<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 March 31, 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 April 30,
1997: 39,374,406
<PAGE> 2
FALCON DRILLING COMPANY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Item Number Description Page Number
----------- ----------- -----------
<S> <C> <C>
Part I-
1 Financial Statements-
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited), and December 31, 1996 3
Unaudited Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1997 and 1996 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 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-
1 Legal Proceedings 21
6 Exhibits and Reports on Form 8-K 22
</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>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 56,775 $ 85,050
Accounts receivable, net of allowance for doubtful accounts of $1,471 at
March 31, 1997, and December 31, 1996 73,683 71,591
Other current assets 14,949 9,933
------------ ------------
Total current assets 145,407 166,574
EQUIPMENT AND PROPERTY:
Drilling rigs and equipment 541,529 520,025
Vessels and other equipment 30,771 6,803
------------ ------------
572,300 526,828
Less-Accumulated depreciation (67,094) (58,866)
------------ ------------
505,206 467,962
OTHER ASSETS 17,107 17,506
------------ ------------
Total assets $ 667,720 $ 652,042
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 44,433 $ 53,903
Income tax payable 933 413
Debt due within one year 3,269 2,746
------------ ------------
Total current liabilities 48,635 57,062
LONG-TERM DEBT, less current portion 289,537 292,305
DEFERRED INCOME TAXES 38,384 28,927
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized; 39,369,406 and
39,285,473 shares issued and outstanding at March 31, 1997, and
December 31, 1996, respectively 394 393
Additional paid-in capital 239,016 238,565
Accumulated earnings 51,754 34,790
------------ ------------
Total stockholders' equity 291,164 273,748
------------ ------------
Total liabilities and stockholders' equity $ 667,720 $ 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
ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES $ 109,945 $ 56,134
COSTS AND EXPENSES:
Operating costs 62,947 38,144
General and administrative expenses 6,986 4,568
Depreciation 8,235 6,033
------------ ------------
OPERATING INCOME 31,777 7,389
OTHER (INCOME) EXPENSE:
Interest expense 5,168 5,710
Amortization of deferred costs 613 595
Other (income) expense, net (931) (631)
------------ ------------
INCOME BEFORE INCOME TAXES 26,927 1,715
INCOME TAX PROVISION 9,963 720
------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 16,964 $ 995
============ ============
NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
USED IN COMPUTING EARNINGS PER SHARE 39,843,985 35,893,122
============ ============
NET INCOME PER COMMON SHARE $ .43 $ .03
============ ============
</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>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,964 $ 995
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 8,848 6,628
Realized gain on sale of assets (116) (213)
Provision for deferred income taxes 9,458 720
Changes in assets and liabilities-
Accounts receivable, trade (2,092) (8,797)
Other assets (5,230) 2,608
Accounts payable and accrued liabilities (8,951) 161
------------ ------------
Net cash provided by operating activities 18,881 2,102
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and property (43,074) (53,523)
Refunds (deposits) made for drill pipe, rigs and equipment, net -- 950
Purchase of Double Eagle Marine, net of cash acquired (2,410) --
Proceeds from the sale of equipment and property 121 413
------------ ------------
Net cash used in investing activities (45,363) (52,160)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt -- 152,000
Payments of outstanding debt (2,245) (39,211)
Issuance of common stock 452 178
Debt issuance costs -- (3,681)
------------ ------------
Net cash provided by financing activities (1,793) 109,286
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (28,275) 59,228
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,050 9,016
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 56,775 $ 68,224
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 14,220 $ 9,855
Income taxes paid $ 259 $ --
</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
MARCH 31, 1997
1. BASIS OF PRESENTATION
AND SIGNIFICANT ACTIVITIES:
The accompanying unaudited condensed consolidated financial statements
of the Company for the three months ended March 31, 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.
The Company holds a 37.5 percent effective interest in a Venezuelan
joint venture which operates two barge drilling rigs in Venezuela. The Company
accounts for its interests in the Venezuelan joint venture under the cost
method as Falcon does not currently exercise significant influence over the
venture. Through December 31, 1995, the Company had received cash distributions
of approximately $1.5 million of which $600,000 was recorded as a reduction of
the investment in the joint venture in order to reduce the investment to zero,
and the balance was recognized as revenues. During 1996 and the three months
ended March 31, 1997, the Company had received additional cash distributions of
approximately $1,195,000 and $357,000, respectively which were recorded as
revenues in the condensed consolidated statements of operations.
-6-
<PAGE> 7
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. EARNINGS PER COMMON SHARE:
Net income per share of common stock has been computed on the basis of
the weighted average number of common shares outstanding during the period and,
where dilutive, the effect of common stock contingently issuable, which arises
primarily from the exercise of stock options and warrants. Fully diluted
earnings per share are considered to be equal to primary earnings per share in
all periods presented because the effects of potentially dilutive securities
that are not common stock equivalents were either antidilutive or immaterial.
The following table presents the computation of common and common
equivalent shares used in computing primary earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Weighted average shares of common stock
outstanding 39,338,242 35,289,541
Weighted average of common stock equivalents 728,836 992,427
Effect of shares issuable pursuant to stock option plans
using the treasury stock method (223,093) (388,846)
------------ ------------
Shares used in computing earnings per share 39,843,985 35,893,122
============ ============
</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.
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.
-7-
<PAGE> 8
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT:
The Company had the following debt outstanding as of March 31, 1997
and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 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 -- --
Note payable to a bank, at LIBOR plus 1.5% through
maturity at December 31, 1999 206 689
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 933 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
------------ ------------
292,806 295,051
Less-Amounts due within one year (3,269) (2,746)
------------ ------------
$ 289,537 $ 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 million 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 million revolving loan facility
secured by accounts receivable, maturing in November 1999, and (ii) a $40
million revolving loan facility secured by certain drilling rigs and
receivables, maturing in November 1998.
The $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 March 31, 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 March 31, 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 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 March 31, 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 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 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.
The Company is in the process of finalizing negotiations for a
shipyard and third party construction manager for the work on both the
Peregrine IV and Peregrine VI. 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
construction manager.
-9-
<PAGE> 10
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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% Notes and Floating Rates 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--MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<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 $ 49,522 $ 7,253 $ -- $ -- $ 56,775
Accounts receivable, net 29,903 43,780 -- -- 73,683
Other current assets 33 14,916 -- -- 14,949
------------ ------------ ------------ ------------ ------------
Total current assets 79,458 65,949 -- -- 145,407
EQUIPMENT AND PROPERTY, net
9,311 493,434 2,461 -- 505,206
OTHER ASSETS -- 17,107 -- -- 17,107
INTERCOMPANY AND INVESTMENT IN
SUBSIDIARIES 513,331 -- -- (513,331) --
------------ ------------ ------------ ------------ ------------
Total assets $ 602,100 $ 576,490 $ 2,461 $ (513,331) $ 667,720
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities $ 20,730 $ 24,636 $ -- $ -- $ 45,366
Debt due within one year 1,206 1,666 397 -- 3,269
------------ ------------ ------------ ------------ ------------
Total current liabilities 21,936 26,302 397 -- 48,635
LONG-TERM DEBT, net 289,000 -- 537 -- 289,537
DEFERRED INCOME TAXES -- 38,384 -- -- 38,384
STOCKHOLDERS' EQUITY:
Partnership capital -- 56,672 -- (56,672) --
Common stock 394 -- -- -- 394
Additional paid-in capital 239,016 371,296 2,042 (373,338) 239,016
Accumulated earnings
(deficit) 51,754 83,836 (515) (83,321) 51,754
------------ ------------ ------------ ------------ ------------
Total stockholders' equity 291,164 511,804 1,527 (513,331) 291,164
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 602,100 $ 576,490 $ 2,461 $ (513,331) $ 667,720
============ ============ ============ ============ ============
</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 393 -- -- -- 393
Additional paid-in capital 238,565 341,807 1,954 (343,761) 238,565
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 THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 2,321 $ 107,624 $ -- $ -- $ 109,945
COSTS AND EXPENSES:
Operating costs 1,442 61,505 -- -- 62,947
General and administrative 146 6,840 -- -- 6,986
Depreciation 192 7,996 47 -- 8,235
-------------- -------------- -------------- -------------- --------------
OPERATING INCOME 541 31,283 (47) -- 31,777
OTHER (INCOME) EXPENSE:
Interest expense 5,077 73 18 -- 5,168
Other (income) expense, net 1 (319) -- -- (318)
Equity in income of subsidiaries (19,822) -- -- 19,822 --
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 15,285 31,529 (65) (19,822) 26,927
INCOME TAX PROVISION (BENEFIT) (1,679) 11,666 (24) -- 9,963
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 16,964 $ 19,863 $ (41) $ (19,822) $ 16,964
============== ============== ============== ============== ==============
</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 THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FALCON DRILLING GUARANTOR NONGUARANTOR
COMPANY, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 4,454 $ 51,680 $ -- $ -- $ 56,134
COSTS AND EXPENSES:
Operating costs 2,949 35,195 -- -- 38,144
General and administrative
expenses 146 4,422 -- -- 4,568
Depreciation 323 5,694 16 -- 6,033
-------------- -------------- -------------- -------------- --------------
OPERATING INCOME 1,036 6,369 (16) -- 7,389
OTHER (INCOME) EXPENSE:
Interest expense 5,576 109 25 -- 5,710
Other (income) expense, net 64 (100) -- -- (36)
Equity in income of subsidiaries (3,665) -- -- 3,665 --
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (939) 6,360 (41) (3,665) 1,715
INCOME TAX PROVISION (BENEFIT) (1,934) 2,671 (17) -- 720
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 995 $ 3,689 $ (24) $ (3,665) $ 995
============== ============== ============== ============== ==============
</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 THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<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 $ 16,964 $ 19,863 $ (41) $ (19,822) $ 16,964
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities-
Equity in unconsolidated
subsidiaries (19,822) -- -- 19,822 --
Depreciation and
amortization 192 8,609 47 -- 8,848
Realized gain on the sale
of assets -- (116) -- -- (116)
Deferred income tax
provision -- 9,458 -- -- 9,458
Changes in current assets
and current liabilities
and intercompany balance (30,340) 13,978 89 -- (16,273)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities (33,006) 51,792 95 -- 18,881
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property -- (45,484) -- -- (45,484)
Refunds on drill pipe, rigs and
equipment, net of deposits -- -- -- -- --
Sale of equipment and property -- 121 -- -- 121
Deferred costs of Venezuelan
operations -- -- -- -- --
Net cash provided by (used
in) investing activities -- (45,363) -- -- (45,363)
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt -- -- -- -- --
Proceeds from sale of stock 452 -- -- -- 452
Payments of outstanding debt (483) (1,667) (95) -- (2,245)
Stock issuance costs -- -- -- -- --
Retirement and dividend on
preferred stock -- -- -- -- --
Debt issuance costs -- -- -- -- --
Net cash provided by (used in)
financing activities (31) (1,667) (95) -- (1,793)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (33,037) 4,762 -- -- (28,275)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 82,559 2,491 -- -- 85,050
-------------- -------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 49,522 $ 7,253 $ -- $ -- $ 56,775
============== ============== ============== ============== ==============
</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 THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<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) $ 995 $ 3,689 $ (24) $ (3,665) $ 995
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities-
Equity in unconsolidated
subsidiaries (3,665) -- -- 3,665 --
Depreciation and
amortization 387 6,225 16 -- 6,628
Realized gain on the sale
of assets -- (213) -- -- (213)
Provision for deferred
income taxes -- 720 -- -- 720
Changes in assets and
liabilities (426) (5,699) 97 -- (6,028)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
operating activities (2,709) 4,722 89 -- 2,102
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and
property (19,190) (34,333) -- -- (53,523)
Refunds on drill pipe, rigs
and equipment, net of
deposits 950 -- -- -- 950
Sale of equipment and property -- 413 -- -- 413
Intercompany advances (23,028) 23,028 -- -- --
-------------- -------------- -------------- -------------- --------------
Net cash used in
investing activities (41,268) (10,892) -- -- (52,160)
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 152,000 -- -- -- 152,000
Payments of outstanding debt (37,455) (1,667) (89) -- (39,211)
Issuance of common stock, net 178 -- -- -- 178
Debt issuance costs (3,681) -- -- -- (3,681)
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
financing activities 111,042 (1,667) (89) -- 109,286
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 67,065 (7,837) -- -- 59,228
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 141 8,875 -- -- 9,016
-------------- -------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 67,206 $ 1,038 $ -- $ -- $ 68,244
============== ============== ============== ============== ==============
</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 April 30, 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 35 inland tugs
and 29 utility barges as of April 30, 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 day
rates of the Company's active rigs. In response to increased demand, the
Company has reactivated previously cold stacked rigs. In the future, the
Company, in response to changes in demand, may withdraw rigs from active
service or reactivate additional rigs, which could decrease or increase
revenues, respectively.
Operating Costs. Operating costs include all direct costs and
expenditures associated with operating active 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 March 31, 1997. The following are the
most significant of the acquisitions and rig upgrades completed since December
31, 1996:
1) The acquisition, through three transactions, of 35 tugs and 29 utility
barges for approximately $23.0 million.
2) The purchase for $7.5 million of a bulk carrier to be converted to a
dynamically-positioned drillship.
3) The upgrades of a submersible and jackup rig for approximately $4.7
million.
4) The upgrade of two drillships for approximately $4.4 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 MONTH PERIODS ENDED MARCH 31, 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
ENDED
MARCH 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revenues-
Domestic barge drilling $ 38,569 $ 18,089
Domestic barge workover 6,208 4,021
Domestic offshore drilling 34,276 21,544
International shallow water drilling 10,116 10,002
Deepwater operations 16,432 2,478
Marine operations 4,344 --
---------- ----------
$ 109,945 $ 56,134
========== ==========
Operating costs-
Domestic barge drilling $ 23,303 $ 13,237
Domestic barge workover 5,198 2,779
Domestic offshore drilling 16,985 15,103
International shallow water drilling 4,820 5,607
Deepwater operations 10,170 1,418
Marine operations 2,471 --
---------- ----------
$ 62,947 $ 38,144
========== ==========
Rig operating income-
Domestic barge drilling $ 15,266 $ 4,852
Domestic barge workover 1,010 1,242
Domestic offshore drilling 17,291 6,441
International shallow water drilling 5,296 4,395
Deepwater operations 6,262 1,060
Marine operations 1,873 --
---------- ----------
46,998 17,990
General and administrative expenses 6,986 4,568
Depreciation expense 8,235 6,033
---------- ----------
Operating income $ 31,777 $ 7,389
========== ==========
</TABLE>
-18-
<PAGE> 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Revenues. Revenues for the three months ended March 31, 1997,
increased 95.9 percent, or $53.8 million as compared to the corresponding
period in 1996. The increase in revenues reflects: (i) an increase in the
number of units marketed and the overall utilization of the domestic barge
drilling rigs; (ii) higher dayrates and utilization for the domestic offshore
drilling rigs; (iii) the acquisition in December 1996 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. The $24.8 million increase in rig operating costs
was directly related to increased rig activity and fleet size.
Operating Income. Operating income increased $24.4 million due
primarily to increases in rig operating income. The increases in rig operating
income were partially offset by (i) increases in general and administrative
expenses, attributable primarily to increased shore-based 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 $.5 million during the
period primarily due to capitalization of interest associated with the
drillship Peregrine I upgrade project.
Other Income, net. Other income increased by approximately
$.3 million primarily as a result of higher interest income earned on the
Company's available cash balances and gains on sales of equipment during
the period.
Net Income. Net income applicable to common shares increased by
approximately $16.0 million during the 1997 period primarily as a result of an
overall improvement in both barge and offshore domestic drilling operating
results, increased capacity in the drillship operations and the addition of the
inland marine vessel operations during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $18.9 million for the
three months ended March 31, 1997, compared to $2.1 million for the comparable
prior period. The $16.8 million increase was the result of improved operating
results, partially offset by a decrease in the accounts payable and accrued
liability component of working capital at March 31, 1997. Operating results
improved primarily as a result of a significant expansion of the Company's
operations.
Net cash used in investing activities was $45.4 million compared to
$52.2 million for the comparable prior period. The 1997 period investing
activities consisted primarily of (i) tug and utility barge acquisition ($23.0
million), (ii) the purchase of a bulk carrier ($7.5 million), (iii) rig
upgrades ($9.1 million). The 1996 period investing activities consisted
primarily of (i) the purchase of a drillship ($23.5 million), (ii) the purchase
of a submersible rig ($8.0 million), (iii) the purchase of a barge drilling rig
($6.0 million).
Net cash provided by financing activities was negative $1.8 million
for the three months ended March 31, 1997, compared to $109.3 million for the
comparable prior period. The significantly higher figure for the 1996 period
primarily reflects the Company's issuance of $120 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 March 31, 1997, the Company had cash and credit availability
under its lines of credit totaling approximately $121.8 million. In
anticipation of the construction of the dynamically-positioned drillships,
Peregrine IV and Peregrine VI, during 1997 and 1998 at a combined estimated
cost of $290 million, the Company has initiated discussions with various
financial institutions to seek a $200 - 300 million increase in its short-term
credit availability. As of May 8, 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 and Peregrine VI 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 its capital expenditure program, working capital and debt service
requirements. Were such circumstances to occur, the Company would postpone or
otherwise externally finance the Peregrine IV and/or Peregrine VI projects.
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 1 - LEGAL PROCEEDINGS
Various claims have been filed against the Company in the ordinary
course of business. These are primarily claims alleging personal injuries,
which claims the Company believes are covered by insurance, subject to a
deductible for each claim, which is borne by the Company. In addition to such
claims, the Company is party to suits alleging patent infringement and breach
of contract, which are not covered by insurance. In the opinion of management,
no pending claims, actions or proceedings against the Company are expected to
have a material adverse effect on its consolidated financial position or
results of operations.
-21-
<PAGE> 22
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Falcon Drilling Company, Inc. and Subsidiaries
Financial Data Schedule
- -------------------
(b) No reports were filed on Form 8-K during the period.
-22-
<PAGE> 23
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: May 14, 1997 /s/ Robert F. Fulton
---------------------------------------
Robert F. Fulton
Executive Vice President and
Chief Financial Officer
-23-
<PAGE> 24
FALCON DRILLING COMPANY, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27 Falcon Drilling Company, Inc. and
Subsidiaries Financial Data Schedule
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 56,775
<SECURITIES> 0
<RECEIVABLES> 75,154
<ALLOWANCES> (1,471)
<INVENTORY> 0
<CURRENT-ASSETS> 145,407
<PP&E> 572,300
<DEPRECIATION> (67,094)
<TOTAL-ASSETS> 667,720
<CURRENT-LIABILITIES> 48,635
<BONDS> 289,537
0
0
<COMMON> 394
<OTHER-SE> 290,770
<TOTAL-LIABILITY-AND-EQUITY> 667,720
<SALES> 0
<TOTAL-REVENUES> 109,945
<CGS> 0
<TOTAL-COSTS> 78,168
<OTHER-EXPENSES> (318)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,168
<INCOME-PRETAX> 26,927
<INCOME-TAX> 9,963
<INCOME-CONTINUING> 16,964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,964
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
