ITEM 1. BUSINESS
GENERAL
Marine Drilling Companies, Inc. (collectively with its subsidiaries, the "Company") was incorporated in Texas in January 1990. Since 1966, the Company or its predecessors have been engaged in offshore contract drilling of oil and gas wells for independent and major oil and gas companies. Operations are conducted in the U.S. Gulf of Mexico and internationally. The Company's principal office is located at One Sugar Creek Center Blvd., Suite 600, Sugar Land, Texas 77478 and its telephone number is (281) 243-3000.
The Company owns and operates a fleet of 17 offshore drilling rigs consisting of five independent leg jack-up units, four of which have a cantilever feature, ten mat supported jack-up units, five of which have a cantilever feature, and two semi-submersible units. Additionally, the Company owns one independent leg jack-up rig configured as an accommodation unit. Currently, thirteen of the Company's rigs are located in the U.S. Gulf of Mexico, and the Company intends to bring two of its international rigs to the U.S. Gulf of Mexico during the second quarter of 2000. The three remaining rigs are in Southeast Asia, the North Sea and Western Australia.
BUSINESS STRATEGY
The Company's business strategy is designed to position it to capitalize on cyclical upturns, and minimize exposure to cyclical downturns, in the worldwide jack-up rig market. The key elements of this strategy are:
o U.S. Gulf of Mexico Jack-up Rig Fleet Focus. The Company is committed to remaining a leading operator of jack-up rigs in the U.S. Gulf of Mexico. The Company believes that its significant presence in the region offers logistical advantages, including reduced mobilization costs and flexibility of crew deployment, both of which reduce operating costs. The Company also believes that there is significant upside potential for dayrates in the U.S. Gulf of Mexico jack-up rig market due to both a worldwide supply of jack-up rigs that is not growing and an increasing rate of oil and natural gas reserve depletion in the region, which could increase drilling activity. The Company will increase its U.S. Gulf of Mexico presence in the second quarter of 2000 when it brings the MARINE 201 and MARINE 202 to the U.S. Gulf of Mexico from the United Arab Emirates and Southeast Asia.
o Balanced Long-Term and Short-Term Contract Portfolio. The Company seeks to appropriately balance its contract portfolio between long-term and short-term contracts. The Company believes that a balanced contract portfolio will help mitigate the cyclical nature of the drilling industry and will provide for a component of longer-term, more predictable cash flow, while maintaining the opportunity to capitalize on potential increases in drilling rig dayrates worldwide. In the current market environment, availability of long-term contracts has been primarily limited to semi-submersible rigs used for offshore drilling in deepwater markets. The MARINE 500 and MARINE 700 have provided the Company an opportunity to capitalize on the long-term contracts available in this market. Both of these rigs continue to operate under long-term contracts which are expected to generate contract revenues in excess of $300 million over the remaining life of the contracts. The Company believes that these two contracts help to counterbalance the short-term and spot market contracts in its rig portfolio.
o Growth Through Acquisitions and Upgrades. The Company actively seeks attractive opportunities for acquisitions to increase the size and capabilities of its fleet. The Company believes that during prolonged periods of depressed industry fundamentals assets become available at attractive prices. In January 2000, the Company purchased the MARINE 202 (formerly known as the Baruna V), a mat cantilever jack-up drilling rig for $13.5 million. Additionally, when market conditions warrant, the Company may elect to perform upgrades on its existing rig fleet.
o Maintain an Appropriate Capital Structure. Because the offshore drilling business is subject to substantial fluctuations in demand, pricing and profitability, the Company seeks to maintain a level of debt that can be adequately supported by its working capital and long-term contract revenues. The Company believes this approach will enable it to better withstand the volatility associated with industry cycles.
RECENT MARKET CONDITIONS
During 1996 and early 1997, oil and gas prices rose to a level that stimulated significant oil and gas drilling activity resulting in improved utilization and dayrates for the drilling industry. However, oil and gas prices declined significantly beginning in October 1997, and reached multi-year lows in various markets in early 1999. As a result of oil price declines in 1998 and early 1999, oil and gas companies made significant cutbacks in their drilling programs. This reduced industry-wide rig utilization including the U.S. Gulf of Mexico, where the Company operates most of its rigs, which not only sharply reduced dayrates, but also shortened the average length of drilling contracts primarily to a well-by-well basis. Oil and gas prices improved during 1999, resulting in recent increases in rig utilization and dayrates in the Gulf of Mexico jack-up market.
The following table sets forth rig utilization rates according to Offshore Data Services:
As of March 14, 2000, eleven of the Company's 16 jackup rigs are working under short-term contracts that will expire in the first or second quarter of 2000, one rig is under contract through the third quarter of 2000, and four rigs are currently idle. All four idle rigs are located outside the U.S. Gulf of Mexico, including the MARINE 201 and the MARINE 202, which will be transported back to the U.S. Gulf of Mexico during the second quarter of 2000. The Company's two semi-submersible rigs, the MARINE 500 and the MARINE 700, are currently operating under long-term contracts.
RECENT DEVELOPMENTS
On March 22, 2000, a blowout occurred on a Gulf of Mexico well in which one of the Company's jack-up rigs, MARINE 4, was working. All personnel were safely evacuated from the rig and there was no apparent damage to the rig or the rig equipment. The Company and its customer are currently in the process of regaining control of the well. The Company is currently unaware of any material financial exposure related to this blowout, but due to the recentness of the event, the Company is unable to assess the likelihood or amount of any liabilities that may result from the blowout.
CUSTOMERS AND CONTRACTS
General. The Company's drilling contracts generally provide for compensation on a "daywork" basis. Under daywork contracts, the Company receives a fixed amount per day for providing drilling services using the rigs it operates. Under most daywork contracts, the Company pays virtually all costs associated with operating the rig such as labor, operating supplies and repair and maintenance. The Company typically negotiates with the customer the cost of moving the rigs and related equipment to the job site and the customer pays all other costs of drilling the well such as mud, casing, logging and completion services. Daywork contracts may provide for lower rates during periods when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather or water conditions or other
conditions beyond the Company's control. Historically, the Company has not marketed its rigs under fixed price or turnkey contracts.
A daywork contract generally extends over a period of time covering either the drilling of a single well, a group of wells or a stated term. The customer may terminate the contract if the drilling rig is destroyed or lost, or if drilling operations are suspended for a specified period of time as a result of breakdown of major equipment or other specific events. The duration of drilling contracts is generally determined by market demand and competitive conditions. Historically, domestic jack-up rig drilling contracts are typically on a well-by-well basis, while contracts in the deepwater and international jack-up markets have been on a term basis. The Company's experience during recent years has been consistent with this general rule, with its rigs operating in the shallow water Gulf of Mexico generally having been contracted on a well-to-well basis and its deepwater and international rigs operating under term contracts. Due to the highly cyclical nature of the offshore drilling business, the Company seeks to appropriately balance its contract portfolio between long-term and short-term contracts.
The Company obtains most of its contracts through competitive bidding against other contractors in response to oil and gas companies' solicitations of bids. The Company's current drilling contracts, both foreign and domestic, provide for payment in U.S. Dollars.
The Company provides drilling services to a customer base that includes independent and major foreign and domestic oil and gas companies. As is typical in the industry, the Company does business with a relatively small number of customers at any given time. For the year ended December 31, 1999, the Company performed services for approximately 33 different customers. During 1999, Applied Drilling Technology, Inc., a subsidiary of Global Marine Inc., accounted for approximately 22% of the Company's total consolidated revenues, Western Australian Petroleum Pty., Ltd. accounted for approximately 17% of revenues and Esso Exploration, Inc. accounted for approximately 16% of revenues. The loss of any one of the Company's customers could, at least on a short-term basis, have a material adverse effect on the Company's profitability. See Note 11 of Notes to Consolidated Financial Statements for further information regarding the Company's major customers.
MARINE 700 Drilling Contract. In January 1998, the Company signed a long-term drilling contract with Esso Exploration Inc. ("Esso"), an affiliate of Exxon Corporation, for the MARINE 700. The contract had an initial term of three years and gave Esso the option to extend the contract to a five-year term. In June 1998, Esso exercised the option to extend the contract to five years, with a normal operating dayrate of $165,410 per day. In addition to the normal operating dayrate, the Company would be entitled to obtain approximately $4,300 per day for certain construction and equipment changes requested by Esso during the construction process. The dayrates were also subject to adjustments for changes in indexed operating cost elements, changes in costs arising from moving the rig outside the U.S. Gulf of Mexico, or changes in personnel requirements. The Esso contract was expected to generate aggregate dayrate revenues of approximately $302 million at full utilization, not including the additional construction cost recoveries. The contract also entitled Esso to elect up to five additional one-year extensions of the primary term at mutually agreeable dayrates. Under the terms of the contract the rig was to be delivered to Esso by July 15, 1999.
On July 23, 1999, the Company signed an amendment to the MARINE 700 drilling contract with Esso providing an extension of the delivery deadline and a reduction in the initial dayrate. The reduced initial dayrate is $130,000 per day plus approximately $4,300 per day for the cost of Esso change orders and is subject to an annual adjustment in years two through five of the contract to the dayrate based on market conditions for comparable rigs (not below $130,000 per day and not above $165,000 per day in years two and three) such that total revenue from the contract could range from $237 million to $302 million depending on drilling market conditions. Dayrates are still subject to adjustments for changes in indexed operating cost elements as discussed above. On August 5, 1999, the rig was accepted by Esso and began operating under the parties' amended five-year drilling contract.
MARINE 500 Drilling Contract. In July 1997, the Company entered into a drilling contract with a drilling consortium led by West Australian Petroleum Pty., Ltd. ("WAPET") for the MARINE 500. The consortium consists of WAPET, Indonesia Petroleum, Ltd. ("INPEX") and Mobil Exploration and Producing Australia ("MEPA"). Certain other oil companies have an option to participate in the consortium. The contract required the Company, prior to delivery of the rig, to upgrade the rig to work in water depths up to 5,000 feet with 15,000 psi drilling equipment, as described below. The contract was originally scheduled for a three-year term beginning in January 1999. However, because the rig was delayed in arriving to the shipyard for the upgrade work as a result of work extensions for its
previous customer, the rig was not delivered until July 5, 1999. This delay, however, did not extend the term of the contract, consequently the contract will still expire on December 31, 2001. During the term of this contract, the MARINE 500 will work predominately in Western Australia, although the consortium members may use the rig in Southeast Asia, the Pacific Rim, and/or New Zealand.
The consortium drilling contract is a master agreement that contemplates separate drilling contracts with the individual consortium members at a base dayrate of $127,500, which is adjusted for each contract based on operating costs in the area in which the rig is to be used. Two of the consortium members, WAPET and INPEX, have committed drilling contracts under the consortium agreement and have agreed under the consortium agreement to be liable for the conract minimum payments to the Company for the initial contract term ending December 31, 2001. The optional consortium members have made no commitments under the agreement, and are not liable for any payments under the consortium contract until they commit to a drilling contract. The INPEX drilling contract was a two-well contract with up to three option wells to be drilled at an operating dayrate of $150,000 per day and was completed on January 5, 2000. The WAPET drilling contract provides for a dayrate of $168,600 for an unspecified number of wells. When the rig departed the shipyard in Singapore on July 5, 1999, the Company, in accordance with the consortium drilling contract, received a fee of $6 million. This $6 million fee is being recognized as revenue over the term of the drilling contract. The contract provides that the consortium can terminate the contract at any time after January 1, 2001 in exchange for a termination payment of $95,890 for each day remaining in the term of the contract, subject to offset if the rig is otherwise employed. In addition, either party can terminate the WAPET drilling contract after 20 days of certain force majeure events and in the event of certain breaches.
MARINE 510 Charter. In July 1997, the Company entered into a Charter Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter the KANTAN 3 (referred to as the MARINE 510), a semi-submersible rig, for a period of five years. The MARINE 510 is a 600-foot water depth rig based upon the Pacesetter design and was built in China in 1984. The Charter Agreement began in mid-May 1998. The Charter Agreement and related agreements required the Company to pay approximately $26,000 per day during the first year, $23,000 per day during the second year and $24,500 per day for the last three years of the charter for each day that the MARINE 510 is working. The rig did not work from November 1998 until July 21, 1999, when the Company terminated the Charter Agreement for the MARINE 510. The termination agreement provides that if market conditions improve and the rig becomes available to work outside of Chinese waters, the Company and SBMGS anticipate entering into another Charter Agreement upon mutually agreeable terms or upon the same terms as the original Charter Agreement.
Marketing Agreement for NANHAI VI. In August 1998, the Company entered into an agreement effective through October 1, 1999, with the Peoples Republic of China's Southern Drilling Company to market the 1,500-foot water depth rated semi-submersible NANHAI VI. The Company recently extended the agreement through December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling rig, which was built in 1982 and modified and refurbished in 1995. The rig is technically and economically suitable to be upgraded to 5,000-foot water depth capability. Estimated total lead time required to secure the equipment needed for the upgrade, complete the project and move the rig to first drilling location is one year. Pursuant to the marketing agreement, if the rig is required to be upgraded, the cost of the upgrade will be funded by the owner. Under the agreement, the Company is to receive $3,000 per day in management fees while the rig is operating and 50% of all rig-level profits after management fees and amortization over a 36-month period of the costs of any upgrades to the vessel. The Company is actively marketing the rig, which will be made available by Southern Drilling Company upon consummation of a mutually agreeable drilling contract.
ENVIRONMENTAL MATTERS
General. The Company is subject to numerous domestic and foreign governmental laws and regulations that relate directly or indirectly to its operations, including certain laws and regulations (a) controlling the discharge of materials into the environment, (b) requiring removal and cleanup under certain circumstances, (c) requiring the proper handling and disposal of waste materials, or (d) otherwise relating to the protection of the environment. For example, the Company, as an operator of mobile offshore drilling rigs in waters of the United States and certain foreign offshore areas, may be liable for damages and for the cost of removing oil spills for which it is held responsible, subject to certain limitations. Laws and regulations protecting the environment have become more stringent in recent years and may, in certain circumstances, assess administrative, civil and criminal penalties and impose "strict liability," rendering a company liable for environmental damage without regard to negligence or fault on the part of such company. Such
laws and regulations may expose the Company to liability for the conduct of or conditions caused by others or for acts of the Company that were in compliance with all applicable laws and regulations at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on the Company. The Company believes that it has conducted its operations in substantial compliance with all applicable environmental laws and regulations.
The Company has generally been able to obtain contractual indemnification in its drilling contracts against pollution and environmental damages that are not caused by the gross negligence or willful misconduct of the Company, but there can be no assurance that such indemnification will be enforceable in all instances, that the customer will be financially able in all cases to comply with its indemnity obligations, or that the Company will be able to obtain such indemnification agreements in the future.
The Company maintains insurance coverage against certain environmental liabilities, but there can be no assurance that such insurance will continue to be available or carried by the Company or, if available and carried, will be adequate to cover the Company's liability in the event of a catastrophic occurrence.
U.S. Oil Pollution Act of 1990. The U.S. Oil Pollution Act of 1990 ("OPA '90") and regulations promulgated pursuant thereto impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills. A "responsible party" includes the owner or operator of an onshore facility, a pipeline or a vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA '90 assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a responsible party for an Outer Continental Shelf ("OCS") facility must pay all spill removal costs incurred by a federal, state or local government. OPA '90 establishes liability limits (subject to indexing) for mobile offshore drilling rigs. If functioning as an offshore facility, the mobile offshore drilling rigs are considered "tank vessels" for spills of oil on or above the water surface, with liability limits of the greater of $1,200 per gross ton or $10 million. To the extent damages and removal costs exceed this amount, the mobile offshore drilling rigs will be treated as an offshore facility and the offshore lessee will be responsible up to higher liability limits of all removal costs plus $75 million. A party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction, or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by OPA '90.
OPA '90 also imposes ongoing requirements on a responsible party. A failure to comply with ongoing requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement action. In short, OPA '90 places a burden on drilling rig owners or operators to conduct safe operations and take other measures to prevent oil spills. If a spill occurs, OPA '90 then imposes liability for resulting damages.
The ongoing requirements of OPA '90 include proof of financial responsibility (to cover at least some costs in a potential spill), and preparation of an oil spill contingency plan. OPA requires owners and operators of vessels over 300 gross tons to provide the U.S. Coast Guard with evidence of financial responsibility to cover the costs of cleaning up oil spills from such vessels. Moreover, certain amendments to OPA '90, that were enacted in 1996, requires owners and operators of offshore facilities that have a worst case oil spill potential of more than 1,000 barrels to demonstrate financial responsibility in amounts ranging from $10 million in specified state waters to $35 million in federal OCS waters, with higher amounts, up to $150 million, in certain limited circumstances where the Minerals Management Service ("MMS") believes such a level is justified by the risks posed by the quantity or quality of oil that is handled by the facility. On August 11, 1998, the MMS promulgated a final rule implementing the OPA '90 financial responsibility requirements for offshore facilities. The MMS final rule applies to those facilities used for exploring for, drilling for, or producing oil (including wells drilled from mobile offshore drilling rigs) as well as facilities (e.g., pipelines) used to transport oil from such exploration, drilling or production facilities. Vessels, including mobile offshore drilling rigs functioning as vessels rather than drilling platforms, are not subject to the MMS final rule but rather remain subject to regulations administered by the U.S. Coast Guard. The Company believes that it currently has established adequate proof of financial responsibility for its mobile offshore drilling rigs functioning as offshore facilities. However, the Company cannot predict whether financial responsibility requirements under any subsequent amendments to OPA '90, if any, will result in the imposition of substantial additional annual costs to the Company in the future or otherwise materially adversely affect the Company. The impact of any such future financial responsibility requirement should be
no more burdensome on the Company than on similarly situated or less capitalized drilling contractors operating in U.S. waters.
Outer Continental Shelf Lands Act (U.S.). The Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the Outer Continental Shelf. Specific design and operational standards may apply to Outer Continental Shelf vessels, rigs, platforms, vehicles and structures. Violations of lease terms relating to environmental matters or regulations issued pursuant to the Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or citizen prosecution.
CERCLA and RCRA (U.S.). The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, currently exempts crude oil, and the Resource Conservation and Recovery Act ("RCRA"), as amended, currently exempts certain drilling materials, such as drilling fluids and produced water, from the definitions of hazardous substances and hazardous wastes for purposes of these statutes. The Company's operations, however, may involve the use or handling of other material that may be classified as environmentally hazardous substances or wastes. There can be no assurances that these exemptions will be preserved in future amendments of such acts, if any, or that more stringent federal or state laws and regulations protecting the environment will not be adopted. CERCLA assigns strict liability to each responsible party for all response and re-mediation costs, as well as natural resource damage. Few defenses exist to the liability imposed by CERCLA.
GOVERNMENTAL REGULATION
The Company's business is affected by political developments and by federal, state, foreign and local laws and regulations that relate directly to the oil and gas industry. The adoption of laws and regulations curtailing exploration and developmental drilling for oil and gas for economic, environmental or other policy reasons would and have adversely affected the operations of the Company by limiting available drilling opportunities for its customers and/or increasing the costs of such activities to the Company or its customers. The Company believes that it has conducted its operations in substantial compliance with applicable governmental laws and regulations.
OPERATIONAL RISKS AND INSURANCE
Contract drilling operations are subject to various risks including blowouts, cratering, fires and explosions, each of which could result in damage to or destruction of drilling rigs and oil and gas wells, damage to life and property, suspension of operations, and environmental damage through oil spillage and extensive uncontrolled fires. The Company insures its drilling rigs and plant assets for amounts approximating used equipment replacement cost and also insures against catastrophic losses resulting from employer's liability and other risks customary in the energy service industry. The Company currently maintains insurance coverage it believes to be customary in the industry against certain general and marine public liabilities, including liabilities for personal injuries. Except in limited circumstances, this insurance does not cover liability for pollution or environmental damage that originates below the water surface, although the Company is generally indemnified against such pollution and environmental liabilities by its customers. There is no assurance that such insurance or indemnification will be adequate to protect the Company against liability from all consequences of well disasters, extensive fire damage or damage to the environment. Recognizing these risks, the Company has programs that are designed to promote a safe environment for its personnel and equipment.
COMPETITION
The contract drilling industry is highly competitive, and the Company competes with many drilling contractors, which are substantially larger than the Company with greater financial and other resources. Customers often award contracts on a competitive bid basis, and although a customer selecting a rig may consider, among other things, a contractor's safety record, crew quality and quality of service and equipment, the historical oversupply of rigs has created an intensely competitive market in which price is the primary factor in determining the selection of a drilling contractor. The Company believes that competition for drilling contracts will continue to be intense in the foreseeable future. Contractors are also able to adjust localized supply and demand imbalances by moving rigs from areas of low utilization and day rates to areas of greater activity and relatively higher day rates. In addition, there are inactive non-marketed rigs that could be reactivated to meet an increase in demand for drilling rigs in any given market. Such
movements or reactivations or a decrease in drilling activity in any major market could depress day rates and could adversely affect utilization of the Company's rigs.
In addition, the improvement the offshore contract drilling industry as a whole experienced during 1997 led to increased rig construction and enhancement programs by the Company and its competitors. A significant increase in the supply of new or enhanced rigs may have an adverse effect on the average operating day rates for the Company's rigs, particularly its semi-submersible units, and on the overall utilization level of the Company's fleet. The availability of other suitable rigs could cause customers to attempt to re-negotiate their long-term contracts with the Company or even attempt to cancel their contracts. In such cases, the Company's results of operations would be adversely affected.
INTERNATIONAL OPERATIONS
The Company's international operations are also subject to certain political, economic and other uncertainties including, among others, risks of war and civil disturbances, expropriation, nationalization, renegotiation or nullification of existing contracts, taxation policies, environmental regulation, foreign exchange restrictions, changing political conditions, international monetary fluctuations and other hazards arising out of foreign governmental sovereignty over certain areas in which the Company conducts operations. To date the Company has experienced no material loss as a result of any of these factors.
EMPLOYEES
As of March 14, 2000, the Company had 1,028 employees. The number of employees varies throughout the year depending on the level of drilling activity. The Company considers relations with its employees to be good. None of the Company's employees is presently represented by labor unions.
Crew quality is an important factor considered by the customer in selecting a rig. Accordingly, the Company seeks experienced personnel when selecting crews from among the available applicants and maintains a safety and personnel training program.
ITEM 2.
ITEM 2. PROPERTIES
DRILLING RIG FLEET
Jack-up Rigs. The Company owns 16 jack-up rigs, one of which is currently configured as an accommodation unit. Jack-up rigs 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. An offshore jack-up rig consists of a hull, which supports the drilling equipment, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. The rig legs may operate independently or have a lower hull or mat attached to the lower portion of the legs in order to provide a more stable foundation in soft bottom areas.
Ten of the Company's rigs are mat supported rigs and six are of independent leg design. Five of the mat supported rigs and one of the independent leg rigs are of slot type design, which are configured for the drilling operations to take place through a slot in the hull. The Company's other five mat supported rigs and four 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 jack-up rigs are capable of drilling to depths of 20,000 to 30,000 feet in maximum water depths ranging from 200 to 300 feet.
There are several factors that determine the type of rig most suitable for a particular job, the most significant of which include the water depth and bottom conditions at the proposed drilling location, whether the drilling is being done over a platform or other structure, and the intended well depth. Independent leg jack-up rigs typically have greater water depth capability and are advantageous in offshore areas where uneven bottom conditions or obstructions, such as pipelines, exist. Mat supported rigs are advantageous in offshore areas with soft bottom conditions. A slot design is appropriate for drilling exploratory wells in the absence of any existing permanent structure, such as a production platform, although some slot design rigs are capable of drilling over production platforms. A cantilevered jack-up can extend its drill floor and derrick over an existing, fixed structure, thereby permitting the rig to drill or work over a well located on such a structure. Jack-up rigs with the cantilever feature historically have achieved higher utilization and dayrates.
The Company has top drive drilling systems installed on 9 of its jack-up rigs. A top drive drilling system allows drilling with 90-foot lengths of drill pipe rather than 30-foot lengths, thus reducing the number of required connections. A top drive drilling system also permits rotation of the drill string while tripping in or out of the hole. These characteristics increase drilling speed, personnel safety and drilling efficiency and reduce the risk of the drill string sticking during operations.
Currently, the Company has four jack-up rigs located in international markets, two of which will be brought to the U.S. Gulf of Mexico during the second quarter of 2000. The Company's jack-ups, except for the MARINE 306, are not suitable for those areas that require hostile environment capabilities, such as the North Sea, or in deep waters in excess of 200 to 300 feet.
Semi-submersible Rigs. Semi-submersibles rigs operate worldwide and are usually deployed in water depths that exceed the water depth range that jack-up rigs are capable of working in. A semi-submersible rig is a column stabilized drilling platform, with a ship or barge type displacement hull of single or multiple configuration, with a main deck connected to the underwater hull or footings by columns, intended for operations in the floating condition. Such rigs operate in a "semi-submerged" position, remaining afloat, off bottom, in a position in which the lower hull is about 40 to 80 feet below the water line and the upper deck protrudes well above the surface. The conventionally moored semi-submersible rig is typically anchored on location. There are three types of mooring configurations, all wire, all chain, or a combination of wire and chain. The water depth that semi-submersible rigs operate in will range from 200 to 7,500 feet. Multiple deck structures provide the space necessary for machinery, drilling package, office and crew accommodations, open and closed storage, and helideck. Semi-submersible rigs have drilling depth capability of 25,000 feet. Variable deck load capacities range from 2,000 to 7,000 short tons, liquid mud storage capacity range from 2,000 to 7,000 barrels, bulk mud storage capacity ranges from 5,000 to 12,000 cu. ft. and bulk cement storage capacity ranges from 5,000 to 12,000 cu. ft. These units are equipped with blowout prevention equipment rated at either 10,000 or 15,000 psi.
The Company owns two conventionally moored semi-submersible rigs, the MARINE 500 and the MARINE 700. The MARINE 500 has a combination wire/chain mooring system rated for 5,000 foot water depth and drilling depth capability of 25,000 feet. The rig has a variable deck load capacity of 5,780 short tons. The rig has a liquid mud storage capacity of 5,441 barrels, sack storage capacity of 6,000 sacks, bulk mud storage capacity of 10,500 cu. ft. and bulk cement storage capacity of 10,500 cu. ft. The rig is equipped with 15,000 psi rated blowout prevention equipment. The MARINE 700 has a combination wire/chain mooring system rated for 7,500 foot water depth and drilling depth capability of 25,000 feet. The rig has a variable deck load capacity of 8,375 short tons. The rig has a liquid mud storage capacity of 10,260 barrels, multi-purpose liquid storage capacity of 14,760 barrels, sack storage capacity of 700 metric ton, bulk mud storage capacity of 14,100 cu. ft. and bulk cement storage capacity of 8,475 cu. ft. The rig is equipped with a 15,000 psi rated blowout prevention equipment.
The following table describes the Company's drilling rigs as of March 14, 2000:
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(a) Currently configured for 250-foot water depth, can be modified to provide for 300-foot water depth capability with Company owned leg extensions.
(b) Designed to operate in environmentally sensitive areas such as Mobile Bay.
(c) Rigs will be mobilized to the U.S. Gulf of Mexico during the second quarter of 2000.
T Equipped with top drive drilling system.
* Friede & Goldman.
** Marathon LeTourneau.
In addition to the drilling rigs described above, in August 1998 we entered into an agreement with the owner of the NANHAI VI, a 1,500-foot water depth semi-submersible, to market that rig on an exclusive basis. See "-- Customers and Contracts - Marketing Agreement for NANHAI VI".
Independent Leg Jack-up Rig - This type of rig consists of a floating hull with three independent elevated legs. After being towed to the drilling location, the legs are lowered until they penetrate the seabed and the hull is jacked to the desired elevation above sea level. The rig depicted in the diagram has a cantilever feature that permits the rig to operate over an existing, fixed platform or other structure.
[PHOTO]
Mat Supported Jack-up 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 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. The rig depicted is cantilevered.
[PHOTO]
Semi-submersible Rig - This type of rig consists of an upper working and living deck resting on vertical columns connected to lower hull members. Such rigs operate in a "semi-submerged" position, remaining afloat, off bottom, in a position in which the lower hull is from about 55 to 90 feet below the water line and the upper deck protrudes well above the surface. The rig is typically anchored in position and remains stable for drilling in the semi-submerged floating position due in part to its wave transparency characteristics at the water line.
[PHOTO]
FACILITIES
The Company's principal executive offices are located in Sugar Land, Texas, a suburb of Houston, and consist of approximately 26,000 square feet of leased space. The Company also leases a warehouse, storage and repair facility, including approximately 31 acres of land and 60,000 square feet of buildings, in Rosharon, Texas (near Houston). In connection with the Company's foreign operations, the Company leases offices, warehouse space and/or employee living quarters in Australia, Indonesia and Singapore.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
Jagson International Limited ("Jagson"), an Indian entity, has brought suit against Marine Drilling Companies, Inc. and Marine 300 Series, Inc. The plaintiff has alleged that the Company agreed to charter two jack-up rigs to the plaintiff during 1992 and that the Company breached the agreement by failing to charter the rigs resulting in damages in excess of $14,500,000. In August 1995, Jagson filed a suit against the Company in New Delhi, India that was subsequently withdrawn and filed a second suit in New Delhi against the Company in October 1995 that was dismissed by the court. In May 1996, Jagson filed a third suit against the Company in Bombay, India for the same claim and attempted to attach the MARINE 201, located in India at the time, to the claim. In March 1998, the court dismissed the motion for attachment. Although the third suit is still on file with the court, the MARINE 201 is no longer in India and there have been no further proceedings in the lawsuit. The Company disputes the existence of the agreement and intends to vigorously defend the suit. The Company does not believe this dispute will have a material adverse effect on its results of operations or financial condition.
Various other claims have been filed against the Company and its subsidiaries in the ordinary course of business, particularly claims alleging personal injuries. Management believes that the Company has adequate insurance coverage and has established adequate reserves for any liabilities that may reasonably be expected to result from these claims. In the opinion of management, no pending claims, actions or proceedings against the Company or its subsidiaries are expected to have a material adverse effect on its financial position or results of operations.
ITEM 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 REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common Stock"), trades on the New York Stock Exchange ("NYSE") under the symbol "MRL." The following table sets forth the range of high and low sale prices per share of the Common Stock as reported by the NYSE and the NASDAQ National Market System (prior to August 14, 1998) for the periods indicated.
The last sale price of the Common Stock as reported by the NYSE on March 14, 2000 was 23 5/8 per share and there were approximately 624 holders of record.
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. The Company's Credit Facility limits the ability of the Company to pay dividends. 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 as of and for the five year period ended December 31, 1999 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
OVERVIEW
Demand for the Company's offshore drilling services is primarily driven by the worldwide expenditures for oil and gas drilling which is closely linked to the underlying economics of oil and gas exploration, development and production. The economics of oil and gas business activities are impacted by current and projected oil and gas prices. Oil and gas prices are volatile and somewhat unpredictable, which has caused significant fluctuations in oil and gas drilling expenditures. Many factors influence oil and gas prices, including world economic conditions, worldwide oil and gas production and the activities of the Organization of Petroleum Exporting Countries ("OPEC").
The rates that the industry can charge for drilling services is a function of not only demand for services but the supply of drilling rigs available in the market to provide service. During the early 1980's when oil and gas prices were high and significant demand for drilling services existed, the industry built a significant number of offshore drilling rigs. In the mid-1980's when oil and gas prices declined significantly and the corresponding demand for drilling services declined, the supply of drilling rigs was significantly greater than the industry needed. This resulted in an imbalance of supply and demand causing low utilization with dayrates declining to virtually cash operating costs.
During 1996 and early 1997, oil and gas prices rose to a level that stimulated significant oil and gas drilling activity resulting in improved utilization and dayrates for the drilling industry. However, oil and gas prices declined significantly beginning in October 1997, and reached multi-year lows in various markets in early 1999. As a result of oil price declines in 1998 and early 1999, oil and gas companies made significant cutbacks in their drilling programs. This reduced industry-wide rig utilization including the U.S. Gulf of Mexico, where the Company operates most of its rigs, which not only sharply reduced dayrates, but also shortened the average length of drilling contracts primarily to a well-by-well basis. Oil and gas prices improved during 1999, resulting in recent increases in rig utilization and dayrates in the Gulf of Mexico jack-up market.
The following table sets forth rig utilization rates according to Offshore Data Services:
As of March 14, 2000, twelve of the Company's 16 jack-up rigs were working, all twelve are located in the Gulf of Mexico. The four international jack-up rigs are idle. The MARINE 500 semi-submersible rig began operating in July 1999 in Western Australia under a long-term drilling contract that expires December 31, 2001. In early August 1999, the MARINE 700 began working under a five-year contract in the deep-water U.S. Gulf of Mexico.
RESULTS OF OPERATIONS
The number of rigs the Company has available for service and the utilization rates and dayrates of the Company's active rigs are the most significant factors affecting the Company's level of revenues. Operating costs include all direct costs and expenditures associated with operating the Company's rigs. These costs include rig labor, repair, maintenance and supply expenditures, insurance costs, mobilization costs and other costs related to operations. Operating expenses do not necessarily fluctuate in proportion to changes in operating revenues due to the cost of maintaining personnel on board the rigs and equipment maintenance when the rigs are idle. Labor costs increase primarily due to higher salary levels, rig staffing requirements and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity the rig is performing and the age and condition of the equipment. Inflation is another contributing factor in the fluctuation of operating expenses.
The changes in operating income are more directly affected by revenue factors than expense factors since changes in dayrates directly impact revenues but not expenses. Utilization rate changes have a significant impact on revenues, but in the short-term do not impact expenses. Over a long period, significant changes in utilization may cause the Company to adjust the level of its actively marketed rig fleet and labor force to match anticipated levels of demand, thus changing the level of operating expenses. General and administrative expenses do not vary significantly unless the Company materially expands its asset base. Depreciation, which is affected by the Company's level of capital expenditures and depreciation practices, is another major determinant of operating income, and is not affected by changes in dayrates or utilization.
The following table sets forth the average rig utilization rates, operating days, average dayrates, revenues and operating expenses of the Company by operating segments for the periods indicated:
- -------------- (1) Based on the number of actively marketed rigs. Excluding rigs under construction or in the process of substantial upgrading, the Company had an average of 0, 0.1, and 1.1 non-marketed rigs during 1999, 1998 and 1997, respectively.
(2) Excludes depreciation and amortization and general and administrative expenses.
Years Ended December 31, 1999 and 1998
Revenues. The Company's drilling revenues decreased $112,609,000 or 49% during the year ended December 31, 1999 as compared to 1998. The decrease in revenues for 1999 was primarily due to decreased dayrates and rig utilization. Average daily revenue and rig utilization declined to $28,566 and 69% for the year ended December 31, 1999 as compared to $43,917 and 92% for 1998.
Contract Drilling Expense. Contract drilling expenses in 1999 decreased $24,575,000 or 24% compared to 1998. The decrease was primarily a result of lower labor costs and repairs and maintenance expense, due to lower utilization rates and less international operating activity in 1999 compared to 1998. The number of operating days for international rigs decreased from 1,117 days in 1998 to 262 days in 1999. International rig operations typically have higher average operating costs than domestic rig operations.
Depreciation and Amortization Expense. Depreciation and amortization expense for the year ended December 31, 1999 increased $9,378,000 compared to 1998. The increase was due to depreciation associated with expenditures for (i) the acquisition of the MARINE 306 in December 1998, (ii) the upgrade of the MARINE 500 which was out of service October 13, 1998 to July 5, 1999 and (iii) the construction of the MARINE 700, which was placed in service in early August 1999.
General and Administrative Expense. General and administrative expenses for the year ended December 31, 1999, compared to 1998, increased $288,000 or 2% primarily due to increased employee benefits cost, non-recurring severance costs and professional service fees incurred in 1999 partially offset by no bonus expense in 1999. The Company's bonus plan provides for no bonuses in a year in which the Company does not generate net income. General and administrative expenses in 1998 included $1,754,000 of bonus expense.
Interest Expense. Interest expense in 1999 was $6,184,000 compared to $481,000 for 1998. The increase was primarily the result of increased borrowings under the Credit Facility, net of capitalized interest associated with construction of the MARINE 500 and MARINE 700.
Interest Income. Interest income decreased $797,000 or 47% for 1999 from $1,683,000 in 1998. The decrease was related primarily to decreased cash balances as a result of expenditures related to the Company's two major construction and upgrade projects.
Income Taxes. Income tax expense decreased in 1999 as compared to 1998, primarily due to a decrease in the Company's pretax income. The Company's effective tax benefit rate for 1999 is less than the U.S. federal statutory rate of 35% because of foreign tax payments for which the Company did not receive U.S. federal tax benefit.
Years Ended December 31, 1998 and 1997
Revenues. The Company's 1998 drilling revenues increased $37,758,000 or 20%, compared to 1997. The increase in revenues was primarily due to a 16% increase in average daily revenue to $43,917. An increase of 159 operating days in 1998 also contributed to the increased revenues due to placing the MARINE 305 into service in August 1997 and the MARINE 510 in May 1998. Partially offsetting these increases was a 7% decline in rig utilization to 92% in 1998 from 99% in 1997.
Contract Drilling Expenses. Contract drilling expenses in 1998 increased $24,319,000 or 31% compared to 1997. The increase was primarily a result of increased fleet size in the international market where the average operating costs are typically higher. The MARINE 305 was placed into service in August 1997 and the MARINE 510 in May 1998.
Depreciation and Amortization Expense. Depreciation and amortization expense for 1998 increased $3,196,000 (19%) from $16,995,000 to $20,191,000 compared to the same period in 1997. The increase in 1998 was due to a full year of depreciation in 1998 associated with 1997 expenditures for the acquisition of the MARINE 500 and upgrade of the MARINE 305.
General and Administrative Expense. General and administrative expenses increased $4,480,000 or 57% to $12,287,000 in 1998 from $7,807,000 in 1997. The increase was attributed to an increase in professional services and increased personnel costs consistent with the increased level of operations, new deepwater contracts and increased international activity.
Interest Expense. Interest expense for 1998 was $481,000 compared to $575,000 during 1997. The decrease was primarily the result of the prepayment and termination of the Company's $35 million credit facility in February 1997.
Interest Income. Interest income decreased $715,000 or 30% from $2,398,000 in 1997 to $1,683,000 in 1998. The decrease was related primarily to decreased cash balances throughout the year as a result of expenditures related to the Company's two major construction and upgrade projects.
Income Taxes. Income tax expense increased for 1998 as compared to the same period in 1997, primarily due to an increase in the Company's pretax income.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity. At December 31, 1999, the Company had working capital of $30,816,000 as compared to working capital of $6,699,000 at December 31, 1998.
Net cash provided by operating activities for the year ended December 31, 1999 decreased by $120,788,000 to $12,320,000 compared to $133,108,000 for the same period in the prior year. The decrease is primarily attributable to the decreased dayrates and rig operating activity. Cash used in investing activities increased $13,205,000 during 1999 to $205,097,000 from $191,892,000 in 1998 due primarily to capital expenditures related to the completion of the MARINE 700 and upgrade of the MARINE 500. Net cash provided by financing activities during 1999 consisted primarily of $130,000,000 in proceeds from long-term debt borrowings and $54,417,000 in net proceeds from the sale of 4,600,000 shares of common stock in May 1999.
On August 12, 1998, the Company entered into a credit agreement (the "Credit Facility") with a consortium of domestic and international banks providing financing of up to $200,000,000 to be used for rig acquisitions and upgrades, as well as for general corporate purposes. The Credit Facility is a five-year revolving credit facility and is secured by substantially all of the Company's assets, including its rig fleet. The Company and its subsidiaries are required to comply with various covenants and restrictions, including, but not limited to, the maintenance of financial ratios and the restriction on payments of dividends. Interest accrues at a rate of (i) London Interbank Offered Rate ("LIBOR") plus a margin determined pursuant to a debt to EBITDA calculation or (ii) prime if a Base Rate Loan. As of December 31, 1999, $180,000,000 was outstanding under the Credit Facility. Subsequent to year-end, the Company has made $25,000,000 in principal payments, reducing the outstanding debt balance under the Credit Facility to $155,000,000 as of March 14, 2000.
On September 21, 1999, the Company amended the Credit Facility. The significant elements of the amendment include (i) an increase in the maximum permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1, (ii) a modification to the definition of EBITDA to give pro forma effect to certain newly acquired assets or long-term contracts, and (iii) a change to the definition of working capital to include any available commitments under the Credit Facility for purposes of satisfying the positive working capital requirement. Also, the margin over LIBOR that the Company pays under the Credit Facility was increased from a range of 75 to 125 basis points to 100 to 250 basis points. As of December 31, 1999, the Company was in compliance with the covenants of its amended Credit Facility.
During 1997, the improvement in the offshore drilling market allowed the Company to place some of its offshore rigs under longer-term contracts. The MARINE 500 and MARINE 700 are both operating under long-term contracts that will generate contract revenues in excess of $300,000,000 over the remaining life of the contracts. The MARINE 500 contract expires on December 31, 2001 and the MARINE 700 is under contract until August 5, 2004.
Capital Resources. During the year ended December 31, 1999 the Company expended $205,897,000 in capital expenditures consisting primarily of disbursements for (i) the completion of the MARINE 700, (ii) the upgrade of the MARINE 500, and to a lesser extent (iii) the purchase of other rig machinery. Capital expenditures for the year 2000 are expected to be approximately $30 to $35 million, which includes the acquisition, upgrade and mobilization of the Marine 202 (formerly Baruna V) in January 2000. On January 10, 2000, the Company completed an offering of 1,000,000 shares of its Common Stock in an underwritten offering at a net price of $18.50 per share, or $18.5 million. The proceeds of the offering were used to acquire, upgrade and mobilize the Baruna V drilling rig.
The Company will continue to pursue acquisitions of additional drilling rigs and related equipment and/or businesses. Future acquisitions, if any, would likely be funded from the Company's working capital, the Credit Facility, or through the issuance of debt and/or equity securities. The Company cannot predict whether it will be successful in acquiring additional rigs, and obtaining financing therefore, on acceptable terms. In addition, it is currently anticipated that the Company will continue the upgrading of rigs to enhance their capability to obtain longer-term contracts. The timing and actual amounts expended by the Company in connection with its plans to upgrade and refurbish selected rigs, as well as the type of rig modification comprising each program, is subject to the discretion of the Company and will depend on the Company's view of market conditions, the Company's cash flow, whether other acquisitions are made, and other factors.
The Company anticipates that its available funds, together with cash generated from operations and amounts that may be borrowed under the Credit Facility and other potential funding sources, such as increased credit facilities and private or public debt or equity offerings, will be sufficient to fund its required capital expenditures, working capital and debt service requirements for the foreseeable future. Future cash flows and the availability of other funding sources, however, are subject to a number of uncertainties, especially the condition of the oil and gas industry. Accordingly, there can be no assurance that these resources will be sufficient to fund the Company's cash requirements.
YEAR 2000 ISSUE
As of March 1, 2000, the year 2000 date change has not posed any significant problems for the Company. Based upon the system upgrades performed and experiences to date, the Company believes that the year 2000 will not pose any significant operational problems for the Company that could have a material adverse affect on the Company. However, there can be no assurances that the Company or its key vendors and suppliers will not encounter any year 2000 related problems that could result in a disruption of normal business activities and operations.
To date, the Company has spent approximately $114,000 to ensure year 2000 compliance, including hardware and software expenditures. This does not include internal labor costs for the Company's information technology personnel who spend a portion of their time working on year 2000 compliance issues.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting for and disclosure of derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material effect on its reported results.
FORWARD-LOOKING STATEMENTS
This Form 10-K, particularly the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts concerning, among other things, market conditions, the demand for offshore drilling services, future acquisitions and fleet expansion, future financings, future rig contracts, future capital expenditures including rig construction, upgrades and refurbishments, and future results of operations. Actual results may differ materially from those included in the forward-looking statements, and no assurance can be given that the Company's expectations will be realized or achieved. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include (i) a prolonged period of low oil or gas prices; (ii) the inadequacy
of insurance and indemnification to protect the Company against liability from all consequences of well disasters, fire damage or environmental damage; (iii) the inability of the Company to obtain insurance at reasonable rates; (iv) a decrease in the demand for offshore drilling rigs especially in the U.S. Gulf of Mexico; (v) the risks attendant with operations in foreign countries including actions that may be taken by foreign countries and actions that may be taken by the United States against foreign countries; (vi) the failure of the Company to successfully compete with the Company's competitors that are larger and have a greater diversity of rigs and greater financial resources than the Company; (vii) a decrease in rig utilization resulting from reactivation of currently inactive non-marketed rigs or new construction of rigs; (viii) the continuation of market and other conditions similar to those in which the Company incurred net losses for the six months ended June 30, 1999; (ix) the loss of key management personnel or the inability of the Company to attract and retain sufficient qualified personnel to operate its rigs; (x) the re-negotiation or cancellation of the long-term contracts for the MARINE 700 or the MARINE 500, whether as a result of rig performance or because of some other reason; (xi) the adoption of additional laws or regulations that limit or reduce drilling opportunities or that increase the cost of drilling or increase the potential liability of the Company; (xii) the occurrence of risks attendant to contract drilling operations including blowouts, cratering, fires and explosions, capsizing, grounding or collision involving rigs while in operation, mobilization or otherwise or damage to rigs from weather, sea conditions or unsound location; (xiii) adverse uninsured litigation results; (xiv) adverse tax consequences with respect to operations; and (xv) adequacy of the Company's cash resources in the future. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company is subject to market risk exposure related to changes in interest rates on its Credit Facility. Interest on borrowings under the Credit Facility is at either the prime interest rate or LIBOR plus a pre-agreed upon percentage point spread. The Company may, at its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to 6 months, with longer periods requiring bank approval. On May 28, 1999, the Company elected to lock in $100 million of outstanding debt at a fixed LIBOR rate of 5.5% plus a margin for one year. On November 24, 1999, the Company locked in $50 million of outstanding debt at a fixed LIBOR rate of 6.1% plus a margin for six months. The margin on these borrowings can range from 1.0% to 2.5% determined pursuant to a quarterly debt to EBITDA calculation. As of December 31, 1999, the margin for all borrowings was 1.75% and the Company had $180 million outstanding under its Credit Facility. On the remaining $30 million balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $0.3 million on an annual basis. The Company's objective in fixing the interest rate on these borrowings was to protect itself against rising interest rates.
Foreign Currency Exchange Rate Risk. The Company conducts business in several foreign countries. Predominately all of its foreign operations are denominated in U.S. dollars. The Company structures its drilling contracts in U.S. dollars to mitigate its exposure to fluctuations in foreign currencies. Other than some limited trade payables the Company does not currently have financial instruments that are sensitive to foreign currency exchange rates.
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 balance sheets of Marine Drilling Companies, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas January 25, 2000
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 PER SHARE DATA)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT 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, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
Organization and Business -- The consolidated financial statements include the accounts of Marine Drilling Companies, Inc. ("Parent") and its subsidiaries, Marine Drilling Management Company ("MDMC"), Marine 300 Series, Inc. ("M300SI") and Marine Drilling International, Inc. ("MDII"). Unless the context otherwise requires, the term "Company" refers to Marine Drilling Companies, Inc. and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
The Company is engaged in the business of drilling offshore oil and gas wells in domestic and international locations. International operations have been conducted in India, Southeast Asia and Western Australia.
Inventory -- Inventory is carried at the lower of cost or market and consists of operating supplies primarily for the Company's international operations.
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 as shown below:
Major renewals and improvements are capitalized and depreciated over the respective asset's useful life. Expenditures for normal maintenance and repairs are charged to expense as incurred. Maintenance and repairs amounted to $10,307,000, $12,345,000 and $12,066,000 in 1999, 1998 and 1997, respectively. 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 as while operating. The Company capitalizes interest expense related to certain capital expenditure projects. Capitalized interest was approximately $3,610,000, $193,000 and $49,000 for 1999, 1998 and 1997, respectively.
The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or certain changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
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. Deferred financing costs, net of accumulated amortization were $1,422,000, $1,472,000 and $783,000 at December 31, 1999, 1998 and 1997, respectively.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes -- Deferred tax assets and liabilities are recorded to reflect the future tax consequences of differences between the financial statement and tax bases of existing assets and liabilities. 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. 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.
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 with its rigs. Revenues are recognized as earned. In connection with drilling contracts, the Company may receive lump sum fees for mobilization of equipment and personnel or for capital improvements to rigs. Significant mobilization and reimbursements are deferred and amortized over the term of the drilling contract. As of December 31, 1999, there was $4,800,000 of unamortized mobilization revenue. There were no unamortized mobilization and reimbursements as of December 31, 1998.
Rig Mobilization Costs -- When significant costs are incurred in connection with mobilizing a drilling rig for a new contract, the Company defers and amortizes such costs over the term of the applicable drilling contract. There were no unamortized mobilization costs as of December 31, 1999 and 1998. Mobilization costs incurred in connection with rig purchases are capitalized as part of the purchase price and are depreciated over the life of the rig.
Stock-Based Compensation -- The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount the employee must pay to acquire the stock.
Cash and Cash Equivalents -- The Company generally considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1999 and 1998 none of the Company's cash on hand was restricted. As of December 31, 1999 and 1998, letters of credit totaling $791,000 and $908,000, respectively, were outstanding.
Capital Structure -- The Company has one class of common stock, par value $0.01. The stock is traded on the NYSE Stock Market under the symbol MRL. There are 200,000,000 authorized shares of which 57,199,489 were issued and outstanding as of December 31, 1999. Each share of common stock is allowed one voting right.
Earnings Per Share -- Basic earnings per share, represents net income divided by the weighted average common shares outstanding - without the dilutive effects of common stock equivalents (options, warrants, etc). Diluted earnings per share is determined based on the assumption that common stock equivalents have been converted using the average price for the period. Common stock equivalents with a weighted average of 509,000 and 880,000 are reflected in the calculation of diluted earnings per share for the years ended December 31, 1998 and 1997, respectively. For the year ended December 31, 1999, there were 2,693,000 stock options outstanding that were not included in the computation of diluted earnings per share. There were 849,000 stock options outstanding for the year ended December 31, 1998, which were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the common shares. For the year ended December 31, 1997, there were no stock options outstanding that were not included in the computation of diluted earnings per share. No adjustment to net income was made in calculating diluted earnings per share for the years ended December 31, 1999, 1998 and 1997.
Reclassification of Accounts -- Certain reclassifications have been made to conform to current year presentation with no effect on net income.
Concentrations of Credit Risk -- The market for the Company's services and products is 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 historically been within management's expectations. At December 31, 1999, 1998 and 1997, the Company had cash deposits in one bank. In addition, the Company had mutual funds and commercial paper with a variety of companies and financial institutions
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
with strong credit ratings, and such securities are held until maturity. The Company believes that credit and market risk in such instruments is minimal.
Fair Values of Financial Instruments -- The fair values of the Company's cash equivalents, trade receivables and trade payables approximated their carrying values due to the short-term maturities of these instruments. The estimated fair value of long-term debt is equivalent to its carrying value due to the floating interest rate (see Note 5).
Use of Estimates -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(2) ACCOUNTS RECEIVABLE - TRADE AND OTHER, NET
Accounts receivables are summarized as follows (in thousands):
(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 (in thousands):
Depreciation expense was $29,569,000, $19,984,000 and $16,631,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) ACCRUED EXPENSES
Accrued expenses are summarized as follows (in thousands):
(5) LONG-TERM DEBT
On August 12, 1998, the Company entered into a credit agreement (the "Credit Facility") with a consortium of domestic and international banks providing financing of up to $200 million to be used for rig acquisitions and upgrades as well as for general corporate purposes. The Credit Facility is a five-year revolver and is secured by substantially all of the Company's assets, including its rig fleet. The Company and its subsidiaries are required to comply with various covenants and restrictions, including, but not limited to, the maintenance of financial ratios and the restriction on payments of dividends. Interest accrues at a rate of (i) London Interbank Offered Rate ("LIBOR") plus a margin determined pursuant to a debt to EBITDA calculation or (ii) prime if a Base Rate Loan. As of December 31, 1999, $180 million was outstanding under the Credit Facility. Subsequent to year-end, the Company has made $25 million in principal payments, reducing the outstanding debt balance under the Credit Facility to $155 million as of March 14, 2000.
On September 21, 1999, the Company amended the Credit Facility. The significant elements of the amendment include (i) an increase in the maximum permitted ratio of debt to EBITDA to 4 to 1 compared to the original 3 to 1, (ii) a modification to the definition of EBITDA to give pro forma effect to certain newly acquired assets or long-term contracts, and (iii) a change to the definition of working capital to include any available commitments under the Credit Facility for purposes of satisfying the positive working capital requirement. Also, the margin over LIBOR that the Company pays under the Credit Facility was increased from a range of 75 to 125 basis points to 100 to 250 basis points. As of December 31, 1999, the Company was in compliance with the covenants of its amended Credit Facility.
During 1999, the Company incurred $6.2 million of interest expense, including amortization of deferred financing costs related to the Credit Facility. Interest expense for the construction and refurbishment of qualifying assets is capitalized. Accordingly, $3.6 million, $0.2 million and $0 of interest expense was capitalized during the years ended December 31, 1999, 1998 and 1997 respectively.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) INCOME TAXES
Income taxes consist of the following (in thousands):
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 as an adjustment to additional paid-in capital and are not reflected as a reduction of income tax expense. The realization of tax attributes prior to the quasi-reorganization are subject to the rules and guidance of the Internal Revenue Service and United States Department of the Treasury as interpreted or applied to situations similar to the Company.
For the years ended December 31, 1999, 1998 and 1997, the effective tax rates for financial reporting purposes were 28%, 36%, and 35%, respectively. The effective tax benefit rate of 28% in 1999 was less than U.S. federal statutory rate of 35% and the 1998 effective tax rate was higher than the statutory rate due to the effects of foreign tax payments for which the Company did not receive U.S. federal tax benefits in 1999 and 1998.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below (in thousands):
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1999 and 1998 was $4,066,000. 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, 1999.
At December 31, 1999, the Company had the following carryforwards for federal income tax purposes (in thousands):
In late 1995 and early 1996, certain venture capital firms holding significant percentages of the Company's common stock sold or distributed their positions. These transactions triggered an ownership change pursuant to Section 382 in March 1996. As a result of this ownership change, the Company's use of its net operating loss, investment tax credit and general business credit carryforwards subsequent to that date will be limited.
(7) BENEFIT PLANS
1992 LONG TERM INCENTIVE PLAN -- In late 1992, the Company adopted the Marine Drilling 1992 Long Term Incentive Plan ("1992 Plan") which was amended in 1997. 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 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 outstanding stock options, SARs and restricted stock awards would exceed 7% 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.
Restricted Common Stock. During 1999, 1998 and 1997, the Company issued restricted stock grants consisting of 15,350, 76,900 and 76,500 shares, respectively, of common stock. These grants generally lapse over four-year periods and the values of the grants are based on the respective closing prices on the day preceding each grant and are recognized as compensation expense over the periods during which the restrictions lapse. Compensation expense related to the issuance of restricted common stock for the years ended December 31, 1999, 1998 and 1997 was $606,000, $648,000 and $590,000, respectively. During 1999, 1998 and 1997, 7,850, 10,000 and 12,000 shares, respectively, of restricted common stock were forfeited.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Common Stock Options. The exercise price of each option equals the market price of the Company's stock on the date of grant. An option's maximum term is ten years. The vesting periods range from immediately to four years and is determined at the issuance of each grant. The following table summarizes stock option transactions pursuant to the 1992 Plan:
The following table summarizes information about fixed-price stock options outstanding and exercisable at December 31, 1999:
Based upon common stock outstanding as of December 31, 1999 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 7,133,476. The number of shares available due to the 7% limitation was 1,491,998 and 809,279 shares, respectively.
No compensation costs were recognized as expense for 1999, 1998 and 1997 because the Company has elected to continue accounting for such transactions under APB 25.
NON-EMPLOYEE DIRECTORS' PLAN -- The Company adopted the 1995 Non-Employee Directors' Plan (the "Directors' Plan") effective June 29, 1995. The Directors' Plan provides for the grant of shares and options to acquire common stock to each director who is not an employee of the Company. A maximum of 350,000 shares may be issued pursuant to stock awards or options. Each option granted will vest and become exercisable one year after its grant and will expire ten years from the date the option is granted. The exercise price of each option equals the market price of the Company's stock on the date of grant. No compensation costs were recognized as expense.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes stock option transactions under the Director's Plan as of December 31, 1999:
The following table summarizes information about fixed-price stock options outstanding and exercisable at December 31, 1999 under the Director's Plan.
During 1999, 1998 and 1997, 4,398, 4,628 and 2,815 shares were issued as stock awards and related compensation expense of $166,000, $169,000 and $151,000 was recognized in 1999, 1998 and 1997, respectively.
EMPLOYEE 401(K) PROFIT SHARING PLAN -- The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") covering substantially all of its employees who have been employed at least three months. The Company matches employees' contributions to the Plan on a dollar-for-dollar basis, in the form of Company common stock, up to 6% of their eligible compensation. During 1999, 1998 and 1997, the Company made matching contributions with the Company's common stock totaling $1,505,000, $1,704,000 and $1,303,000, respectively.
EXECUTIVE DEFERRED COMPENSATION PLAN -- The Company adopted the Executive Deferred Compensation Plan (the "Executive Plan") effective December 31, 1994. Employees who participate in the Executive Plan are selected by an Administrative Committee. Under the Executive Plan, the participating executives may elect (i) to defer up to 80% of compensation after reaching the limitations applicable to the Company's 401(k) Plan and (ii) to defer any excess contributions refunded by the 401(k) Plan. The Company matches executives' contributions to the Executive Plan on a dollar-for-dollar basis, in cash up to 5% of their eligible compensation. As of December 31, 1999 and 1998 the amount deferred under the Executive Plan was $434,000 and $338,000, respectively.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for its fixed stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options at the grant date as prescribed by SFAS 123, net income and net income per share would approximate the pro forma amounts indicated below (in thousands except per share data):
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.
The effects of applying SFAS 123 in the pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years were not anticipated in the calculations.
(9) SHAREHOLDERS RIGHTS PLAN
The Company adopted a shareholder rights plan on November 8, 1996, designed to assure that the Company's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers and other abusive takeover tactics to gain control of the Company without paying all shareholders a fair price. The rights plan was not adopted in response to any specific takeover proposal. Under the rights plan, the Company issued one preferred share purchase right (a "Right") with respect to each outstanding share of common stock outstanding on November 20, 1996. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Junior Participating Preferred Stock, $.01 par value per share (the "Preferred Shares"), of the Company at a price of $56.00 per one one-thousandth of a Preferred Share, subject to adjustment. The Rights are not currently exercisable and will become exercisable only in the event a person or group acquires beneficial ownership of 15% or more of the Company's common stock. Each whole Preferred Share will be entitled to receive a quarterly preferential dividend in an amount per share equal to the greater of (i) $1.00 in cash or (ii) in the aggregate, 1,000 times the dividend declared on the common stock. In the event of liquidation, the holders of the Preferred Shares will be entitled to receive a preferential liquidation payment equal to the greater of (i) $1,000 per share or (ii) in the aggregate, 1,000 times the payment made on the shares of common stock. In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged for or changed into other stock or securities, cash or other property, each whole Preferred Share will be entitled to receive 1,000 times the amount received per share of common stock. Each whole Preferred Share shall be entitled to 1,000 votes on all matters submitted to a vote of the shareholders of the Company, and Preferred Shares shall generally vote together as one class with the common stock and any other capital stock on all matters submitted to a vote of shareholders of the Company. The Rights will expire
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
on November 19, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or the Rights are earlier redeemed or exchanged by the Company.
(10) COMMITMENTS AND CONTINGENCIES
India Lawsuit -- Jagson International Limited ("Jagson"), an Indian entity, has brought suit against Marine Drilling Companies, Inc. and one of its subsidiaries, Marine 300 Series, Inc. The plaintiff has alleged that the Company agreed to charter two jack-up rigs to the plaintiff during 1992 and that it breached the agreement by failing to charter the rigs resulting in damages in excess of $14.5 million. In August 1995, Jagson filed a suit against the Company in New Delhi, India that was subsequently withdrawn and filed a second suit in New Delhi against the Company in October 1995 that was dismissed by the court. In May 1996, Jagson filed a third suit against the Company in Bombay, India for the same claim and attempted to attach the MARINE 201, located in India at the time, to the claim. In March 1998, the court dismissed the motion for attachment. Although the third suit is still on file with the court, the MARINE 201 is no longer in India and there have been no further proceedings in the lawsuit. The Company disputes the existence of the agreement and intends to vigorously defend the suit. The Company does not believe this dispute will have a material adverse effect on its results of operations or financial condition.
Shipyard Contract Dispute -- In December 1997, the company entered into an agreement whereby HAM Marine, Inc., now Friede Goldman International, Inc. ("FGI"), would complete construction of the MARINE 700 semi-submersible drilling rig in their shipyard in Pascagoula, Mississippi for $87 million. As a result of, among other things, delays and cost overruns, the Company incurred $122 million ($87 million contract plus $35 million in change orders) for completion of the construction of the MARINE 700.
FGI asserted an $18.2 million claim for additional costs allegedly incurred by FGI as a result of alleged changes in scope of work associated with construction of the MARINE 700. The Company believed that it was not obligated under its contract with FGI to pay any costs over and above the $122 million invoiced by FGI. Additionally, the Company asserted a $3.8 million claim against FGI and offset the $3.8 million against the $122 million invoiced by FGI. The $3.8 million claim consisted of $3.5 million for work performed by the Company that the Company believes was contractually the responsibility of FGI plus $0.3 million for late delivery damages. The Company and FGI settled the claim in February 2000, for $3.8 million, the amount previously withheld by the Company.
Other Legal Proceedings -- The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Operating Leases -- The Company rents certain equipment and other property under operating leases. Rental expense was $1,507,000, $1,722,000 and $1,836,000 in 1999, 1998 and 1997, respectively. Aggregate future minimum rental payments relating to operating leases not including the charter fee for the MARINE 510, are as follows (in thousands):
Charter Agreement -- In July 1997, the Company entered into a Charter Agreement with Shanghai Bureau of Marine Geological Survey ("SBMGS") to charter the KANTAN 3 (referred to as the MARINE 510), a semi-submersible rig, for a period of five years. The MARINE 510 is a 600-foot water depth rig based upon the Pacesetter design and was built in China in 1984. The Charter Agreement began in mid-May 1998. The Charter Agreement and related agreements required the Company to pay approximately $26,000 per day during the first year, $23,000 per day during the second year and $24,500 per day for the last three years of the charter for each day that the MARINE 510 worked. The rig did not work from November 1998 until July 21, 1999, when the Company terminated the Charter Agreement for the MARINE 510. The termination agreement provides that if market conditions improve and the rig becomes available to work outside of Chinese waters, the Company and SBMGS anticipate entering into another charter agreement upon mutually agreeable terms or upon the same terms as the original Charter Agreement.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Marketing Agreement for NANHAI VI -- In August 1998, the Company entered into an agreement effective through October 1, 1999, with China's Southern Drilling Company to market and manage the 1,500-foot water depth rated semi-submersible NANHAI VI. The Company recently extended the agreement through December 31, 2000. The NANHAI VI is a self-propelled, semi-submersible drilling rig, which was built in 1982 and modified and refurbished in 1995. The rig is technically and economically suitable to be upgraded to 4,000-foot water depth capability. Estimated total lead time required to secure the equipment needed for the upgrade, complete the project and move the rig to first drilling location is one year. Pursuant to the marketing agreement, if the rig is required to be upgraded, the cost of the upgrade will be funded by the owner. The Company is actively marketing the rig, which will be made available by Southern Drilling Company upon consummation of a mutually agreeable drilling contract.
(11) SEGMENT AND RELATED INFORMATION
For reporting purposes the Company defines its segments as shallow water drilling (jack-up rigs) and deepwater drilling (semi-submersibles). The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on income before taxes and non-recurring items. Operating income consists of revenues less the related operating costs and expenses, including depreciation and allocated operation support, excluding interest and unallocated corporate expenses. Identifiable assets by operating segment include assets directly identified with those operations.
The following table sets forth consolidated financial information with respect to the Company and its subsidiaries by operating segment (in thousands):
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company also provides services in both domestic and foreign locations. The following table sets forth financial information with respect to the Company and its subsidiaries by geographic area (in thousands):
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 1999, 1998 and 1997, sales to customers that represented 10% or more of consolidated drilling revenues were as follows (in thousands):
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.
(12) RELATED PARTY TRANSACTIONS
In August 1997 Marine Drilling Companies (Norway) ASA acquired 100% of Norwegian Drilling Technology AS ("NDT") a Norwegian corporation. Idar Iversen, former President and Chief Executive Officer of Marine Drilling Companies (Norway) ASA owned 50% of NDT at the time of the purchase. Mr. Iversen no longer has any interests in NDT and is no longer employed by the Company.
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) UNAUDITED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly consolidated financial information for 1999 and 1998 is as follows (in thousands, except per share data):
- -------------- (1) Quarterly net income per common share may not total to annual results due to rounding.
(14) SUBSEQUENT EVENTS
On January 10, 2000, the Company completed an offering of 1,000,000 shares of its Common Stock in an underwritten offering at a net price of $18.50 per share, or $18,500,000. The proceeds of the offering were used to acquire, upgrade and mobilize the Baruna V drilling rig.
On January 20, 2000, the Company acquired a jack-up rig, the Baruna V, for $13.5 million. The rig is a Bethlehem mat cantilever capable of working in up to 200 feet of water. The rig was built in 1980 and is currently located in Southeast Asia. The rig was renamed the MARINE 202 and will be mobilized to the Gulf of Mexico during the second quarter of 2000, along with the MARINE 201, currently located in the United Arab Emirates.
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 11, 2000, 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 AND REPORTS ON FORM 8-K
(a) The following documents are included in Part II, Item 8:
(1) Consolidated Financial Statements
All other schedules are omitted as the information is not required or is not applicable.
(2) Exhibits Exhibit No.
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 First Amended and Restated Employment Agreement between Marine Drilling Companies, Inc. and Jan Rask dated September 1, 1999 (incorporated by reference to Exhibit 10.1 in Form 10-Q for quarter ended September 30, 1999).
++ 10.2 First Amended and Restated Severance Agreement between Marine Drilling Companies, Inc. and George H. Gentry, III dated September 1, 1999 (incorporated by reference to Exhibit 10.2 in Form 10-Q for quarter ended September 30, 1999).
++ 10.3 First Amended and Restated Severance Agreement between Marine Drilling Companies, Inc. and H. Larry Adkins dated September 1, 1999 (incorporated by reference to Exhibit 10.3 in Form 10-Q for quarter ended September 30, 1999).
++ 10.4 Severance Agreement between Marine Drilling Companies, Inc. and O. Peter Blom dated September 1, 1999 (incorporated by reference to Exhibit 10.4 in Form 10-Q for quarter ended September 30, 1999).
++ 10.5 First Amended and Restated Employment Agreement between Marine Drilling Companies, Inc. and Bobby E. Benton dated September 1, 1999 (incorporated by reference to Exhibit 10.5 in Form 10-Q for quarter ended September 30, 1999).
++ 10.6 Marine Drilling Companies, Inc. 1995 Non-Employee Directors' Plan (incorporated by reference to Annex A of the Company's Proxy Statement dated July 17, 1995) (incorporated by reference to Exhibit 10.6 in Form 10-Q for quarter ended September 30, 1999).
++ 10.7 First Amended and Restated Employment Agreement between Marine Drilling Companies, Inc. and T. Scott O'Keefe dated September 1, 1999 (incorporated by reference to Exhibit 10.7 in Form 10-Q for quarter ended September 30, 1999).
++ 10.9 First Amended and Restated Severance Agreement between Marine Drilling Companies, Inc. and Vincent G. Bounds dated September 1, 1999 (incorporated by reference to Exhibit 10.9 in Form 10-Q for quarter ended September 30, 1999).
++ 10.10 First Amended and Restated Severance Agreement between Marine Drilling Companies, Inc. and Dale W. Wilhelm dated September 1, 1999 (incorporated by reference to Exhibit 10.10 in Form 10-Q for quarter ended September 30, 1999).
10.11 Amendment No. 1 and Waiver Agreement dated September 21, 1999 among Marine Drilling Companies and ABN AMRO Bank N.V., Christiania Bank Og Kreditkasse, Credit Agricole Indosuez, Bankers Trust Company, Skandinaviska Enskilda Banken AB (Publ.), Bank Austria, Bank of Nova Scotia, Banque Nationale Paris, Natexis Banque BFCE, and Nederlandse Scheepshypotheekbank N.V. (incorporated by reference to Exhibit 10.11 in Form 10-Q for quarter ended September 30, 1999).
++ 10.18 The Marine Drilling 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.18 of the Company's Registration Statement No. 33-52470 on Form S-1).
++ 10.25 Marine Drilling Companies, Inc. Amended and Restated Executive Deferred Compensation Plan effective July 1, 1996 (incorporated by reference to Exhibit 10.25 on Form 10-K for the year ended December 31, 1996).
10.26 Marine Drilling Companies, Inc. Shareholders Rights Agreement (incorporated by reference to Exhibits 1 - 5 to the Current Report on Form 8-K of the Registrant dated November 15, 1996).
* 21.1 Subsidiaries of the Registrant.
* 23.1 Consent of KPMG LLP.
* 27 Financial Data Schedule.
* Filed herewith.
++ Management contract or compensation plan or arrangement required to be filed as an exhibit to this report.
- ---------------------------
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the fourth quarter of 1999.
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, IN THE CITY OF SUGAR LAND, STATE OF TEXAS, ON MARCH 24, 2000.
MARINE DRILLING COMPANIES, INC.
By /s/ Jan Rask ----------------------------- Jan Rask President
PURSUANT TO THE REQUIREMENT 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:
INDEX TO EXHIBITS