ITEM 3. LEGAL PROCEEDINGS
In February, 1994, the Company settled litigation with Diamond M concerning various matters relating to the sale and bareboat charter of 3 offshore drilling rigs. Legal proceedings were instituted by the Company on August 29, 1991, and were consolidated with related legal proceedings subsequently instituted by Diamond M in the United States District Court, Southern District of Texas, Houston Division. In June, 1993, a partial summary judgment awarded the Company $1.8 million, together with interest and attorneys fees, for notes payable owed by Diamond M to the Company, offset by certain charter hire payments due Diamond M. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division, awarding Diamond M $3.5 million, plus court costs, offset by the partial summary judgment
of $1.8 million. The Company paid Diamond M $1.7 million in February, 1994 as a final settlement of all disputed issues. See Note 12 of Notes to Consolidated Financial Statements.
The Company is also party to a number of lawsuits which are ordinary, routine litigation incidental to the Company's business, the outcome of which, individually, or in the aggregate, is not expected to have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any matter to a vote of stockholders in the fourth quarter of 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market ("Nasdaq") under the symbol "CLDR." The following table sets forth the range of high and low closing sale prices per share of Common Stock as reported by Nasdaq for the periods indicated.
On March 1, 1995, the closing sale price of the Company's Common Stock, as reported by Nasdaq, was $12 3/4 per share. On that date, there were 2,028 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock, and it is not anticipated that cash dividends will be paid to holders of Common Stock in the foreseeable future. Under the Company's credit agreement with Internationale Nederlanden (U.S.) Capital Corporation ("INCC"), formerly Internationale Nederlanden Bank N.V., the Company is restricted from declaring, making, or paying any cash dividend on any class of capital stock except for the quarterly dividend applicable to the Company's Preferred Stock.
The Company's $2.3125 Convertible Exchangeable Preferred Stock ("Preferred Stock") is also traded on the Nasdaq under the symbol "CLDRP." The following table sets forth the range of high and low closing sale prices per share of Preferred Stock as reported by Nasdaq for the periods indicated.
On February 28, 1995, the closing sale price of the Company's Preferred Stock, as reported by Nasdaq, was $26 13/64 per share. On that date, there were 33 holders of record of the Company's Preferred Stock.
Holders of shares of Preferred Stock are entitled to receive, when, as, and if declared by the Board of Directors out of funds of the Company legally available therefor, cash dividends at an annual rate of $2.3125 per share, payable quarterly on March 15, June 15, September 15 and December 15 in each year, except that if any such date is a Saturday, Sunday or legal holiday, such dividend is payable on the next day that is not a Saturday, Sunday or legal holiday. Dividends are cumulative and are payable to holders of record as they appear in the stock books of the Company on such record dates as are fixed by the Board of Directors. Cash dividends paid on each of the quarterly dividend dates in 1994, 1993 and 1992 were $665,000. The Preferred Stock is also convertible into shares of Common Stock at the rate of 1.89394 shares of Common Stock for each share of Preferred Stock and is subject to redemption at the option of the Company at varying prices depending on the date called for redemption. Under the credit agreement with INCC, the Company is restricted from redeeming the Preferred Stock unless such redemption is mandatory.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information of the Company. The amounts as of and for each of the five years in the period ended December 31, 1994 have been derived from audited consolidated financial statements of the Company. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The selected consolidated financial data provided below are not necessarily indicative of the future results of operations or financial performance of the Company.
- ---------------
(1) Includes exchange rate losses of $1.2 million in 1994, litigation settlement and expenses of $3.7 million in 1993 and gains on disposition of assets of $5.0 million in 1992.
(2) The Company has not paid any cash dividends on its Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Activity in the contract drilling industry and related oil service businesses has shown signs of improvement over the last two years due to various market consolidations. Crude oil prices declined significantly during the first quarter of 1994 and have currently returned to higher levels, while natural gas prices have fallen to levels not experienced since 1991. This continued price volatility creates an uncertain domestic market and competition, therefore, remains intense within the contract drilling industry. The financial condition and results of operations of the Company and other drilling contractors are dependent upon the price of oil and natural gas, as demand for their services is primarily dependent upon the level of spending by oil and gas companies for exploration, development and production activities.
The Company has endeavored to mitigate the effect of volatile product pricing by diversifying its scope of operations beyond the domestic daywork contract drilling market. To achieve its strategic objective, the Company established separate but related lines of business in turnkey drilling and MOPU operations, and pursued foreign drilling and production opportunities. Each of the Company's business segments will continue to be affected, however, by the unsettled energy markets, which are influenced by a variety of factors, including general economic conditions, the extent of worldwide oil and gas production and demand therefor, government regulations, and environmental concerns.
RESULTS OF OPERATIONS
Year 1994 Versus 1993
The Company recognized net income, before preferred dividends, of $6.1 million in 1994 compared to net income of $3.6 million in 1993. Operating income increased $.9 million from 1993 to 1994. The improvement in operating income was primarily due to an increase in foreign daywork drilling operating income of $5.3 million, a reduction in domestic daywork drilling operating losses of $2.3 million, an increase in engineering services operating income of $1.9 million, and a reduction in oil and gas operating losses of $.9 million, offset in part by a reduction in MOPU operating income of $9.2 million and an increase in corporate overhead of $.3 million.
Daywork Drilling
Domestic daywork drilling results in 1994 reflect the Company's strategy to diversify away from this volatile market. As a result of rig deployments out of the United States, domestic daywork drilling operating losses decreased by $2.3 million from 1993 to 1994. Operating losses incurred in 1993 were due primarily to stacked rig costs associated with the Company's domestic land rigs. One of the Company's land drilling rigs was mobilized to Venezuela during the first quarter of 1994 and began daywork drilling operations for Corpoven for a three-year term. Two of the Company's land drilling rigs, which were stacked during all of 1993, were mobilized to Venezuela during the first quarter of 1994 and are currently drilling turnkey wells for Corpoven.
Foreign daywork drilling revenues increased $11.4 million from 1993 to 1994. Foreign daywork drilling operating income increased $5.3 million during the same period. Foreign daywork drilling operating results reflect increased revenues and operating income primarily due to contributions from one of the Company's jack-up drilling rigs which was mobilized to the Bay of Tampico, Mexico during the first quarter of 1994. This jack-up drilling rig completed operations for CNCTI during the fourth quarter of 1994. The Company has stacked the rig until another contract is awarded. No assurance can be given that the Company will be able to secure a contract for the operation of this unit. Also contributing to the improved results were increased operating income from the Company's 2 jack-up drilling rigs working in Venezuela, primarily due to reduced operating expenses, and contributions from the 3 additional land rigs mobilized to Venezuela during 1994.
Contracts for the Company's 2 jack-up drilling rigs operating in Venezuela were re-negotiated in the first quarter of 1994 and expired in February, 1995. The contract rates were adjusted quarterly based upon fluctuations in oil prices from the base oil price in effect at the contract renewal date. The 2 jack-up rigs will continue drilling operations on a well-to-well basis in Venezuela at reduced dayrates from those received in 1994. The Company is currently marketing the rigs to others for use in Venezuela. No assurance can be given that the Company will be able to secure a contract for the operation of these units. If contracts are not obtained, Maraven is required to demobilize the rigs to the U.S. Gulf of Mexico. Contracts on 2 of the 3 land drilling rigs working in eastern Venezuela on daywork contracts for Corpoven expire in September, 1995, and the other contract expires in February, 1997.
Engineering Services
Engineering services revenues increased $19.1 million from 1993 to 1994. Engineering services operating income increased $1.9 million during the same period. Fifteen turnkey contracts were completed in 1994 compared to 6 turnkey contracts completed in 1993. Five of the 15 turnkey wells completed in 1994 and 2 of the 6 turnkey wells completed in 1993 were drilled by CNCTI and recorded under the equity method. One of the 15 turnkey wells completed in 1994 was drilled by CNTI and also recorded under the equity method. See Note 4 of Notes to Consolidated Financial
Statements. Two of the wells completed in 1994 encountered downhole problems. As a result, the Company recorded losses of $3.2 million in the 1994 results of operations on these contracts. The Company provided well engineering and management services during 1993 and 1994, primarily in Venezuela and Mexico. These activities contributed operating income of $1.0 million and $.1 million in 1994 and 1993, respectively.
The Company is currently drilling the fourth and fifth wells included in 2 packages of 3 turnkey wells for Corpoven. The Company expects these 2 wells and the last contracted well to be completed in 1995 with revenues of approximately $18.0 million. The Company mobilized 2 land rigs to Venezuela during the first quarter of 1994 to work on these projects. In addition to the 2 turnkey wells being drilled in Venezuela, the Company is currently in the process of drilling an additional turnkey well in Mexico and one turnkey well in the United States.
MOPU Operations
MOPU revenues decreased $5.7 million from 1993 to 1994. MOPU operating income decreased $9.2 million during the same period. The decrease in revenues was primarily due to the expirations in May and September, 1994 of the two-year contracts on the 3 MOPUs which worked in Venezuela. The decreased revenues were offset in part by contributions from Cliffs No. 8, which began operations during the third quarter of 1993. Operating income decreased primarily due to the non-cash deferral of income recognition of $5.2 million on the 2 MOPUs which worked in Venezuela through September, 1994. The expiration of the contracts on the 3 MOPUs which worked in Venezuela also contributed to the decrease in operating income. The 3 MOPUs which worked in Venezuela contributed revenues of $11.9 million and $19.2 million and operating income of $1.6 million and $12.0 million during 1994 and 1993, respectively. The LANGLEY was demobilized back to the United States during the second quarter of 1994 and is currently being marketed. No assurance can be given that the Company will be able to secure a contract for the operation of this unit. The charterer exercised buyout options and purchased the other 2 units which worked in Venezuela for a total of $4.0 million in the fourth quarter of 1994. No gain or loss was recognized upon buyout of the 2 units. See "Liquidity and Capital Resources."
The contract for MARLIN NO. 4, which was operating in the Gulf of Mexico, expired at the end of April, 1994. The Company renovated the unit during the third quarter of 1994 and has secured a commitment for a contract for operations which are expected to commence in the second quarter of 1995. The Company secured a bareboat charter for Cliffs No. 11 from a third party for use as a workover rig in the U.S. Gulf of Mexico. Operations commenced on this charter during the second quarter of 1994. The contract option on another of its MOPUs, Cliffs No. 10, was canceled during February, 1995. Renewed marketing efforts have commenced subsequent to the cancellation. No assurance can be given that the Company will be able to secure a contract for the operation of this unit.
Oil and Gas
Oil and gas revenues decreased $2.2 million from 1993 to 1994, primarily due to reduced gas revenues resulting from a net revenue interest reduction upon payout of a significant well. Operating losses in 1994 decreased $.9 million when compared to 1993, primarily because decreased depreciation, depletion and amortization and operating expenses more than offset the revenue decrease.
Corporate Overhead
Corporate overhead increased $.3 million from 1993 to 1994. The increase was primarily due to an overall increase in employment costs and other expenses.
Other Income (Expense)
The Company recognized $2.4 million of other expense during 1994 compared to $3.9 million of other expense during 1993. The net decrease in other expense resulted primarily from the litigation settlement and expenses of $3.7 million recorded in 1993, compared to none in 1994, offset in part by decreased gains on disposition of assets and increased exchange rate losses incurred during 1994. Income tax expense for 1994 was consistent with income tax expense for 1993 due primarily to the recognition of a $.4 million net deferred tax asset during the third quarter of 1994. See "Liquidity and Capital Resources."
Year 1993 Versus 1992
The Company recognized net income, before preferred dividends, of $3.6 million in 1993 compared to net income of $3.0 million in 1992. The 1993 results include litigation settlement and expenses of $3.7 million, or $0.82 per share. Excluding this charge in 1993, the Company would have reported net income of $7.3 million, or $1.03 per common share. The 1992 results included a $1.5 million writedown in the carrying value of oil and gas properties and a $4.7 million gain on the disposition of one of the Company's MOPUs due to its constructive total loss in Hurricane Andrew. Excluding these amounts in 1992, the Company would have reported a net loss of $.2 million, or $0.86 per common share. Operating income increased $7.2 million from 1992 to 1993. The improvement in operating income was primarily due to an increase in MOPU operating income of $7.1 million, an increase in foreign daywork drilling operating income of $1.7 million, and a decrease in domestic daywork drilling operating losses of $.4 million, offset in part by a decrease in engineering services operating income of $1.1 million, an increase in oil and gas operating losses of $.5 million, and an increase in corporate overhead of $.4 million.
Daywork Drilling
Domestic daywork drilling revenues decreased $4.3 million from $5.5 million in 1992 to $1.2 million in 1993. The decrease was primarily due to the stacking of the majority of the Company's domestic land rigs in 1993 and the sale, effective January 1, 1993, of the Company's 4 inland posted barge drilling rigs together with rights to certain oil and gas production proceeds. Domestic daywork drilling operating losses decreased by $.4 million from $2.8 million in 1992 to $2.4 million in 1993. Cost savings resulting from the sale of the 4 inland posted barge drilling rigs
were partially offset by costs associated with stacking the Company's domestic land rigs and the sale, effective January 1, 1993, of rights to certain oil and gas production proceeds. One of the Company's land drilling rigs was mobilized to Venezuela in 1994 and began drilling operations for Corpoven for a three-year term. Two other land drilling rigs began operations in 1994 in Venezuela to drill turnkey wells awarded the Company by Corpoven.
Foreign daywork drilling revenues decreased $.5 million from $21.5 million in 1992 to $21.0 million in 1993. Foreign daywork drilling operating income increased $1.7 million during the same period. The increase in operating income was primarily due to reduced labor costs and repair and maintenance expenses, offset in part by decreased revenues during 1993 when compared to 1992. Foreign operating results reflect decreased revenues primarily due to reduced cost flow-throughs billed to the operators and devaluation of the Venezuelan Bolivar. The contracts for the Company's 2 jack-up drilling rigs operating in Venezuela expired on March 9, 1994 and March 15, 1994, respectively. The Company re-negotiated the contracts through February, 1995. Contracts on the 2 land drilling rigs working in eastern Venezuela on daywork contracts for Corpoven expire in September, 1995.
Engineering Services
Engineering services revenues decreased $20.0 million from $37.0 million in 1992 to $17.0 million in 1993. Twelve turnkey contracts were completed during 1992 compared to 6 turnkey contracts completed in 1993, 2 of which related to CNCTI and were accounted for under the equity method in the Company's Consolidated Financial Statements. See Note 4 of Notes to Consolidated Financial Statements. Engineering services operating income decreased $1.1 million in 1993 when compared to 1992, primarily due to fewer completed contracts in 1993.
The Company was awarded approximately $50 million in international turnkey contracts to be drilled in 1994 and 1995. The Company was awarded 2 packages with 3 turnkey wells in each package to be drilled for Corpoven with estimated revenues of approximately $36 million. The Company mobilized 2 of its idle domestic land drilling rigs to Venezuela to work on these projects. In addition, CNCTI, a joint venture in which the Company holds a one-third ownership percentage, was awarded 2 drilling packages by PEMEX for the drilling of a total of 4 wells. The Company mobilized an idle jack-up drilling rig to the Bay of Tampico, Mexico in the first quarter of 1994 to drill 2 of the 4 wells. The 2 packages are expected to generate $42 million in revenues to CNCTI.
MOPU Operations
MOPU revenues increased $12.5 million from $9.2 million in 1992 to $21.7 million in 1993. MOPU operating income increased $7.1 million in 1993. The Company's MOPUs contributed greater income in 1993 due to 3 MOPU units working in Venezuela during all of 1993 while the 3 units worked only part of 1992. In addition, the Company's mobile offshore supply unit operated in the Bay of Campeche, Mexico during most of 1993 and none in 1992, and a new MOPU began working during the third quarter of 1993. Partially offsetting these increased revenues and operating income was the loss of income from the MARLIN NO. 3, which was destroyed in a hurricane on August 25, 1992. The MARLIN NO. 3 contributed revenues of $.8 million and operating income of $.4 million in 1992. Each of the 3 MOPUs working in Venezuela has an initial contract term of two years, subject to certain buyout options which, if exercised, could have a material adverse effect on the Company's future results of operations. See "Liquidity and Capital Resources."
Oil and Gas
Oil and gas revenues increased $1.0 million from $3.7 million in 1992 to $4.7 million in 1993, primarily due to increased natural gas production and pricing. Operating losses from oil and gas exploration activities increased $.5 million during the same period. Increased depreciation, depletion and amortization more than offset the revenue increases. Average daily natural gas production
volumes increased to 4,522 Mcf per day in 1993 from 3,363 Mcf per day in 1992. Oil and condensate production decreased from 163 barrels per day in 1992 to 121 barrels per day in 1993. Average product pricing received in 1993 was $2.31 per Mcf of gas and $18.39 per barrel of oil and condensate compared to $2.08 per Mcf and $18.65 per barrel in 1992.
Corporate Overhead
Corporate overhead increased $.4 million from $4.5 million during 1992 to $4.9 million in 1993. The increase was primarily due to higher costs of certain employee benefits.
Other Income (Expense)
The Company recognized $3.9 million of other expense in 1993 compared to $2.7 million of other income in 1992. The $6.6 million decrease was primarily due to a litigation settlement and expenses of $3.7 million in 1993, decreased gains on disposition of assets of $2.9 million and increased income taxes of $.7 million, offset in part by increased interest income of $.7 million. See "Liquidity and Capital Resources" for a discussion of the Diamond M litigation settlement and expenses. The net decrease in gains on disposition of assets was primarily related to the $4.7 million gain recorded in 1992 related to the disposition of one of the Company's MOPUs as a result of its constructive total loss in Hurricane Andrew, offset in part by net gains on assets disposed of in 1993. The Company recorded income taxes of $.7 million in 1993 in anticipation of alternative minimum taxes in the United States and certain foreign taxes. The increase in interest income was primarily due to interest on notes receivable issued in connection with the sale of the 4 inland posted barge drilling rigs together with rights to certain oil and gas production proceeds effective January 1, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $.7 million from $10.6 million at December 31, 1993 to $11.3 million at December 31, 1994. The increase resulted from $23.7 million provided by operating activities, $17.0 million from borrowings, $5.9 million received from the sale of property and equipment, and $1.0 million received from the collection of notes receivable, partially offset by $9.1 million used to fund capital expenditures and $37.8 million used to make payments on borrowings, preferred stock dividends and purchases of Treasury Stock.
Cash provided by operating activities of $23.7 million included $.6 million used for working capital and other requirements, primarily to fund the Company's foreign daywork drilling and engineering services operations. "Accounts Receivable" decreased from December 31, 1993 to December 31, 1994 due primarily to the collection of receivables associated with the Company's MOPU operations in Venezuela. "Inventories" increased from December 31, 1993 to December 31, 1994 due primarily to the purchase of casing and other supplies for turnkey and daywork drilling operations in Venezuela. The increases in "Drilling Contracts in Progress" and "Accounts Payable" were due primarily to the Company's expanded turnkey operations. The decrease in "Property and Equipment" from December 31, 1993 to December 31, 1994 was due primarily to the sale of 2 MOPUs which worked in Venezuela.
Cash was used during 1994 to fund $9.1 million of capital expenditures, which primarily related to the upgrade of 3 land drilling rigs prior to mobilization to Venezuela, renovation of a jack-up drilling rig, Cliffs No. 12, which was mobilized for drilling operations in Mexico, modifications to Cliffs No. 11 in preparation for workover operations in the U.S. Gulf of Mexico, and drill pipe purchases for the expanded drilling operations in Venezuela.
In February, 1995, the Company received a commitment for a contract to drill 2 wells on a daywork basis in Venezuela for Total. The Company intends to purchase, upgrade and mobilize a 3000 HP rig to Venezuela at a cost of approximately $8.6 million to work on this project. Drilling activities are expected to commence in the third quarter of 1995. The Company has plans for other
capital expenditures totaling approximately $3.4 million during 1995. The Company intends to fund these capital expenditure requirements with internally-generated cash flow and amounts currently available under its revolving line of credit.
During the fourth quarter of 1992, the Company acquired 5 jack-up drilling rigs at a cost of $6.0 million, with plans to convert them to MOPUs. The first unit, Cliffs No. 8, was converted to a MOPU and commenced operations on July 19, 1993. The second of the 5 rigs acquired was also converted to a MOPU. The Company secured a contract option for this unit, Cliffs No. 10, during 1994. The option on this contract was canceled during February, 1995. Renewed marketing efforts have commenced subsequent to the cancellation. Cliffs No. 14 is currently being used as a mobile offshore supply unit to facilitate the Company's joint venture turnkey drilling operations in Mexico. The Company upgraded and mobilized Cliffs No. 12 into Mexico during the first quarter of 1994 for turnkey drilling operations in the Bay of Tampico. The Company secured a bareboat charter on the final unit, Cliffs No. 11, from a third party for use as a workover rig in the U.S. Gulf of Mexico. The Company refurbished this rig during 1994 at a cost of $1.4 million. Operations commenced during the second quarter of 1994.
The LANGLEY, one of 3 MOPUs which worked in Venezuela, ended its two-year contract in May, 1994, and the contract was not extended. The rig was demobilized back to the United States, and the demobilization costs were reimbursed to the Company by the charterer. No assurance can be given that the Company will be able to secure a contract for operation of this unit. Each of the 2 remaining MOPUs which worked in Venezuela had an initial contract term of two years which expired in September, 1994, subject to certain buyout options. The charterer exercised its option to purchase the FRANKLIN and FORRESTAL effective December, 1994 for total proceeds of $4.0 million. The loss of future operating income associated with these units could have a material adverse effect on the Company's future results of operations. Because the Company believed there was a reasonable likelihood that the buyout options on the 2 units would be exercised in 1994 or 1995, the Company deferred income recognition on these 2 units to the extent of losses that would occur upon exercise of the options. As a result, no gain or loss was recognized when the buyout options were exercised.
Approximately 78% of the Company's revenues and a substantial portion of its operating income were sourced from its Venezuelan and Mexican operations during 1994. See Note 14 of Notes to Consolidated Financial Statements. These operations are subject to customary political and foreign currency risks in addition to operational risks. The Company has attempted to reduce these risks through insurance and the structure of its contracts. Exchange losses increased substantially in 1994 compared to 1993 due to significant devaluation of the Venezuelan Bolivar during the second quarter of 1994. Venezuela instituted currency exchange controls during June, 1994 in response to this devaluation. These exchange controls could impair the Company's ability to convert its Venezuelan cash flow into U.S. dollars in the future. Despite the current economic volatility in Venezuela, the Company believes that the country continues to be a favorable market for its services.
In conjunction with the redelivery to Diamond M of 3 offshore drilling rigs under long-term charters, a dispute existed as to whether or not the Company complied with the terms of the charters regarding maintenance and repair of the rigs during the charter period, as well as the condition of the rigs upon redelivery. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division, awarding Diamond M $3.5 million, plus court costs, offset by a partial summary judgment of $1.8 million. The Company reported this litigation settlement and expenses in the Consolidated Statements of Operations during the fourth quarter of 1993. The Company paid Diamond M $1.7 million in February, 1994 as a final settlement of all disputed issues.
At December 31, 1993, the Company's credit agreement with INCC provided for a $10.0 million working capital credit facility which had a maturity date of January 1, 1995 and a $30.0 million term
loan which matured January 1, 1995. The Company executed the Second Restated Credit Agreement with INCC during March, 1994, thereby converting its $10.0 million working capital credit facility to a $20.0 million revolving line of credit subject to certain borrowing base limitations. The revolving line of credit matures on January 1, 1996. As of December 31, 1994, the Company had no outstanding balance on the revolving line of credit with INCC. The $30.0 million term loan was repaid in full during October, 1994.
The Company from time to time purchases its Common Stock in the open market. During 1994, the Company purchased 427,000 shares of its Common Stock at an aggregate purchase price of $5.1 million, or approximately $11.93 per share. A total of 5,000 shares, at an aggregate purchase price of $.1 million, or approximately $11.38 per share, was acquired in the fourth quarter of 1993. Management of the Company believes that the Common Stock is trading at prices which do not reflect the value of the Company and has determined that the acquisition of such stock would be in the best interest of the Company and its shareholders. All of the acquired shares are held as Common Stock in treasury, less shares issued under certain benefit plans.
The ability of the Company to fund working capital, capital expenditures, debt service and dividends in excess of cash on hand will be dependent upon the success of the Company's domestic and foreign operations. To the extent that internal sources are insufficient to meet those cash requirements, the Company can draw on its available credit facility or seek other debt or equity financing; however, the Company can give no assurance that such other debt or equity financing would be available on terms acceptable to the Company.
In any case, the satisfaction of long-term capital requirements will depend upon successful implementation by the Company of its business strategy and future results of operations. Management believes it has successfully implemented the strategy to achieve results of operations commensurate with its immediate and near-term liquidity requirements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company appear on pages 30 through 52 hereof and are incorporated by reference into this Item 8. Selected quarterly financial data is set forth in Note 15 of Notes to Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's accountants regarding accounting principles or practices for financial statement disclosures.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and "Executive Officers" in the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, which is to be filed with the Securities and Exchange Commission (the "Commission"), describes the directors and executive officers of the Company and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Officers -- Compensation" in the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, which is to be
filed with the Commission, sets forth information regarding management compensation and is incorporated herein by reference.
ITEM 12.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under captions "Principal Shareholders" and "Election of Directors -- Security Ownership of Management" in the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, which is to be filed with the Commission, describes the security ownership of certain beneficial owners and management and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, which is to be filed with the Commission, sets forth information regarding certain relationships and related transactions and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) and (2) Financial Statements and Schedules
See "lndex to Consolidated Financial Statements and Schedules" on Page 28.
(3) Exhibits. See Exhibit Index on pages 54 to 57.
The management contracts and compensatory plans or arrangements required to be filed as Exhibits to this report are as follows:
(b) Reports on Form 8-K.
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 2, 1995 CLIFFS DRILLING COMPANY
By: /s/ DOUGLAS E. SWANSON --------------------------------- Douglas E. Swanson Chairman of the Board and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
FORM 1O-K ITEM 14A (1) AND (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Schedule: For Each of the Three Years in the Period Ended December 31, 1994:
All other schedules for which provision is made in the applicable rules and regulations of the Securities and Exchange Commission have been omitted as the schedules are not required under the related instructions, are not applicable or the information required thereby is set forth in the Consolidated Financial Statements or the Notes thereto.
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS CLIFFS DRILLING COMPANY
We have audited the accompanying consolidated balance sheets of Cliffs Drilling Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cliffs Drilling Company and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas February 17, 1995
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure
On June 21, 1988, Cliffs Drilling Company (the "Company") became a separate publicly-owned company as a result of the spin-off of the Company to shareholders of Cleveland-Cliffs Inc ("Cleveland"). These statements include the activities of the Company's wholly-owned subsidiaries, Cliffs Oil and Gas Company ("COGC") and Cliffs Drilling International, Inc. ("International") and the Company's Venezuelan activities, which are organized as a foreign branch.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Activities of the Venezuelan branch are also recorded in the accounts of the Company. The Company's one-third ( 1/3) interest in the operations of Cliffs Neddrill Central Turnkey International ("CNCTI"), a joint venture consisting of International, Neddrill Turnkey Drilling B.V. and Perforadora Central, S.A. de C.V., has been accounted for under the equity method. The Company's interest in the operations of Cliffs-Neddrill Turnkey International ("CNTI"), a 50/50 joint venture between the Company and Neddrill Nederland B.V. of the Netherlands ("Neddrill") has been accounted for under the equity method. All significant intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in short-term investments. Uninvested cash balances are kept at minimum levels. Investments are valued at cost, which approximates market. The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents.
Inventories
Inventories, consisting principally of tubular goods consumed in turnkey drilling operations and spare drilling parts, are carried at cost, specific identification method.
Drilling Contracts in Progress
The Company recognizes revenues and expenses related to its turnkey drilling contracts when all terms and conditions of the contract have been fulfilled. Consequently, the costs related to in-progress turnkey drilling contracts are deferred as drilling contracts in progress until the contract is completed and revenue is realized. The amount of drilling contracts in progress is dependent on the volume of contracts, the duration of the contract at the end of the reporting period and the contract amount. Provision for losses on incomplete contracts is made when such losses are anticipated.
Revenue Recognition
The Company recognizes revenues from its daywork drilling and MOPU operations based upon the contracted daily rate multiplied by the number of operating days in the period. Turnkey drilling contract revenues are recognized when all terms and conditions of the contract have been fulfilled. The Company recognizes oil and gas revenues from its interests in producing wells based upon the sales method.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each of the 3 MOPUs which worked in Venezuela had an initial contract term of two years expiring in 1994, subject to certain buyout options. The buyout options could have been exercised at any time during the contract term. Because the Company believed there was a reasonable likelihood that the buyout options on 2 of the units would be exercised in 1994, the Company deferred income recognition on these 2 units to the extent of potential losses that could occur upon exercise of the options. The deferral of income recognition is reflected as "Contract Termination Provision" in the Consolidated Statements of Operations and was reflected in "Deferred Income" in the Consolidated Balance Sheets until the 2 MOPUs were sold during December, 1994.
Property and Equipment
Property and equipment are carried at original cost or at adjusted net realizable value, as applicable. Certain leases have been capitalized and the leased assets have been included in property and equipment. Major renewals and betterments are capitalized in the property accounts, while the cost of repairs and maintenance is charged to operating expenses in the period incurred.
The Company records expenditures made on significant projects as construction in progress ("CIP") until the assets are ready for their intended use. No depreciation expense is recorded on amounts included in CIP.
Interest on funds borrowed for construction of qualifying assets is capitalized during the construction period. Amortization of capitalized interest is included in depreciation, depletion and amortization in the Consolidated Statements of Operations.
Cost and accumulated depreciation, depletion and amortization are removed from the accounts when assets are sold or retired and the resulting gains or losses are included in the Consolidated Statements of Operations.
Depreciation of property and equipment is provided on the straight-line basis at rates based upon expected useful lives of the various classes of assets. Amortization of capital leases is included in depreciation, depletion and amortization in the Consolidated Statements of Operations.
Costs related to the exploration and development of oil and gas properties are accounted for under the "Successful Efforts" method of accounting. Lease acquisition costs related to oil, gas and mineral properties are capitalized when incurred. The acquisition costs of unproved properties, which are individually significant, are assessed on a property-by-property basis and a loss is recognized by provision of a valuation allowance when the assessment indicates an impairment in value. Exploration costs, excluding exploratory wells, are charged to expense as incurred. Costs of drilling exploratory wells are capitalized pending determination as to whether the wells have proved reserves which justify commercial development. If commercial reserves are not found, the drilling costs are charged to dry hole expense. Tangible and intangible drilling costs applicable to productive exploratory wells and to the development of oil and gas reserves are capitalized.
The cost of productive leaseholds is amortized by field on the unit of production basis by applying the ratio of produced oil and gas to estimated proved reserves. Lease and well equipment and other intangible drilling costs associated with productive wells are amortized based on proved developed reserves. The carrying value of proved oil and gas properties is limited to the undiscounted future net revenue from proved reserves, adjusted for income taxes, on a company-wide basis.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." Deferred income taxes are provided
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on items recognized in different periods for financial and tax reporting purposes. See Note 6 of Notes to Consolidated Financial Statements.
Earnings Per Share
Primary earnings per share computations are based on net income less dividends on the Company's $2.3125 Convertible Exchangeable Preferred Stock (the "Preferred Stock"), divided by the average number of common shares and equivalents outstanding during the respective years. Common stock equivalents include the number of shares issuable upon exercise of stock options, less the number of shares that could have been repurchased with the exercise proceeds using the treasury stock method. The Preferred Stock is not included in the primary earnings per share computation as it is not a common stock equivalent. Fully diluted earnings per common share computations are made after the assumption of conversion of the Preferred Stock when the effect of such conversion is dilutive.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of the Company's operations. Foreign currency gains and losses are included in the Consolidated Statements of Operations during the period incurred.
Concentration of Credit Risk
The market for the Company's services is the oil and gas industry, and the Company's customers consist primarily of integrated and government-owned international oil companies and independent oil and gas producers. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company has in place insurance to cover certain exposure in its foreign operations and provides allowances for potential credit losses when necessary. Accordingly, management considers such credit risk to be limited.
Change in Presentation
Certain financial statement items have been reclassified in prior years to make them conform with the current year presentation.
2. PROCEEDS-OF-PRODUCTION DRILLING PROGRAM AND NOTES AND OTHER RECEIVABLES -- CURRENT AND LONG-TERM
The Company entered into a proceeds-of-production drilling program in 1986 to drill and/or complete 25 oil and gas wells. The revenues due under this arrangement were paid to the Company through an assignment of the proceeds of production generated from the wells drilled. The revenues and costs associated with the services supplied directly by the Company, including handling fees and interest income, were deferred, resulting in income to be recognized in future periods. Revenues and expenses were recognized in amounts equal to the portion of the cash payments applicable to directly supplied services until all the Company's costs were recovered in the fourth quarter of 1989.
Effective January 1, 1993, the Company sold its 4 inland posted barge drilling rigs and rights to certain oil and gas production payment proceeds generated from the proceeds-of-production drilling program for an aggregate sales price of $13,500,000, consisting of $5,000,000 in cash and $8,500,000 in notes. The first note has a face amount of $1,000,000, bears interest at the base rate on corporate loans as quoted by the Wall Street Journal, and is due on or before December 31, 1995. Interest is due and payable semi-annually and commenced June 30, 1993. The second note
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has a face amount of $7,500,000, bears interest at the base rate on corporate loans as quoted by the Wall Street Journal plus one and one-half percent (1 1/2%), and matures on January 1, 1998. Principal and interest on the $7,500,000 note is payable on a monthly basis solely from the proceeds of the oil and gas production payment which secures the note. No net gain or loss on the sale was recorded for financial reporting purposes.
3. PROPERTY AND EQUIPMENT
Buyout options on 2 MOPUs which previously worked in Venezuela were exercised by the charterer during the fourth quarter of 1994. The Company received total proceeds of $4,000,000 for the 2 units in December, 1994. No net gain or loss on sale was recognized for financial reporting purposes.
Effective January 1, 1993, the Company sold its 4 inland posted barge drilling rigs and rights to certain oil and gas production payment proceeds for an aggregate sales price of $13,500,000.
During the fourth quarter of 1992, the Company purchased 5 jack-up drilling rigs for $6,000,000 in cash. The Company converted 2 of the 5 rigs to MOPUs, converted one to a mobile offshore supply unit for use in the Bay of Campeche, Mexico, mobilized one unit to the Bay of Tampico, Mexico in February, 1994, to drill turnkey wells during 1994, and bareboat chartered the other unit in 1994 to a third party for use as a workover rig in the U.S. Gulf of Mexico.
On October 31, 1991, the Company purchased 3 jack-up drilling rigs from Chiles Offshore Corporation for $15,500,000 in cash. The Company completed the process of refurbishing and converting the rigs for operation as portable compression units in Lake Maracaibo, Venezuela in 1992. The 3 units were contracted to Dresser-Rand Company ("Dresser-Rand") and mobilized to Venezuela. Expenditures made in 1991 to acquire and modify the rigs, in addition to the associated financing costs, were included in ClP until the units became operational. No interest was capitalized during the years ended December 31, 1994 and 1993. Total interest capitalized during the year ended December 31, 1992 was $1,278,000. Costs to mobilize the rigs to Venezuela were reimbursed to the Company by Dresser-Rand.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
CNCTI was awarded a contract for one turnkey bid package to drill 4 turnkey wells in the Bay of Campeche, Mexico. Drilling operations commenced in February, 1993. CNCTI was subsequently awarded 2 turnkey bid packages for 2 wells each in the Bay of Campeche and the Bay of Tampico, Mexico. Five and 2 turnkey contracts were completed by CNCTI in 1994 and 1993, respectively, and were recorded under the equity method. The following information summarizes the unaudited Statements of Operations and Balance Sheets of CNCTI:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
In conjunction with the acquisition of 3 jack-up rigs and the related Dresser-Rand contracts, the Company entered into an interim financing agreement with NMB Postbank Groep N.V., now known as Internationale Nederlanden (U.S.) Capital Corporation ("INCC"), on October 31, 1991. The interim financing provided $20,000,000 in available funding for the purchase, construction, modification, mobilization and interest carry on the 3 jack-up rigs ("Term Loan") and $10,000,000 in a working capital credit facility. On December 16, 1991, a permanent facility replaced the interim agreement and increased the amount available under the Term Loan to $30,000,000.
The Company executed the Second Restated Credit Agreement with INCC during the first quarter of 1994, thereby converting its $10,000,000 working capital credit facility to a $20,000,000 revolving line of credit subject to certain borrowing base limitations.
For the $30,000,000 Term Loan, the Company paid a fee equal to two percent (2%) of the facility. The Company paid interest on the advances at either two percent (2%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or INCC's prime rate; or at the adjusted LIBOR rate plus three and three-quarters percent (3 3/4%) per annum during the period prior to commencement of payments on all three charters from Dresser-Rand, ("Mobilization Period") and, thereafter, at one percent (1%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or INCC's prime rate; or at the adjusted LIBOR rate plus two and three-quarters percent (2 3/4%) per annum. Eighty-five percent (85%) of the cash flow attributable to the contracts for the Company's 3 MOPUs working in Venezuela was dedicated to debt repayment under the contracts and loan agreements relating to such MOPUs. In addition, both notes were secured by an assignment of the revenues due under the contract with Dresser-Rand. The Company paid the outstanding balance under the Term Loan in October, 1994.
All advances to the Company from the $20,000,000 revolving line of credit bear interest at three-quarters of one percent ( 3/4%) per annum plus the greater of the prevailing Federal Funds Rate plus one-half percent ( 1/2%) or a referenced average prime rate; or at the adjusted LlBOR rate plus two and one-half percent (2 1/2%) per annum. The foregoing rates are subject to an increase of one-half percent ( 1/2%) in the event certain financial thresholds are exceeded. The Company is also obligated to pay INCC (i) a commitment fee equal to one-half percent ( 1/2%) per annum on the average daily unadvanced portion of the commitments and (ii) a letter of credit fee of two percent (2%) per annum on the average daily undrawn and unexpired amount of each letter of credit during the period that sum remains outstanding. The revolving line of credit matures on January 1, 1996. At December 31, 1994, the Company had no outstanding borrowings on the $20,000,000 revolving line of credit.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The revolving line of credit note is secured by accounts receivable, certain oil and gas properties, and a first preferred fleet mortgage on a majority of the Company's rig inventory. Under the Second Restated Credit Agreement with INCC, as amended, the Company is required to comply with various covenants including, but not limited to, the maintenance of various financial ratios, and is restricted from declaring, making, or paying any dividends on the Common Stock.
Interest payments on all indebtedness amounted to $919,000, $1,536,000 and $2,623,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
6. INCOME TAXES
The Company incurred net operating losses in prior years resulting in tax net operating loss carryforwards. The total carryforward is available to offset taxable income in future years. At December 31, 1994, the net operating loss carryforward is $8,607,000 for regular tax purposes. The Company also has a percentage depletion carryover to 1995 of approximately $1,937,000. The majority of these amounts have been realized in the financial statements as a reduction of deferred taxes. In addition, the Company has $1,394,000 of unused investment tax credit carryforwards and $2,186,000 of foreign tax credit carryforwards at December 31, 1994. These carryforwards are available for use by the Company through the following expiration dates:
- --------------- (1) The investment tax credits reflect the 35% reduction required by the Tax Reform Act of 1986.
The Company provided for $790,000 of income taxes for the year ended December 31, 1994. This amount is comprised of a current provision of $1,190,000 for the taxes paid in foreign jurisdictions and a deferred tax benefit of $400,000 for alternative minimum taxes paid in prior years
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which are available as credits indefinitely against regular tax liabilities. The significant components of deferred tax assets and liabilities are as follows:
For financial reporting purposes, income (loss) before income taxes includes the following components:
Significant components of the provision for income taxes attributable to continuing operations are as follows:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax attributable to continuing operations computed at the U.S. statutory tax rates to income tax expense is:
Income tax payments amounted to $982,000 and $685,000 for the years ended December 31, 1994 and 1993. No income tax payments were made during the year ended December 31, 1992.
7. TAX LEASES
The Company contracted for the construction of 2 jack-up drilling rigs in the period 1980-1982 at a cost of $65,575,000. For tax purposes, both rigs were sold in 1982 to third parties under lease back terms pursuant to Section 168(f)(8) of the Internal Revenue Code ("Safe Harbor Lease"). Cleveland received a payment in the aggregate of $16,685,000 which represented the investment tax credit and depreciable benefits attributable to the rigs. The interest income and principal due the Company from the third parties is equal to the lease payments by the Company to the third parties throughout the lease term. Cleveland guarantees the Company's obligations to indemnify the tax lessors against loss of tax benefits throughout the lease term ending in 1997.
The future net tax deductions associated with the Safe Harbor Leases are $3,732,000, $4,644,000 and $5,117,000 for the years 1995, 1996 and 1997, respectively.
8. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan ("401(k) Plan"). Under the 401(k) Plan, an employee who has reached age 21 and completed 90 days of service is eligible to participate in the plan through contributions that range in one percent multiples up to 16% of salary, with a 1994 dollar maximum of $9,240. In addition, the Company contributes (or "matches") on behalf of each participant an amount equal to 100% of the portion of each participant's contribution which does not exceed 6% of the participant's annual salary. Employer contributions for certain highly compensated employees may be further limited through the operation of the non-discrimination requirements found in Sections 401(k) and 401(m) of the Internal Revenue Code.
Employee contributions can be invested in any or all of 6 investment options in multiples of 5%. Employer contributions are invested in the Company's Common Stock. Employee contributions are 100% vested and non-forfeitable. Employer contributions are subject to a graded vesting schedule, with participants becoming fully vested upon completion of five years employment service with the Company. Distributions from the 401(k) Plan are made upon retirement, death, disability or separation of service. Participants may borrow up to one-half ( 1/2) of their vested interest in the
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan, limited to a maximum of $50,000. Contributions to the 401(k) Plan and earnings on contributions are not included in a participant's gross income until distributed to the participant. Contributions to the 401(k) Plan by the Company were $302,000, $233,000 and $266,000 for the years 1994, 1993 and 1992, respectively.
9. LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES
Maturities of obligations under capital leases at December 31, 1991 were $2,682,000. The final payment under the capital lease obligation was made on January 2, 1992.
10. CAPITAL STOCK
On October 22, 1992, the Company completed a secondary public offering of 1,500,000 shares of common stock at a price to the public of $13.25 per share. The Company received net proceeds of $18,780,000 on October 29, 1992 after deducting underwriting discounts and commissions of $1,095,000, or $0.73 per share. The common stock sold in the public offering has been recorded at par value as Common Stock, with the remainder of the proceeds, after deducting offering costs of $364,000, being recorded as paid-in capital.
Changes in the number of outstanding shares of the Company's Common Stock are summarized as follows:
The Company has an Incentive Equity Plan under which stock options, stock appreciation rights, restricted and deferred stock awards relating to the Company's Common Stock may be awarded to officers, directors and key employees. The Company's Incentive Equity Plan is designed to attract and reward key executive personnel. The stock options granted under this plan expire not more than ten years from the date of grant.
At December 31, 1994, the following options were outstanding and exercisable:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options for 1,500 shares were exercised during 1993 while no options were exercised in 1994 or 1992, respectively.
The Company's Board of Directors has awarded restricted stock to the Company's officers and key employees as follows:
Restrictions on the 1988 award lapsed with respect to 20% of the entire award after one year and after each of the succeeding 4 years. Restrictions lapse with respect to 25% of the entire award after one year and after each of the succeeding 3 years for all other awards. Expense related to amortization of the restricted stock was $46,000, $120,000 and $442,000 for the years 1994, 1993, and 1992, respectively.
Deferred compensation expense relative to non-vested shares of restricted stock, measured by the market value of the stock on the date of grant, is being amortized on a straight-line basis over the restriction period. The unamortized deferred compensation expense, which has been deducted from equity in the Consolidated Balance Sheets, amounted to $57,000 and $103,000 at December 31, 1994 and 1993, respectively.
Effective December 31, 1992, the Company's Board of Directors approved the sale of 17,500 shares of restricted Common Stock to certain key executives. The price paid for the restricted stock was $13.25 per share. The Company extended full recourse, interest-bearing loans to the key executives in the aggregate amount of $232,000. The promissory notes bear interest at seven and one-half percent (7 1/2%) per annum payable quarterly as it accrues on the last day of March, June, September and December until the notes are due on December 31, 1997. Additional shares of deferred stock will be awarded on December 31, 1997 if certain performance criteria are attained by the Company. Compensation expense related to the deferred stock awards will be accrued in future years if it becomes probable the Company performance criteria will be met. No such compensation expense was accrued during the years ended December 31, 1994 and 1993.
11. REDEEMABLE PREFERRED STOCK
The Preferred Stock is redeemable at the option of the Company, in whole or in part, at $25.93 per share if redeemed prior to September 15, 1995, and at prices decreasing ratably annually to $25 per share from and after September 15, 1998, plus accrued and unpaid dividends to the redemption date. Any such non-mandatory redemption would be subject to INCC approval according to the terms of the Second Restated Credit Agreement. Dividends on the Preferred Stock are cumulative from the date of first issuance and are payable quarterly at the rate of $2.3125 per share per annum. Pursuant to the Second Restated Credit Agreement, dividends on Preferred Stock cannot exceed the current dividend rate per share without the consent of INCC.
In case of the voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of shares of Preferred Stock are entitled to receive a liquidation preference of $25 per share
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus an amount equal to any accrued but unpaid dividends to the payment date. The Preferred Stock is also exchangeable in whole, but not in part, at the option of the Company on any dividend payment date for nine and one-quarter percent (9 1/4%) Convertible Subordinated Debentures due 2013. The Preferred Stock is convertible into Common Stock of the Company at the initial conversion rate of 1.89394 shares of Common Stock for each share of Preferred Stock, subject to adjustment under certain circumstances. The Preferred Stock has no voting rights except as described below or as required by law.
The holders of the Preferred Stock have no voting rights to elect directors except when dividends on the Preferred Stock or on any outstanding shares of parity dividend stock have not been paid in the aggregate amount equal to at least six quarterly dividends on such shares. The holders of the Preferred Stock will then be entitled to elect two additional directors to the Board, at any meeting of the shareholders of the Company at which directors are to be elected held during the period such dividends remain in arrears. The voting rights, as well as the term of office of all directors so elected, shall terminate when all such dividends accrued and in default have been paid in full or set apart for payment.
In addition, so long as any Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of sixty-six and two-thirds percent (66 2/3%) of all outstanding shares of Preferred Stock voting separately as a class, (i) amend, alter or repeal any provision of the Certificate of Incorporation or the By-Laws of the Company so as to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Preferred Stock, (ii) authorize, issue or increase the authorized amount of any class or series of stock, or any security convertible into stock of such class or series, ranking senior to the Preferred Stock as to dividends or upon liquidation, dissolution or winding up of the Company or (iii) effect any reclassification of the Preferred Stock.
The affirmative vote or consent of the holders of a majority of the Preferred Stock, voting or consenting separately as a class, is required to (a) authorize any sale, lease or conveyance of all or substantially all of the assets of the Company, or (b) approve any merger, consolidation or compulsory share exchange to which the Company is a party, unless (i) the terms of such merger, consolidation or compulsory share exchange do not provide for a change in the terms of the Preferred Stock and (ii) the Preferred Stock is on a parity with or prior to (in respect of dividends and upon liquidation, dissolution or winding up) any other class or series of capital stock authorized by the surviving corporation, other than any class or series of stock of the Company ranking senior to the Preferred Stock either as to dividends or upon liquidation, dissolution or winding up of the Company and previously authorized with the consent of the holders of Preferred Stock.
In the event (i) any person becomes the beneficial owner of more than fifty percent (50%) of the Common Stock or the Company is a party to a business combination, including a merger or consolidation or the sale of all or substantially all of its assets, and (ii) either (a) as a result of such acquisition of shares of Common Stock or business combination, the Preferred Stock thereafter is not convertible into Common Stock of the Company or of the ultimate parent of the Company, which Common Stock is traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System, or (b) all or substantially all of the consideration paid in such share acquisition or business combination does not consist of Common Stock of the ultimate parent of the Company, which Common Stock is traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System, then each holder of Preferred Stock shall have the option to require the Company to redeem all the Preferred Stock owned by such holder at $25 per share plus accrued and unpaid dividends to the redemption date.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its headquarters office, office equipment and other items under operating leases expiring at various dates during the next five years. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Total rent expense under operating leases was $583,000, $656,000 and $576,000 for the years ended 1994, 1993 and 1992, respectively. Minimum future obligations under non-cancelable operating leases at December 31, 1994 for the following five years are $667,000, $510,000, $515,000, $545,000 and $555,000, respectively, and $693,000 thereafter.
In conjunction with the return to Loews San Antonio Hotel Corporation, now known as Diamond Offshore Company ("Diamond M"), of 3 offshore drilling rigs under long-term charters, a dispute existed as to whether or not the Company complied with the terms of the charters regarding maintenance and repair of the rigs during the charter period, as well as the condition of the rigs upon redelivery. Diamond M withheld payment of $1,700,000 in notes payable to the Company, representing a part of the purchase price for the subject rigs. Diamond M also claimed additional damages associated with repairs to the drilling rigs. In June, 1993, a partial summary judgment awarded the Company $1,800,000, together with interest and attorneys fees, for the notes payable owed by Diamond M to the Company, offset by certain charter hire payments due Diamond M. Following a trial in February, 1994, a judgment was entered in the United States District Court, Southern District of Texas, Houston Division, awarding Diamond M $3,500,000, plus court costs, offset by the partial summary judgment of $1,800,000. The Company reported this litigation settlement and expenses in the Consolidated Statements of Operations during the fourth quarter of 1993. The Company paid Diamond M $1,700,000 in February, 1994, as a final settlement of all disputed issues.
The Company has other contingent liabilities resulting from litigation, claims and commitments incidental to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company.
13. BUSINESS SEGMENTS
During the three years ended December 31, 1994, the Company conducted the following business activities:
Daywork Drilling -- domestic and foreign drilling of oil and gas wells on a dayrate basis for major and independent oil and gas companies on land, inland waters and offshore.
Engineering Services -- domestic and foreign drilling of oil and gas wells on a turnkey basis for major and independent oil and gas companies on land, inland waters and offshore and foreign well engineering and management services.
MOPU Operations -- domestic and foreign operation of mobile offshore production units on a dayrate basis for major and independent oil and gas companies.
Oil and Gas -- domestic exploration, development and production of hydrocarbon reserves.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intersegment sales were $3,357,000, $147,000 and $3,082,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Such intersegment sales were accounted for at prices comparable to unaffiliated customer sales.
Identifiable assets by industry segment include assets directly identified with those operations.
The Company derived a significant amount of its revenues from a few customers in each of the three years ended December 31, 1994. The following table summarizes information with respect to these major customers.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. DISTRIBUTION OF EARNINGS AND ASSETS
The following table sets forth financial information with respect to the Company and its subsidiaries on a consolidated basis by geographical area.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for years ended December 31, 1994, 1993 and 1992 are summarized as follows:
- --------------- (1) Fourth quarter 1993 results include a charge of $3,703,000 related to the Diamond M litigation settlement and expenses.
(2) Fourth quarter 1992 results include a $1,500,000 writedown in the carrying value of oil and gas properties.
(3) Net Income (Loss) per Share for the year ended December 31, 1992 differs from the summation of the individual quarters within that year due to the impact of the public offering of Common Stock completed during the fourth quarter of 1992.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
COGC, from time to time, participates as a working interest owner in oil and gas exploration activities when it directly or indirectly results in the award of a drilling contract. The Company's oil and gas operations did not meet applicable disclosure requirements at or for the year ended December 31, 1994.
A $1,500,000 writedown in the carrying value of oil and gas properties was recorded during the year ended December 31, 1992 due to a decline in estimated future net revenues, caused principally by downward revisions of reserve quantities.
The aggregate capitalized costs related to the Company's oil and gas exploration and production activities are summarized in the following table:
Costs incurred in oil and gas property acquisition, exploration and development activities are summarized as follows:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The results of operations for oil and gas exploration and production activities are summarized as follows:
- ---------------
(1) Includes $63,000 and $158,000 attributable to net profits interests for the years ended December 31, 1993 and 1992, respectively.
Net quantities of proved reserves, all of which are located in the United States are summarized in the following table:
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The standardized measure of discounted future net cash flows and major components of that calculation relating to proved oil and gas reserves are summarized as follows:
The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows:
1. Estimates were made of quantities of proved reserves and the future periods in which they are expected to be produced based on year-end economic conditions.
2. The estimated future gross revenues of proved reserves were priced on the basis of year-end prices.
3. The future gross revenue streams were reduced by estimated future costs to develop and to produce the proved reserves, based on year-end cost estimates. Future income taxes have not been included due to the effect of net operating loss carryforwards.
The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. A market value determination would include, among other things, anticipated future changes in oil and gas prices and production and development costs; the value of additional estimated reserves, not considered proved at present, which may be recovered as a result of further exploration and development activities; and other business risks.
CLIFFS DRILLING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are principal sources of changes in the standardized measure of discounted net cash flows:
SCHEDULE II
CLIFFS DRILLING COMPANY
VALUATION AND QUALIFYING ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 (IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------- * Filed herewith
All other exhibits are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.