<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________________ to _____________________
Commission file number: 0-26388
FALCON DRILLING COMPANY, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0351754
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 W. Loop South
Suite 1800
Houston, Texas 77027
-------------- -----
(Address of Principal (Zip Code)
Executive offices)
Registrant's telephone number, including area code: (713) 623-8984
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, as of October
31, 1996: 35,541,650
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<PAGE> 2
<PAGE>
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Item Number Description Page Number
----------- ----------- -----------
<S> <C> <C>
Part I-
1 Financial Statements-
Condensed Consolidated Balance Sheets as of September 30, 1996
(unaudited), and December 31, 1995 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1996 and 1995
4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Part II-
1 Legal Proceedings 22
6 Exhibits and Reports on Form 8-K 23
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,309 $ 9,016
Accounts receivable, net of allowance for doubtful accounts of $625 and
$375 at September 30, 1996, and December 31, 1995, respectively 68,834 38,000
Other current assets 3,080 4,888
--------- ---------
Total current assets 78,223 51,904
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment 464,635 295,004
Vessels and other equipment 6,106 3,903
--------- ---------
470,741 298,907
Less- Accumulated depreciation (53,285) (33,299)
--------- ---------
417,456 265,608
OTHER ASSETS 18,045 23,511
--------- ---------
Total assets $ 513,724 $ 341,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 42,576 $ 31,326
Income tax payable 166 141
Debt due within one year 3,124 3,999
--------- ---------
Total current liabilities 45,866 35,466
LONG-TERM DEBT, less current portion 312,405 179,362
DEFERRED INCOME TAXES 20,838 10,679
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized; 35,465,317 and
35,244,384 shares issued and outstanding at September 30, 1996, and
December 31, 1995, respectively 355 352
Additional paid-in capital 113,905 112,853
Accumulated earnings 20,355 2,311
--------- ---------
Total stockholders' equity 134,615 115,516
--------- ---------
Total liabilities and stockholders' equity $ 513,724 $ 341,023
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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<PAGE> 4
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 90,885 $ 47,977 $ 220,965 $ 128,613
COSTS AND EXPENSES:
Operating costs 55,532 30,719 141,311 86,934
General and administrative expenses 4,311 3,494 13,191 10,327
Depreciation 7,761 4,296 20,839 11,703
------------ ------------ ------------ ------------
OPERATING INCOME 23,281 9,468 45,624 19,649
OTHER (INCOME) EXPENSE:
Interest expense 6,061 4,573 18,158 13,277
Amortization of deferred costs 807 420 2,108 1,642
Other (income) expense, net (1,099) (742) (3,283) (2,359)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 17,512 5,217 28,641 7,089
INCOME TAX PROVISION 6,479 2,015 10,597 2,319
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 11,033 3,202 18,044 4,770
MINORITY INTEREST -- 180 -- 1,291
------------ ------------ ------------ ------------
NET INCOME 11,033 3,022 18,044 3,479
PREFERRED STOCK DIVIDENDS
AND ACCRETION -- 102 -- 304
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 11,033 $ 2,920 $ 18,044 $ 3,175
============ ============ ============ ============
NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
USED IN COMPUTING EARNINGS
PER SHARE 36,039,395 30,471,724 35,991,120 28,242,875
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ .31 $ .10 $ .50 $ .11
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-4-
<PAGE> 5
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,044 $ 3,479
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 22,947 13,345
Realized gain on sale of assets (775) (778)
Minority interest in earnings of subsidiary -- 1,291
Provision for deferred income taxes 10,159 2,319
Changes in assets and liabilities-
Accounts receivable, trade (30,834) (5,840)
Other assets 3,021 (486)
Accounts payable and accrued liabilities 11,275 (2,327)
--------- ---------
Net cash provided by operating activities 33,837 11,003
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property (173,220) (78,817)
Refunds (deposits) made for drill pipe, rigs and equipment, net 6,174 --
Distribution for minority owner's interest in Blake Workover -- (1,804)
Proceeds from the sale of equipment and property 1,307 3,019
--------- ---------
Net cash used in investing activities (165,739) (77,602)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 172,000 66,000
Payments of outstanding debt (39,831) (29,984)
Issuance of common stock 1,054 35,027
Debt issuance costs (4,028) (2,125)
--------- ---------
Net cash provided by financing activities 129,195 68,918
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,707) 2,319
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,016 4,868
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,309 $ 7,187
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 24,760 $ 16,607
Income taxes paid $ 30 $ 593
</TABLE>
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-5-
<PAGE> 6
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
AND SIGNIFICANT ACTIVITIES:
The accompanying unaudited condensed consolidated financial
statements of the Company for the three months and nine months ended September
30, 1996 and 1995, have been prepared without an audit pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments, which consist of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. Operating results for the
interim periods are not necessarily indicative of the results that can be
expected for a full year. It is suggested that these interim condensed
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Company's latest
annual report filed on Form 10-K.
The Company holds a 37.5 percent effective interest in a Venezuelan
joint venture which operates two barge drilling rigs in Venezuela. The Company
accounts for its interests in the Venezuelan joint venture under the cost
method as Falcon does not currently exercise significant influence over the
venture. Through December 31, 1995, the Company had received cash
distributions of approximately $1.5 million of which $600,000 was recorded as
a reduction of the investment in the joint venture in order to reduce the
investment to zero, and the balance was recognized as revenues. During the
three and nine months ended September 30, 1996, the Company had received
additional cash distributions of approximately $408,000 and $1,195,000,
respectively which were recorded as revenues in the condensed consolidated
statements of operations.
-6-
<PAGE> 7
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. EARNINGS PER COMMON SHARE:
Net income per share of common stock has been computed on the basis
of the weighted average number of common shares outstanding during the period
and, where dilutive, the effect of common stock contingently issuable, which
arises primarily from the exercise of stock options and warrants. Accrued
dividends on the Series B redeemable preferred stock as well as the accretion
of the difference between the value of the Series B redeemable preferred stock
at the date of issue and the redemption value have been deducted from net
income for purposes of calculating net income applicable to common shares for
the three and nine months ended September 30, 1995. The Company redeemed the
Series B redeemable preferred stock in December 1995. Fully diluted earnings
per share are considered to be equal to primary earnings per share in all
periods presented because the effects of potentially dilutive securities that
are not common stock equivalents were either antidilutive or immaterial.
The following table presents the computation of common and common
equivalent shares used in computing primary earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average shares of common stock
outstanding 35,410,474 24,828,938 35,337,488 18,923,937
Weighted average of common stock equivalents 980,340 6,564,871 1,013,344 10,230,550
Effect of shares issuable pursuant to stock option plans
using the treasury stock method (351,419) (922,085) (359,712) (911,612)
----------- ----------- ----------- -----------
Shares used in computing earnings per share 36,039,395 30,471,724 35,991,120 28,242,875
=========== =========== =========== ===========
</TABLE>
3. PRO FORMA RESULTS OF OPERATIONS:
The Company completed the acquisition of the remaining 50 percent
interest in Blake Workover in August 1995. Pro forma net income applicable to
common shares of the Company for the three-month and nine-month period ended
September 30, 1995, was $3,028,000 and $3,927,000, respectively, and net
income per common share was $.10 and $.14 respectively assuming the Company
had completed the acquisition of Blake Workover and had issued the 1,199,000
shares of common stock that were issued in connection with the acquisition of
the remaining 50 percent interest in Blake Workover as of January 1, 1995. Pro
forma revenues remained the same for all periods presented. The effects of the
Blake Workover acquisition and the issuance of the common stock have been
reflected in the Company's historic balance sheet and results of operations
beginning August 1995.
-7-
<PAGE> 8
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
The Company had the following debt outstanding as of September 30,
1996, and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
8-7/8% Senior Notes, due 2003 $ 120,000 $ --
9-3/4% Senior Notes, due 2001 110,000 110,000
Floating Rate Notes, bearing interest at LIBOR plus 3.5%, redeemable in
varying amounts beginning in 1998 10,000 10,000
12-1/2% Senior Subordinated Notes, due 2005 50,000 50,000
Borrowings pursuant to a credit agreement with two banks, at LIBOR plus 2.5%
or 1% over the higher of the prime rate or the federal funds rate plus .5%,
secured by certain accounts receivable 20,000 5,000
Note payable to a bank, at LIBOR plus 1.5% through maturity at December 31, 1999
1,074 1,969
Notes payable by affiliates, secured by certain rigs, at 7.0%, due in varying
amounts commencing July 1994 with final payment due June 30, 1999 1,122 1,392
Secured promissory note payable to Grace Offshore Company at 8.7%, secured by
certain FALRIG Partnership jackup rigs, principal payments of $1,667 due
March 31, 1997 and 1998 3,333 5,000
--------- ---------
315,529 183,361
Less- Amounts due within one year (3,124) (3,999)
--------- ---------
$ 312,405 $ 179,362
========= =========
</TABLE>
The 9-3/4% Senior Notes (the Notes) mature on January 15, 2001, and
bear interest at a rate of 9.75 percent, payable semiannually on January 15
and July 15. The Company has the option to redeem up to 30 percent of the
Notes through January 15, 1997, at a redemption price of 109 percent of the
principal amount thereof, with the proceeds of the sale and issuance of
capital stock of the Company, provided that at least $50 million in aggregate
principal of the Notes remains outstanding following redemption. Upon the
occurrence of a Change of Control of the Company, as defined in the Indenture,
each Noteholder will have the right to require the Company to repurchase all
of such Noteholder's Notes in whole or in part at a purchase price in cash
equal to 101 percent of the principal amount thereof.
The 8-7/8% Senior Notes (the 8-7/8% Notes) mature on March 15, 2003,
and bear interest at a rate of 8.875 percent, payable semiannually on March 15
and September 15. Beginning March 15, 2000, the Company may redeem the 8-7/8%
Notes at annually declining redemption prices beginning at 104.4375 percent of
the principal amount of such notes. Upon change in control of the Company, as
defined in the Indenture, the Company will be required to make an offer to
purchase the 8-7/8% Notes at 101 percent of the principal amount thereof.
-8-
<PAGE> 9
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 12-1/2% Senior Subordinated Notes (the Subordinated Notes) mature on March
15, 2005, and bear interest at a rate of 12.5 percent, payable semiannually on
March 15 and September 15. The Company has the option to redeem up to 30
percent of the Subordinated Notes through March 15, 1998, at a redemption
price of 111.5 percent of the principal amount of such notes with the proceeds
of a public offering of the Company's capital stock, provided that at least
$35 million in aggregate principal of the Subordinated Notes remains
outstanding immediately after giving effect to such redemption. Beginning
March 15, 2000, the Company may redeem the Subordinated Notes at annually
declining redemption prices beginning at 104.688 percent of the principal
amount of such notes. Upon change in control of the Company, as defined in the
Indenture, the Company will be required to make an offer to purchase the
Subordinated Notes at 101 percent of the principal amount thereof. The
Subordinated Notes are senior unsecured obligations of the Company
subordinated in right of payment to all other existing or future senior
indebtedness of the Company.
The Floating Rate Notes bear interest at LIBOR plus 3.5 percent and
are redeemable at face value plus unpaid accrued interest at the option of the
Company; provided, any such redemption, if less all such notes, must be of at
least $5.0 million principal amount of such notes. If not previously redeemed,
principal amounts of the Floating Rate Notes are due in payments of $1.0
million, $2.0 million and $2.0 million in January 1998, 1999, and 2000,
respectively, with the balance due January 24, 2001.
In order to provide an additional source of funds, the Company has a
revolving credit facility with two banks providing for borrowings of up to
$25.0 million, which is secured by the Company's accounts receivable. The
Company had $20.0 million outstanding under this credit facility as of
September 30, 1996. Approximately $5.0 million of borrowings were available
under this facility at September 30, 1996, based on the Company's eligible
borrowing base, as defined. This facility provides that amounts borrowed will
bear interest at floating rates based on LIBOR plus 2.5 percent or 1 percent
over the greater of the prime rate or the federal funds rate plus 2.5 percent.
The Company has received a commitment from its commercial bank lenders
to increase its bank credit facilities from a maximum of $25 million to
$65 million. The new facilities would consist of (i) a $25 million revolving
loan facility secured by accounts receivable, maturing in November 1999, and
(ii) a $40 million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998.
5. COMMITMENTS AND CONTINGENCIES:
The Company is currently involved in various lawsuits and other
contingencies arising out of operations in the normal course of business. In
the opinion of management, uninsured losses, if any, in excess of those
accrued will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The Company is self-insured for
the deductible portion of its insurance coverage and participates in an
insurance cooperative for most of its coverage. Most of its insurance provides
for premium adjustments based on claims experience. Future events, claims or
assessments may increase the Company's costs for such coverage. In the opinion
of management, adequate accruals have been made based on known and estimated
exposures.
The Company has multiyear employment agreements with several of its
officers. The employment agreements provide for annual salaries and
discretionary bonuses to be determined by the board of directors.
The Company entered into contingent profits interest agreements
during 1992 associated with certain acquisitions. The agreements require
annual payments of 15 percent of an agreed-upon amount to be paid to the
previous rig owners and a former mortgage holder. This agreed-upon amount can
be generally described as domestic barge net income less overhead,
depreciation and interest attributable to these operations. These payments, if
any, continue through 1997 or until payment of $5 million is made. There have
been no required payments under these agreements through September 30, 1996.
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<PAGE> 10
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994 a subsidiary of the Company (Raptor) acquired an interest
in a joint venture (the Chenier JV) engaged in the development of drilling
prospects in the general areas of the Company's barge drilling operations and,
in one instance, has participated with several other companies in the funding
of seismic activities in south Louisiana. The Company's historical
expenditures and commitments to date for the funding and exploratory efforts
of the Chenier JV activities are approximately $3.4 million. In June 1996, the
joint venture distributed these properties to Raptor and the other joint
venturer, and Raptor sold a portion of the properties so distributed to it for
$1,177,804 in cash and a promissory note in the amount of $734,696. The
promissory note bears interest at two percent over prime, and is payable out
of a percentage of revenues from the properties sold, but in all events no
later than June 1, 1999. There is currently no production from the properties
sold. The consideration received by Raptor represented, in part the assumption
by the purchaser of certain loans that Raptor had made to the other joint
venturer. At September 30, 1996, approximately $1.7 million of the Company's
historical expenditures remained in other assets.
COMMITMENTS RELATING TO CERTAIN RIGS
Falcon has entered into an agreement to purchase three barge drilling
rigs for an approximate cost of $5.25 million and estimated mobilization costs
of $700,000. At December 31, 1995, Falcon had made deposits of approximately
$500,000 which have been included in other assets. The seller of three of
these rigs is encountering logistical problems in connection with their
delivery to Falcon. The Company has recently commenced a legal action to
enforce its rights under that contract. Management of Falcon believes the
deposit on these rigs is refundable should the delivery of these rigs not be
accomplished.
In May 1995, Falcon completed the purchase of the Pelerin, a
dynamically positioned drillship, for approximately $33 million and renamed
the drillship the Pergrine III. Management has committed to spend an
additional $7 million on the Peregrine III for upgrades in connection with a
contract scheduled for early 1997. Prior to the purchase of the drillship, the
Peregrine III was managed on behalf of its owner by Foramer S.A. As one of the
conditions of purchase, Falcon entered into a management agreement with
Foramer pursuant to which Foramer was to manage the vessel until December 31,
1996. During October 1996, the management agreement with Foramer was
terminated for a fee of $250,000 and Falcon assumed responsibility for
managing the vessel.
In June 1996, Falcon entered into a contract to purchase a
substantially completed drillship hull for approximately $8.0 million. Falcon
estimates that it will cost approximately $120 million to complete the
construction necessary for this hull to become an operational drillship.
Management is currently investigating alternatives for financing this
construction and Falcon currently has no construction obligations relative to
the drillship hull. Management does not intend to undertake completion of the
drillship hull until Falcon has obtained a long-term commitment for the use of
the completed drillship and made arrangements for financings.
In October 1996, the Company entered into a letter of intent to
purchase two conventionally-moored drillships, the Deepsea Ice and Deepsea
Duchess, at a cost of approximately $40 million. The Company is negotiating to
have third party purchase the Deepsea Ice for $20 million (unaudited) and
lease it to the Company. The Deepsea Duchess purchase price is expected to be
funded by issuance to the seller of $15 million (unaudited) in market value of
common stock and $5 million (unaudited) in cash.
During 1996, the Company entered into several short-term leasing
arrangements with various parties for the use of one jackup rig, one barge
drilling rig, and two workover rigs. Future minimum lease payments relating to
these agreements are $2.1 million for the fourth quarter of 1996, $6.0 million
in 1997, $6.0 million in 1998, $4.4 million in 1999 and $758,000 in 2000.
The refurbishment and upgrade of Falcon's dynamically positioned
drillship, the Peregrine I, was completed in September 1996. This drillship
began operating in November 1996. Falcon incurred refurbishment and upgrade
costs and the purchase of additional riser, BOP equipment and other fleet spares
and inventory of approximately $6.5 million during 1995, and $60 million
during the nine months ended September 30, 1996.
-10-
<PAGE> 11
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL GUARANTOR INFORMATION:
The Company's obligations under the 9-3/4% Notes and the Floating
Rate Notes are unconditionally guaranteed by each of the Company's directly
held subsidiaries and certain of the Company's indirectly held subsidiaries on
a joint and several basis.
The Indenture under which the 9-3/4% Notes were issued provides for
subsidiaries acquired subsequent to the issuance of the 9-3/4% Notes to be
designated as guarantors of the 9-3/4% Notes. The Indenture also provides that
12 specified barge rigs are to be nonrecourse rigs, whereby the Company has
the option to transfer such nonrecourse barge rigs to nonrecourse subsidiaries
at any time provided, however, that the Company may, at its option and at any
time, designate up to two of its barge rigs in substitution for any two of the
designated nonrecourse barge rigs. In addition, up to two of the Company's
jackup rigs may be designated nonrecourse rigs provided certain financial
tests are met. Nonrecourse subsidiaries are not required to provide guarantees
of the 9-3/4% Notes and Floating Rate Senior Notes and are not subject to
certain of the Indenture covenants.
During December 1994, the Company transferred three nonrecourse barge
rigs to a newly formed nonguarantor subsidiary, Falcon Drilling de Venezuela,
Inc. During March 1995, Falcon Drilling de Venezuela, Inc., was merged into a
guarantor subsidiary of the Company in connection with the issuance of the
Subordinated Notes, and the three barge rigs previously designated as
nonrecourse rigs ceased being nonrecourse rigs. The following condensed
consolidating financial statements are presented for purposes of complying
with the reporting requirements of the parent company and the subsidiaries
which are guarantors under the 9-3/4% Notes and Floating Rate Notes. The
financial statements at September 30, 1996, and December 31, 1995, include
Eilert-Olsen Investments, Inc., as a nonguarantor subsidiary. The Company
believes that separate financial statements and other disclosures of the
guarantors are not material to the investors.
Upon occurrence of an event of default (as defined) under a revolving
credit facility with two banks, the ability of certain subsidiaries of the
Company to make distributions or other transfers to the Company will be
restricted.
-11-
<PAGE> 12
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET--SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,224 $ 2,085 $ -- $ -- $ 6,309
Accounts receivable, net 24,871 43,963 -- -- 68,834
Other current assets 3 3,077 -- -- 3,080
--------- --------- --------- --------- ---------
Total current assets 29,098 49,125 -- -- 78,223
EQUIPMENT AND PROPERTY, net 65,647 349,254 2,555 -- 417,456
OTHER NONCURRENT ASSETS
-- 18,045 -- -- 18,045
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES AND JOINT
VENTURES, net 367,106 -- -- (367,106) --
--------- --------- --------- --------- ---------
Total assets $ 461,851 $ 416,424 $ 2,555 $(367,106) $ 513,724
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 17,236 $ 25,506 $ -- $ -- $ 42,742
Current maturities of
long-term debt -- 2,741 383 -- 3,124
--------- --------- --------- --------- ---------
Total current liabilities 17,236 28,247 383 -- 45,866
LONG-TERM DEBT, net 310,000 1,666 739 -- 312,405
DEFERRED INCOME TAXES -- 20,838 -- -- 20,838
MINORITY INTEREST -- -- -- -- --
PREFERRED STOCK -- -- -- -- --
STOCKHOLDERS' EQUITY:
Partnership capital -- 56,672 -- (56,672) --
Common stock 355 -- -- -- 355
Additional paid-in capital 113,905 262,765 1,865 (264,630) 113,905
Accumulated earnings (deficit) 20,355 46,236 (432) (45,804) 20,355
--------- --------- --------- --------- ---------
Total stockholders' equity 134,615 365,673 1,433 (367,106) 134,615
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 461,851 $ 416,424 $ 2,555 $(367,106) $ 513,724
========= ========= ========= ========= =========
</TABLE>
-12-
<PAGE> 13
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET--DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
ASSETS COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141 $ 8,875 $ -- $ -- $ 9,016
Accounts receivable, net 11,953 26,047 -- -- 38,000
Other current assets 2,524 2,364 -- -- 4,888
--------- --------- --------- --------- ---------
Total current assets 14,618 37,286 -- -- 51,904
EQUIPMENT AND PROPERTY, net
18,598 244,313 2,697 -- 265,608
OTHER ASSETS 137 23,374 -- -- 23,511
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES AND JOINT
VENTURES, net 268,118 -- -- (268,118) --
--------- --------- --------- --------- ---------
Total assets $ 301,471 $ 304,973 $ 2,697 $(268,118) $ 341,023
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 8,985 $ 22,482 $ -- $ -- $ 31,467
Debt and other obligations
due within one year 1,969 1,666 364 -- 3,999
--------- --------- --------- --------- ---------
Total current liabilities 10,954 24,148 364 -- 35,466
LONG-TERM DEBT, net 175,000 3,334 1,028 -- 179,362
DEFERRED INCOME TAXES -- 10,679 -- -- 10,679
STOCKHOLDERS' EQUITY:
Partnership capital -- 56,672 -- (56,672) --
Common stock 352 -- -- -- 352
Additional paid-in capital 112,854 191,921 1,603 (193,525) 112,853
Accumulated earnings (deficit) 2,311 18,219 (298) (17,921) 2,311
--------- --------- --------- --------- ---------
Total stockholders' equity 115,517 266,812 1,305 (268,118) 115,516
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 301,471 $ 304,973 $ 2,697 $(268,118) $ 341,023
========= ========= ========= ========= =========
</TABLE>
-13-
<PAGE> 14
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 10,217 $ 210,748 $ -- $ -- $ 220,965
COSTS AND EXPENSES:
Operating costs 6,877 134,434 -- -- 141,311
General and administrative 404 12,787 -- -- 13,191
Depreciation 565 20,132 142 -- 20,839
--------- --------- --------- --------- ---------
OPERATING INCOME 2,371 43,395 (142) -- 45,624
OTHER (INCOME) EXPENSE:
Interest expense 17,842 245 71 -- 18,158
Other (income) expense, net 146 (1,321) -- -- (1,175)
Equity in income of subsidiaries (27,883) -- -- 27,883 --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 12,266 44,471 (213) (27,883) 28,641
INCOME TAX PROVISION (BENEFIT) (5,778) 16,454 (79) -- 10,597
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
MINORITY INTEREST 18,044 28,017 (134) (27,883) 18,044
MINORITY INTEREST -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 18,044 $ 28,017 $ (134) $ (27,883) $ 18,044
========= ========= ========= ========= =========
</TABLE>
-14-
<PAGE> 15
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 6,898 $ 120,322 $ 1,393 $ -- $ 128,613
COSTS AND EXPENSES:
Operating costs 3,834 81,213 1,887 -- 86,934
General and administrative
expenses 353 9,974 -- -- 10,327
Depreciation 418 10,941 344 -- 11,703
--------- --------- --------- --------- ---------
OPERATING INCOME 2,293 18,194 (838) -- 19,649
OTHER (INCOME) EXPENSE:
Interest expense 12,684 515 183 (105) 13,277
Other (income) expense, net 228 (1,056) 6 105 (717)
Equity in income of subsidiaries (10,625) -- -- 10,625 --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST
6 18,735 (1,027) (10,625) 7,089
INCOME TAX PROVISION (BENEFIT) (4,764) 7,494 (411) -- 2,319
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE MINORITY
INTEREST 4,770 11,241 (616) (10,625) 4,770
MINORITY INTEREST 1,291 -- -- -- 1,291
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 3,479 $ 11,241 $ (616) $ (10,625) $ 3,479
========= ========= ========= ========= =========
</TABLE>
-15-
<PAGE> 16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,044 $ 28,017 $ (134) $ (27,883) $ 18,044
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (27,883) -- -- 27,883 --
Depreciation and
amortization 2,528 20,277 142 -- 22,947
Realized gain on the sale
of assets -- (775) -- -- (775)
Minority interest in
earnings of subsidiary -- -- -- -- --
Deferred income tax
provision -- 10,159 -- -- 10,159
Changes in current assets
and current liabilities
and intercompany balance (69,037) 52,237 262 -- (16,538)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (76,348) 109,915 270 -- 33,837
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property (57,769) (115,451) -- -- (173,220)
Refunds on drill pipe, rigs and
equipment, net of deposits 6,174 -- -- -- 6,174
Sale of equipment and property -- 1,307 -- -- 1,307
Deferred costs of Venezuelan
operations -- -- -- -- --
Net cash provided by (used
in) investing activities (51,595) (114,144) -- -- (165,739)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 172,000 -- -- -- 172,000
Proceeds from sale of stock 1,078 -- -- -- 1,078
Payments of outstanding debt (37,000) (2,561) (270) -- (39,831)
Stock issuance costs (24) -- -- -- (24)
Retirement and dividend on
preferred stock -- -- -- -- --
Debt issuance costs (4,028) -- -- -- (4,028)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 132,026 (2,561) (270) -- 129,195
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,083 (6,790) -- -- (2,707)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 141 8,875 -- -- 9,016
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 4,224 $ 2,085 $ -- $ -- $ 6,309
========= ========= ========= ========= =========
</TABLE>
-16-
<PAGE> 17
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,479 $ 11,241 $ (616) $ (10,625) $ 3,479
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (10,625) -- -- 10,625 --
Depreciation and
amortization 646 12,355 344 -- 13,345
Realized gain on the sale
of assets -- (778) -- -- (778)
Minority interest in
earnings of subsidiary 1,291 -- -- -- 1,291
Provision for deferred
income taxes -- 2,319 -- -- 2,319
Changes in current assets
and current liabilities
and intercompany balances (93,677) 84,500 524 -- (8,653)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (98,886) 109,637 252 -- 11,003
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property -- (78,817) -- -- (78,817)
Distribution for minority
owner's interest in Blake
Workover -- (1,804) -- -- (1,804)
Sale of equipment and property -- 3,019 -- -- 3,019
Deferred costs of Venezuelan
operations -- -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in
financing activities -- (77,602) -- -- (77,602)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 66,000 -- -- -- 66,000
Payments of outstanding debt -- (29,732) (252) -- (29,984)
Issuance of common stock 35,027 -- -- -- 35,027
Debt issuance costs (2,125) -- -- -- (2,125)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 98,902 (29,732) (252) -- 68,918
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 16 2,303 -- -- 2,319
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR -- 4,868 -- -- 4,868
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 16 $ 7,171 $ -- $ -- $ 7,187
========= ========= ========= ========= =========
</TABLE>
-17-
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's financial condition and historical results of
operations have been significantly affected by a series of acquisitions that
have resulted in the Company's current fleet of barge and offshore rigs. As of
October 31, 1996, the Company's rig fleet was composed of 76 rigs, including
43 barge drilling rigs, ten barge workover rigs, 16 jackup drilling rigs,
three submersible drilling rigs, three dynamically-positioned drillships and
one semisubmersible drilling rig. Included in these totals are one jackup
drilling rig, one barge drilling rig and two barge workover rigs leased from
third parties.
Changes in the number of actively marketed rigs and their geographic
locations significantly affect the Company's capital expenditure requirements,
working capital requirements and results of operations. As of December 31,
1995, the Company's active domestic rig fleet included 19 barge drilling rigs,
seven barge workover rigs, 14 jackup drilling rigs and one submersible
drilling rig and the active international rig fleet included three drilling
barges and one submersible drilling rig, all in Venezuela. Since then, the
Company's active rig fleet has changed significantly. As of October 31, 1996,
the active domestic fleet included 25 barge drilling rigs, ten barge workover
rigs, 15 jackup drilling rigs and two submersible drilling rigs, and the
active international rig fleet included three drilling barges and one
submersible drilling rig in Venezuela, one jackup drilling rig in Nigeria, two
drillships in Brazil and one drillship in Australia. In addition, the Company
owns a minority position in a venture that operates two barge drilling rigs in
Venezuela.
Revenues. The Company's revenues are determined primarily by (a) the
number of rigs it has available for service and (b) demand for contract
drilling and workover services, which affects the utilization rate and day
rates of the Company's active rigs. In response to increased demand, the
Company has reactivated previously cold stacked rigs for both the domestic and
international markets, particularly Venezuela. In the future, the Company, in
response to changes in demand, may withdraw rigs from active service or
reactivate additional rigs, which could decrease or increase revenues,
respectively.
Operating Costs. Operating costs include all direct costs and
expenditures associated with operating active rigs and cold stacking inactive
rigs. These costs and expenditures vary based on rig utilization and the
number of rigs actively marketed by the Company. These costs and expenditures
include rig labor costs, repair, maintenance and supply expenditures,
insurance costs, fuel costs, mobilization costs and other costs related to
operations.
Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Changes in day rates do not affect operating expenses. Significant changes in
rig utilization can change the level of operating expenses from period to
period as the Company may adjust the level of its actively marketed rig fleet
to match more closely the anticipated level of demand. The general and
administrative expenses, which generally include the costs of the Company's
shore-based support functions, also affect operating income. These costs
generally do not vary significantly from period to period unless the Company
materially expands its asset base, nor do they vary over short periods of time
with changes in rig utilization. Depreciation, which is determined by the
level of the Company's capital expenditures and depreciation practices, is the
other major determinant of operating income.
CHANGES IN FINANCIAL CONDITION
Rig acquisitions, financings completed, the increase in active units
as described above and cash flow generated from operations were responsible
for the significant changes in the Company's financial position between
December 31, 1995, and September 30, 1996. The following are the most
significant of the acquisitions and financings completed since December 31,
1995:
-18-
<PAGE> 19
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
1) The purchase of two dynamically-positioned drillships, the
upgrade of a third drillship and the acquisition of spares for
approximately $119 million.
2) The purchase of one jackup drilling rig, one barge drilling rig
and one submersible drilling rig for approximately $28.2
million.
3) The upgrade and activation of eight barge drilling and workover
rigs for approximately $11 million.
4) The charter to the Company of one jackup drilling rig and three
barge drilling and workover rigs.
5) The placement of $120 million of senior unsecured notes in March
1996.
RESULTS OF OPERATIONS - FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER
30, 1996 AND 1995
Comparative data relating to the Company's revenues and operating expenses by
major areas of operations are listed below:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues-
Domestic barge drilling $ 32,916 $ 23,049 $ 77,464 $ 58,204
Domestic barge workover 4,547 3,378 12,760 10,676
International shallow water drilling 9,657 8,307 28,230 22,533
Offshore drilling 30,534 13,243 79,946 37,200
Deepwater operations 13,231 -- 22,565 --
-------- -------- -------- --------
$ 90,885 $ 47,977 $220,965 $128,613
======== ======== ======== ========
Operating costs-
Domestic barge drilling $ 20,089 $ 14,198 $ 50,416 $ 38,377
Domestic barge workover 3,978 2,197 10,499 6,064
International shallow water drilling 5,511 3,747 15,197 10,204
Offshore drilling 17,812 10,577 51,161 32,289
Deepwater operations 8,142 -- 14,038 --
-------- -------- -------- --------
$ 55,532 $ 30,719 $141,311 $ 86,934
======== ======== ======== ========
Rig operating income-
Domestic barge drilling $ 12,827 $ 8,851 $ 27,048 $ 19,827
Domestic barge workover 569 1,181 2,261 4,612
International shallow water drilling 4,146 4,560 13,033 12,329
Offshore drilling 12,722 2,666 28,785 4,911
Deepwater operations 5,089 -- 8,527 --
-------- -------- -------- --------
35,353 17,258 79,654 41,679
General and administrative expenses 4,311 3,494 13,191 10,327
Depreciation expense 7,761 4,296 20,839 11,703
-------- -------- -------- --------
Operating income $ 23,281 $ 9,468 $ 45,624 $ 19,649
======== ======== ======== ========
</TABLE>
-19-
<PAGE> 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Revenues. Revenues increased $42.9 million and $92.3 million during
the three and nine month periods ended September 30, 1996, respectively, as
compared to the corresponding periods in 1995. The increase in revenues
reflects: (i) an increase in the number of units marketed an the overall
utilization of the domestic barge drilling rigs for both periods; (ii) higher
utilization and day rates during both periods for the offshore drilling rigs
and the acquisition of five jackup rigs in September 1995; and (iii) the
commencement of deepwater operations during 1996 with Peregrine II and
Peregrine III, which began operations in February and June, 1996,
respectively, and the mobilization fee of $2.5 million on the Peregrine I
which was delivered to Brazil in September and commenced drilling operations
in November.
Operating Costs. Rig operating costs increased $24.8 million and
$54.4 million during the three and nine month periods, respectively, primarily
as a result of increased rig activity and fleet size.
Operating Income. Operating income increased $13.8 million and $26.0
million during the three and nine month periods, respectively, due primarily
to increases in rig operating income. The increases in rig operating income
were partially offset in both periods by: (i) increases in general and
administrative expenses due primarily to increased shorebase activity in
Venezuela and Brazil; and (ii) increases in depreciation expense resulting
from rig and drillship acquisitions.
Interest Expense. Interest expense was $1.5 million and $4.9 million
higher during the three and nine month periods primarily due to the issuance
of $120.0 million in 8-7/8% Senior Notes in March, 1996.
Other Income, net. Other income increased $.3 million and $.9 million
during the three and nine month periods primarily as a result of interest
income earned on the Company's available cash balances.
Net Income. Net income applicable to common shares increased $8.1
million and $14.9 million during the three and nine month periods ended
September 30, 1996, as compared to the corresponding periods in 1995 as a
result of improved operating results and the addition of the drillship
operations, all of which more than offset increases in depreciation, interest
expense, and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $33.8 million for
the nine months ended September 30, 1996, compared to $11.0 million for the
comparable prior period. The $22.8 million increase was the result of improved
operating results, partially offset by an increase in the receivables component
of working capital at September 30, 1996. Operating results improved primarily
as a result of a significant expansion of the Company's operations.
Net cash used in investing activities was $165.7 million compared to
$77.6 million for the comparable prior period. The increase of $88.1 million
was primarily due to expenditures related to the expansion of the Company's
rig fleet, including approximately $119 million expended in connection with
the acquisition, upgrade and purchase of fleet spares related to the Company's
dynamically-positioned deepwater drillships, the Peregrine I, II and III. In
addition, during the nine months ended September 30, 1996, the Company also
expended approximately $28.2 million in connection with the acquisition of
three other drilling rigs (one barge rig, one submersible rig and one jackup
rig) and approximately $26.1 million on the purchase of drillpipe, rig
reactivations, and rig upgrades. Included in the $119 million of
expenditures related to the Company's drillship operations was approximately
$60.0 million for the upgrade of the Peregrine I and the purchase of
additional riser, BOP equipment and other fleet spares and rig inventory. The
upgrade of the Peregrine I was completed during the third quarter of 1996 and
the rig was mobilized to Brazil where it commenced operations in early
November, approximately four months behind the Company's original intended
delivery date. The upgrade of the Peregrine I exceeded the Company's original
cost estimates as a result of increased shipyard time due to delays in
equipment deliveries and additional rig upgrades which increased the water
depth capability of the rig.
-20-
<PAGE> 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Net cash provided by financing activities was $129.2 million for the
nine months ended September 30, 1996, compared to $68.9 million for the
comparable prior period. The $60.3 million increase was primarily due to the
issuance by the Company of $120 million of Senior Notes on March 4, 1996.
During the prior nine-month period ended September 30, 1995, the Company had
issued $50.0 million of Senior Subordinated notes.
During the fourth quarter of 1996, the Company currently expects to
make additional capital expenditures of (i) approximately $8.0 million for the
purchase of a hull and certain other equipment to be used in the construction
of the dynamically positioned drillship Peregrine IV and its initial
mobilization, (ii) $20.0 million for the purchase of the Deepsea Duchess,
(iii) $3.0 million for the refurbishment of certain rig equipment, and (iv)
$2.0 million for drillpipe and other equipment expenditures. In addition to its
expected capital expenditures for the remainder of 1996, the Company may
commit, upon receipt of acceptable contracts, to the completion of the
Peregrine IV and the upgrade of the Pacesetter III, at costs currently
estimated at $120 million and $25 million, respectively. Should the Company
commit to these or any other similar projects, the Company anticipates that a
substantial portion of the funding would come from third party equipment
lessors or debt.
As of September 30, 1996, the Company had cash and credit
availability under its line of credit totaling approximately $11.3 million.
The Company has received a commitment from its commercial bank lenders to
increase its bank credit facilities from a maximum of $25 million to $65
million. The new facilities would consist of (i) a $25 million revolving loan
facility secured by accounts receivable, maturing in November 1999, and (ii) a
$40 million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998. The Company believes that its available
funds, together with cash generated from operations, will be sufficient to fund
its capital expenditure program, working capital and debt service requirements.
Future commitments for capital expenditures will depend upon market conditions
and opportunities, as well as the availability of adequate financing.
Although substantially all the Company's marketed rigs are currently
under contract, its domestic based rigs are typically contracted on a
well-to-well basis or on short term contracts which typically expire within
six months. A severe decline in demand for oil and gas drilling could
therefore adversely impact the Company's cash flow from operations. Should
these circumstances occur and persist for a material length of time, there
could be no assurance that the Company's cash flow from operations would
remain adequate to meet its requirements and the Company would likely scale
back to the scope of its operations and dispose of excess or non-essential
assets.
-21-
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In October 1996, suit was initiated against the Company by Springwell
Corporation in the United States District Court for the Southern District of
New York. Springwell alleges that it "introduced" the Company to an investment
banking firm which subsequently participated in placements of debt and equity
of the Company. Springwell claims it is entitled to compensation based on
quantum meruit and express or implied agreements by the Company or its agents
to pay Springwell a commission. The Company believes Springwell's claims are
without merit and intends to vigorously contest such claims.
Mirchink N.V., an affiliate of the entity that sold the Peregrine I to the
Company, has initiated litigation against the Company in South Africa,
alleging the Company has repudiated an agreement to pay Mirchink a commission
in connection with the purchase of the Peregrine I. Mirchink seeks to recover
approximately $1.2 million in damages. The Company denies that it has breached
any agreement with Mirchink, and contends that it is entitled to an offset
against Mirchink's commission as a result of encumbrances on the Peregrine I
at the time it was delivered.
-22-
<PAGE> 23
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Falcon Drilling Company, Inc. and Subsidiaries
Financial Data Schedule
- -----------------
(b) No reports were filed on Form 8-K during the period.
-23-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Falcon Drilling Company, Inc.
Date: November 7, 1996 /s/ Robert F. Fulton
--------------------
Robert F. Fulton
Executive Vice President
and Chief Financial Officer
-24-
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
27 Falcon Drilling Company, Inc. and Subsidiaries
Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Item 1 -
Financial Statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,309
<SECURITIES> 0
<RECEIVABLES> 69,459
<ALLOWANCES> (625)
<INVENTORY> 0
<CURRENT-ASSETS> 78,223
<PP&E> 470,741
<DEPRECIATION> (53,285)
<TOTAL-ASSETS> 513,724
<CURRENT-LIABILITIES> 45,866
<BONDS> 312,405
0
0
<COMMON> 355
<OTHER-SE> 134,260
<TOTAL-LIABILITY-AND-EQUITY> 513,724
<SALES> 0
<TOTAL-REVENUES> 220,965
<CGS> 0
<TOTAL-COSTS> 175,341
<OTHER-EXPENSES> (1,175)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,158
<INCOME-PRETAX> 28,641
<INCOME-TAX> 10,597
<INCOME-CONTINUING> 18,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,044
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
