notwithstanding continued strength in natural gas prices. Indeed, market conditions were markedly weaker in early 1994 due to reduced jack-up rig demand and an increased supply of rigs.
According to Offshore Data Services, as of February 15, 1994, there were 127 jack-up rigs in the U.S. Gulf of Mexico of which 98 were contracted (a 77% utilization rate). Ownership of these rigs is widely dispersed among a number of drilling contractors. As a result, no one contractor (including the Company) is able to materially affect pricing levels in the U.S. Gulf of Mexico.
Bay of Campeche, Offshore Mexico
According to Offshore Data Services, as of February 17, 1994, there were 19 contracted jack-up rigs in the Bay of Campeche compared to 11 contracted jack-up rigs in early December 1992. These rigs are operated by a variety of U.S.-based and Mexico-based drilling contractors. All of the rigs in the Bay of Campeche are performing drilling services for Petroleos Mexicanos ("Pemex"), the national oil company of the Republic of Mexico. Some of the rigs working for Pemex are subject to contracts between the respective drilling contractors and Pemex. Other rigs are working for turnkey companies which, in turn, have entered into turnkey contracts with Pemex. Two of the Company's rigs commenced working in the Bay of Campeche for a Mexican turnkey operator, Perforadora Faja de Oro, S.A. de C.V. ("Faja de Oro") in January 1993. The Company's contracts with Faja de Oro provided for compensation on a "day work" basis (and not on a turnkey or fixed price basis) and for each rig to drill three wells. The rigs completed their contracts and returned to the U.S. Gulf of Mexico in September 1993 and January 1994, respectively. In May 1993, the Company entered into a one-year bareboat charter and limited operating contract with Industrial Perforadora de Campeche, S.A. de C.V. ("IPC"), with a six-month renewal at the option of IPC, to provide drilling services in the Bay of Campeche. The rig commenced operations under the contract on May 4, 1993. The Company considers the Bay of Campeche a lucrative market and continues to actively market its fleet in this area.
Pemex's current activity levels reflect a significant increase compared to recent years. If Pemex were to elect to reduce its activity levels, or should it be unable to finance these activities in the future, the Company's operations could be adversely affected. Furthermore, if such reductions were to occur, several of the rigs currently operated in the Bay of Campeche could be mobilized back to the U.S. Gulf of Mexico which would increase competition in that area and could adversely affect the Company's U.S. Gulf of Mexico results.
The following table sets forth certain industry and Company historical data for the periods indicated:
- --------------- (1) Average of weekly data published by Offshore Data Services.
(2) The numbers included in the table represent the average number of rigs (rounded to the nearest whole number) operated by the Company for the periods indicated.
(3) From January 1, 1988 to March 12, 1990, the Company operated 16 rigs. In March 1990, the Company acquired four additional rigs and assumed charter agreements covering three additional rigs. The Company's rig fleet was substantially reduced during 1991 and 1992. See Item 2
ITEM 2. PROPERTIES
RIG FLEET
All of the Company's rigs are jack-up rigs, which are mobile self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the drilling platform. The Company owns eleven rigs and operates one additional rig under a two-year charter agreement which commenced in early 1993. Of the Company's twelve rig fleet, eight are mat supported rigs (i.e., they have a lower hull attached to the rig legs) and four are of independent leg design. Five of the mat supported rigs and one of the independent leg rigs are slot type jack-up units which are configured for the drilling operations to take place through a slot in the hull. The Company's other mat supported rigs and three of the independent leg rigs have a cantilever feature which allows the extension of the drilling equipment over a customer's platform to perform development drilling or workover operations. The Company's rigs are currently capable of drilling to depths of 20,000 to 30,000 feet in maximum water depths ranging from 200 to 300 feet. The Company's rigs could, if applicable modifications were made and certifications obtained, operate in certain non-hostile areas outside of their current markets. The Company believes that all of its rigs are in good operating condition and have been well maintained.
Mat Supported Rig -- This type of rig consists of a floating upper hull with three legs which are attached to a lower hull commonly referred to as a mat. After being towed to the drilling location, the legs are lowered until the {GRAPH} mat contacts the seabed and the upper hull is jacked to the desired elevation above sea level. One advantage of mat supported rigs is the ability to operate in areas having soft seabed conditions where independent leg rigs are prone to have excessive penetration and subject to leg damage.
Independent Leg Rig -- This type of rig consists of a floating hull with three independent elevated legs. After being towed to the drilling location, the {GRAPH} legs are lowered until they penetrate the seabed and the hull is jacked to the desired elevation above sea level.
The following table describes the Company's drilling rigs as of February 17, 1994:
- --------------- (a) Can be modified to provide for 300 foot water depth capacity. (b) Designed to operate in environmentally sensitive areas such as Mobile Bay. (c) Equipped with top drive. (d) Year of construction -- 1976 (e) Year of construction -- 1969 (f) Chartered pursuant to a two-year charter agreement expiring in February 1995. * Friede & Goldman. ** Marathon LeTourneau
The Company's fleet was substantially reduced during 1991 and 1992. In 1991, the Company sold one rig and returned two chartered rigs to their owners pursuant to the termination of the related charter agreements. In 1992, the Company (i) sold two rigs (one of which was 50% owned), (ii) transferred custody of seven rigs to the United States Maritime Administration ("MarAd") and (iii) returned one chartered rig to its owner pursuant to the expiration of the related charter agreement. The rigs transferred to MarAd were sold to third parties during 1992 and 1993 with MarAd receiving the proceeds from such sales. Pursuant to the terms of such sales, the owners of such rigs are prohibited from marketing them in the U.S. Gulf of Mexico for exploratory and development drilling purposes. See Item 7 " -- The Recapitalization." In December 1992, the Company chartered an additional rig under a two-year charter agreement providing for charter payments of $1,500 and $1,800 per operating day during the first and second years, respectively. In August 1993, the Company acquired and refurbished the MARINE 304. Also in 1993, the Company refurbished and reactivated the MARINE 1.
OTHER PROPERTY
The Company leases approximately 28,000 square feet of office space in Sugar Land, Texas for its headquarters. In addition, the Company leases an approximately 60,000 square foot warehouse and repair facility on 31 acres near Houston, Texas. The Company also owns a 16 acre property in Corpus Christi, Texas, which is presently held for sale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
Various 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 established adequate reserves for any liabilities which may reasonably be expected to result from these claims.
In the opinion of management, no pending claims, actions or proceedings against the Company or its subsidiaries are expected to have a material adverse effect on its financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common Stock"), trades on the Nasdaq Stock Market under the symbol "MDCO." The following table sets forth the range of high and low sale prices per share of the Common Stock as reported by the Nasdaq Stock Market for the periods indicated. Share price data has been adjusted to reflect a one-for-twenty-five reverse stock split (the "Reverse Stock Split") effected in October 1992. See Item 7 " -- The Recapitalization."
The last sale price of the Common Stock as reported by the Nasdaq Stock Market on February 17, 1994 was $5 5/8 per share. As of February 17, 1994, there were approximately 500 holders of record of the Common Stock.
The Company has not paid cash dividends on its Common Stock in the past and does not intend to pay dividends on the Common Stock in the foreseeable future. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included in Item 8 of this report.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the Company as of and for each of the periods indicated. The selected financial data for each of the five years in the period ended December 31, 1993 are derived from the Company's audited consolidated financial statements. The information presented below should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION -- GENERAL
The following is a discussion of the Company's financial condition, results of operations, historical financial resources and working capital. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Marine Drilling Companies, Inc.:
We have audited the consolidated financial statements of Marine Drilling Companies, Inc. and subsidiaries as listed in Item 14 on page 38. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in Item 14 on page 38. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK
Houston, Texas February 18, 1994
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
{Continued}
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS, EXCEPT SHARE DATA)
(1) BASIS OF PRESENTATION AND RECAPITALIZATION TRANSACTIONS
Basis of Presentation
Marine Drilling Companies, Inc. ("Company") became a holding company on March 13, 1990 through a reorganization and acquisition plan ("Keyes Merger") pursuant to which Mar-Dril, Inc. ("Mar-Dril") acquired various corporations and partnerships in which Mr. William O. Keyes had direct or indirect interests ("Keyes Entities"). In the Keyes Merger, Mar-Dril and the Keyes Entities became wholly-owned subsidiaries of the Company. During 1993, the Keyes Entities included Keyes 303, Inc. ("Keyes 303"), Marine 300 Series, Inc. ("Marine 300 Subsidiary") and Keyes Holding Corporation. In September 1993, Keyes 303 and Marine 300 Subsidiary were merged into Keyes Holding Corporation. References herein to the Company include its subsidiaries unless otherwise stated or the context otherwise requires.
Recapitalization Transactions
On June 19, 1992, the Company entered into an agreement with certain of its lenders and preferred shareholders providing for a significant recapitalization ("Recapitalization").
On June 19, 1992, $500 was paid to one of Mar-Dril's lenders in exchange for the discharge of approximately $13,942 of bank indebtedness.
On October 29, 1992, the Recapitalization was approved by the Company's shareholders and, as a result, the Company's debt (including interest) and preferred stock obligations were reduced during 1992 by approximately $187,000 and the Company's rig fleet was substantially reduced. The Recapitalization included a one-for-twenty-five reverse split of the Company's $.10 par value common stock into $.01 par value common stock ("Common Stock").
In connection with the approval of the Recapitalization, Mar-Dril's remaining bank indebtedness and related interest totalling approximately $51,919 as of September 30, 1992 was completely discharged for approximately 5,000,000 shares of Common Stock which were issued to Mar-Dril's lenders.
The Recapitalization also included the reclassification of the Company's 14% cumulative exchangeable preferred stock, par value $1.00 per share ("Old Preferred Stock") with a liquidation preference as of October 29, 1992 of approximately $65,582 into 19,369,893 shares of Common Stock.
The Company sold 9,638,214 shares of Common Stock of which 4,800,000 shares were purchased by three of the Company's principal shareholders pursuant to a rights offering ("Rights Offering"). The Rights Offering was closed in December 1992 with the Company receiving net proceeds of approximately $11,537.
As part of the Recapitalization, the Company entered into a $4,000 bridge loan facility with three of its principal shareholders which was intended to fund the Company's operations through the completion thereof. On October 29, 1992, the $4,000 principal amount and interest thereon were exchanged for shares of Common Stock at an exchange price of $1.25 per share.
During 1992 the Company defaulted on all series of its U.S. Government guaranteed Title XI ("Title XI") ship financing bonds owed by two of its subsidiaries. The Company transferred custody and financial responsibility for seven of its eight Title XI financed rigs to the Maritime Administration of the United States Department of Transportation ("MarAd"), agreed to pay to MarAd certain additional amounts in connection with certain litigation (see below), proposed to restructure approximately $2,300 in debt and
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pay approximately $460 in consideration for the discharge of approximately $63,019 in debt and related interest. In September 1992, Mar-Dril; Storm Drilling Company, a wholly owned subsidiary of Mar-Dril ("SDC"); Marine Drilling Management Company, a wholly owned subsidiary of the Company ("MDMC"); the Company and MarAd entered into an agreement (the "Storm Drilling Restructuring"). MarAd agreed to (i) release Mar- Dril from its limited guarantee of interest on the SDC Title XI debt, (ii) not to take adverse actions against SDC or any of its affiliates (including Mar-Dril, the Company and MDMC) or their respective officers and directors with respect to any deficiencies remaining on the Title XI debt after the foreclosure or sale of SDC's rigs and (iii) take custody of the SDC rigs. In addition to the foregoing, MDMC paid approximately $3,802 to MarAd from litigation involving the MARINE 7.
Quasi-Reorganization
On December 31, 1992, the Company adopted quasi-reorganization accounting procedures. Quasi-reorganization accounting allowed the Company to eliminate the accumulated deficit against additional paid-in capital and to revalue assets and liabilities to estimated fair values. Therefore, the adoption of quasi-reorganization accounting procedures following the Recapitalization gave the Company a "fresh start" for accounting purposes.
The adoption of quasi-reorganization accounting procedures resulted in a decrease to property and equipment of $56,051, a decrease in assets held for sale of $240, a decrease in other assets of $9,043, a decrease in debt of $8,054, a decrease in deferred expenses of $145, a decrease in receivables of $112 and an increase in other liabilities of $25.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries -- Mar-Dril, MDMC, Marine Drilling International, Inc., Keyes Holding Corporation and Drilling Services Supply Company.
All significant intercompany balances and transactions have been eliminated in consolidation.
Operations
As of December 31, 1993, the Company's fleet consisted of 12 jack-up rigs, 11 of which are owned by the Company and one of which is operated by the Company under a charter agreement expiring in February 1995.
Property and Equipment
Property and equipment are stated at historical cost or the cost assigned to the assets at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures. Depreciation is provided on the straight-line method over the estimated remaining useful lives of the assets which are as follows:
Years ------- Jack-up rigs 5 to 15 Drill string 4 Other equipment 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance and repairs amounted to $8,030, $1,943 and $8,593 in 1993, 1992 and 1991, respectively. Expenditures for major renewals and betterments are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When property or equipment is retired, the related assets and accumulated depreciation are removed from the accounts and a gain or loss is reflected in other income (expense). The Company continues to depreciate idle drilling equipment using the same rates.
Goodwill Amortization
Goodwill recognized in the prior years' acquisitions of minority interests in Mar-Dril affiliates and the 1990 acquisition of the Keyes Entities was amortized over 15 years. Such amortization expense amounted to $791 in 1992 and $1,056 in 1991. All goodwill was eliminated at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures.
Employer's Liability Claims
Employer's liability claims, principally arising from actual or alleged personal injuries, are estimates of the Company's liabilities for such occurrences. These claims are classified as current or long-term based upon the periods in which such claims are expected to be funded.
Deferred Financing Costs
Deferred financing costs are amortized over the life of the related debt. All such costs, amounting to $1,003, were eliminated at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures or were written off in connection with early extinguishments of debt.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 required a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective December 31, 1992, in conjunction with the adoption of quasi-reorganization accounting procedures, the Company adopted Statement 109. The change in the method of accounting for income taxes had no cumulative effect on the 1992 consolidated statements of operations. Pursuant to the deferred method under APB Opinion 11, which was applied during 1992 and prior years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates.
Revenue Recognition
Drilling revenues are recorded pursuant to day rate contracts, under which the Company receives a fixed amount per day for providing drilling services using the rigs it operates.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
Cash equivalents of $21,396 and $8,600 at December 31, 1993 and 1992, respectively, consist of loan participations, Eurodollar investments, mortgage backed and corporate debt securities. Their carrying value is a reasonable approximation of their fair value. For purposes of the statement of cash flows, the Company generally considers all investments with an original maturity of three months or less at date of purchase and other highly liquid investments readily convertible to determinable amounts of cash, excluding restricted cash investments, to be cash equivalents.
Income (Loss) Per Common Share
Income (loss) per common share is based on the weighted average number of common shares outstanding and common stock equivalents, if dilutive. For the years ended December 31, 1992 and 1991, the net income (loss) applicable to common shareholders has been adjusted to reflect the dividends on and the accretion of discount on Old Preferred Stock. Net income per common share for the year ended December 31, 1993 does not include the effect of outstanding stock options as the potential dilution from their exercise is less than three percent.
Reclassification of Accounts
Certain reclassifications have been made to the 1992 and 1991 consolidated financial statements to conform with the current presentation.
Restricted Cash Investments
Restricted cash investments consist primarily of funds held in a cash collateral account required to secure employer's liability claims.
Concentrations of Credit Risk
The market for the Company's services and products in the offshore oil and gas industry, and the Company's customers consist primarily of independent and major oil and gas companies. The Company performs ongoing credit evaluations of its customers and obtains collateral security as deemed prudent. The Company has established an adequate allowance for bad debts, and such losses have been within management's expectations (see Note 9).
At December 31, 1993 and 1992, the Company had cash deposits concentrated primarily in two major banks. In addition, the Company had certificates of deposits, commercial paper and Eurodollar time deposits with a variety of companies and financial institutions with strong credit ratings, and generally hold such securities until maturity. The Company believes that credit and market risk in such instruments is minimal.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost or the cost assigned to the assets at December 31, 1992 in connection with the adoption of quasi-reorganization accounting procedures, and are summarized as follows:
Depreciation expense was $5,312, $11,030 and $15,463 for the years ended December 31, 1993, 1992 and 1991, respectively. The Company rents drilling rigs, certain equipment and other property under operating leases. Rental expense was $936, $1,013 and $1,658 in 1993, 1992 and 1991, respectively.
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
(5) DEBT OBLIGATIONS
Long-term debt is summarized as follows:
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Marine 300 Subsidiary - Note Payable to Bank
During 1991 and through August 12, 1992, the Marine 300 Subsidiary note payable to a bank accrued interest at the lender's reference rate plus three-quarters of one percent. This loan was secured by two drilling rigs, including their respective drilling contracts and related receivables, and by a cash collateral account. Amounts on deposit in a cash collateral account were seized by the lender in February 1992 and were applied against the Marine 300 Subsidiary indebtedness. In August 1992, the debt of the Marine 300 Subsidiary was restructured. Pursuant to that restructuring, $2,030 of the note was paid and $40 applied to principal from a cash collateral account with the remaining principal balance due April 30, 1993. Interest accrued at the lender's prime rate plus one and one-quarter percent and was payable monthly. In connection with the restructuring, all defaults were cured. On March 31, 1993, the Marine 300 Subsidiary note was again restructured by (i) extending the maturity to March 31, 1994, (ii) prepaying the principal to reduce the balance to $6,720, (iii) adjusting the interest rate to prime plus one and one-half percent, (iv) paying a restructuring fee of $67 and (v) providing for the amortization of principal through monthly prepayments of $560 each. In July 1993, the remaining principal balance of $5,040 was prepaid in full.
Keyes 303 - Notes Payable to Banks
The Keyes 303 notes payable to banks accrued interest at the lender's reference rate plus one and one-fourth percent. Amounts on deposit in a cash collateral account were seized by the lender in February 1992 and were applied against the Keyes 303 indebtedness. In August 1992, the debt of Keyes 303 was restructured. Pursuant to that restructuring, $2,000 of the note was paid with the remaining principal balance due April 30, 1993. In connection with the restructuring, all defaults were cured. On March 31, 1993, the Keyes 303 note was again restructured by (i) extending the maturity to March 31, 1994, (ii) prepaying the principal to reduce the balance to $3,280, (iii) adjusting the interest rate to prime plus one and one-half percent, (iv) paying a restructuring fee of $33 and (v) providing for the amortization of principal through monthly prepayments of $273 each. In July 1993, the remaining principal balance of $2,460 was prepaid in full.
Note Payable to MarAd
On July 14, 1992, Marine 200 Subsidiary filed for protection under Chapter 11 of the United States Bankruptcy Code in connection with the restructuring of its indebtedness to MarAd which as of December 31, 1992 was approximately $10,913 including related interest. The net book value of the rig owned by Marine 200 Subsidiary was reduced to approximately $2,300 pursuant to the Chapter 11 reorganization and the quasi-reorganization. The reduction in the debt from its original face amount of approximately $11,000 was reflected in these financial statements as part of the quasi-reorganization. The Chapter 11 plan of reorganization of the Marine 200 Subsidiary was confirmed by the U.S. Bankruptcy Court on March 16, 1993 after the plan was unanimously approved by its creditors. The restructuring of the Title XI debt was also completed as of March 31, 1993, at which time all defaults were cured. That restructuring involved the issuance of notes totaling approximately $2,890 and a cash payment of approximately $230. The notes were prepaid in full in August 1993.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Income taxes consist of the following:
As a result of the adoption of quasi-reorganization accounting procedures on December 31, 1992, the tax effect of the realization of tax attributes generated prior thereto are recorded directly to shareholders' equity and are not reflected as a reduction of income tax expense.
For the year ended December 31, 1993, the effective tax rate for financial reporting purposes approximates the U.S. federal statutory rate of 35%.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 and 1992 are presented below.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1993 and 1992 was $42,209 and $39,594, respectively. The net change in the total valuation allowance for the years ended December 31, 1993 and 1992 was an increase of $2,615 and $39,594, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon projections for future taxable income over the periods which the deferred tax assets are deductible and the Section 382 limitation as discussed below, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1993.
At December 31, 1993, the Company had net operating loss carryforwards for federal income tax purposes of $95,176 which are available to offset future federal taxable income, if any, through 2007. The Company also had investment tax credit and general business credit carryforwards for federal income tax purposes of approximately $15,463 (including $1,844 which are subject to the limitation as to their use imposed in connection with the 1989 Ownership Change as discussed below) at December 31, 1993 which are available to reduce future federal income taxes, if any, through 2000.
The Company has taken the position that the Recapitalization did not cause an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended ("Code"). The Company's position is based on the applicability of Section 382(l)(3)(C) of the Code, which provides generally that any change in the proportionate ownership attributable solely to fluctuations in relative fair market value of different classes of stock are not to be taken into account for purposes of Section 382. To date, neither the Internal Revenue Service nor the United States Department of Treasury has established any rules or guidance as to how such Section will be interpreted or applied to situations similar to the Recapitalization. Accordingly, there can be no assurance that an ownership change for purposes of Section 382 will not be deemed to have occurred as a result of the Recapitalization. If an ownership change were deemed to have occurred, the utilization of the Company's net operating losses, against its future income, if any, would be limited annually to approximately $1,500. Since such limitation would be less than the Section 382 limitation (approximately $9,000) imposed as a result of the Company's 1989 sale of Common Stock which resulted in an ownership change ("1989 Ownership Change") pursuant to Section 382 of the Code, the Section 382 limitation imposed in connection with the Recapitalization would apply to all net operating losses applicable to the period before the Recapitalization.
(7) LONG TERM INCENTIVE PLANS
Discontinued Plans
In 1987, the Company adopted a Stock Appreciation Rights plan ("SAR Plan"), for certain officers and key employees, which could grant up to 28,800 stock appreciation rights ("SARs"). During 1989 the Company elected not to grant additional SARs and adopted the Marine Drilling Company 1989 Stock Option Plan ("1989 Plan"), which provided for the issuance, to key employees and officers, of options to purchase up to 28,800 shares of Old Common Stock. On September 29, 1989, all holders who were permitted to do so converted their SARs (18,720 SARs) into stock options.
In conjunction with the Keyes Merger, the Company assumed the obligations of the 1989 Plan and adopted the Marine Drilling Companies, Inc. 1990 Stock Option Plan ("1990 Plan"), in substantially the same form as the 1989 Plan, covering 10,080 shares.
From inception to October 29, 1992, no SARs were exercised, 1,080 of the 1989 options were exercised, 5,400 of the 1989 options were forfeited and 680 of the 1990 options were forfeited and were available for future grant.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Previously recorded compensation expense ($741) related to the stock options was reversed during 1992 for options which expired during 1992. Compensation expense charged (or credited) to operations relating to the stock options for 1992 and 1991 was $(741) and $1,146, respectively.
Adoption and Implementation of New Plan
On September 14, 1992, the Company's Board of Directors adopted the Marine Drilling 1992 Long Term Incentive Plan ("1992 Plan"), which was subsequently approved by the shareholders on October 29, 1992. Pursuant to the terms of the 1992 Plan, an aggregate of 10,000,000 shares (subject to the restrictions described herein) of Common Stock are available for distribution pursuant to stock options, SARs and restricted stock. The number of shares of Common Stock available for distribution as described above is further limited in that no stock options, SARs or restricted stock may be issued if, immediately after such issuance, the number of shares subject to stock options, SARs and restricted stock awards would exceed 5% of the Common Stock then outstanding. The shares of Common Stock subject to any stock option or SAR that terminates without a payment being made in the form of Common Stock would again become available for distribution pursuant to the 1992 Plan. During 1993, the Company issued 385,000 shares of restricted Common Stock. Compensation expense related to the issuance of restricted Common Stock for the year ended December 31, 1993 was $233. During 1993, 30,000 shares of restricted Common Stock were forfeited.
Holders of SARs granted under the 1987 SAR Plan and options granted under the 1989 Plan and the 1990 Plan have surrendered such SARs and options in exchange for options under the 1992 Plan. The 1987 SAR Plan, the 1989 Plan and the 1990 Plan have been terminated.
During the fourth quarter 1992, 1,440 SARs outstanding under the 1987 SAR Plan and 21,640 shares subject to option under the 1989 and 1990 Plans were exchanged for 23,080 shares subject to option at $1.25 per share under the 1992 Plan. Additionally, options for 1,590,000 shares exercisable at $1.25 were granted on November 3, 1992 and options for 190,000 shares exercisable at $6.00 were granted on June 29, 1993. All such options expire November 2002 and June 2003, respectively, unless earlier exercised. During 1993, 261,030 shares were exercised at $1.25 per share and options for 1,400 shares were forfeited.
The following table sets forth the shares subject to options outstanding under the 1992 Plan at December 31, 1993:
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based upon Common Stock outstanding as of December 31, 1993 and 1992 and shares reserved for issuance as set forth above, the number of shares then available for future stock options, SARs and restricted stock grants was 404,870 and 388,312 shares, respectively.
(8) RELATED PARTY TRANSACTIONS
The Company has performed services directly for Newfield Exploration Company ("Newfield") and indirectly for Newfield's customers. Amounts received directly from Newfield were $-0-, $515 and $188 during 1993, 1992 and 1991, respectively. Amounts received indirectly from Newfield's customers were approximately $526, $774 and $2,523 during 1993, 1992 and 1991, respectively. One of the Company's directors is also a director of Newfield.
The Company has performed services for Brooklyn Union Exploration Company, Inc. ("Brooklyn"), the operator of certain oil and gas properties with respect to which Smith Offshore Exploration Company ("Smith") participates as a working interest owner. During 1993, 1992 and 1991, the Company recorded revenues of $5,165, $1,356 and $5,312, respectively, from Brooklyn. Aeneas, a principal shareholder of the Company, is a principal shareholder and creditor of Smith. In addition, Mr. Eisenson, a director of the Company, is an officer and director of Aeneas.
In connection with the Recapitalization, the Company entered into a loan agreement ("Bridge Loan") with three of its significant shareholders. The Bridge Loan provided for the Company to borrow up to $4,000 at 10%. On October 29, 1992, concurrently with the Recapitalization, the Company issued 3,270,054 shares of Common Stock in full satisfaction of the loan balance of $4,000 and accrued interest thereon.
(9) GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS
The following table summarizes geographic area operating revenues and operating income for the year ended December 31, 1993, and identifiable assets by geographic area at year-end 1993:
There were no significant international operations in the years 1992 or 1991.
The Company conducts business in one industry segment, oil and gas well contract drilling. 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 years 1993, 1992 and 1991, sales to customers that represented 10% or more of consolidated drilling revenues were as follows:
* Less than 10%
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As is typical in the industry, the Company does business with a relatively small number of customers at any given time. The loss of any one of such customers could, at least on a short-term basis, have a material adverse effect on the Company's profitability. Management believes, however, that at current levels of drilling activity, the Company would have alternative customers for its services if it lost any single customer and that the loss of any one customer would not have a material adverse effect on the Company on a long-term basis.
(10) COMMITMENTS AND CONTINGENCIES
Operating Leases
Aggregate future minimum rental payments relating to operating leases are as follows:
(11) UNAUDITED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly consolidated financial information for 1993 and 1992 is as follows:
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of operations during 1993 were generally improved compared to 1992 periods. These improvements were due primarily to improved rig utilization and day rates resulting from increases in natural gas prices from early 1992 levels. The 1993 results were also positively affected by the Company's redeployment of three of its rigs to the Bay of Campeche offshore Mexico.
Utilization rates of the Company's rigs during the first, second and third quarters of 1992 reflected depressed industry conditions in the U.S. Gulf of Mexico drilling market. During the second quarter of 1992, the Company recorded a rig writedown of $65,822 related to the anticipated disposition of seven rigs financed by MarAd and the writedown to net realizable value of three rigs to be held for sale. Also, during that quarter the Company paid a lender $500 in connection with the Mar-Dril debt restructuring (see Note 1) and recorded early extinguishment of debt of $13,942 and a related gain of $13,442. During the third quarter of 1992 the Company (i) accrued an additional $1,300 of general and administrative expense to reflect the costs associated with certain litigation and the Recapitalization, (ii) recognized a loss in the accompanying Consolidated Statements of Operations of $2,500 to reflect the further impairment of the values of the rigs owned by SDC and (iii) recorded an extraordinary gain of $45,406 reflecting the gain associated with the early extinguishment of Title XI debt of SDC pursuant to the Storm Drilling Restructuring (see Note 1). During the fourth quarter of 1992, the Company's rig utilization and day rates increased dramatically from earlier levels, resulting in improved operating results.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Part III, Items 10 through 13, of Form 10-K is incorporated by reference from the Registrant's Proxy Statements relating to its annual meeting of Shareholders to be held May 4, 1994, which will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year. Also reference is made to the information contained under the captioned "Executive Officers of Registrant" contained in Part I hereof.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included in Part II, Item 8:
All other schedules are omitted because they are not required or are not applicable.
(3) Exhibits:
Exhibit Number ------
3.1 Restated Articles of Incorporation of Marine Drilling Companies, Inc. (Incorporated by reference to Exhibit 28.17 to the Current Report on Form 8-K of the Registrant dated October 30, 1992.)
3.2 Amended and Restated Bylaws of Marine Drilling Companies, Inc. (Incorporated by reference to Exhibit 28.18 to the Current Report on Form 8-K of the Registrant dated October 30, 1992.)
10.1 Keyes Noncompetition Agreement, dated as of March 13, 1990, between the Registrant and William O. Keyes. (Incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1989.)
++ 10.6 Bonus Agreement, dated November 18, 1991, among Marine Drilling Management Company, Marine Drilling Companies, Inc. and William O. Keyes. (Incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1991.)
++ 10.7 Bonus Agreement, dated November 18, 1991, among Marine Drilling Management Company, Marine Drilling Companies, Inc. and William H. Flores. (Incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1991.)
* ++ 10.8 Amendment dated October 27, 1993 to the Bonus Agreement dated November 18, 1991, among Marine Drilling Management Company, Marine Drilling Companies, Inc. and William O. Keyes.
* ++ 10.9 Amendment dated October 27, 1993 to the Bonus Agreement dated November 18, 1991, among Marine Drilling Management Company, Marine Drilling Companies, Inc. and William H. Flores.
10.12 Reorganization Agreement concerning Marine Drilling Companies, Inc., dated June 19, 1992, among Marine Drilling Companies, Inc., Mar-Dril, Inc., The Chase Manhattan Bank (National Association), Corpus Christi National Bank, Bank One, Texas, N.A., Energy Management Corporation, Randall D. Smith, Trustee, Kathryn Sladek Smith Trust Article Third B, II of Last Will and Testament of Kathryn Sladek Smith, Warburg, Pincus Capital Company, L.P., Aeneas Venture Corporation, Capricorn Investors, L.P. and solely for certain limited purposes, William O. Keyes. (Incorporated by reference to Exhibit 28.4 to the Current Report on Form 8-K of the Registrant dated June 23, 1992.)
10.13 Amendment Number 1 to the Reorganization Agreement, dated as of August 3, 1992. (Incorporated by reference to Exhibit 28.5 to the Current Report on Form 8-K of the Registrant dated September 14, 1992).
10.14 Amendment Number 2 to the Reorganization Agreement, dated as of August 7, 1992. (Incorporated by reference to Exhibit 28.6 to the Current Report on Form 8-K of the Registrant dated September 14, 1992).
10.15 Settlement Agreement dated as of September 2, 1992 among Storm Drilling Company, Mar-Dril, Inc., Marine Drilling Management Company, Marine Drilling Companies, Inc. and the United States of America, represented by the Secretary of Transportation acting by and through the Maritime Administrator. (Incorporated by reference to Exhibit 28.14 to the Current Report on Form 8-K of the Registrant dated September 25, 1992).
10.16 Amendment No. 1 dated as of September 30, 1992, to Settlement Agreement among Storm Drilling Company, Mar-Dril, Inc., Marine Drilling Management Company, Marine Drilling Companies, Inc. and the United States of America, represented by the Secretary of Transportation acting by and through the Maritime Administrator.
10.17 Release dated October 19, 1992 issued by the United States Secretary of Transportation acting by and through the Maritime Administrator. (Incorporated by reference to Exhibit 28.16 to the Current Report on Form 8-K of the Registrant dated October 19, 1992).
++10.18 The Marine Drilling 1992 Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10.26 of the Company's Registration Statement No. 33-52470 on Form S-1).
10.20 Registration Rights Agreement, dated October 29, 1992, among Marine Drilling Companies, Inc., The Chase Manhattan Bank (National Association), Corpus Christi National Bank, Bank One, Texas, N.A., Energy Management Corporation, Randall D. Smith, Trustee, Kathryn Sladek Smith Trust Article Third B, II of Last Will and Testament of Kathryn Sladek Smith, Warburg, Pincus Capital Company, L.P., Aeneas Venture Corporation, Capricorn Investors, L.P. and William O. Keyes. (Incorporated by reference to Exhibit 28.19 to the Current Report on Form 8-K of the Registrant dated October 30, 1992.)
10.21 Shareholders' Agreement, dated October 29, 1992, among Marine Drilling Companies, Inc., The Chase Manhattan Bank (National Association), Warburg, Pincus Capital Company, L.P., Aeneas Venture Corporation, Capricorn Investors, L.P. and William O. Keyes. (Incorporated by reference to Exhibit 28.20 to the Current Report on Form 8-K of the Registrant dated October 30, 1992.)
* 10.22 Termination and Amendment Agreement (respecting the Shareholders' Agreement dated October 29, 1992) dated as of June 18, 1993 by and among Marine Drilling Companies, Inc., The Chase Manhattan Bank (National Association), Warburg, Pincus Capital Company, L.P., Aeneas Venture Corporation, Capricorn Investors, L.P. and William O. Keyes.
* 21.1 Subsidiaries of the Registrant.
* 23.1 Consent of Independent Certified Public Accountants.
* 24.1 Powers of attorney.
- --------------- ++ Management contract or compensation plan or arrangement required to be filed as an exhibit to this report. * Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1993.
SCHEDULE V
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES PROPERTY AND EQUIPMENT YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN THOUSANDS)
- --------------- (1) Adjustments between categories. (2) Includes asset writedowns of $195,175; quasi-reorganization adjustments of $118,396 and other of $131.
See accompanying notes and the notes to the Consolidated Financial Statements
SCHEDULE VI
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES ACCUMULATED DEPRECIATION YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (DOLLARS IN THOUSANDS)
- --------------- (1) Adjustments between categories. (2) Includes asset writedowns of $121,284 and quasi-reorganization adjustments of $62,345.
See accompanying notes and the notes to the Consolidated Financial Statements
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By William O. Keyes ----------------------------- William O. Keyes President
Date: February 24, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: