ITEM 3. LEGAL PROCEEDINGS
The Company recently settled litigation with Diamond M concerning various matters relating to the sale and bareboat charter of 3 offshore drilling rigs. Legal proceedings were instituted by the
Company on August 29, 1991, and were consolidated with related legal proceedings subsequently instituted by Diamond M in the United States District Court, Southern District of Texas, Houston Division.
In May, 1989, the Company sold 3 rigs to Diamond M for $22 million, $15 million of which was payable in cash, and $7 million of which was payable pursuant to three-year promissory notes. Simultaneously with the sale, the Company bareboat chartered the rigs from Diamond M for a two-year period, with charter hire payment dates pursuant to the charters coinciding with principal and interest payment dates pursuant to the notes. In the litigation, Diamond M alleged that the Company failed to properly maintain and repair the rigs during the terms of the charters, that the rigs were not in compliance with certain specified classifications and conditions at redelivery upon expiration of the respective charters, and that as a result, Diamond M incurred substantial costs to improve the conditions of the rigs. Diamond M also claimed the right to receive additional charter hire attributable to the period during which its repairs and improvements to the rigs were performed. In June, 1993, a partial summary judgment awarded the Company $1.8 million, together with interest and attorney's fees, for the notes payable by Diamond M to the Company, offset by certain charter hire payments due Diamond M. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division. The judgment awarded Diamond M $3.5 million, plus court costs, offset by the partial summary judgment of $1.8 million. The Company paid Diamond M $1.7 million in February, 1994 as a final settlement of all disputed issues. See Note 13 of Notes to Consolidated Financial Statements.
The Company is also party to a number of lawsuits which are ordinary, routine litigation incidental to the Company's business, the outcome of which, individually or in the aggregate, is not expected to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any matter to a vote of stockholders in the fourth quarter of 1993.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "CLDR." The following table sets forth the range of high and low closing sale prices per share of Common Stock as reported by NASDAQ for the periods indicated.
On March 3, 1994, the closing sale price of the Company's Common Stock, as reported by the NASDAQ, was $11 3/4 per share. On that date, there were 2,173 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and it is not anticipated that cash dividends will be paid to holders of Common Stock in the foreseeable future. Under the Company's credit agreement with INCC, the Company is restricted from declaring, making, or
paying any cash dividend on any class of capital stock except for the quarterly dividend applicable to the Company's Preferred Stock.
The Company's $2.3125 Convertible Exchangeable Preferred Stock ("Preferred Stock") is also traded on the NASDAQ National Market System under the symbol "CLDRP." The following table sets forth the range of high and low closing sale prices per share of Preferred Stock as reported by NASDAQ for the periods indicated.
On March 3, 1994, the closing sale price of the Company's Preferred Stock, as reported by NASDAQ, was $26 3/4 per share. On that date, there were 50 holders of record of the Company's Preferred Stock.
Holders of shares of Preferred Stock are entitled to receive, when, as, and if declared by the Board of Directors out of funds of the Company legally available therefor, cash dividends at an annual rate of $2.3125 per share, payable quarterly on March 15, June 15, September 15 and December 15 in each year, except that if any such date is a Saturday, Sunday or legal holiday, such dividend is payable on the next day that is not a Saturday, Sunday or legal holiday. Dividends are cumulative and are payable to holders of record as they appear on the stock books of the Company on such record dates as are fixed by the Board of Directors. Cash dividends paid on each of the quarterly dividend dates in 1993, 1992 and 1991 were $665,000. The Preferred Stock is also convertible into shares of Common Stock at the rate of 1.89394 shares of Common Stock for each share of Preferred Stock and is subject to redemption at the option of the Company at varying prices depending on the date called for redemption. Under the credit agreement with INCC, the Company is restricted from redeeming the Preferred Stock unless such redemption is mandatory.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information of the Company. The amounts as of and for each of the five years in the period ended December 31, 1993, have been derived from audited consolidated financial statements of the Company. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The selected consolidated financial data provided below are not necessarily indicative of the future results of operations or financial performance of the Company.
- ---------------
(1) Includes litigation settlement and expenses of $3.7 million in 1993 and gains of $5.0 million and $5.5 million on disposition of assets in 1992 and 1989, respectively.
(2) The Company has not paid any cash dividends on its Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Activity in the contract drilling industry and related oil service businesses has been severely depressed since 1982 due to volatility in oil and natural gas prices. These conditions have resulted in an oversupply of drilling equipment, decreased rig utilization, declining dayrates and intense competition for drilling contracts. The financial condition and results of operations of the Company and other drilling contractors have suffered, as demand for their services is primarily dependent upon the level of spending by oil and gas companies for exploration, development and production activities.
The Company has endeavored to mitigate the effect of these depressed market conditions by diversifying its scope of operations beyond the traditional domestic daywork contract drilling market. To achieve its strategic objective, the Company established separate but related lines of business in turnkey drilling and MOPU operations, and pursued foreign drilling and production opportunities. Each of the Company's business segments will continue to be affected, however, by the unsettled energy markets, which are influenced by a variety of factors, including general economic conditions, the extent of worldwide oil and gas production and demand therefor, government regulations, and environmental concerns.
RESULTS OF OPERATIONS
Year 1993 Versus 1992
The Company recognized net income, before preferred dividends, of $3.6 million in 1993 compared to net income of $3.0 million in 1992. The 1993 results include litigation settlement and expenses of $3.7 million, or $0.82 per share. Excluding this charge in 1993, the Company would have reported net income of $7.3 million, or $1.03 per common share. The 1992 results included a $1.5 million writedown in the carrying value of oil and gas properties and a $4.7 million gain on the disposition of one of the Company's MOPUs due to its constructive total loss in Hurricane Andrew. Excluding these amounts in 1992, the Company would have reported a net loss of $.2 million, or $0.86 per common share. Operating income increased $7.2 million from 1992 to 1993. The improvement in operating income was primarily due to increased MOPU operating income of $7.1 million, increased foreign daywork drilling operating income of $1.7 million, and decreased domestic daywork drilling operating losses of $.4 million, offset in part by reduced turnkey drilling operating income of $1.1 million, increased oil and gas operating losses of $.5 million, and increased corporate overhead of $.4 million.
Daywork Drilling
Domestic daywork drilling revenues decreased $4.3 million from $5.5 million in 1992 to $1.2 million in 1993. The decrease was primarily due to the stacking of the majority of the Company's domestic land rigs in 1993 and the sale, effective January 1, 1993, of the Company's 4 inland posted barge drilling rigs together with rights to certain oil and gas production proceeds. Domestic daywork drilling operating losses decreased by $.4 million from $2.8 million in 1992 to $2.4 million in 1993. Costs savings resulting from the sale of the 4 inland posted barge drilling rigs were partially offset by costs associated with stacking the Company's domestic land rigs and the sale, effective January 1, 1993, of rights to certain oil and gas production proceeds. Three of the Company's 4 domestic land drilling rigs will operate in Venezuela during 1994. One of the Company's land drilling rigs was mobilized to Venezuela in 1994 and began drilling operations for Corpoven for a three-year term. Two other domestic land drilling rigs will begin drilling operations in 1994 in Venezuela to drill turnkey wells awarded the Company by Corpoven.
Foreign daywork drilling revenues decreased $.5 million from $21.5 million in 1992 to $21.0 million in 1993. Foreign daywork drilling operating income increased $1.7 million during the same period. The increase in operating income was primarily due to reduced labor costs and repair and maintenance expenses, offset in part by decreased revenues during 1993 when compared to 1992. Foreign operating results reflect decreased revenues primarily due to reduced cost flow-throughs billed to the operators and devaluation of the Venezuelan Bolivar. The contracts for the Company's 2 jack-up drilling rigs operating in Venezuela expire on March 9, 1994 and March 15, 1994, respectively. The Company is currently in the process of renegotiating the contracts. No assurance can be given that the contracts will be renewed, and if renewed, at rates comparable to those received in 1993. Contracts on the 2 land drilling rigs working in eastern Venezuela expire in September, 1995.
Turnkey Drilling
Turnkey drilling revenues decreased $20.0 million from $37.0 million in 1992 to $17.0 million in 1993. Twelve turnkey contracts were completed during 1992 compared to 6 turnkey contracts completed in 1993, 2 of which related to CNCTI and were accounted for under the equity method in the Company's Consolidated Financial Statements. See Note 5 of Notes to Consolidated Financial Statements. Turnkey drilling operating income decreased $1.1 million in 1993 when compared to 1992, primarily due to fewer completed contracts in 1993.
The Company anticipates improved turnkey drilling operating results in 1994 due to the award of approximately $50 million in international turnkey contracts to be drilled in 1994 and 1995. The Company was awarded 2 packages with 3 turnkey wells in each package to be drilled for Corpoven with estimated revenues of approximately $36 million. The Company will mobilize 2 of its idle domestic land drilling rigs to Venezuela to work on these projects. In addition, CNCTI, a joint venture in which the Company holds a one-third ownership percentage, was awarded 2 drilling packages by PEMEX for the drilling of a total of 4 wells. The Company has mobilized an idle jack-up drilling rig to the Bay of Tampico, Mexico in the first quarter of 1994 to drill 2 of the 4 wells. The 2 packages are expected to generate $42 million in revenues to CNCTI.
MOPU Operations
MOPU revenues increased $12.5 million from $9.2 million in 1992 to $21.7 million in 1993. MOPU operating income increased $7.1 million in 1993. The Company's MOPUs contributed greater income in 1993 due to 3 MOPU units working in Venezuela during all of 1993 while the 3 units worked only part of 1992. In addition, the Company's mobile offshore supply unit operated in the Bay of Campeche, Mexico during most of 1993 and none in 1992, and a new MOPU began working during the third quarter of 1993. Partially offsetting these increased revenues and operating income was the loss of income from the MARLIN NO. 3, which was destroyed in a hurricane on August 25, 1992. The MARLIN NO. 3 contributed revenues of $.8 million and operating income of $.4 million in
1992. Each of the 3 MOPUs working in Venezuela has an initial contract term of two years, subject to certain buyout options which, if exercised, could have a material adverse effect on the Company's future results of operations. See "Liquidity and Capital Resources."
Oil and Gas
Oil and gas revenues increased $1.0 million from $3.7 million in 1992 to $4.7 million in 1993, primarily due to increased natural gas production and pricing. Operating losses from oil and gas exploration activities increased $.5 million during the same period. Increased depreciation, depletion and amortization more than offset the revenue increases. Average daily natural gas production volumes increased to 4,522 Mcf per day in 1993 from 3,363 Mcf per day in 1992. Oil and condensate production decreased from 163 barrels per day in 1992 to 121 barrels per day in 1993. Average product pricing received in 1993 was $2.31 per Mcf of gas and $18.39 per barrel of oil and condensate compared to $2.08 per Mcf and $18.65 per barrel in 1992.
Corporate Overhead
Corporate overhead increased $.4 million from $4.5 million during 1992 to $4.9 million in 1993. The increase was primarily due to higher costs of certain employee benefits.
Other Income (Expense)
The Company recognized $3.9 million of other expense in 1993 compared to $2.7 million of other income in 1992. The $6.6 million decrease was primarily due to a litigation settlement and expenses of $3.7 million in 1993, decreased gains on disposition of assets of $2.9 million and increased income taxes of $.7 million, offset in part by increased interest income of $.7 million. See "Liquidity and Capital Resources" for a discussion of the Diamond M litigation settlement and expenses. The net decrease in gains on disposition of assets was primarily related to the $4.7 million gain recorded in 1992 related to the disposition of one of the Company's MOPUs as a result of its constructive total loss in Hurricane Andrew, offset in part by net gains on assets disposed of in 1993. The Company recorded income taxes of $.7 million in 1993 in anticipation of alternative minimum taxes in the United States and certain foreign taxes. The increase in interest income was primarily due to interest on notes receivable issued in connection with the sale of the 4 inland posted barge drilling rigs together with rights to certain oil and gas production proceeds effective January 1, 1993.
Year 1992 Versus 1991
The Company recognized net income, before preferred dividends, of $3.0 million in 1992 compared to a net loss of $3.9 million in 1991. The improvement of $6.9 million was due to a $4.8 million increase in MOPU operating income, a $3.2 million reduction in domestic daywork drilling operating losses, a $2.7 million increase in the recognition of other income and reduced oil and gas operating losses of $2.3 million. These improvements were offset in part by a $3.9 million
reduction in turnkey drilling operating income, reduced foreign daywork drilling operating income of $2.0 million and increased corporate overhead of $.2 million.
Daywork Drilling
Domestic daywork drilling revenues decreased $10.4 million from $15.9 million in 1991 to $5.5 million in 1992. The decrease in domestic daywork drilling revenues was attributable to the movement of 2 land rigs to Venezuela, the return to the owner of 3 leased offshore drilling rigs under long-term charter, and the stacking of the Company's 4 barge rigs. Domestic daywork drilling operating losses were reduced by $3.2 million from $6.0 million in 1991 to $2.8 million in 1992. The reduced operating loss was primarily attributable to cost savings associated with barge rig operations and the return to the owner of 3 leased offshore drilling rigs.
Foreign daywork drilling revenues increased $2.4 million from $19.1 million in 1991 to $21.5 million in 1992. Foreign daywork drilling operating income decreased $2.0 million during the same period. The increased foreign daywork drilling revenues reflect the contribution during 1992 of the 2 land rigs contracted to work in Venezuela, the impact of less downtime experienced in 1992 when compared to 1991, and cost flow-throughs to the operators. Foreign daywork drilling operating results decreased due to increased jack-up rig repair and maintenance expenses, contract rate reductions associated with the renewal of contracts on the Company's 2 jack-up drilling rigs operating in Lake Maracaibo, Venezuela, effective July 15, 1992 and August 9, 1992, and devaluation of the Venezuelan Bolivar. Each of the jack-up contracts were renewed in January and February, 1993 for one year terms at increased dayrates from that received during the second half of 1992, and were subsequently extended to March 9, 1994 and March 15, 1994, respectively. The Company is currently negotiating renewals of these contracts. Contracts on the 2 land drilling rigs working in eastern Venezuela expired in June, 1993, and were renewed for a period of two years, three months.
Turnkey Drilling
Turnkey drilling revenues decreased $7.4 million from $44.4 million in 1991 to $37.0 million in 1992. Nine turnkey contracts were completed during 1991 with average revenues of $4.9 million compared to 12 turnkey contracts completed in 1992 with average revenues of $3.1 million. Turnkey
drilling operating income decreased $3.9 million in 1992 when compared to 1991. The decrease in turnkey drilling operating income resulted primarily from lower margins on completed contracts. The decrease in average revenue per contract and lower margins on completed contracts in 1992 is primarily due to offshore wells contracted in 1992 at lower average revenues when compared to the offshore wells drilled in 1991.
MOPU Operations
MOPU revenues increased $7.0 million from $2.2 million in 1991 to $9.2 million in 1992. MOPU operating income increased $4.8 million in 1992. The Company's MOPUs contributed greater income due to the delivery into Venezuela of the LANGLEY on May 8, 1992 and the FRANKLIN and FORRESTAL on September 26, 1992, partially offset by the loss of income from the MARLIN NO. 3. Each of the MOPUs working in Venezuela has an initial contract term of two years, subject to certain buyout options.
One of the Company's MOPUs, the MARLIN NO. 3, was declared a constructive total loss on September 2, 1992, as a result of hurricane damage sustained on August 25, 1992. The MARLIN NO. 3 contributed revenues of $.8 million and $1.3 million and operating income of $.4 million and $1.0 million in 1992 and 1991, respectively.
Oil and Gas
Oil and gas revenues increased $.8 million from $2.9 million in 1991 to $3.7 million in 1992 due primarily to increased natural gas production and pricing. The Company's oil and gas exploration and production activities reflect an operating loss of $1.8 million in 1992, which was an improvement of $2.3 million over the 1991 operating loss of $4.1 million. Average daily natural gas production volumes increased to 3,363 Mcf per day in 1992 from 2,530 Mcf per day in 1991. Oil and condensate production decreased from 181 barrels per day in 1991 to 163 barrels per day in 1992. Average product pricing received in 1992 was $2.08 per Mcf of gas and $18.65 per barrel of oil and condensate compared to $1.66 per Mcf and $19.40 per barrel in 1991. The reduced operating loss was attributable to a $1.5 million writedown in the carrying value of oil and gas properties in 1992 compared to a $4.0 million writedown in 1991 due to a decline in reserve values.
Corporate Overhead
Corporate overhead increased $.2 million from $4.3 million during 1991 to $4.5 million in 1992. The increase was primarily due to higher costs of certain employee benefits, primarily group medical insurance, increased amortization of restricted stock and other increased expenses.
Other Income (Expense)
The Company recognized $2.7 million of other income in 1992 compared to $.1 million of other income in 1991. The change resulted from a $3.6 million increase in gains on disposition of assets due principally to the receipt of insurance proceeds associated with the constructive total loss of the MARLIN NO. 3, partially offset by lower interest income, slightly higher interest expense and an increase in other net expenses. The net increase in interest expense resulted from an increase in interest expense associated with the Company's Venezuelan MOPU project, due to interest no longer being capitalized following completion of construction, partially offset by the elimination of interest expense on a capital lease which expired in January 1992 and lower average interest rates on the revolving line of credit. The increase in other net expenses is primarily attributable to reserves established for potentially uncollectible accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $5.1 million from $15.7 million at December 31, 1992 to $10.6 million at December 31, 1993. The decrease resulted from $12.7 million used to fund capital expenditures and $17.9 million used to make payments on borrowings and
preferred stock dividends, partially offset by $17.2 million provided by operating activities and $8.3 million of proceeds received from the sale of the 4 barge drilling rigs, certain oil and gas production payment proceeds, and other excess property and equipment.
Cash provided by operating activities of $17.2 million included $7.8 million used for working capital and other requirements, primarily to fund the Company's foreign daywork drilling and turnkey drilling operations. Accounts receivable decreased from December 31, 1992 to December 31, 1993 due primarily to the timing of customer payments. Partially offsetting this decrease in trade receivables was a $1.9 million increase in other receivables due primarily to increased insurance claims. In addition, cash was used to reduce accounts payable and accrued expenses by $3.8 million.
Cash was used during 1993 to fund $12.7 million of capital expenditures, consisting of $9.5 million related to MOPU projects, $1.6 million in oil and gas exploration and development expenditures, $1.1 million for drill pipe to be used in the Company's Venezuelan drilling operations, and $.5 million of other expenditures.
During the fourth quarter of 1992, the Company acquired 5 jack-up drilling rigs at a cost of $6.0 million, with plans to convert them to MOPUs. The conversion of the first unit, which replaced the MARLIN NO. 3, cost approximately $4.2 million and was funded by a portion of the insurance proceeds received in connection with the constructive total loss of MARLIN NO. 3 in 1992. The unit commenced operations on July 19, 1993 and is currently contracted to Union Pacific Resources Company. The second of the 5 rigs acquired has been converted to a MOPU at a cost of $4.5 million. The cost of this unit was funded by a portion of the proceeds received from the sale of 1,500,000 shares of Common Stock of the Company which was completed during October, 1992. This MOPU is currently being marketed. No assurance can be given that the Company will be able to secure a contract for the operation of the second unit. One of the acquired rigs is currently being used as a mobile offshore supply unit to facilitate the Company's joint venture turnkey drilling operations in Mexico. The Company has mobilized another of the acquired rigs into Mexico where it will be used in turnkey drilling operations in the Bay of Tampico, Mexico. The Company presently expects to bareboat charter the other unit to a third party for use as a workover rig in the U.S. Gulf of Mexico.
Charter hire payments commenced September, 1992 with respect to the first of 3 MOPUs contracted to work in Venezuela. Charter hire payments commenced in February, 1993 on the other 2 MOPUs working in Venezuela. Eighty-five percent (85%) of the cash flow attributable to the contracts for the Company's 3 MOPUs working in Venezuela is dedicated to debt repayment under the contracts and loan agreements relating to such MOPUs, and the remaining 15% was deposited by the charterer into a restricted joint account until a $1.0 million balance was attained on June 4, 1993. Construction costs for refurbishment and conversion of the 3 MOPUs contracted to work in Venezuela exceeded the original budget. In accordance with the terms of an agreement between the Company and the charterer of the MOPUs, the charterer paid these excess costs as they became due and payable. The Company reached an agreement with the charterer during the third quarter of 1993 whereby the Company paid the charterer approximately $.8 million in satisfaction of all cost overruns and the charterer paid all outstanding construction and mobilization receivables. Additionally, the restricted joint account was terminated.
Each of the 3 MOPUs working in Venezuela has an initial contract term of two years expiring in 1994, subject to certain buyout options. The buyout options can be exercised at any time during the contract term. The loss of future operating income associated with these units, should the buyout options be exercised or contract renewals not be obtained, could have a material adverse effect on the Company's future results of operations. Because the Company now believes there is a reasonable likelihood that the buyout options on 2 of the units will be exercised in 1994, the Company has elected to defer income recognition prospectively on these 2 units to the extent of potential losses that could occur upon exercise of the options. At December 31, 1993, the Company
had provided $.6 million of reserves to offset potential losses on the units if the buyout options were to be exercised on 2 of the units. The Company expects to defer additional income recognition in the amounts of $1.6 million, $1.8 million, and $1.8 million, respectively, during the first 3 quarters of 1994.
Approximately 62% of the Company's revenues and a substantial portion of its operating income were sourced from its Venezuelan operations in 1993. These operations are subject to customary political and foreign currency risks in addition to operational risks. The Company has attempted to reduce these risks through insurance and the structure of its Venezuelan contracts.
In conjunction with the return to Diamond M of 3 offshore drilling rigs under long-term charters, a dispute existed as to whether or not the Company complied with the terms of the charters regarding maintenance and repair of the rigs during the charter period, as well as the condition of the rigs upon redelivery. Diamond M withheld payment of $1.7 million in notes payable by Diamond M to the Company, representing a part of the purchase price for the subject rigs. Diamond M also claimed additional damages associated with repairs to the drilling rigs. In June 1993, a partial summary judgment awarded the Company $1.8 million, together with interest and attorney's fees, for the notes payable by Diamond M to the Company, offset by certain charter hire payments due Diamond M. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division. The judgment awarded Diamond M $3.5 million, plus court costs, offset by the partial summary judgment of $1.8 million. The Company paid Diamond M $1.7 million in February, 1994, as a final settlement of all disputed issues. See "Legal Proceedings" and Note 13 of Notes to Consolidated Financial Statements.
The Company's credit agreement with INCC provides for a $10.0 million working capital line of credit facility which matures January 1, 1995 and a $30.0 million term loan which matures January 1, 1995. As of December 31, 1993, the outstanding balance of the Company's term loan with INCC was $13.1 million. The Company has $10.0 million currently available under the working capital line of credit facility. The Company executed a commitment letter to amend the terms of the credit facility to increase the amount available to $20.0 million, subject to certain borrowing base limitations, and extend the maturity date to January 1, 1996. See Note 14 of Notes to Consolidated Financial Statements.
The ability of the Company to fund working capital, capital expenditures, debt service and dividends in excess of cash on hand will be dependent upon the success of the Company's domestic and foreign operations. To the extent that internal sources are insufficient to meet those cash requirements, the Company can draw on its available credit facility or seek other debt or equity financing; however, the Company can give no assurance that such other debt or equity financing would be available on terms acceptable to the Company.
In any case, the satisfaction of long-term capital requirements will depend upon successful implementation by the Company of its business strategy and future results of operations. Management believes it has successfully implemented the strategy to achieve results of operations commensurate with its immediate and near-term liquidity requirements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company appear on pages 31 through 55 hereof and are incorporated by reference into this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's accountants regarding accounting principles or practices for financial statement disclosures.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and "Executive Officers" in the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, which is to be filed with the Securities and Exchange Commission (the "Commission"), describes the directors and executive officers of the Company and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Officers -- Compensation" in the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, which is to be filed with the Commission, sets forth information regarding management compensation and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under captions "Principal Shareholders" and "Election of Directors -- Security Ownership of Management" in the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, which is to be filed with the Commission, describes the security ownership of certain beneficial owners and management and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, which is to be filed with the Commission, sets forth information regarding certain relationships and related transactions and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Schedules" on Page 29.
(3) Exhibits. See Exhibit Index on pages 61 to 64
The management contracts and compensatory plans or arrangements required to be filed as Exhibits to this report are as follows:
(b) Reports on Form 8-K.
None.
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.
March 4, 1994 CLIFFS DRILLING COMPANY
By: /s/ DOUGLAS E. SWANSON ----------------------------- Douglas E. Swanson President & Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
FORM 10-K ITEM 14A (1) AND (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Schedules: For Each of the Three Years in the Period Ended December 31, 1993:
All other schedules for which provision is made in the applicable rules and regulations of the Securities and Exchange Commission have been omitted as the schedules are not required under the related instructions, are not applicable or the information required thereby is set forth in the Consolidated Financial Statements or the Notes thereto.
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS CLIFFS DRILLING COMPANY
We have audited the accompanying consolidated balance sheets of Cliffs Drilling Company and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and 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 consolidated financial position of Cliffs Drilling Company and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the 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 financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG
Houston, Texas February 23, 1994
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure
On June 21, 1988, Cliffs Drilling Company (the "Company") became a separate publicly-owned company as a result of the spin-off of the Company to shareholders of Cleveland-Cliffs Inc ("Cleveland"). These statements include the activities of the Company's wholly-owned subsidi-aries, Cliffs Oil and Gas Company ("COGC") and Cliffs Drilling International, Inc. ("International"), the Company's Venezuelan activities, which are organized as a foreign branch, and the Company's one-third ( 1/3) interest in a joint venture in Mexico which was organized to perform turnkey drilling services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Activities of the Venezuelan branch are also recorded in the accounts of the Company. Certain foreign turnkey drilling operations conducted through International have been consolidated based upon the Company's pro rata ownership. The Company's interest in the operations of Cliffs Neddrill Central Turnkey International, a joint venture consisting of Cliffs Drilling International, Inc., a wholly-owned subsidiary of the Company, Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A. de C.V. ("CNCTI") has been accounted for under the equity method. All significant intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in short-term investments. Uninvested cash balances are kept at minimum levels. Investments are valued at cost, which approximates market. The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents.
Inventories
Inventories, consisting principally of tubular goods consumed in turnkey drilling operations, and spare drilling parts, are carried at cost, specific identification method.
Drilling Contracts in Progress
The Company recognizes revenues and expenses related to its turnkey drilling contracts when all terms and conditions of the contract have been fulfilled. Consequently, the costs related to in progress turnkey drilling contracts are deferred as drilling contracts in progress until the contract is completed and revenue is realized. The amount of drilling contracts in progress is dependent on the volume of contracts, the duration of the contract at the end of the reporting period and the contract amount. Provision for losses on incomplete contracts is made when such losses are anticipated.
Revenue Recognition
The Company recognizes revenues from its daywork drilling and MOPU operations based upon the contracted daily rate multiplied by the number of operating days in the period. Turnkey drilling contract revenues are recognized when all terms and conditions of the contract have been fulfilled. The Company recognizes oil and gas revenue from its interests in producing wells based upon the sales method.
Each of the 3 MOPUs working in Venezuela has an initial contract term of two years expiring in 1994, subject to certain buyout options. The buyout options can be exercised at any time during the
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract term. Because the Company now believes there is a reasonable likelihood that the buyout options on 2 of the units will be exercised in 1994, the Company defers income recognition on these 2 units to the extent of potential losses that could occur upon exercise of the options. The deferral of income recognition is reflected as "Contract Termination Provision" in the Consolidated Statements of Operations and in "Deferred Income" in the Consolidated Balance Sheets.
Property and Equipment
Property and equipment are carried at original cost or at adjusted net realizable value, as applicable. Certain leases have been capitalized and the leased assets have been included in property and equipment. Major renewals and betterments are capitalized in the property accounts, while the cost of repairs and maintenance is charged to operating expenses in the period incurred.
The Company records expenditures made on significant projects as construction in progress ("CIP") until the assets are ready for their intended use. No depreciation expense is recorded on amounts included in CIP.
Interest on funds borrowed for construction of qualifying assets is capitalized during the construction period. Amortization of capitalized interest is included in depreciation, depletion and amortization in the Consolidated Statements of Operations.
Cost and accumulated depreciation are removed from the accounts when assets are sold or retired and the resulting gains or losses are included in the Consolidated Statements of Operations.
Depreciation of property and equipment is provided on the straight-line basis at rates based upon expected useful lives of the various classes of assets. Amortization of capital leases is included in depreciation, depletion and amortization in the Consolidated Statements of Operations.
Costs related to the exploration and development of oil and gas properties are accounted for under the "Successful Efforts" method of accounting. Lease acquisition costs related to oil, gas and mineral properties are capitalized when incurred. The acquisition costs of unproved properties, which are individually significant, are assessed on a property-by-property basis and a loss is recognized by provision of a valuation allowance when the assessment indicates an impairment in value. Exploration costs, excluding exploratory wells, are charged to expense as incurred. Costs of drilling exploratory wells are capitalized pending determination as to whether the wells have proved reserves which justify commercial development. If commercial reserves are not found, the drilling costs are charged to dry hole expense. Tangible and intangible drilling costs applicable to productive exploratory wells and to the development of oil and gas reserves are capitalized.
The cost of productive leaseholds is amortized by field on the unit of production basis by applying the ratio of produced oil and gas to estimated proved reserves. Lease and well equipment and other intangible drilling costs associated with productive wells are amortized based on proved developed reserves. The carrying value of proved oil and gas properties is limited to the undiscounted future net revenue from proved reserves, adjusted for income taxes, on a company-wide basis.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Deferred income taxes are provided on
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
items recognized in different periods for financial and tax reporting purposes. See Note 7 of Notes to Consolidated Financial Statements.
Earnings (Loss) Per Share
Primary earnings (loss) per share computations are based on net income (loss) less dividends on the Company's $2.3125 Convertible Exchangeable Preferred Stock (the "Preferred Stock"), divided by the average number of common shares and equivalents outstanding during the respective years. Common stock equivalents include the number of shares issuable upon exercise of stock options, less the number of shares that could have been repurchased with the exercise proceeds using the treasury stock method. The Preferred Stock is not included in the primary earnings (loss) per share computation as it is not a common stock equivalent. Fully diluted earnings per common share computations are made after the assumption of conversion of the preferred stock when the effect of such conversion is dilutive.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company's operations. Foreign currency gains and losses are included in the Consolidated Statements of Operations during the period incurred. Foreign currency losses for 1993, 1992 and 1991 amounted to $443,000, $132,000 and $112,000, respectively, and are included in "Other, net" in the Consolidated Statements of Operations.
Concentration of Credit Risk
The market for the Company's services is the oil and gas industry, and the Company's customers consist primarily of integrated and government-owned international oil companies and independent oil and gas producers. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company has in place insurance to cover certain exposure in its foreign operations and provides allowances for potential credit losses, when necessary. Accordingly, management considers such credit risk to be limited.
Change in Presentation
Certain financial statement items have been reclassified in prior years to make them conform with the current year presentation.
2. PROCEEDS-OF-PRODUCTION DRILLING PROGRAM, OTHER RECEIVABLES, AND NOTES AND OTHER RECEIVABLES -- LONG TERM
The Company entered into a proceeds-of-production drilling program in 1986 to drill and/or complete 25 oil and gas wells. The revenues due under this arrangement were paid to the Company through an assignment of the proceeds of production generated from the wells drilled. In addition, the Company entered into separate agreements with other industry companies to provide goods and services and were paid in a like manner from the proceeds received by the Company. The revenues and costs associated with the services supplied directly by the Company, including handling fees and interest income, were deferred, resulting in income to be recognized in future periods. Revenues and expenses were recognized in amounts equal to the portion of the cash payments applicable to directly supplied services until all the Company's costs were recovered in the fourth quarter of 1989.
During the years 1993, 1992, and 1991, net income of $0, $1,380,000, and $1,240,000 respectively, was recognized from the proceeds-of-production drilling program. At December 31,
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993 and 1992, amounts due the Company of $0 and $1,288,000, respectively, were included in "Other Receivables" for the current portion and amounts of $0 and $3,060,000, respectively, were included in "Notes and Other Receivables -- Long-Term" for the noncurrent portion based upon the estimates of future proceeds of production prepared by the Company's independent petroleum consultants. At December 31, 1993 and 1992, amounts of $0 and $1,533,000, respectively, were included in "Deferred Income." Outstanding accounts receivable earned interest at the prime rate plus 2%.
On one of the program wells drilled, an alleged failure of the casing provided by one of the industry companies ("Vendor") led the Company to, at the direction of the operator, withhold proceeds due under the assignment agreement pending legal determination of responsibility for the casing failure and remedial costs. The dispute among the Company, the Vendor and the operator regarding the alleged casing failure was referred to the American Arbitration Association for settlement as provided in the agreement. The proceedings before the panel failed to provide sufficient evidence to prove that the Vendor was responsible for the alleged casing failure. On November 12, 1991, an award totaling $1,740,000 was granted the Vendor by the arbitration panel, which represented the amounts previously withheld plus accrued interest and legal fees. The award was paid by the Company on December 16, 1991, and was recoverable, along with the Company's legal fees of $131,000, from the proceeds of production generated from the program wells drilled.
Effective January 1, 1993, the Company sold its interest in the proceeds-of-production drilling program together with its 4 inland posted barge drilling rigs, and paid the remaining industry companies for their interests in the production.
Other Receivables are summarized as follows:
Notes and Other Receivables -- Long Term are summarized as follows:
3. PROPERTY AND EQUIPMENT
Effective January 1, 1993, the Company sold its 4 inland posted barge drilling rigs and rights to certain oil and gas production payment proceeds to Cerrito Investment Corporation for an aggregate sales price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000 in notes. The first note has a face amount of $1,000,000, bears interest at the base rate on corporate loans as quoted
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the Wall Street Journal, and is due on or before December 31, 1995. Interest is due and payable semi-annually and commenced June 30, 1993. The second note has a face amount of $7,500,000, bears interest at the base rate on corporate loans as quoted by the Wall Street Journal plus one and one-half (1-1/2%), and matures on January 1, 1998. Principal and interest on the $7,500,000 note is payable on a monthly basis solely from the proceeds of the oil and gas production payment which secures the note. No net gain or loss on the sale was recorded for financial reporting purposes.
During the fourth quarter of 1992, the Company purchased 5 jack-up drilling rigs for $6,000,000 in cash. The Company has converted 2 of the 5 rigs to MOPUs, converted one to a mobile offshore supply unit for use in the Bay of Campeche, Mexico, mobilized one unit to the Bay of Tampico, Mexico in February, 1994, to drill turnkey wells, and presently expects to bareboat charter the other unit to a third party for use as a workover rig in the U.S. Gulf of Mexico.
On October 31, 1991, the Company purchased 3 jack-up drilling rigs from Chiles Offshore Corporation ("Chiles") for $15,500,000 in cash. The Company completed the process of refurbishing and converting the rigs for operation as portable compression units in Lake Maracaibo, Venezuela in 1992. The 3 units were contracted to Dresser-Rand Company ("Dresser-Rand") and mobilized to Venezuela. Expenditures made in 1991 to acquire and modify the rigs, in addition to the associated financing costs, were included in CIP until the units became operational. No interest was capitalized during the year ended December 31, 1993. Total interest capitalized during the years ended December 31, 1992 and 1991 was $1,278,000 and $248,000, respectively. Costs to mobilize the rigs to Venezuela were reimbursed to the Company by Dresser-Rand.
Capital leases related to 3 land drilling rigs expired in January, 1992, resulting in the release of the lessors' security interests in such rigs. A capital lease related to an inland posted barge rig expired in July, 1990. The Company exercised its purchase option on the barge and its associated drill pipe for $2,101,841. The rig was sold effective January 1, 1993.
4. DIAMOND M TRANSACTION
On May 24, 1989, the Company sold 2 jack-up rigs and a semisubmersible rig to Diamond Offshore Company ("Diamond M"), formerly known as Loews San Antonio Hotel Corporation, for a purchase price of $22,000,000 consisting of $15,000,000 in cash and three promissory notes totaling $7,000,000. Each promissory note was for a term of three years, had an interest rate of 10% per annum and was guaranteed by Loews Corporation, the parent of Diamond M. In connection with the sale, the Company entered into bareboat charters with Diamond M at competitive rates for the 3 rigs for a period of two years from the effective date of the sale. Principal and interest payments by Diamond M to the Company were structured to minimize cash outflow during the charter period.
A gain of $10,300,000 was recorded on the sale of the 3 rigs to Diamond M, $4,500,000 of which was recognized in 1989 and $5,800,000 of which was deferred and amortized to income over the charter hire period (1989-1991).
In conjunction with the return of the 3 rigs under the terms of the respective bareboat charters with Diamond M, a dispute arose between the Company and Diamond M over the amounts payable pursuant to the promissory notes executed by Diamond M and the Company, among other matters. This dispute was settled in February, 1994, with a payment to Diamond M of $1,700,000. See Note 13 of Notes to Consolidated Financial Statements.
5. OTHER ASSETS
CNCTI was awarded a contract for one of 4 turnkey bid packages to drill 4 turnkey wells in the Bay of Campeche, Mexico. Drilling operations commenced in February, 1993. Two turnkey contracts
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were completed in 1993 and were accounted for by the Company under the equity method. Equity in earnings of CNCTI of $602,000 is included in the Consolidated Statements of Operations as "Revenues" for the year ended December 31, 1993. The Company's investment in CNCTI of $1,852,000 is included in the Consolidated Balance Sheets under the caption "Other Assets" at December 31, 1993.
The following information summarizes the unaudited Statements of Operations and Balance Sheets of CNCTI:
6. NOTES PAYABLE
In conjunction with the acquisition of 3 jack-up rigs from Chiles and the related Dresser-Rand contracts, the Company entered into an interim financing agreement with NMB Postbank Groep N.V., now known as Internationale Nederlanden (U.S.) Capital Corporation ("INCC"), on October 31, 1991. The interim financing provided $20,000,000 in available funding for the purchase, construction, modification, mobilization and interest carry on the 3 jack-up rigs ("Term Loan") and $10,000,000 in a working capital credit facility. On December 16, 1991, a permanent facility replaced the interim agreement and increased the amount available under the Term Loan to $30,000,000.
For the $30,000,000 Term Loan, the Company paid a fee equal to two percent (2%) of the facility. Advances to the Company bear interest at either two percent (2%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or INCC's prime rate; or at the adjusted LIBOR rate plus three and three-quarters percent (3 3/4%) per annum during the period prior to commencement of payments on all three charters from Dresser-Rand, ("Mobilization Period") and, thereafter, at one percent (1%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or INCC's prime rate; or at the adjusted LIBOR rate plus
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
two and three-quarters percent (2 3/4%) per annum. The applicable lending rate under the Term Loan was approximately six and three-eighths percent (6 3/8%) per annum at December 31, 1993. The Term Loan matures on January 1, 1995.
All advances to the Company from the $10,000,000 working capital credit facility bear interest at one and one-half percent (1 1/2%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or INCC's prime rate; or at the adjusted LIBOR rate plus three and one-quarter percent (3 1/4%) per annum. The Company is also obligated to pay INCC (i) a commitment fee equal to one-half percent ( 1/2%) per annum on the average daily unadvanced portion of the commitments and (ii) a letter of credit fee of two percent (2%) per annum on the average daily undrawn and unexpired amount of each letter of credit during the period that sum remains outstanding. The working capital credit facility expires January 1, 1995.
At December 31, 1993, the Company had outstanding borrowings amounting to $13,108,000 of the $30,000,000 available under the Term Loan and $0 of the $10,000,000 available under the working capital credit facility. Eighty-five percent (85%) of the cash flow attributable to the contracts for the Company's 3 MOPUs working in Venezuela is dedicated to debt repayment under the contracts and loan agreements relating to such MOPUs. The carrying amount of the Company's notes payable approximates fair market value. See Note 14 of Notes to Consolidated Financial Statements.
The notes are secured by accounts receivable, certain oil and gas properties, and a first preferred fleet mortgage on a majority of the Company's rig inventory. In addition, both notes are secured by an assignment of the revenues due under the contract with Dresser-Rand. Under the First Restated Credit Agreement with INCC, as amended, the Company is required to comply with various covenants including, but not limited to, the maintenance of various financial ratios, and is restricted from declaring, making, or paying any dividends on the Common Stock.
Interest payments on all indebtedness amounted to $1,536,000, $2,623,000 and $894,000 for the years ended December 31, 1993, 1992, and 1991, respectively. Of the totals, $751,000 related to capital leases for the year ended December 31, 1991.
7. INCOME TAXES
The Company has incurred net operating losses in prior years resulting in tax net operating loss carryforwards. Of the total carryforwards available, $17,959,000 was utilized during 1993 to offset taxable income for the year. At December 31, 1993, remaining net operating loss carryforwards are $7,684,000 for regular tax purposes. The Company also has a percentage depletion carryover to 1994 of $506,000 and a charitable contribution carryover to 1994 of $24,000. The majority of these amounts have been realized in the financial statements as a reduction of deferred taxes. In addition, the Company has $2,353,000 of unused investment tax credit carryforwards at December 31, 1993. These carryforwards are available for use by the Company through the following expiration dates:
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(1) The investment tax credits reflect the 35% reduction required by the Tax Reform Act of 1986.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provided for $475,000 of U.S. federal income taxes for the year ended December 31, 1993, due to the alternative minimum tax provisions of the Internal Revenue Code. In addition, the Company provided for $210,000 of Mexican taxes, which are available for credit in the U.S. through 1998.
The Company recognized no deferred tax assets or liabilities at December 31, 1993 or 1992, because the tax effects of operating loss carryforwards are offset by the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes and the valuation allowance applied to deferred tax assets. The significant components of deferred tax assets and liabilities are as follows:
For financial reporting purposes, income (loss) before income taxes includes the following components:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes attributable to continuing operations are as follows:
The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is:
Income tax payments amounted to $658,000 for the year ended December 31, 1993. No income tax payments were made during the years ended December 31, 1992 and 1991.
8. TAX LEASES
The Company contracted for the construction of 2 jack-up drilling rigs in the period 1980-1982 at a cost of $65,575,000. For tax purposes, both rigs were sold in 1982 to third parties under lease back terms pursuant to Section 168(f)(8) of the Internal Revenue Code ("Safe Harbor Lease"). Cleveland received a payment in the aggregate of $16,685,000 which represented the investment tax credit and depreciable benefits attributable to the rigs. The interest income and principal due the Company from the third parties is equal to the lease payments by the Company to the third parties throughout the lease term.
The future net tax deductions associated with the Safe Harbor Leases are $2,950,000, $3,732,000, $4,644,000 and $5,117,000 for the years 1994, 1995, 1996, and 1997, respectively.
9. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan ("401(k) Plan"). Under the 401(k) Plan, an employee who has reached age 21 and completed one year of service is eligible to participate in the plan through contributions that range in one percent multiples up to 16% of salary, with a 1993 dollar maximum of $8,994. In addition, the Company contributes (or "matches") on behalf of each participant an amount equal to 100% of the portion of each participant's contribution which does not exceed 6% of the participant's annual salary. Employer contributions for certain highly compensated
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees may be further limited through the operation of the non-discrimination requirements found in Sections 401(k) and 401(m) of the Internal Revenue Code.
Employee contributions can be invested in any or all of 3 funds in multiples of 25%. Employer contributions are invested in the Company's Common Stock. Employee contributions are 100% vested and non-forfeitable. Employer contributions are subject to a graded vesting schedule, with participants becoming fully vested upon completion of 5 years participation in the plan. Distributions from the 401(k) Plan are made upon retirement, death, disability or separation of service. Participants may borrow up to one-half ( 1/2) of their vested interest in the plan, limited to a maximum of $50,000. Contributions to the 401(k) Plan and earnings on contributions are not included in a participant's gross income until distributed to the participant. Contributions to the 401(k) Plan by the Company were $233,000, $266,000, and $393,000 for the years 1993, 1992, and 1991, respectively.
10. LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES
Maturities of obligations under capital leases at December 31, 1991 were $2,682,000. The interest portion of the obligation was $240,000 for the year. The final payment under the capital lease obligation was made on January 2, 1992. Interest expense related to the capital leases incurred during 1991 was $572,000.
11. CAPITAL STOCK
Changes in the number of issued and outstanding shares of the Company's Common Stock are summarized as follows:
The Company has an Incentive Equity Plan under which stock options, stock appreciation rights, restricted and deferred stock awards relating to the Company's Common Stock may be awarded to officers, directors and key employees. The Company's Incentive Equity Plan is designed to attract and reward key executive personnel. The stock options granted under this plan expire not more than 10 years from the date of grant.
At December 31, 1993, the following options were outstanding and exercisable:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options for 1,500 shares were exercised during 1993 while no options were exercised in 1992 or 1991, respectively.
The Company's Board of Directors has awarded restricted stock to key executives as follows:
Restrictions on the 1988 award lapse with respect to 20% of the entire award after one year and after each of the succeeding 4 years. Restrictions lapse with respect to 25% of the entire award after one year and after each of the succeeding 3 years. Expense related to amortization of the restricted stock was $120,000, $442,000, and $274,000 for the years 1993, 1992, and 1991, respectively.
Deferred compensation expense relative to non-vested shares of restricted stock, measured by the market value of the stock on the date of grant, is being amortized on a straight-line basis over the restriction period. The unamortized deferred compensation expense, which has been deducted from equity in the Consolidated Balance Sheets, amounted to $103,000 and $150,000 at December 31, 1993 and 1992, respectively.
Effective December 31, 1992, the Company's Board of Directors awarded restricted stock for 17,500 shares of Common Stock to certain key executives. The price paid for the shares of the restricted stock was $13.25 per share. The Company extended full-recourse, interest-bearing loans to the key executives in the aggregate amount of $232,000. The promissory notes bear interest at seven and one-half percent (7 1/2%) per annum payable quarterly as it accrues on the last day of March, June, September and December until the notes are due on December 31, 1997. Additional shares of deferred stock will be awarded on December 31, 1997 if certain performance criteria are attained by the Company. Compensation expense related to the deferred stock awards will be accrued in future years if it becomes probable the Company performance criteria will be met. No such compensation expense was accrued during the year ended December 31, 1993.
12. REDEEMABLE PREFERRED STOCK
On September 27, 1988, the Company completed a public offering of $28,750,000 of $2.3125 Convertible Exchangeable Preferred Stock ("Preferred Stock") which is traded in the over-the-counter market and quoted on the NASDAQ National Market System under the symbol "CLDRP".
The Preferred Stock is redeemable at the option of the Company, in whole or in part, at $26.16 per share if redeemed prior to September 15, 1994, and at prices decreasing ratably annually to $25 per share from and after September 15, 1998, plus accrued and unpaid dividends to the redemption date. Any such non-mandatory redemption would be subject to INCC approval according to the terms of the First Restated Credit Agreement. Dividends on the Preferred Stock are cumulative from the date of first issuance and are payable quarterly commencing December 15, 1988 at the rate of $2.3125 per share per annum. Pursuant to the First Restated Credit Agreement, dividends on Preferred Stock cannot exceed the current dividend rate per share without the consent of INCC.
In case of the voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of shares of Preferred Stock are entitled to receive a liquidation preference of $25 per share
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus an amount equal to any accrued but unpaid dividends to the payment date. The Preferred Stock is also exchangeable in whole, but not in part, at the option of the Company on any dividend payment date subsequent to September 15, 1990, for nine and one-quarter percent (9 1/4%) Convertible Subordinated Debentures due 2013. The Preferred Stock is convertible into Common Stock of the Company at the initial conversion rate of 1.89394 shares of Common Stock for each share of Preferred Stock, subject to adjustment under certain circumstances. The Preferred Stock has no voting rights except as described below or as required by law.
The holders of the Preferred Stock have no voting rights to elect directors except when dividends on the Preferred Stock or on any outstanding shares of parity dividend stock have not been paid in the aggregate amount equal to at least six quarterly dividends on such shares. The holders of the Preferred Stock will then be entitled to elect two additional directors to the Board, at any meeting of the shareholders of the Company at which directors are to be elected held during the period such dividends remain in arrears. The voting rights, as well as the term of office of all directors so elected, shall terminate when all such dividends accrued and in default have been paid in full or set apart for payment.
In addition, so long as any Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of sixty-six and two-thirds percent (66 2/3%) of all outstanding shares of Preferred Stock voting separately as a class, (i) amend, alter or repeal any provision of the Certificate of Incorporation or the By-Laws of the Company so as to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Preferred Stock, (ii) authorize, issue or increase the authorized amount of any class or series of stock, or any security convertible into stock of such class or series, ranking senior to the Preferred Stock as to dividends or upon liquidation, dissolution or winding up of the Company or (iii) effect any reclassification of the Preferred Stock.
The affirmative vote or consent of the holders of a majority of the Preferred Stock, voting or consenting separately as a class, is required to (a) authorize any sale, lease or conveyance of all or substantially all of the assets of the Company, or (b) approve any merger, consolidation or compulsory share exchange to which the Company is a party, unless (i) the terms of such merger, consolidation or compulsory share exchange do not provide for a change in the terms of the Preferred Stock and (ii) the Preferred Stock is on a parity with or prior to (in respect of dividends and upon liquidation, dissolution or winding up) any other class or series of capital stock authorized by the surviving corporation, other than any class or series of stock of the Company ranking senior to the Preferred Stock either as to dividends or upon liquidation, dissolution or winding up of the Company and previously authorized with the consent of the holders of Preferred Stock.
In the event (i) any person becomes the beneficial owner of more than fifty percent (50%) of the Common Stock or the Company is a party to a business combination, including a merger or consolidation or the sale of all or substantially all of its assets, and (ii) either (a) as a result of such acquisition of shares of Common Stock or business combination, the Preferred Stock thereafter is not convertible into Common Stock of the Company or of the ultimate parent of the Company, which Common Stock is traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System, or (b) all or substantially all of the consideration paid in such share acquisition or business combination does not consist of Common Stock of the ultimate parent of the Company, which Common Stock is traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System, then each holder of Preferred Stock shall have the option to require the Company to redeem all the Preferred Stock owned by such holder at $25 per share plus accrued and unpaid dividends to the redemption date.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 20, 1992, the staff of the Securities and Exchange Commission (the "Commission") advised the Company of a change in the staff's previous interpretation of a Commission rule regarding the classification of the Company's Preferred Stock as Shareholders' Equity. Accordingly, the Preferred Stock is not presented as a component of Shareholders' Equity.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its headquarters office, office equipment and other items under operating leases expiring at various dates during the next five years. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Total rent expense under operating leases was $656,000, $576,000, and $536,000, for the years ended 1993, 1992 and 1991, respectively. Minimum future obligations under non-cancelable operating leases at December 31, 1993 for the following five years are $724,000, $525,000, $506,000, $514,000 and $544,000, respectively, and $1,248,000 thereafter.
In conjunction with the spin-off of the Company from Cleveland, the Company and Cleveland and certain of their subsidiaries entered into a Reorganization and Distribution Agreement (the "Distribution Agreement"). The Distribution Agreement provides, among other things, that the guarantee obligations of Cleveland under the following financing arrangement will continue after the Distribution until the underlying obligations of the Company are satisfied: (i) the Company's lease financing of 3 land rigs with a balance at the Distribution of approximately $8,400,000 which expired in 1992, (ii) the Company's lease financing of one inland posted barge rig with a balance at the Distribution of approximately $2,000,000 which expired in 1990, and (iii) 2 tax benefit transfer lease transactions involving 2 of the Company's offshore jack-up rigs, under which Cleveland guarantees, among other things, the Company's obligations to indemnify the tax lessors against loss of tax benefits thereunder throughout the lease terms ending in 1992 and 1997. Pursuant to the Distribution Agreement, the Company granted to Cleveland a first preferred ship mortgage on BARGE NO. 3 to secure Cleveland's rights to repayment of any amounts that may be paid by Cleveland under either of the guaranties referred to in the foregoing clauses (i) and (ii). Subsequent to the purchase by the Company of BARGE NO. 1 on July 20, 1990 and the final land rig lease payment on January 2, 1992, Cleveland released the first preferred ship mortgage on BARGE NO. 3 effective March 9, 1992. All 4 of the Company's inland posted barge rigs were sold effective January 1, 1993. See Note 3 of Notes to Consolidated Financial Statements.
In conjunction with the return to Diamond M of 3 offshore drilling rigs under long-term charters, a dispute existed as to whether or not the Company complied with the terms of the charters regarding maintenance and repair of the rigs during the charter period, as well as the condition of the rigs upon redelivery. Diamond M withheld payment of $1,700,000 in notes payable to the Company, representing a part of the purchase price for the subject rigs. Diamond M also claimed additional damages associated with repairs to the drilling rigs. In June, 1993, a partial summary judgment awarded the Company $1,800,000, together with interest and attorney's fees, for the notes payable owed by Diamond M to the Company, offset by certain charter hire payments due Diamond M. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division. The judgment awarded Diamond M $3,500,000, plus court costs, offset by the partial summary judgment of $1,800,000. The Company paid Diamond M $1,700,000 in February, 1994, as a final settlement of all disputed issues.
The Company has other contingent liabilities resulting from litigation, claims and commitments incidental to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
The Company executed a commitment letter with INCC to amend the terms of the working capital credit facility. The $10,000,000 working capital credit facility will be converted to a $20,000,000 revolving line of credit subject to certain borrowing base limitations. The revolving line of credit will mature on January 1, 1996.
15. BUSINESS SEGMENTS
During the three years ended December 31, 1993, the Company conducted the following business activities:
Daywork Drilling -- domestic and foreign drilling of oil and gas wells on a dayrate basis for major and independent oil and gas companies on land, inland waters and offshore.
Turnkey Drilling -- domestic and foreign drilling of oil and gas wells on a turnkey basis for major and independent oil and gas companies on land, inland waters and offshore.
MOPU Operations -- domestic and foreign operation of mobile offshore production units on a dayrate basis for major and independent oil and gas companies.
Oil and Gas -- domestic exploration, development and production of hydrocarbon reserves.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were intersegment sales for the year ended December 31, 1993 of $147,000 compared to $3,082,000 and $2,353,000 for the years ended December 31, 1992 and 1991, respectively. Such intersegment sales were accounted for at prices comparable to unaffiliated customer sales.
Identifiable assets by industry segment include assets directly identified with those operations.
The Company derived a significant amount of its revenues from a few customers in each of the three years ended December 31, 1993. The following table summarizes information with respect to these major customers.
16. DISTRIBUTION OF EARNINGS AND ASSETS
The following table sets forth financial information with respect to the Company and its subsidiaries on a consolidated basis by geographical area.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for years ended December 31, 1993, 1992, and 1991 are summarized as follows:
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(1) Fourth quarter 1993 results include a charge of $3,703,000 related to the Diamond M litigation settlement and expenses.
(2) Fourth quarter 1992 results include a $1,500,000 writedown in the carrying value of oil and gas properties.
(3) Net Income (Loss) per share for the year ended December 31, 1992 differs from the summation of the individual quarters within that year due to the impact of the public offering of Common Stock completed during the fourth quarter of 1992.
(4) Fourth quarter 1991 results include a $4,000,000 writedown in the carrying value of oil and gas properties.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
COGC conducts exploration and production activities in conjunction with the marketing of the Company's contract drilling services. This approach is referred to as the contract drilling support ("CDS") program. Under this program, COGC participates as a working interest owner in oil and gas exploration activities when it directly or indirectly results in the award of a drilling contract.
In order to provide funding for the Company's share of development and completion costs of the CDS wells in which the Company has acquired or will acquire a working interest, the Company entered into an Exploration and Development Agreement (the "Development Agreement"), effective as of May 25, 1988, with Mosbacher Offshore, Inc. ("Mosbacher"). Under the terms of the Development Agreement, the Company generally pays the lease acquisition costs and the costs to casing point attributable to the interest it acquired in the initial test well drilled on a property. Subject to maximum funding limits discussed below and the elections of the other working interest owners in the wells with respect to particular operations and certain other contingencies, Mosbacher pays the costs incurred after the casing point of initial test wells (the "completion costs"), the drilling and completion costs of subsequent wells located on the property interest upon which the initial test well was drilled (the "development costs"), and the platform production facility and pipeline costs (the "joint facilities costs") incurred with respect to all wells located on the property interests. Each party owns a working interest in the test well based upon the amount of costs borne by each. With respect to property interests other than the initial test wells, Mosbacher owns all the working interest and the Company owns net profits interests. Should Mosbacher recoup its total costs borne with respect to all of its property interests ("payout"), the Company's net profits interest percentage would increase. However, the Company currently does not believe that payout will occur under the Development Agreement. Under certain circumstances, the Company's net profits interest converts to a working or cost bearing interest in all the property interest. At December 31, 1993, Mosbacher had expended $4,590,000 of completion costs on initial test wells and $16,993,000 in development and joint facilities costs. The obligation of Mosbacher to fund completion costs expired on February 15, 1992; however, Mosbacher will continue to be obligated to fund development and joint facilities costs up to the $25,000,000 limit on properties included under the Development Agreement. Approximately 24%, 19%, and 37% of the future net revenues at December 31, 1993, 1992 and 1991, respectively, were subject to the Development Agreement.
A $1,500,000 writedown in the carrying value of oil and gas properties was recorded during the year ended December 31, 1992 due to a decline in estimated future net revenues, caused principally by downward revisions of reserve quantities. A $4,000,000 writedown in the carrying value of oil and gas properties was recorded during the year ended December 31, 1991 due to a decline in estimated future net revenues, caused principally by a decrease in the value of reserves associated with the Development Agreement and lower product prices. The decrease in the Development Agreement value was due principally to a delay in the expected occurrence of payout in the development drilling program due to an increase in the level of third party investment, coupled with a decrease in the estimated proved reserves.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate capitalized costs related to the Company's oil and gas exploration and production activities are summarized in the following table:
Costs incurred in oil and gas property acquisition, exploration and development activities are summarized as follows:
The results of operations for oil and gas exploration and production activities are summarized as follows:
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(1) Includes $63,000, $158,000, and $79,000 attributable to a net profits interest for the years ended December 31, 1993, 1992, and 1991, respectively.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net quantities of proved reserves, all of which are located in the United States are summarized in the following table:
The standardized measure of discounted future net cash flows and major components of that calculation relating to proved oil and gas reserves at December 31, 1993, 1992 and 1991 are as follows:
The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows:
1. Estimates were made of quantities of proved reserves and the future periods in which they are expected to be produced based on year-end economic conditions.
2. The estimated future gross revenues of proved reserves were priced on the basis of year-end prices.
3. The future gross revenue streams were reduced by estimated future costs to develop and to produce the proved reserves, based on year-end cost estimates. Future income taxes have not been included due to the effect of net operating loss carryforwards.
The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. A market value determination would include, among other things, anticipated future changes in oil and gas prices and production and development costs; the value of additional estimated reserves, not considered proved at present,
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which may be recovered as a result of further exploration and development activities; and other business risks.
The standardized measure of discounted future net cash flows as of December 31, 1993 was calculated using prices in effect at December 31, 1993, which averaged $12.86 per Bbl of oil and $2.42 per Mcf of natural gas.
The following are principal sources of changes in the standardized measure of discounted net cash flows:
SCHEDULE V
CLIFFS DRILLING COMPANY
PROPERTY AND EQUIPMENT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 (IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SCHEDULE VI
CLIFFS DRILLING COMPANY
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY AND EQUIPMENT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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SCHEDULE VIII
CLIFFS DRILLING COMPANY
VALUATION AND QUALIFYING ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 (IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
SCHEDULE IX
CLIFFS DRILLING COMPANY
SHORT-TERM BORROWINGS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 (IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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Notes:
(1) Interest expressed as rate per annum.
(2) Calculated by taking the amount of borrowings outstanding multiplied by the number of days outstanding divided by the number of days in the year.
(3) Calculated as total interest expense on the credit agreement divided by the weighted average amount of principal outstanding.
SCHEDULE X
CLIFFS DRILLING COMPANY
SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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EXHIBIT INDEX
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* Filed herewith
All other exhibits are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.