<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, 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 October 31,
1997: 79,350,778
<PAGE> 2
FALCON DRILLING COMPANY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ITEM NUMBER DESCRIPTION PAGE NUMBER
----------- ----------- -----------
<S> <C> <C>
Part I-
1 Financial Statements-
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited), and December 31, 1996 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1997 and 1996
4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 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,
1997 1996
--------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,452 $ 85,050
Accounts receivable, net of allowance for doubtful accounts of
$1,220 and $1,471 at September 30, 1997, and December 31, 1996,
respectively 89,886 71,591
Other current assets 16,478 9,933
--------- ---------
Total current assets 128,816 166,574
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment 680,214 520,025
Vessels and other equipment 49,506 6,803
--------- ---------
729,720 526,828
Less- Accumulated depreciation (85,437) (58,866)
--------- ---------
644,283 467,962
OTHER ASSETS 19,856 17,506
--------- ---------
Total assets $ 792,955 $ 652,042
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 41,873 $ 53,903
Income tax payable 3,537 413
Debt due within one year 1,411 2,746
--------- ---------
Total current liabilities 46,821 57,062
LONG-TERM DEBT, less current portion 340,718 292,305
DEFERRED INCOME TAXES 58,475 28,927
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized; 79,284,111 and
78,570,946 shares issued and outstanding at September 30, 1997, and
December 31, 1996, respectively 793 786
Additional paid-in capital 242,122 238,172
Accumulated earnings 104,026 34,790
--------- ---------
Total stockholders' equity 346,941 273,748
--------- ---------
Total liabilities and stockholders' equity $ 792,955 $ 652,042
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
-3-
<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,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 136,707 $ 90,885 $ 367,342 $ 220,965
COSTS AND EXPENSES:
Operating costs 70,321 55,532 196,222 141,311
General and administrative expenses 7,498 4,311 20,947 13,191
Depreciation 10,225 7,761 27,147 20,839
------------ ------------ ------------ ------------
OPERATING INCOME 48,663 23,281 123,026 45,624
OTHER (INCOME) EXPENSE:
Interest expense 5,278 6,061 15,564 18,158
Amortization of deferred costs 615 807 1,844 2,108
Other (income) expense, net (1,898) (1,099) (3,672) (3,283)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 44,668 17,512 109,290 28,641
INCOME TAX PROVISION 16,145 6,479 40,055 10,597
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES
$ 28,523 $ 11,033 $ 69,235 $ 18,044
============ ============ ============ ============
NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
USED IN COMPUTING EARNINGS
PER SHARE 80,079,577 72,078,790 79,896,034 71,982,240
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ .36 $ .15 $ .87 $ .25
============ ============ ============ ============
</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,
------------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,235 $ 18,044
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 28,991 22,947
Realized gain on sale of assets (2,504) (775)
Provision for deferred income taxes 29,548 10,159
Changes in assets and liabilities-
Accounts receivable, trade (18,295) (30,834)
Other assets (10,737) 3,021
Accounts payable and accrued liabilities (8,907) 11,275
--------- ---------
Net cash provided by operating activities 87,331 33,837
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and refurbishments of equipment and property (197,117) (173,220)
Refunds (deposits) made for drill pipe, rigs and equipment -- 6,174
Purchase of Double Eagle Marine, net of cash acquired (2,410) --
Proceeds from the sale of equipment and property 6,603 1,307
--------- ---------
Net cash used in investing activities (192,924) (165,739)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 45,000 172,000
Payments of outstanding debt (4,312) (39,831)
Issuance of common stock 2,307 1,054
Debt issuance costs -- (4,028)
--------- ---------
Net cash provided by financing activities 42,995 129,195
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (62,598) 2,707
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,050 9,016
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,452 $ 6,309
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 29,144 $ 24,760
Income taxes paid 6,817 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
SEPTEMBER 30, 1997
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, 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. Of
the $290 million of outstanding principal indebtedness at September 30, 1997,
which is subject to the change in control provisions, $280 million have fixed
rates of interest and have recently been trading at amounts in excess of the
redemption price Falcon is required to offer. Because credit market conditions
and Falcon's credit rating are subject to change, it is difficult to predict the
amount of bonds which may be tendered following the consummation of the merger.
Management estimates that it is probable that bonds with an aggregate principal
balance outstanding ranging from $0 to $55 million will be tendered representing
up to 50% of the outstanding principal balance of the $110 million 9-3/4% Senior
Notes due 2001 due to Falcon's early redemption option and the relatively low
redemption price provided by this indenture. 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.
-6-
<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. As
of September 30, 1997 the Company has incurred approximately $1.3 million of
merger related costs which are currently recorded as other assets.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average shares of common stock
Outstanding 79,227,163 70,820,948 78,928,462 70,674,976
Weighted average of common stock equivalents 1,140,050 1,960,680 1,336,899 2,026,688
Effect of shares issuable pursuant to stock option
plans using the treasury stock method (287,636) (702,838) (369,327) (719,424)
----------- ----------- ----------- -----------
Shares used in computing earnings per share 80,079,577 72,078,790 79,896,034 71,982,240
=========== =========== =========== ===========
</TABLE>
-7-
<PAGE> 8
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 September 30,
1997, and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 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 45,000 --
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 739 1,029
Note payable to Grace Offshore Company at 8.7% -- 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 --
--------- ---------
342,129 295,051
Less- Amounts due within one year (1,411) (2,746)
--------- ---------
$ 340,718 $ 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.
-8-
<PAGE> 9
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
$165.0 million, which consists of (i) a $25.0 million revolving loan facility
secured by accounts receivable, maturing in November 1999, (ii) a $60.0 million
revolving loan facility secured by certain drilling rigs, maturing in November
1998, and (iii) an $80.0 million revolving loan facility secured by certain
drilling rigs, maturing in October 1998.
The $25.0 million facility provides for interest at LIBOR plus 1% or
the greater of prime or 1/2% over the federal funds rate. The $60.0 million
facility provides for interest at LIBOR plus 1-1/2% or the greater of prime plus
1/2% or the federal funds rate plus 1%. The $80.0 million facility provides for
interest at LIBOR plus 1-3/4% or the greater of prime plus 3/4% or the federal
funds rate plus 1-1/4%. The Company had no borrowings outstanding under the
revolving credit facility as of December 31, 1996. As of September 30, 1997, the
$25.0 million facility was fully utilized and $20.0 million was outstanding
under the $60.0 million facility.
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 September 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
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.
-9-
<PAGE> 10
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 a cost currently estimated at $160.0 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 a cost
currently estimated at $190.0 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 a cost currently estimated at $145.0 million. Upon completion,
the vessel will begin a three-year drilling contract in West Africa.
In August 1997, Falcon entered into a letter of intent with Petroleo
Brasilerio S/A ("Petrobras") to contract the Falcon 100, a second generation
semisubmersible drilling rig, for a primary term of four years. The Falcon 100
will be refurbished and upgraded to operate in up to 750 meters of water at a
cost currently estimated at $60.0 million.
The Peregrine IV, Peregrine VI, Peregrine VII and Falcon 100 projects
are underway at shipyards in Singapore, Portugal, England and the United States
with a total combined cost currently estimated at $555 million. As of September
30, 1997, the Company has expended approximately $92.3 million on these four
projects. 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--SEPTEMBER 30, 1997
(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 $ 16,930 $ 5,522 $ -- $ -- $ 22,452
Accounts receivable, net 22,452 67,434 -- -- 89,886
Other current assets 5,103 11,375 -- -- 16,478
--------- --------- --------- --------- ---------
Total current assets 44,485 84,331 -- -- 128,816
EQUIPMENT AND PROPERTY, net
352,936 288,981 2,366 -- 644,283
OTHER ASSETS 19,856 -- -- -- 19,856
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES
340,510 -- -- (340,510) --
--------- --------- --------- --------- ---------
Total assets $ 757,787 $ 373,312 $ 2,366 $(340,510) $ 792,955
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 10,981 $ 34,429 $ -- $ -- $ 45,410
Debt due within one year 1,000 -- 411 -- 1,411
--------- --------- --------- --------- ---------
Total current liabilities 11,981 34,429 411 -- 46,821
LONG-TERM DEBT, net 340,390 -- 328 -- 340,718
DEFERRED INCOME TAXES 58,475 -- -- -- 58,475
STOCKHOLDERS' EQUITY:
Partnership capital -- -- -- -- --
Common stock 793 -- -- -- 793
Additional paid-in capital 242,122 221,068 2,223 (223,291) 242,122
Accumulated earnings (deficit)
104,026 117,815 (596) (117,219) 104,026
--------- --------- --------- --------- ---------
Total stockholders' equity 346,941 338,883 1,627 (340,510) 346,941
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 757,787 $ 373,312 $ 2,366 $(340,510) $ 792,955
========= ========= ========= ========= =========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 108,150 $ 259,192 $ -- $ -- $ 367,342
COSTS AND EXPENSES:
Operating costs 54,509 141,713 -- -- 196,222
General and administrative 5,464 15,483 -- -- 20,947
Depreciation 8,860 18,145 142 -- 27,147
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) 39,317 83,851 (142) -- 123,026
OTHER (INCOME) EXPENSE:
Interest expense 15,514 -- 50 -- 15,564
Other (income) expense, net (688) (1,140) -- -- (1,828)
Equity in income of subsidiaries (53,720) -- -- 53,720 --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
78,211 84,991 (192) (53,720) 109,290
INCOME TAX PROVISION (BENEFIT)
8,976 31,149 (70) -- 40,055
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 69,235 $ 53,842 $ (122) $ (53,720) $ 69,235
========= ========= ========= ========= =========
</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 (LOSS) 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
12,266 44,471 (213) (27,883) 28,641
INCOME TAX PROVISION (BENEFIT)
(5,778) 16,454 (79) -- 10,597
--------- --------- --------- --------- ---------
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 CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 69,235 $ 53,842 $ (122) $ (53,720) $ 69,235
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (53,720) -- -- 53,720 --
Depreciation and
amortization 8,860 19,989 142 -- 28,991
Realized gain on the sale
of assets (272) (2,232) -- -- (2,504)
Deferred income tax
provision 6,609 22,939 -- -- 29,548
Changes in current assets
and current liabilities
and intercompany balance
(14,924) (23,285) 270 -- (37,939)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 15,788 71,253 290 -- 87,331
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property (124,987) (74,540) -- -- (199,527)
Refunds on drill pipe, rigs and
equipment, net of deposits -- -- -- -- --
Sale of equipment and property
285 6,318 -- -- 6,603
--------- --------- --------- --------- ---------
Net cash used in investing
activities (124,702) (68,222) -- -- (192,924)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 45,000 -- -- -- 45,000
Issuance of common stock 2,307 -- -- -- 2,307
Payments of outstanding debt (4,022) -- (290) -- (4,312)
Debt issuance costs -- -- -- -- --
Net cash provided by (used in)
financing activities 43,285 -- (290) -- 42,995
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
(65,629) 3,031 -- -- (62,598)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
82,559 2,491 -- -- 85,050
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR
$ 16,930 $ 5,522 $ -- $ -- $ 22,452
========= ========= ========= ========= =========
</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 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)
Deferred income tax
provision -- 10,159 -- -- 10,159
Changes in current assets
and current liabilities
and intercompany balances
(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
--------- --------- --------- --------- ---------
Net cash used in investing
activities (51,595) (114,144) -- -- (165,739)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 172,000 -- -- -- 172,000
Issuance of common stock 1,054 -- -- -- 1,054
Payments of outstanding debt (37,000) (2,561) (270) -- (39,831)
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
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 October 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 59 inland tugs
and 44 utility barges as of October 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. Workover services are performed on previously
drilled wells in order to restore or enhance production from such wells, and
include activities such as acidizing, refracturing, replacing tubing and
cleaning well bores.
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 September 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 59 tugs and 44 utility barges
for approximately $38.7 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 three jackup rigs for approximately
$12.5 million.
4) The upgrade of five drillships and one semisubmersible rig for
approximately $60.8 million.
5) The purchase for $33.8 million of a purpose-built dynamically-positioned
drillship.
6) The refurbishment of two previously stacked barge drilling rigs for
approximately $7.0 million.
-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 NINE MONTH PERIODS ENDED SEPTEMBER 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues-
Domestic barge drilling $ 42,373 $ 32,916 $121,920 $ 77,464
Domestic barge workover 8,166 4,547 22,464 12,760
Domestic offshore drilling 47,374 30,534 121,274 79,946
International shallow-water drilling 7,284 9,657 26,808 28,230
Deepwater operations 19,809 13,231 51,034 22,565
Marine operations 11,701 -- 23,842 --
-------- -------- -------- --------
$136,707 $ 90,885 $367,342 $220,965
======== ======== ======== ========
Operating costs-
Domestic barge drilling $ 21,960 $ 20,089 $ 66,649 $ 50,416
Domestic barge workover 5,630 3,978 15,571 10,499
Domestic offshore drilling 21,197 17,812 57,436 51,161
International shallow-water drilling 4,001 5,511 14,370 15,197
Deepwater operations 10,209 8,142 27,087 14,038
Marine operations 7,324 -- 15,109 --
-------- -------- -------- --------
$ 70,321 $ 55,532 $196,222 $141,311
======== ======== ======== ========
Rig operating income-
Domestic barge drilling $ 20,413 $ 12,827 $ 55,271 $ 27,048
Domestic barge workover 2,536 569 6,893 2,261
Domestic offshore drilling 26,177 12,722 63,838 28,785
International shallow-water drilling 3,283 4,146 12,438 13,033
Deepwater operations 9,600 5,089 23,947 8,527
Marine operations 4,377 -- 8,733 --
-------- -------- -------- --------
66,386 35,353 171,120 79,654
General and administrative expenses 7,498 4,311 20,947 13,191
Depreciation expense 10,225 7,761 27,147 20,839
-------- -------- -------- --------
Operating income $ 48,663 $ 23,281 $123,026 $ 45,624
======== ======== ======== ========
</TABLE>
The Financial Accounting Standards Board recently issued Statement of Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) effective for financial statements issued for
periods beginning after December 15, 1997. SFAS No. 131 requires that companies
report financial and descriptive information about reportable operating segments
in financial statements. Segment information to be reported is to be based upon
the way management organizes the segments for making operating decisions and
assessing performance. Falcon will adopt SFAS No. 131 beginning the first
quarter of 1998.
-18-
<PAGE> 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Revenues. Revenues increased $45.8 million and $146.4 million during
the three and nine month periods ended September 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;
(iii) the acquisitions of the drillships Falcon Ice and Falcon Duchess, which
began operations in December, 1996 and February, 1997, respectively, accounted
for additional revenues of $10.7 million and $27.7 million during the three and
nine month periods; and (iv) the first quarter acquisition of the inland marine
vessel operations generated additional revenues of $11.7 million and $23.8
million during the three and nine month periods.
Operating Costs. Rig operating costs increased $14.8 million and $54.9
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 $25.4 million and $77.4
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 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 $.8 million and $2.6
million during the three and nine month periods primarily due to the
capitalization of interest associated with the drillship Peregrine I upgrade
project.
Net Income. Net income applicable to common shares increased $17.5
million and $51.2 million in the three and nine month periods ended September
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 $87.3 million for the
nine months ended September 30, 1997, compared to $33.8 million for the
comparable prior period. The $53.5 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 September 30, 1997. Operating results improved
primarily as a result of a significant expansion of the Company's operations and
improved operating margin.
Net cash used in investing activities for the nine months ended
September 30, 1997, was $192.9 million compared to $165.7 million for the
comparable prior period.
Net cash provided by financing activities was $43.0 million for the
nine months ended September 30, 1997, compared to $129.2 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.
-19-
<PAGE> 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
As of September 30, 1997, the Company had cash and credit availability
under its lines of credit totaling approximately $142.5 million. The current
estimated total cost of $555.0 million for the construction and refurbishment of
the dynamically-positioned drillships Peregrine IV, Peregrine VI and Peregrine
VII and the semisubmersible drilling rig, Falcon 100, exceeds the Company's
available cash and credit. The Company has postponed finalizing the permanent
financing of these projects pending its planned merger with Reading & Bates.
Post merger, the Company anticipates that these projects will be financed with a
combination of short and long term debt. Should the shareholders of the Company
and Reading & Bates vote against the proposed merger, the Company would
immediately seek to expand its short-term credit availability to complete the
constitution financing of these projects. The Company believes that long-term
permanent financing debt commitments could be obtained prior to March 31, 1988.
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. Of the $290 million
of outstanding principal indebtedness at September 30, 1997, which is subject to
the change in control provisions, $280 million have fixed rates of interest and
have recently been trading at amounts in excess of the redemption price Falcon
is required to offer. Because credit market conditions and Falcon's credit
rating are subject to change, it is difficult to predict the amount of bonds
which may be tendered following the consummation of the merger. Management
estimates that it is probable that bonds with an aggregate principal balance
outstanding ranging from $0 to $55 million will be tendered representing up to
50% of the outstanding principal balance of the $110 million 9-3/4% Senior Notes
due 2001 due to Falcon's early redemption option and the relatively low
redemption price provided by this indenture. 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.
-20-
<PAGE> 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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.
-21-
<PAGE> 22
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 ("Right") for each outstanding
Common Share of the Company. The dividend was payable on July 16, 1997 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, of the Company at a price of
$125.00 per one one-thousandth of a preferred Share, 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.
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.
-22-
<PAGE> 23
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger dated July 10, 1997 among R&B Falcon
Corporation, FDC Acquisition Corp., Reading & Bates Acquisition
Corp., Falcon Drilling, Inc. and Reading & Bates Corporation
(incorporated by reference to the Company's Current Report on
Form 8-K dated July 16, 1997).
4.1 Amendment Number One, dated as of July 10, 1997, to the Rights
Agreement dated as of June 25, 1997 (incorporated by reference to
the Company's Current Report on Form 8-K dated July 16, 1997).
4.2 Amendment Number Two, dated as of August 8, 1997, to the Rights
Agreement dated as of June 25, 1997 (incorporated by reference to
the Company's Current Report on Form 8-K dated August 8, 1997).
10.1 FDC Stock Option Agreement dated as of July 10, 1997 between
Falcon Drilling Company, Inc. and Reading & Bates Corporation
(incorporated by reference to the Company's Current Report on
Form 8-K dated July 16, 1997).
10.2 R&B Corporation Stock Option Agreement dated as of July 10, 1997
between Reading & Bates Corporation and Falcon Drilling Company,
Inc. (incorporated by the reference to the Company's Current
Report on Form 8-K dated July 16, 1997).
27 Falcon Drilling Company, Inc. and Subsidiaries Financial Data
Schedule.
- ------------------------------------
(b) Reports on Form 8-K
(i) Report dated July 16, 1997 relating to the Company's proposed
merger with Reading & Bates Corporation and Amendment Number
One to the Rights Agreement between the Company and American
Stock Transfer & Trust Company.
(ii)Report dated August 8, 1997, relating to an amendment to the
Company's Rights Agreement, which amendment terminated said
Rights Agreement.
-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 13, 1997 /s/ Robert F. Fulton
--------------------
Robert F. Fulton
Principal Financial Officer
-24-
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated July 10, 1997 among R&B Falcon
Corporation, FDC Acquisition Corp., Reading & Bates Acquisition
Corp., Falcon Drilling, Inc. and Reading & Bates Corporation
(incorporated by reference to the Company's Current Report on
Form 8-K dated July 16, 1997).
4.1 Amendment Number One, dated as of July 10, 1997, to the Rights
Agreement dated as of June 25, 1997 (incorporated by reference to
the Company's Current Report on Form 8-K dated July 16, 1997).
4.2 Amendment Number Two, dated as of August 8, 1997, to the Rights
Agreement dated as of June 25, 1997 (incorporated by reference to
the Company's Current Report on Form 8-K dated August 8, 1997).
10.1 FDC Stock Option Agreement dated as of July 10, 1997 between
Falcon Drilling Company, Inc. and Reading & Bates Corporation
(incorporated by reference to the Company's Current Report on
Form 8-K dated July 16, 1997).
10.2 R&B Corporation Stock Option Agreement dated as of July 10, 1997
between Reading & Bates Corporation and Falcon Drilling Company,
Inc. (incorporated by the reference to the Company's Current
Report on Form 8-K dated July 16, 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,452
<SECURITIES> 0
<RECEIVABLES> 91,106
<ALLOWANCES> (1,220)
<INVENTORY> 0
<CURRENT-ASSETS> 128,816
<PP&E> 729,720
<DEPRECIATION> (85,437)
<TOTAL-ASSETS> 792,955
<CURRENT-LIABILITIES> 46,821
<BONDS> 340,718
0
0
<COMMON> 793
<OTHER-SE> 346,148
<TOTAL-LIABILITY-AND-EQUITY> 792,955
<SALES> 0
<TOTAL-REVENUES> 367,342
<CGS> 0
<TOTAL-COSTS> 244,316
<OTHER-EXPENSES> (3,672)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,408
<INCOME-PRETAX> 109,290
<INCOME-TAX> 40,055
<INCOME-CONTINUING> 69,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,235
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
</TABLE>
