<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 June 30, 1997
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 July 31,
1997: 79,224,944
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<PAGE> 2
FALCON DRILLING COMPANY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Item Number Description Page Number
----------- ----------- -----------
<S> <C> <C>
Part I-
1 Financial Statements-
Condensed Consolidated Balance Sheets as of June 30, 1997 (unaudited),
and December 31, 1996 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 1997 and 1996
4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 17
Part II-
2 Changes in Securities 21
4 Submission of Matters to a Vote of Security Holders 22
6 Exhibits and Reports on Form 8-K 23
</TABLE>
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<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>
JUNE 30, DECEMBER 31,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,631 $ 85,050
Accounts receivable, net of allowance for doubtful accounts of $1,471 and
$1,495 at December 31, 1996 and June 30, 1997, respectively
85,649 71,591
Other current assets 16,663 9,933
--------- ---------
Total current assets 125,943 166,574
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment 613,479 520,025
Vessels and other equipment 41,078 6,803
--------- ---------
654,557 526,828
Less- Accumulated depreciation (75,482) (58,866)
--------- ---------
579,075 467,962
OTHER ASSETS 15,118 17,506
--------- ---------
Total assets $ 720,136 $ 652,042
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 46,533 $ 53,903
Income tax payable 560 413
Debt due within one year 3,071 2,746
--------- ---------
Total current liabilities 50,164 57,062
LONG-TERM DEBT, less current portion 300,822 292,305
DEFERRED INCOME TAXES 51,491 28,927
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized; 79,151,612 and
78,570,946 shares issued and outstanding at June 30, 1997, and
December 31, 1996, respectively 792 786
Additional paid-in capital 241,365 238,172
Accumulated earnings 75,502 34,790
--------- ---------
Total stockholders' equity 317,659 273,748
--------- ---------
Total liabilities and stockholders' equity $ 720,136 $ 652,042
========= =========
</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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 120,690 $ 73,946 $ 230,635 $ 130,080
COSTS AND EXPENSES:
Operating costs 62,954 47,634 125,901 85,778
General and administrative expenses 6,463 4,313 13,449 8,881
Depreciation 8,687 7,045 16,922 13,078
------------ ------------ ------------ ------------
OPERATING INCOME 42,586 14,954 74,363 22,343
OTHER (INCOME) EXPENSE:
Interest expense 5,118 6,387 10,286 12,097
Amortization of deferred costs 616 706 1,229 1,301
Other (income) expense, net (843) (1,553) (1,774) (2,184)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 37,695 9,414 64,622 11,129
INCOME TAX PROVISION 13,947 3,398 23,910 4,118
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES
$ 23,748 $ 6,016 $ 40,712 $ 7,011
============ ============ ============ ============
NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
USED IN COMPUTING EARNINGS
PER SHARE 79,866,208 72,072,124 79,779,138 71,932,776
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ .30 $ .08 $ .51 $ .10
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
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<PAGE> 5
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,712 $ 7,011
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 18,151 14,378
Realized gain on sale of assets (1,027) (227)
Provision for deferred income taxes 22,564 3,679
Changes in assets and liabilities-
Accounts receivable, trade (14,059) (27,325)
Other assets (5,570) 3,198
Accounts payable and accrued liabilities (7,224) 10,120
--------- ---------
Net cash provided by operating activities 53,547 10,834
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property (117,614) (140,129)
Refunds (deposits) made for drill pipe, rigs and equipment -- 8,826
Purchase of Double Eagle Marine, net of cash acquired (2,410) --
Proceeds from the sale of equipment and property 1,056 413
--------- ---------
Net cash used in investing activities (118,968) (130,890)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 5,000 164,000
Payments of outstanding debt (2,547) (39,425)
Issuance of common stock 1,549 437
Debt issuance costs -- (4,019)
--------- ---------
Net cash provided by financing activities 4,002 120,993
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS (61,419) 937
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,050 9,016
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,631 $ 9,953
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 14,726 $ 10,156
Income taxes paid 1,817 30
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for purchase of equipment 1,650 --
Debt issuance for rig acquisition 6,390 --
</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
JUNE 30, 1997
1. BASIS OF PRESENTATION
AND SIGNIFICANT ACTIVITIES:
The accompanying unaudited condensed consolidated financial statements
of the Company for the three months and six months ended June 30, 1997 and
1996, 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.
SIGNIFICANT EVENTS
During June 1997, the Company declared a dividend of one share of
Falcon's common stock for each share of Falcon common stock issued and
outstanding at the close of business on July 9, 1997. Accordingly, all share
amounts for all periods presented have been restated to reflect this stock
split effected in the form of a stock dividend.
On July 10, 1997 the Company entered into an agreement and plan of
merger with Reading & Bates Corporation (the Merger Agreement). This agreement
and plan of merger is subject to certain regulatory approvals and the approval
of the shareholders of both companies. The Company anticipates that the
agreement and plan of merger will be submitted to a shareholder vote during the
fourth quarter of this year. If approved by the shareholders of both companies,
the plan of merger provides that the shareholders of both companies would
exchange their shares of common stock for shares of common stock of a new
company, R&B Falcon Corporation. Under the terms of the agreement, the
Company's shareholders would receive one share of R&B Falcon Corporation for
each of their existing shares while Reading & Bates Corporation shareholders
would receive 1.18 shares of R&B Falcon Corporation for each of their existing
shares.
Immediately after consummation of the merger, management estimates
that the current shareholders of the Company would hold approximately 48% of
the common stock of R&B Falcon Corporation. As such, consummation of the merger
would cause a change of control of the Company as defined in the Company's bond
indenture agreements. Accordingly, the Company would be required to make a
change of control cash purchase offer to each bondholder at a price equal to
101% of the aggregate principal outstanding or approximately $293 million.
Based on current credit market conditions and the recent trading history of its
bonds, management does not believe that a significant portion of the bonds
would be tendered pursuant to a change of control purchase offer by the
Company. However, should a significant portion of or all of its outstanding
bonds be tendered pursuant to such a change of control purchase offer, the
Company has received a $300 million short-term tender facility financing
commitment from a financial institution that would be used to fund such a bond
repurchase obligation. Borrowings under the short-term tender facility would
mature three months from the date of initial funding and bear interest at the
eurodollar loan rate plus 1.25%. Should a significant portion of its
outstanding bonds be repurchased and funded via the short-term tender facility,
management anticipates that substantially all of any such debt obligation would
be refinanced on a long-term basis prior to maturity.
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<PAGE> 7
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Merger Agreement provides that each of the Company and R&B (each,
a "Payor") is obligated to pay to the other (each, a "Payee") a termination fee
of $100 million upon the occurrence of certain events, including (i) the Payee
terminates the Merger Agreement because the Payor breaches its obligation not
to solicit the acquisition of the Payor by a third party, and the Payor
consummates such acquisition within 18 months after termination, (ii) either
party terminates the Merger Agreement because the Merger has not closed by
January 31, 1998, the Payor had received a proposal to acquire it, and the
Payor is acquired within 18 months after the termination, or (iii) the Payor
elects to terminate the Merger Agreement because it has received a proposal to
acquire it which it deems superior to the Merger, and the Payor's Board
determines that it is unlikely that shareholder approval of the Merger will be
obtained.
In connection with the Merger Agreement, Falcon granted R&B an option
to purchase 15,753,823 shares of Falcon Common Stock at an exercise price of
$27.78 per share. The R&B Option may only be exercised upon the occurrence of
certain events (none of which has occurred) generally relating to an attempt by
a third party to acquire all of or a significant interest in Falcon. In
addition, R&B granted Falcon an option to purchase 14,340,154 shares of R&B
Common Stock at an exercise price of $34.00 per share, subject to the terms and
conditions set forth therein. The Falcon Option may only be exercised upon the
occurrence of certain events (none of which has occurred) generally relating to
an attempt by a third party to acquire all or a significant interest in R&B.
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. The number of shares outstanding
have been restated for all periods presented to reflect the effect of the stock
split effected as a one-for-one stock dividend declared in June of 1997 and
distributed July 9, 1997. Fully diluted earnings per share are considered to be
equal to primary earnings per share 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average shares of common stock
outstanding 78,875,686 70,623,296 78,776,636 70,601,188
Weighted average of common stock equivalents 1,411,816 2,135,256 1,434,618 2,060,054
Effect of shares issuable pursuant to stock option plans
using the treasury stock method (421,294) (686,428) (432,116) (728,466)
----------- ----------- ----------- -----------
Shares used in computing earnings per share 79,866,208 72,072,124 79,779,138 71,932,776
=========== =========== =========== ===========
</TABLE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128, Earnings Per Share (SFAS No. 128).
For the Company, SFAS No. 128 will be effective for the year ended December 31,
1997. SFAS No. 128 simplifies the standards required under current accounting
rules for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share (basic EPS) and diluted earnings per share (diluted
EPS). Basic EPS excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if contracts to issue common stock were exercised or
converted into common stock. Diluted EPS is computed similarly to fully diluted
earnings per share under current accounting rules.
-7-
<PAGE> 8
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The implementation of SFAS No. 128 is not expected to have a material
effect on the Company's earnings per share as determined under current
accounting rules.
3. LONG-TERM DEBT:
The Company had the following debt outstanding as of June 30, 1997,
and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
8-7/8% Senior Notes, due 2003 $ 120,000 $ 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 revolving loan facilities 5,000 --
Note payable to a bank, at LIBOR plus 1.5% -- 689
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
836 1,029
Secured promissory note payable to Grace Offshore Company at 8.7%, secured by
certain FALRIG Partnership jackup rigs, final payment due March 31, 1998
1,667 3,333
Secured promissory note payable to Coastal Capital Corporation at 7.5%, secured
by the vessel Peregrine VI, due January 17, 1999
6,390 --
--------- ---------
303,893 295,051
Less- Amounts due within one year (3,071) (2,746)
--------- ---------
$ 300,822 $ 292,305
========= =========
</TABLE>
The 8-7/8% Senior Notes mature on March 15, 2003, and bear interest at
a rate of 8.875%, payable semiannually on March 15 and September 15. The 9-3/4%
Senior Notes mature on January 15, 2001, and bear interest at a rate of 9.75%,
payable semiannually on January 15 and July 15. The Floating Rate Notes bear
interest at LIBOR plus 3.5%. Principal amounts of the Floating Rate Notes are
due in payments of $1.0 million, $2.0 and $2.0 million in January 1998, 1999
and 2000, respectively, with the balance due January 24, 2001. The 12-1/2%
Senior Subordinated Notes mature on March 15, 2005, and bear interest at a rate
of 12.5% payable semiannually on March 15 and September 15.
In order to provide an additional source of funds, the Company has a
revolving credit facility with three banks providing for borrowings of up to
$65.0 million, which consists of (I) a $25.0 million revolving loan facility
secured by accounts receivable, maturing in November 1999, and (ii) a $40.0
million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998.
The $25.0 million facility provides for interest at LIBOR plus 1% to
1-1/2% (depending on outstanding borrowings) or the greater of prime or 1/2%
over the federal funds rate. The $40.0 million facility provides for interest
at LIBOR plus 2% or the greater of prime plus 1/2% or the federal funds rate
plus 1%. The Company had no borrowings outstanding under either facility as of
December 31, 1996 and $5.0 million outstanding under the $25.0 million facility
as of June 30, 1997.
-8-
<PAGE> 9
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. 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. At June 30, 1997, payments of approximately
$1.5 million have been made pursuant to these agreements. These payments have
been recorded as an addition to rigs and equipment. The agreements remain in
effect through 1997, and payments are not to exceed $5.0 million in the
aggregate.
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. At June 30, 1997, Falcon had
made deposits of approximately $500,000 which have been included in other
assets. The Company has 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.
During 1996, the Company entered into several leasing arrangements
with various parties for the use of one drillship, one jackup rig, one barge
drilling rig and two barge workover rigs. At December 31, 1996, future minimum
lease payments relating to these agreements are $9.7 million in 1997, $9.7
million in 1998, $8.6 million in 1999 and $855,000 in 2000. The lease
agreements for the barge drilling rig and one of the barge workover rigs
provides for additional rental payments based upon revenues of certain of the
Company's barge rigs. The Company has the option to purchase the leased
drillship and jackup, and the purchase of either such rig by the Company would
terminate its obligation to make further lease payments with respect to such
rig.
In April 1997, Falcon entered into letters of intent with two
customers to provide, under long term contracts, two dynamically-positioned
drillships to be designated the Peregrine IV and Peregrine VI. The Company
plans to complete and deliver these two vessels prior to year end 1998. The
Peregrine IV will be completed at an estimated cost of $140.0 million utilizing
the drillship hull and engine package that the Company acquired in late 1996
from the Kherson shipyard for approximately $8.0 million. Upon completion, this
vessel will mobilize to Brazil where it will commence operations under a
six-year drilling contract. The Peregrine VI will be completed at an estimated
cost of $150.0 million by conversion of the 135,000 ton bulk carrier formerly
known as the Coastal Golden which Falcon purchased in January 1997 for
approximately $7.5 million. Following completion, this vessel will mobilize to
the U.S. Gulf of Mexico where it will commence operations under a three-year
drilling contract.
In June, 1997 Falcon purchased a purpose-built dynamically-positioned
drillship, the Deepsea Worker, for approximately $33.8 million. This vessel has
been designated the Peregrine VII. The Peregrine VII will be converted to the
drilling mode at an estimated cost of $110.0 million. Upon completion, the
vessel will begin a three-year drilling contract in West Africa.
-9-
<PAGE> 10
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is in the process of finalizing negotiations for a
shipyard and third party construction manager for the work on the Peregrine IV,
Peregrine VI and Peregrine VII. The Company anticipates that these contracts
will be "time and materials" type contracts rather than fixed price or turnkey
contracts with on-site construction management provided by Falcon and its third
party construction manager. Without expanding its short-term credit
availability, the Company's available funds, together with cash generated from
operations would likely not be sufficient to fund the Company's capital
expenditure program, working capital and debt service requirements. Were such
circumstances to occur, the Company would postpone or otherwise externally
finance one or more of the Peregrine IV, Peregrine VI and Peregrine VII
projects.
5. SUPPLEMENTAL GUARANTOR INFORMATION:
Falcon's obligations under the 9-3/4% Notes and Floating Rates Notes
are fully and unconditionally guaranteed by Falcon and each of Falcon's
directly held subsidiaries and certain of Falcon's indirectly held subsidiaries
on a joint and several basis. The indenture and note purchase agreement under
which the 9-3/4% Noes and Floating Rates Notes were issued provides for
acquired subsidiaries subsequent to the issuance of the 9-3/4% Notes and
Floating Rates Notes to be designated as guarantors of the 9-3/4% Notes and
Floating Rates Notes.
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 Rates Notes. Falcon believes that separate financial statements
and other disclosures of the guarantors are not material.
-10-
<PAGE> 11
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET--JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,437 $ 7,194 $ -- $ -- $ 23,631
Accounts receivable, net 32,715 52,934 -- -- 85,649
Other current assets 89 16,574 -- -- 16,663
-------------- -------------- -------------- -------------- --------------
Total current assets 49,241 76,702 -- -- 125,943
EQUIPMENT AND PROPERTY, net 9,122 567,540 2,413 -- 579,075
OTHER NONCURRENT ASSETS -- 15,118 -- -- 15,118
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES AND JOINT
VENTURES, net 584,177 -- -- (584,177) --
-------------- -------------- -------------- -------------- --------------
Total assets $ 642,540 $ 659,360 $ 2,413 $ (584,177) $ 720,136
============== ============== ============== ============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 23,492 $ 23,601 $ -- $ -- $ 47,093
Current maturities of
long-term debt 1,000 1,667 404 -- 3,071
-------------- -------------- -------------- -------------- --------------
Total current liabilities 24,492 25,268 404 -- 50,164
LONG-TERM DEBT, net 300,389 0 433 -- 300,822
DEFERRED INCOME TAXES -- 51,491 -- -- 51,491
PREFERRED STOCK -- -- -- -- --
STOCKHOLDERS' EQUITY:
Partnership capital -- 56,672 -- (56,672) --
Common stock 792 -- -- -- 792
Preferred stock, Series A -- -- -- -- --
Additional paid-in capital 241,365 415,056 2,132 (417,188) 241,365
Accumulated earnings (deficit)
75,502 110,873 (556) (110,317) 75,502
-------------- -------------- -------------- -------------- --------------
Total stockholders' equity 317,659 582,601 1,576 (584,177) 317,659
-------------- -------------- -------------- -------------- --------------
Total liabilities and
stockholders' equity $ 642,540 $ 659,360 $ 2,413 $ (584,177) $ 720,136
============== ============== ============== ============== ==============
</TABLE>
-11-
<PAGE> 12
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET--DECEMBER 31, 1996
(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 $ 82,559 $ 2,491 $ -- $ -- $ 85,050
Accounts receivable, net 27,510 44,081 -- -- 71,591
Other current assets 130 9,803 -- -- 9,933
--------------- --------------- --------------- --------------- ---------------
Total current assets 110,199 56,375 -- -- 166,574
EQUIPMENT AND PROPERTY, net 9,503 455,951 2,508 -- 467,962
OTHER ASSETS -- 17,506 -- -- 17,506
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES 463,932 -- -- (463,932) --
--------------- --------------- --------------- --------------- ---------------
Total assets $ 583,634 $ 529,832 $ 2,508 $ (463,932) $ 652,042
=============== =============== =============== =============== ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 19,196 $ 35,120 $ -- $ -- $ 54,316
Debt due within one year 689 1,667 390 -- 2,746
--------------- --------------- --------------- --------------- ---------------
Total current liabilities 19,885 36,787 390 -- 57,062
LONG-TERM DEBT, net 290,000 1,667 638 -- 292,305
DEFERRED INCOME TAXES -- 28,927 -- -- 28,927
STOCKHOLDERS' EQUITY:
Partnership capital -- 56,672 -- (56,672) --
Common stock 786 -- -- -- 786
Additional paid-in capital 238,172 341,807 1,954 (343,761) 238,172
Accumulated earnings (deficit)
34,790 63,973 (474) (63,499) 34,790
--------------- --------------- --------------- --------------- ---------------
Total stockholders' equity 273,748 462,452 1,480 (463,932) 273,748
--------------- --------------- --------------- --------------- ---------------
Total liabilities and
stockholders' equity $ 583,633 $ 529,833 $ 2,508 $ (463,932) $ 652,042
=============== =============== =============== =============== ===============
</TABLE>
-12-
<PAGE> 13
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 5,096 $ 225,539 $ -- $ -- $ 230,635
COSTS AND EXPENSES:
Operating costs 3,752 122,149 -- -- 125,901
General and administrative 334 13,115 -- -- 13,449
Depreciation 381 16,446 95 -- 16,922
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 629 73,829 (95) -- 74,363
OTHER (INCOME) EXPENSE:
Interest expense 10,320 (69) 35 -- 10,286
Other (income) expense, net 1 (546) -- -- (545)
Equity in income of subsidiaries (46,818) -- -- 46,818 --
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
37,126 74,444 (130) (46,818) 64,622
INCOME TAX PROVISION (BENEFIT)
(3,586) 27,544 (48) -- 23,910
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) $ 40,712 $ 46,900 $ (82) $ (46,818) $ 40,712
============ ============ ============ ============ ============
</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 SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 7,164 $ 122,916 $ -- $ -- $ 130,080
COSTS AND EXPENSES:
Operating costs 4,749 81,029 -- -- 85,778
General and administrative expenses 264 8,617 -- -- 8,881
Depreciation 647 12,336 95 -- 13,078
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 1,504 20,934 (95) -- 22,343
OTHER (INCOME) EXPENSE:
Interest expense 11,870 178 49 -- 12,097
Other (income) expense, net 144 (1,027) -- -- (883)
Equity in income of subsidiaries (13,632) -- -- 13,632 --
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 3,122 21,783 (144) (13,632) 11,129
INCOME TAX PROVISION (BENEFIT) (3,889) 8,060 (53) -- 4,118
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 7,011 $ 13,723 $ (91) $ (13,632) $ 7,011
============ ============ ============ ============ ============
</TABLE>
-14-
<PAGE> 15
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(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 (loss) $ 40,712 $ 46,900 $ (82) $ (46,818) $ 40,712
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (46,818) -- -- 46,818 --
Depreciation and
amortization 381 17,675 95 -- 18,151
Realized gain on the sale
of assets -- (1,027) -- -- (1,027)
Deferred income tax
provision -- 22,564 -- -- 22,564
Changes in current assets
and current liabilities
and intercompany balance (72,648) 45,616 179 -- (26,853)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (78,373) 131,728 192 -- 53,547
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property -- (120,024) -- -- (120,024)
Refunds on drill pipe, rigs and
equipment, net of deposits -- -- -- -- --
Sale of equipment and property -- 1,056 -- -- 1,056
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) investing activities -- (118,968) -- -- (118,968)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 5,000 -- -- -- 5,000
Proceeds from sale of stock 1,549 -- -- -- 1,549
Payments of outstanding debt (688) (1,667) (192) -- (2,547)
Stock issuance costs -- -- -- -- --
Debt issuance costs -- -- -- -- --
Net cash provided by (used in)
financing activities 5,861 (1,667) (192) -- 4,002
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (72,512) 11,093 -- -- (61,419)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 82,559 2,491 -- -- 85,050
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 10,047 $ 13,584 $ -- $ -- $ 23,631
============ ============ ============ ============ ============
</TABLE>
-15-
<PAGE> 16
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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 $ 7,011 $ 13,723 $ (91) $ (13,632) $ 7,011
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (13,632) -- -- 13,632 --
Depreciation and
amortization 791 13,493 95 -- 14,379
Realized gain on the sale
of assets -- (227) -- -- (227)
Provision for deferred
income taxes -- 3,679 -- -- 3,679
Changes in current assets
and current liabilities
and intercompany balances (60,009) 45,827 175 -- (14,007)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (65,839) 76,495 179 -- 10,835
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property (57,769) (82,360) -- -- (140,129)
Refunds on drill pipe, rigs and
equipment, net of deposits 8,826 -- -- -- 8,826
Sale of equipment and property -- 413 -- -- 413
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities (48,943) (81,947) -- -- (130,890)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 164,000 -- -- -- 164,000
Issuance of common stock 437 -- -- -- 437
Payments of outstanding debt (37,000) (2,246) (179) -- (39,425)
Debt issuance costs (4,019) -- -- -- (4,019)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 123,418 (2,246) (179) 120,993
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 8,635 (7,698) -- -- 937
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 141 8,875 -- -- 9,016
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 8,776 $ 1,177 $ -- $ -- $ 9,953
============ ============ ============ ============ ============
</TABLE>
-16-
<PAGE> 17
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 rigs and vessels. As of July 31, 1997, the
Company's active rig fleet was composed of 63 rigs, including 29 barge drilling
rigs, ten barge workover rigs, 16 jackup drilling rigs, three submersible
drilling rigs and five drillships. Included in these totals are one drillship,
one jackup drilling rig, one barge drilling rig and two barge workover rigs
leased from third parties. The Company also owned and operated 47 inland tugs
and 36 utility barges as of July 31, 1997.
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 the
number of rigs actively marketed by the Company.
Operating Costs. Operating costs include all direct costs and
expenditures associated with operating active units and cold stacking inactive
units. 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
The increase in active units and cash flow generated from operations
were responsible for the significant changes in the Company's financial
position between December 31, 1996, and June 30, 1997. The following are the
most significant of the acquisitions and rig upgrades completed since December
31, 1996:
1) The acquisition, through six transactions, of 47 tugs and 36 utility
barges for approximately $30.0 million.
2) The purchase for $7.5 million of a bulk carrier to be converted to a
dynamically-positioned drillship.
3) The upgrades of two submersible and two jackup rigs for approximately $8.0
million.
4) The upgrade of two drillships for approximately $16.1 million.
5) The purchase for $33.8 million of a purpose-built dynamically-positioned
drillship.
-17-
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS - FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997
AND 1996
Comparative data relating to the Company's revenues and operating expenses by
major areas of operations are listed below:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues-
Domestic barge drilling $ 40,978 $ 26,459 $ 79,547 $ 44,548
Domestic barge workover 8,090 4,192 14,298 8,214
Domestic offshore drilling 39,624 27,868 73,900 49,412
International shallow-water drilling 9,408 8,571 19,524 18,572
Deepwater operations 14,793 6,856 31,225 9,334
Marine operations 7,797 -- 12,141 --
------------ ------------ ------------ ------------
$ 120,690 $ 73,946 $ 230,635 $ 130,080
============ ============ ============ ============
Operating costs-
Domestic barge drilling $ 21,386 $ 17,090 $ 44,689 $ 30,326
Domestic barge workover 4,743 3,742 9,941 6,521
Domestic offshore drilling 19,254 18,245 36,239 33,350
International shallow-water drilling 5,549 4,079 10,369 9,685
Deepwater operations 6,708 4,478 16,878 5,896
Marine operations 5,314 -- 7,785 --
------------ ------------ ------------ ------------
$ 62,954 $ 47,634 $ 125,901 $ 85,778
============ ============ ============ ============
Rig operating income-
Domestic barge drilling $ 19,592 $ 9,369 $ 34,858 $ 14,222
Domestic barge workover 3,347 450 4,357 1,693
Domestic offshore drilling 20,370 9,623 37,661 16,062
International shallow-water drilling 3,859 4,492 9,155 8,887
Deepwater operations 8,085 2,378 14,347 3,438
Marine operations 2,483 -- 4,356 --
------------ ------------ ------------ ------------
57,736 26,312 104,734 44,302
General and administrative expenses 6,463 4,313 13,449 8,881
Depreciation expense 8,687 7,045 16,922 13,078
------------ ------------ ------------ ------------
Operating income $ 42,586 $ 14,954 $ 74,363 $ 22,343
============ ============ ============ ============
</TABLE>
-18-
<PAGE> 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Revenues. Revenues increased $46.7 million and $100.6 million during
the three and six month periods ended June 30, 1997, respectively, as compared
to the corresponding periods in 1996. The increase in revenues reflects: (i) an
increase in the number of units marketed and the overall utility of the
domestic barge drilling rigs for both periods; (ii) higher utilization and day
rates during both periods for the offshore drilling rigs; and (iii) the
acquisitions of the drillships Falcon Ice and Falcon Duchess, which began
operations in December, 1996 and February, 1997, respectively; and (iv) the
first quarter acquisition of the inland marine vessel operations.
Operating Costs. Rig operating costs increased $15.3 million and $40.1
million during the three and six month periods, respectively, primarily as a
result of increased rig activity and fleet size.
Operating Income. Operating income increased $27.6 million and $52.0
million during the three and six 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 Brazil
and the Far East and employee bonuses paid in 1997; and (ii) increases in
depreciation expense attributable to additional assets being placed in service.
Interest Expense. Interest expense decreased $1.3 million and $1.8
million during the three and six month periods primarily due to the
capitalization of interest associated with the drillship Peregrine I upgrade
project.
Other Income, net. Other income decreased $.7million and $.4 million
during the three and six month periods primarily as a result of increased
miscellaneous expenses.
Net Income. Net income applicable to common shares increased $17.7
million and $33.7 million in the three and six month periods ended June 30,
1997, as compared to the corresponding periods in 1996 as a result of improved
operating results and the addition of the inland marine vessel operations, all
of which more than offset increases in depreciation and general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $53.5 million for the
six months ended June 30, 1997, compared to $10.8 million for the comparable
prior period. The $42.7 million increase in net cash provided by operating
activities was the result of improved operating results, partially offset by an
increase in the other assets and decrease in the accounts payable components of
working capital at June 30, 1997. Operating results improved primarily as a
result of a significant expansion of the Company's operations.
Net cash used in investing activities for the six months ended
June 30, 1997, was $119.0 million compared to $130.9 million for the comparable
prior period.
Net cash provided by financing activities was $4.0 million for the six
months ended June 30, 1997, compared to $121.0 million for the comparable prior
period. The significantly higher figure for the 1996 period primarily reflects
the Company's issuance of $120.0 million of Senior Notes in March, 1996.
As of June 30, 1997, the Company had cash and credit availability
under its lines of credit totaling approximately $83.6 million. In anticipation
of the construction of the dynamically-positioned drillships, Peregrine IV,
Peregrine VI and Peregrine VII during 1997 and 1998 at a combined currently
estimated construction cost of approximately $400 million, the Company has
initiated discussions with various financial institutions to seek a $300 - $400
million increase in its short-term credit availability. As of July 31, 1997,
the Company had not committed nor has any lender agreed to provide any such new
credit facility or facilities. The Company believes that it can successfully
conclude negotiations with potential lenders regarding new credit facilities
prior to commencement of the construction phase of the Peregrine IV, Peregrine
VI and Peregrine VII projects. Without expanding its short-term credit
availability, the Company's
-19-
<PAGE> 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
available funds, together with cash generated from operations would likely not
be sufficient to fund its capital expenditure program, working capital and debt
service requirements. Were such circumstances to occur, the Company would
postpone or otherwise externally finance one or more of the Peregrine IV,
Peregrine VI and Peregrine VII projects.
As discussed in Note 1 of the Notes to Unaudited Condensed
Consolidated Financial Statements, the Company has entered into an agreement
with Reading & Bates Corporation. Should the merger be consummated as
contemplated by the agreement and plan of merger, management estimates that the
current shareholders of the Company would hold approximately 48% of the common
stock of R&B Falcon Corporation. As such, consummation of the merger would
cause a change of control of the Company as defined in the Company's bond
indenture agreements. Accordingly, the Company would be required to make a
change of control cash purchase offer to each bondholder at a price equal to
101% of the aggregate principal amount outstanding or approximately $293
million. Based on current credit market conditions and the recent trading
history of its bonds, management does not believe that a significant portion of
the bonds would be tendered pursuant to a change of control purchase offer by
the Company. However, should a significant portion of or all of its outstanding
bonds be tendered pursuant to such a change of control purchase offer, the
Company has received a $300 million short-term tender facility financing
commitment from a financial institution that would be used to fund such a bond
repurchase obligation. Borrowings under the short-term tender facility would
mature three months from the date of initial funding and bear interest at the
eurodollar loan rate plus 1.25%. Should a significant portion of its
outstanding bonds be repurchased and funded via the short term tender facility,
management anticipates that substantially all of any such debt obligation would
be refinanced on a long-term basis prior to maturity.
The Merger Agreement provides that each of the Company and R&B (each,
a "Payor") is obligated to pay to the other (each, a "Payee") a termination fee
of $100 million upon the occurrence of certain events, including (i) the Payee
terminates the Merger Agreement because the Payor breaches its obligation not
to solicit the acquisition of the Payor by a third party, and the Payor
consummates such acquisition within 18 months after termination, (ii) either
party terminates the Merger Agreement because the Merger has not closed by
January 31, 1998, the Payor had received a proposal to acquire it, and the
Payor is acquired within 18 months after the termination, or (iii) the Payor
elects to terminate the Merger Agreement because it has received a proposal to
acquire it which it deems superior to the Merger, and the Payor's Board
determines that it is unlikely that shareholder approval of the Merger will be
obtained.
In connection with the Merger Agreement, Falcon granted R&B an option
to purchase 15,753,823 shares of Falcon Common Stock at an exercise price of
$27.78 per share. The R&B Option may only be exercised upon the occurrence of
certain events (none of which has occurred) generally relating to an attempt by
a third party to acquire all of or a significant interest in Falcon. In
addition, R&B granted Falcon an option to purchase 14,340,154 shares of R&B
Common Stock at an exercise price of $34.00 per share, subject to the terms and
conditions set forth therein. The Falcon Option may only be exercised upon the
occurrence of certain events (none of which has occurred) generally relating to
an attempt by a third party to acquire all or a significant interest in R&B.
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.
-20-
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
(b) On June 25, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
Common Share of the Company. The dividend was payable on July 16, 1997 (the
"Record Date"), to the stockholders of record on that date. Each Right entitles
the registered holder to purchase from the Company one one-thousandth of a
share of Series C Junior Participating Preferred Stock, no par value (the
"Preferred Shares"), of the Company at a price of $125.00 per one
one-thousandth of a preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of June 25, 1997, as the same may be amended from time to
time (the "Rights Agreement"), between the Company and American Stock Transfer
& Trust Company, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 10% or more of the
outstanding Common Shares (except that S-C Rig Investments, L.P., currently a
principal shareholder of the Company, shall not be deemed to be an Acquiring
Person unless it and its affiliates acquire 40% or more) or (ii) 10 business
days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person or group of affiliated persons
becomes an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 10% or
more of the outstanding Common Shares (the earlier of such dates being called
the "Distribution Date"), the Rights will be evidenced, with respect to any of
the Common Share certificates outstanding as of the Record Date, by such Common
Share certificates. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the Rights will be transferred with and only with
the Common Shares.
The Rights are not exercisable until the Distribution Date. Under the
Rights Agreement as initially adopted, the Rights would expire on the date
sixty days after the next annual meeting of stockholders of the Company, unless
the expiration is delayed by the Board of directors, which it may be in each
successive year, but in no event beyond July 16, 2007 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed or exchanged by the Company.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will thereafter have the right to receive upon exercise that number of Common
Shares having a market value of two times the exercise price of the Right. At
any time after any person or group becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by such person or group, which will have become void), in
whole or in part, at an exchange ratio of the Common Share, or one
one-thousandth of a Preferred Share (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences and
privileges), per Right (subject to adjustment).
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold after any person or group becomes an Acquiring Person,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the Right.
At any time prior to such time as any person or group of affiliated or
associated persons becomes an Acquiring Person, the Board of Directors of the
Company may redeem the Rights in whole, but not in part, at a price of $.001
per Right (the "Redemption Price"). The redemption of the Rights may be made
effective at such time on such basis with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
-21-
<PAGE> 22
PART II - OTHER INFORMATION - (CONTINUED)
A more detailed description of the Rights is set forth in the
Company's Current Report on Form 8-K dated June 25, 1997, which is incorporated
herein by reference.
On August 8, 1997, the Board of Directors of the Company amended the
Rights Agreement to provide that the Final Expiration Date of the Rights is
August 8, 1997. This effectively terminated the Rights on that date. A more
detailed description of such amendment is contained in the Company's Current
Report on Form 8-K dated August 8, 1997.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 1997, the annual meeting of shareholders of the Company
was held in Houston, Texas. At the meeting Kenneth H. Hannan, Jr. and Michael
C. Porter were re-elected as directors. Purnendu Chatterjee, Douglas A.P.
Hamilton, James R. Latimer, Steven A. Webster and William R. Ziegler, the other
directors of the Company, continued as directors of the Company. In addition to
the election of directors, the shareholders approved the 1997 Stock Option Plan
of the Company and ratified the appointment of Arthur Andersen L.L.P. as
independent auditors for the Company for the 1997 fiscal year.
The results of the vote on the matters described above are as follows:
(a) The following number of votes were cast or withheld in the election of the
persons named below as directors of the Company:
<TABLE>
<CAPTION>
For Abstain
---------- -------
<S> <C> <C>
Kenneth H. Hannan, Jr. 27,965,864 518,739
---------- -------
Michael C. Porter 27,965,864 518,739
---------- -------
</TABLE>
(b) The following number of votes were cast or withheld with respect to the
approval of the 1997 Stock Option Plan of the Company:
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
26,704,584 1,774,868 5,151
---------- --------- -----
</TABLE>
(c) The following number of votes were cast or withheld with respect to the
ratification of the appointment of Arthur Andersen & Co. as independent
auditors of the Company for the current fiscal year:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
28,482,836 700 1,067
---------- --- -----
</TABLE>
-22-
<PAGE> 23
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
4 Rights Agreement dated as of June 25, 1997, including Exhibit A,
"Form of Certificate of Designation"; Exhibit B, "Form of Right
Certificate"; Exhibit C, "Summary of Rights to Purchase
Preferred Shares" (incorporated by reference to the Company's
Current Report on Form 8-K dated June 25, 1997).
27 Falcon Drilling Company, Inc. and Subsidiaries Financial Data
Schedule.
- ----------
(b) One report, dated June 25, 1997, was filed during the quarter
ending June 30, 1997.
-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: August 13, 1997 /s/ Robert F. Fulton
---------------------------------
Robert F. Fulton
Principal Financial Officer
-24-
<PAGE> 25
INDEX EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
4 Rights Agreement dated as of June 25, 1997, including Exhibit A,
"Form of Certificate of Designation"; Exhibit B, "Form of Right
Certificate"; Exhibit C, "Summary of Rights to Purchase
Preferred Shares" (incorporated by reference to the Company's
Current Report on Form 8-K dated June 25, 1997).
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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,631
<SECURITIES> 0
<RECEIVABLES> 87,144
<ALLOWANCES> (1,495)
<INVENTORY> 0
<CURRENT-ASSETS> 125,943
<PP&E> 654,557
<DEPRECIATION> (75,482)
<TOTAL-ASSETS> 720,136
<CURRENT-LIABILITIES> 50,164
<BONDS> 300,822
0
0
<COMMON> 792
<OTHER-SE> 316,867
<TOTAL-LIABILITY-AND-EQUITY> 720,136
<SALES> 0
<TOTAL-REVENUES> 230,635
<CGS> 0
<TOTAL-COSTS> 156,272
<OTHER-EXPENSES> (1,774)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,515
<INCOME-PRETAX> 64,622
<INCOME-TAX> 23,910
<INCOME-CONTINUING> 40,712
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,712
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
