UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-51582

 

HERCULES OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

Delaware		56-2542838
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
9 Greenway Plaza, Suite 2200
Houston, Texas		77046
(Address of principal executive offices)		(Zip Code)

     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     þ     NO     o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES      o     NO      o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES     o     NO      þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, par value $0.01 per share		Outstanding as of October 26, 2009
		114,649,249

 

 

HERCULES OFFSHORE, INC.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			3
Consolidated Statements of Operations for the three and nine months ended September 30, 2009, and September 30, 2008			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and September 30, 2008			5
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2009, and September 30, 2008			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			43
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6. Exhibits			48
Signatures			49
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERCULES OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

		September 30,				December 31,
		2009				2008
		(Unaudited)				(As Adjusted)
ASSETS
Current Assets:
Cash and Cash Equivalents		$	219,898			$	106,455
Restricted Cash			3,657				—
Accounts Receivable, Net of Allowance for Doubtful Accounts of $10,701 and $7,756 as of September 30, 2009 and December 31, 2008, respectively			192,967				293,089
Prepaids			26,234				23,033
Current Deferred Tax Asset			18,766				17,379
Assets Held for Sale			—				39,623
Other			17,405				19,946
			478,927				499,525
Property and Equipment, Net			1,975,534				2,049,030
Other Assets, Net			42,658				42,340
		$	2,497,119			$	2,590,895
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term Debt and Current Portion of Long-term Debt		$	9,000			$	11,455
Insurance Note Payable			14,838				11,126
Accounts Payable			68,472				99,823
Accrued Liabilities			78,968				83,424
Interest Payable			13,923				506
Taxes Payable			32,616				32,440
Other Current Liabilities			37,410				35,966
			255,227				274,740
Long-term Debt, Net of Current Portion			942,727				1,015,764
Other Liabilities			27,435				35,529
Deferred Income Taxes			278,080				339,547
Commitments and Contingencies
Stockholders’ Equity:
Common Stock, $0.01 Par Value; 200,000 Shares Authorized; 114,837 and 89,459 Shares Issued, Respectively; 113,334 and 87,976 Shares Outstanding, Respectively			1,148				895
Capital in Excess of Par Value			1,912,175				1,785,462
Treasury Stock, at Cost, 1,503 Shares and 1,483 Shares, Respectively			(50,146	)			(50,081	)
Accumulated Other Comprehensive Loss			(8,265	)			(14,932	)
Retained Deficit			(861,262	)			(796,029	)
			993,650				925,315
		$	2,497,119			$	2,590,895

The accompanying notes are an integral part of these financial statements.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(As Adjusted)								(As Adjusted)
Revenues		$	159,262			$	315,738			$	566,444			$	798,338
Costs and Expenses:
Operating Expenses			123,358				180,978				388,699				470,138
Impairment of Property and Equipment			—				—				26,882				—
Depreciation and Amortization			51,802				50,256				151,739				141,150
General and Administrative			16,814				17,447				48,556				57,777
			191,974				248,681				615,876				669,065
Operating Income (Loss)			(32,712	)			67,057				(49,432	)			129,273
Other Income (Expense):
Interest Expense			(24,131	)			(16,807	)			(54,481	)			(47,985	)
Expense of Credit Agreement Fees			(15,073	)			—				(15,073	)			—
Gain on Early Retirement of Debt, Net			—				—				13,747				—
Other, Net			70				543				2,760				2,818
Income (Loss) Before Income Taxes			(71,846	)			50,793				(102,479	)			84,106
Income Tax Benefit (Provision)			24,876				(18,938	)			39,211				(30,988	)
Income (Loss) from Continuing Operations			(46,970	)			31,855				(63,268	)			53,118
Loss from Discontinued Operation, Net of Taxes			(1,290	)			(168	)			(1,965	)			(766	)
Net Income (Loss)		$	(48,260	)		$	31,687			$	(65,233	)		$	52,352
Basic Earnings (Loss) Per Share:
Income (Loss) from Continuing Operations		$	(0.48	)		$	0.36			$	(0.69	)		$	0.60
Loss from Discontinued Operation			(0.02	)			—				(0.02	)			(0.01	)
Net Income (Loss)		$	(0.50	)		$	0.36			$	(0.71	)		$	0.59
Diluted Earnings (Loss) Per Share:
Income (Loss) from Continuing Operations		$	(0.48	)		$	0.36			$	(0.69	)		$	0.60
Loss from Discontinued Operation			(0.02	)			—				(0.02	)			(0.01	)
Net Income (Loss)		$	(0.50	)		$	0.36			$	(0.71	)		$	0.59
Weighted Average Shares Outstanding:
Basic			97,159				87,950				91,298				88,478
Diluted			97,159				88,508				91,298				89,180

The accompanying notes are an integral part of these financial statements.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

						Nine Months Ended September 30,
						2009				2008
										(As Adjusted)
Cash Flows from Operating Activities:
Net Income (Loss)						$	(65,233	)		$	52,352
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization							151,739				141,168
Stock-Based Compensation Expense							6,208				10,382
Deferred Income Taxes							(64,535	)			11,239
Provision for Doubtful Accounts Receivable							4,468				364
Amortization of Deferred Financing Fees							2,851				2,882
Amortization of Original Issue Discount							3,196				2,598
Non-Cash Loss on Derivatives							5,554				—
Gain on Insurance Settlement							(8,700	)			—
Gain on Disposal of Assets							(58	)			(3,649	)
Expense of Credit Agreement Fees							15,073				—
Gain on Early Retirement of Debt, Net							(13,747	)			—
Impairment of Property and Equipment							26,882				—
Excess Tax Benefit from Stock-Based Arrangements							(4,458	)			(5,469	)
(Increase) Decrease in Operating Assets -
Accounts Receivable							95,654				(119,893	)
Insurance Claims Receivable							(553	)			(369	)
Prepaid Expenses and Other							21,647				30,221
Increase (Decrease) in Operating Liabilities -
Accounts Payable							(32,815	)			6,124
Insurance Note Payable							(19,612	)			(30,528	)
Other Current Liabilities							4,192				21,246
Tax Sharing Agreement Settlement							—				(4,000	)
Other Liabilities							(6,763	)			17,924
Net Cash Provided by Operating Activities							120,990				132,592
Cash Flows from Investing Activities:
Acquisition of Assets							—				(320,839	)
Additions of Property and Equipment							(71,395	)			(184,843	)
Deferred Drydocking Expenditures							(13,719	)			(13,547	)
Proceeds from Sale of Marketable Securities							—				39,300
Insurance Proceeds Received							9,168				29,229
Proceeds from Sale of Assets, Net							23,305				14,584
Increase in Restricted Cash							(3,657	)			—
Net Cash Used in Investing Activities							(56,298	)			(436,116	)
Cash Flows from Financing Activities:
Short-term Debt Borrowings (Repayments), Net							(2,455	)			686
Long-term Debt Borrowings							—				350,000
Long-term Debt Repayments							(20,555	)			(106,720	)
Redemption of 3.375% Convertible Senior Notes							(6,099	)			—
Common Stock Issuance (Repurchase)							83,344				(49,228	)
Proceeds from Exercise of Stock Options							—				5,127
Excess Tax Benefit from Stock-Based Arrangements							4,458				5,469
Payment of Debt Issuance Costs							(9,931	)			(8,085	)
Other							(11	)			—
Net Cash Provided by Financing Activities							48,751				197,249
Net Increase (Decrease) in Cash and Cash Equivalents							113,443				(106,275	)
Cash and Cash Equivalents at Beginning of Period							106,455				212,452
Cash and Cash Equivalents at End of Period						$	219,898			$	106,177

The accompanying notes are an integral part of these financial statements.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(As Adjusted)								(As Adjusted)
Net Income (Loss)		$	(48,260	)		$	31,687			$	(65,233	)		$	52,352
Other Comprehensive Income, Net of Taxes:
Changes Related to Hedge Transactions			5,085				2,028				6,667				354
Comprehensive Income (Loss)		$	(43,175	)		$	33,715			$	(58,566	)		$	52,706

The accompanying notes are an integral part of these financial statements.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

1. General

     Hercules Offshore, Inc. and its majority owned subsidiaries (the “Company”) provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the U.S. Gulf of Mexico and international locations through its Domestic Offshore, International Offshore, Inland, Domestic Liftboats, International Liftboats and Delta Towing segments (See Note 11). At September 30, 2009, the Company owned a fleet of 30 jackup rigs, 17 barge rigs, three submersible rigs, one platform rig, a fleet of marine support vessels operated through Delta Towing, a wholly owned subsidiary, and 60 liftboat vessels and operated an additional five liftboat vessels owned by a third party. In addition, the Company owns four retired jackup rigs and nine retired inland barges, all located in the U.S. Gulf of Mexico, which are currently not expected to re-enter active service. The Company currently operates in nine countries on three continents.

     The consolidated financial statements of the Company are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Company’s Consolidated Balance Sheet at September 30, 2009, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2009 and 2008, and Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008. Although the Company believes the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 and the notes thereto included in the Company’s Annual Report on Form 10-K as amended on Form 8-K, filed September 23, 2009, to reflect changes to the Company’s accounting for convertible debt. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results expected for the full year.

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, investments, intangible assets, property, plant and equipment, income taxes, insurance, employment benefits and contingent liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

     In January 2009, the Company entered into agreements with Mosvold Middle East Jackup I Ltd. and Mosvold Middle East Jackup II Ltd. whereby it would market, manage and operate two high-specification new-build jackup drilling rigs each with a maximum water depth of 300 feet. However, in October 2009, the agreements with Mosvold Middle East Jackup I Ltd. and Mosvold Middle East Jackup II Ltd. were terminated by mutual agreement due to uncertainties in the timing of the delivery of the rigs and disputes between the owner and builder of the rigs.

Recent Common Stock Offering

     In September 2009, the Company raised approximately $82.3 million in net proceeds from an underwritten public offering of 17,500,000 shares of its common stock. In addition, on October 9, 2009, the Company sold an additional 1,313,590 shares of its common stock pursuant to the partial exercise of the underwriters’ over-allotment option and raised an additional $6.3 million in net proceeds (See Note 14). In October 2009, the Company used 50% of the net proceeds from these sales of common stock to repay a portion of its outstanding indebtedness under its term loan facility, and may use some or all of the remaining proceeds to repay additional indebtedness.

Reclassifications

     Certain reclassifications have been made to conform prior year financial information to the current period presentation.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

Revenue Recognition

     Revenues generated from our contracts are recognized as services are performed. For certain contracts, the Company may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize a rig from one market to another under contracts longer than one month are recognized as services are performed over the term of the related drilling contract. Amounts related to mobilization fees are summarized below (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Mobilization revenue deferred		$	130			$	11,050			$	12,130			$	19,327
Mobilization expense deferred			671				—				2,014				3,398
Mobilization revenue recognized			4,371				3,111				12,520				9,287
Mobilization expense recognized			1,295				1,595				2,688				4,551

     For certain contracts, the Company may receive fees from its customers for capital improvements to its rigs. Such fees are deferred and recognized as services are performed over the term of the related contract. The Company capitalizes such capital improvements and depreciates them over the useful life of the asset.

Other Assets

     Other assets consist of drydocking costs for marine vessels, other intangible assets, deferred income taxes, deferred costs, financing fees, investments, deposits and other. Drydocking costs are capitalized at cost and amortized on the straight-line method over a period of 12 months. Drydocking costs, net of accumulated amortization, at September 30, 2009 and December 31, 2008, were $7.0 million and $6.5 million, respectively. Amortization expense for drydocking costs was $4.5 million and $4.9 million for the three months ended September 30, 2009 and 2008, respectively, and $13.1 million and $14.7 million for the nine months ended September 30, 2009 and 2008, respectively.

     Financing fees are deferred and amortized over the life of the applicable debt instrument. However, in the event of an early repayment of debt, the related unamortized deferred financing fees are expensed in connection with the repayment. Unamortized deferred financing fees at September 30, 2009 and December 31, 2008 were $8.8 million and $18.2 million, respectively. The amortization expense related to the deferred financing fees is included in Interest Expense on the Consolidated Statements of Operations. Amortization expense for financing fees was $0.8 million and $1.2 million for the three months ended September 30, 2009 and 2008, respectively, and $2.9 million for both the nine months ended September 30, 2009 and 2008. The Company recognized a pretax charge of $10.8 million, $7.0 million, net of tax, related to the write off of unamortized issuance costs in connection with the July 2009 Credit Amendment, as well as a pretax charge of $1.4 million, $0.9 million, net of tax, related to the write off of unamortized issuance costs related to its 3.375% Convertible Senior Notes in connection with the April 2009 debt repurchase and the June 2009 debt retirement (See Note 5).

Other Intangible Assets

     As of September 30, 2009 and December 31, 2008, the Company had certain international customer contracts with a carrying value of $2.9 million and $7.2 million, net of accumulated amortization of $14.7 million and $10.4 million, respectively, included in Other Assets, Net on the Consolidated Balance Sheets. The value of each contract is being amortized over its respective life.

     Amortization expense was $1.1 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively, and $4.3 million and $6.1 million for the nine months ended September 30, 2009 and 2008, respectively. Future estimated amortization expense for the carrying amount of these intangible assets as of September 30, 2009 is expected to be as follows (in thousands):

Remainder of 2009		$	650
2010			1,590
2011			658
2012			—
2013			—

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

Cash and Cash Equivalents and Marketable Securities

     Cash and cash equivalents include cash on hand, demand deposits with banks and all highly liquid investments with original maturities of three months or less. From time to time the Company may invest a portion of its available cash in marketable securities. Marketable securities are classified as available for sale and are stated at fair value on the Consolidated Balance Sheets. At September 30, 2009 and December 31, 2008, the Company had no investments in marketable securities.

     Realized and unrealized gains and losses related to marketable securities are calculated using the specific identification method. Unrealized gains or losses, net of taxes, are included in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheets until realized. Realized gains or losses are included in Other, Net in the Consolidated Statements of Operations. Proceeds of $39.3 million were received from sales and maturities of marketable securities for the nine months ended September 30, 2008. There were no realized or unrealized gains or losses related to these securities in the three months nor the nine months ended September 30, 2009 and 2008.

Restricted Cash

     The Company has restricted cash of $3.7 million to support surety bonds primarily related to the Company’s Mexico operations. As of December 31, 2008, the Company had no restricted cash balances outstanding.

2. Earnings Per Share

     The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per share is as follows (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Denominator:
Weighted average basic shares			97,159				87,950				91,298				88,478
Add effect of stock equivalents			—				558				—				702
Weighted average diluted shares			97,159				88,508				91,298				89,180

     The Company calculates basic earnings per share by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period as adjusted for the dilutive effect of the Company’s stock option and restricted stock awards. The effect of stock option and restricted stock awards is not included in the computation for periods in which a net loss occurs, because to do so would be anti-dilutive. Stock equivalents of 4,817,059 and 4,510,640 were anti-dilutive and are excluded from the calculation of the dilutive effect of stock equivalents for the diluted earnings per share calculations for the three and nine months ended September 30, 2009, respectively. Stock equivalents of 1,233,207 and 772,901 were anti-dilutive and are excluded from the calculation of the dilutive effect of stock equivalents for the diluted earnings per share calculations for the three and nine months ended September 30, 2008, respectively.

3. Asset Acquisition

     In February 2008, the Company entered into a definitive agreement to purchase three jackup drilling rigs and related equipment for $320.0 million. The Company completed the purchase of the Hercules 350 and the Hercules 261 and related equipment during March 2008, while the purchase of the Hercules 262 and related equipment was completed in May 2008.

4. Dispositions and Assets Held for Sale

     In June 2009, the Company entered into an agreement to sell its Hercules 100 and Hercules 110 jackup drilling rigs for a total purchase price of $12.0 million. The Hercules 100 was classified as “retired” and was stacked in Sabine Pass, Texas, and the Hercules 110 was cold-stacked in Trinidad. The closing of the sale of the Hercules 100 and Hercules 110 occurred in August 2009 and the net proceeds of $11.8 million from the sale were used to repay a portion of the Company’s term loan facility. The Company realized approximately $26.9 million ($13.1 million, net of tax) of impairment charges related to the write-down of the Hercules 110 to fair value less costs to sell during the second quarter of 2009 (See Note 7). The financial information for the Hercules 100 has historically been reported as part of the Domestic Offshore Segment and the Hercules 110 financial information has been reported as part of the International Offshore Segment.

     During the second quarter of 2008, the Company sold Hercules 256 for gross proceeds of $8.5 million, which approximated the carrying value of this asset.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     There were no assets held for sale as of September 30, 2009. Balance sheet information for the assets held for sale as of December 31, 2008 is as follows (in thousands):

		December 31,
		2008
Other		$	123
Property and Equipment, Net			39,500
Current Assets Held for Sale		$	39,623

5. Debt

     Debt is comprised of the following (in thousands):

		September 30, 2009				December 31, 2008
						(As Adjusted)
Term Loan Facility, due July 2013		$	865,944			$	886,500
3.375% Convertible Senior Notes due June 2038			82,271				134,752
7.375% Senior Notes, due April 2018			3,512				3,512
Foreign Overdraft Facility			—				2,455
Total Debt			951,727				1,027,219
Less Short-term Debt and Current Portion of Long-term Debt			9,000				11,455
Total Long-term Debt, Net of Current Portion		$	942,727			$	1,015,764

Senior secured credit agreement

     In July 2007, the Company entered into a $1,050.0 million credit facility, consisting of a $900.0 million term loan facility and a $150.0 million revolving credit facility which is governed by the credit agreement (“Credit Agreement”). In connection with the Credit Agreement, the Company entered into derivative instruments with the purpose of hedging future interest payments (See Note 6). In April 2008, the Company entered into an agreement to increase the revolving credit facility to $250.0 million.

July 2009 Credit Amendment

     On July 27, 2009 the Company amended its Credit Agreement (“Credit Amendment”) in order to revise its covenants to be more favorable to the Company. A fee of 0.50%, which approximated $4.8 million, was paid to lenders consenting to the Credit Amendment based on their total commitment. The Credit Amendment reduced the revolving credit facility by $75.0 million to $175.0 million. The commitment fee on the revolving credit facility increased from 0.375% to 1.00%. The availability under the $175.0 million revolving credit facility must be used for working capital, capital expenditures and other general corporate purposes and cannot be used to prepay the term loan. Additionally, the Credit Amendment establishes a minimum London Interbank Offered Rate (“LIBOR”) rate of 2.00% and 3.00% with respect to the Company’s Alternative Base Rate (“ABR”) Loans and increases the

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

margin applicable to Eurodollar Loans and ABR Loans, subject to a grid based on the aggregate principal amount of the term loans outstanding as follows ($ in millions):

Principal Amount Outstanding								Margin Applicable to:
Less than or equal to:				Greater than:				Eurodollar Loans				ABR Loans
$	882.00			$	684.25				6.50	%			5.50	%
	684.25				484.25				5.00	%			4.00	%
	484.25				—				4.00	%			3.00	%

     The Credit Amendment also modifies certain provisions of the Credit Agreement to, among other things:

	•		Eliminate the requirement that the Company comply with the total leverage ratio financial covenant for the nine month period commencing October 1, 2009 and ending on June 30, 2010 and amend the maximum total leverage ratio following the expiration of the nine month period to be more favorable to the Company;
	•		Require maintenance of a minimum level of liquidity, measured as the amount of unrestricted cash and cash equivalents on hand and availability under the revolving credit facility, of (i) $100.0 million for the period between October 1, 2009 through December 31, 2010, (ii) $75.0 million during calendar year 2011 and (iii) $50.0 million thereafter;
	•		Revise the fixed charge coverage ratio definition and reduce the minimum fixed charge coverage ratio that the Company must maintain in a manner that is more favorable to the Company;
	•		Require mandatory prepayments of debt outstanding under the Credit Agreement with 100% of excess cash flow for the fiscal year ending December 31, 2009 and 50% of excess cash flow thereafter and with proceeds from:

	§		unsecured debt issuances, with the exception of refinancing, through June 30, 2010;
	§		secured debt issuances;
	§		sales of assets in excess of $25 million annually; and
	§		unless the Company has achieved a specified leverage ratio, 50% of proceeds from equity issuances, excluding those for permitted acquisitions or to meet the minimum liquidity requirements.

     The Company’s obligations under the Credit Agreement are secured by liens on a majority of its vessels and substantially all of its other personal property. Substantially all of the Company’s domestic subsidiaries, and several of its international subsidiaries, guarantee the obligations under the Credit Agreement and have granted similar liens on several of their vessels and substantially all of their other personal property.

     The Credit Agreement requires that the Company meet certain financial ratios and tests, which it met as of September 30, 2009. The Company’s failure to comply with such covenants would result in an event of default under the Credit Agreement. An event of default could prevent the Company from borrowing under the revolving credit facility, which would in turn have a material adverse effect on the Company’s available liquidity. Additionally, an event of default could result in the Company having to immediately repay all amounts outstanding under the Credit Agreement and in the foreclosure of liens on its assets.

     As of September 30, 2009, no amounts were outstanding and $10.0 million in standby letters of credit had been issued under the revolving credit facility. The remaining availability under this revolving credit facility was $165.0 million at September 30, 2009. As of September 30, 2009, $865.9 million was outstanding on the term loan facility and the interest rate was 8.5%. The annualized effective rate of interest was 6.54% for the nine months ended September 30, 2009 after giving consideration to revolver fees and derivative activities.

10.5% senior secured notes due 2017

     On October 20, 2009, the Company completed an offering of $300.0 million of senior secured notes at a coupon rate of 10.5% (“10.5% Senior Secured Notes”) with a maturity in October 2017 (See Note 14). The interest on the notes will be payable in cash semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2010, to holders of record at the close of business on April 1 or October 1. Interest on the notes will be computed on the basis of a 360-day year of twelve 30-day months. The notes were sold at 97.383% of their face amount to yield 11.0% and will be recorded at their discounted amount, with the discount to be amortized over the life of the notes. The Company used the net proceeds of approximately $284.4 from the offering to repay a portion of the indebtedness outstanding under its term loan facility.

     The notes will be guaranteed by all of our existing and future restricted subsidiaries that incur or guarantee indebtedness under a credit facility, including our existing credit facility. The notes are secured by liens on all collateral that secures our obligations under our secured credit facility, subject to limited exceptions. The liens securing the notes share on an equal and ratable first priority basis with liens securing our credit facility. Under the intercreditor agreement, the collateral agent for the lenders under our secured credit facility is generally entitled to sole control of all decisions and actions.

     All the liens securing the notes may be released if the Company’s secured indebtedness, other than these notes, does not exceed the lesser of $375.0 million and 15.0% of our consolidated tangible assets. The Company refers to such a release as a “collateral suspension.” If a collateral suspension is in effect, the notes and the guarantees will be unsecured, and will effectively rank junior to our secured indebtedness. If, after any such release of liens on collateral, the aggregate principal amount of the Company’s secured

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

indebtedness, other than these notes, exceeds the greater of (a) $375.0 million and (b) 15.0% of its consolidated tangible assets, as defined in the indenture, then the collateral obligations of the Company and guarantors will be reinstated and must be complied with within 30 days of such event.

     The indenture governing the notes contains covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to:

	•		incur additional indebtedness or issue certain preferred stock;
	•		pay dividends or make other distributions;
	•		make other restricted payments or investments;
	•		sell assets;
	•		create liens;
	•		enter into agreements that restrict dividends and other payments by restricted subsidiaries;
	•		engage in transactions with its affiliates; and
	•		consolidate, merge or transfer all or substantially all of its assets.

     Prior to October 15, 2012, the Company may redeem the notes with the net cash proceeds of certain equity offerings, at a redemption price equal to 110.50% of the aggregate principal amount plus accrued and unpaid interest; provided, that (i) after giving effect to any such redemption, at least 65% of the notes originally issued would remain outstanding immediately after such redemption and (ii) the Company makes such redemption not more than 90 days after the consummation of such equity offering. In addition, prior to October 15, 2013, the Company may redeem all or part of the notes at a price equal to 100% of the aggregate principal amount of notes to be redeemed, plus the applicable premium and accrued and unpaid interest.

     On or after October 15, 2013, the Company may redeem the notes, in whole or part, at the redemption prices set forth below, together with accrued and unpaid interest to the redemption date.

Year		Optional Redemption Price
2013			105.2500	%
2014			102.6250	%
2015			101.3125	%
2016 and thereafter			100.0000	%

     If the Company experiences certain kinds of changes of control, it must offer to repurchase the notes at an offer price in cash equal to 101% of their principal amount, plus accrued and unpaid interest. Furthermore, following certain asset sales, the Company may be required to use the proceeds to offer to repurchase the notes at an offer price in cash equal to 100% of their principal amount, plus accrued and unpaid interest.

3.375% convertible senior notes due 2038

     As of January 1, 2009, the Company was required to adopt the provisions of Financial Accounting Standards Board (“FASB”) Codification Topic 470-20, Debt — Debt with Conversion and Other Options, with retrospective application to the terms of the 3.375% Convertible Senior Notes as they existed for all periods presented (See Note 13). The Consolidated Balance Sheet for December 31, 2008 has been restated to reflect the adoption, which resulted in a $30.1 million increase to Capital in Excess of Par Value, a $9.5 million increase to Deferred Income Taxes, a $27.0 million decrease to Long-term Debt and an increase to Retained Deficit of $12.6 million. The Consolidated Statements of Operations for the three and nine months ended September 30, 2008 have also been restated to reflect the adoption. The restatement of the Consolidated Statements of Operations for the three months ended September 30, 2008 resulted in the Company recognizing $2.0 million, $1.3 million, net of tax, in interest expense, or $0.01 per diluted share, related to discount amortization and $2.6 million, $1.5 million, net of tax, in interest expense, or $0.02 per diluted share, related to discount amortization for the nine months ended September 30, 2008.

     The carrying amount of the equity component of the 3.375% Convertible Senior Notes was $30.1 million at both September 30, 2009 and December 31, 2008. The principal amount of the liability component of the 3.375% Convertible Senior Notes, its unamortized discount and its net carrying amount was $95.9 million, $13.6 million and $82.3 million, respectively, as of September 30, 2009 and $161.8 million, $27.0 million and $134.8 million, respectively, as of December 31, 2008. The unamortized discount is being amortized to interest expense over the expected life of the 3.375% Convertible Senior Notes which ends June 3, 2013. During the three months ended September 30, 2009, the Company recognized $1.6 million, $1.1 million, net of tax, in interest expense, or $0.01 per diluted share, at an effective rate of 7.93%, of which $0.8 million related to the coupon rate of 3.375% and $0.8 million related to discount amortization. During the nine months ended September 30, 2009, the Company recognized $6.5 million, $4.3 million, net of tax, in interest expense, or $0.05 per diluted share, at an effective rate of 7.93%, of which $3.3 million related to the coupon rate of 3.375% and $3.2 million related to discount amortization.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     Upon maturity or redemption, the Company determined it has the intent and ability to settle the principal amount of its 3.375% Convertible Senior Notes in cash, and any additional conversion consideration spread (the excess of conversion value over face value) in shares of the Company’s common stock (“Common Stock”).

     The notes will be convertible under certain circumstances into shares of the Company’s Common Stock at an initial conversion rate of 19.9695 shares of Common Stock per $1,000 principal amount of notes, which is equal to an initial conversion price of approximately $50.08 per share. Upon conversion of a note, a holder will receive, at the Company’s election, shares of Common Stock, cash or a combination of cash and shares of Common Stock. At September 30, 2009, the number of conversion shares potentially issuable in relation to the 3.375% Convertible Senior Notes was 1.9 million.

     In April 2009, the Company repurchased $20.0 million aggregate principal amount of the 3.375% Convertible Senior Notes for a cost of $6.1 million, resulting in a gain of $10.7 million. In addition, the Company expensed $0.4 million of unamortized issuance costs in connection with the retirement. In June 2009, the Company retired $45.8 million aggregate principal amount of its 3.375% Convertible Senior Notes in exchange for the issuance of 7,755,440 Common Stock valued at $4.38 per share and payment of accrued interest, resulting in a gain of $4.4 million. In addition, the Company expensed $1.0 million of unamortized issuance costs in connection with the retirement. The settlement consideration was allocated to the extinguishment of the liability component in an amount equal to the fair value of that component immediately prior to extinguishment, with the difference between this allocation and the net carrying amount of the liability component and unamortized debt issuance costs recognized as a gain or loss on debt extinguishment. If there would have been any remaining settlement consideration, it would have been allocated to the reacquisition of the equity component and recognized as a reduction of Stockholders’ Equity.

Other debt

     In connection with the TODCO acquisition in July 2007, one of our domestic subsidiaries assumed approximately $3.5 million of 7.375% Senior Notes due in April 2018. There are no financial or operating covenants associated with these notes.

     The foreign overdraft facility, which was designed to manage local currency liquidity in Venezuela, was terminated in March 2009 and all outstanding amounts were repaid.

Fair value estimate

     The fair value of the Company’s 3.375% Convertible Senior Notes and term loan facility is estimated based on quoted prices in active markets. The Company believes the carrying value of its short-term debt instruments outstanding at December 31, 2008 approximate fair value. The following table provides the carrying value and fair value of the Company’s long-term debt instruments:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
						(in millions)
Term Loan Facility, due July 2013		$	865.9			$	844.3			$	886.5			$	571.8
3.375% Convertible Senior Notes due June 2038			82.3				71.6				134.8				77.2
7.375% Senior Notes, due April 2018 (a)			3.5				n/a				3.5				n/a

6. Derivative Instruments and Hedging

     The Company is required to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

     The Company periodically uses derivative instruments to manage its exposure to interest rate risk, including interest rate swap agreements to effectively fix the interest rate on variable rate debt and interest rate collars to limit the interest rate range on variable rate debt. These hedge transactions have historically been accounted for as cash flow hedges.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the period or periods during which the hedged transaction affects earnings. The effective portion of the interest rate swaps and collars hedging the exposure to variability in expected future cash flows due to changes in interest rates is reclassified into interest expense. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, or hedged components excluded from the assessment of effectiveness, is recognized in Interest Expense in the Consolidated Statements of Operations during the current period.

     In May 2008 and July 2007, the Company entered into derivative instruments with the purpose of hedging future interest payments on its term loan facility. In May 2008, the Company entered into a floating to fixed interest rate swap with varying notional amounts beginning with $100.0 million with a settlement date of October 1, 2008 and ending with $75.0 million with a settlement date of December 31, 2009. The Company receives an interest rate of three-month LIBOR and pays a fixed coupon of 2.980% over six quarters. The terms and settlement dates of the swap match those of the term loan. In July 2007, the Company entered into a floating to fixed interest rate swap with decreasing notional amounts beginning with $400.0 million with a settlement date of December 31, 2007 and ending with $50.0 million which was settled on April 1, 2009. The Company received a payment equal to the product of three-month LIBOR and the notional amount and paid a fixed coupon of 5.307% on the notional amount over six quarters. The terms and settlement dates of the swap matched those of the term loan. In July 2007, the Company also entered into a zero cost LIBOR collar on $300.0 million of term loan principal with a final settlement date of October 1, 2010 with a ceiling of 5.75% and a floor of 4.99%. The counterparty is obligated to pay the Company in any quarter that actual LIBOR resets above 5.75% and the Company pays the counterparty in any quarter that actual LIBOR resets below 4.99%. The terms and settlement dates of the collar match those of the term loan.

     As a result of the inclusion of a LIBOR floor in the amended Credit Agreement, the Company does not believe, as of July 27, 2009 and on an ongoing basis, that the interest rate swaps and collars will be highly effective in achieving offsetting changes in cash flows attributable to the hedged interest rate risk during the period that the hedge was designated. As such, the Company has prospectively discontinued cash flow hedge accounting for the interest rate swaps and collars as of July 27, 2009 and will no longer apply cash flow hedge accounting to these instruments. Because cash flow hedge accounting will not be applied to these instruments, changes in fair value related to the interest rate swaps and collars subsequent to July 27, 2009 will be recorded in earnings on a go-forward basis. As a result of discontinuing the cash flow hedging relationship, the Company recognized a decrease in fair value of $1.2 million related to the interest rate swaps and collars as Interest Expense in its Consolidated Statement of Operations for the three and nine month periods ended September 30, 2009. The Company expects to realize all of the unrealized loss in the Consolidated Statements of Operations over the next twelve months.

     The following table provides the fair values of the Company’s interest rate derivatives (in thousands):

September 30, 2009						December 31, 2008
Balance Sheet		Fair				Balance Sheet		Fair
Classification		Value				Classification		Value
Derivatives(a):
Interest rate contracts:
Other		$	53			Other		$	21
Total Asset Derivatives		$	53			Total Asset Derivatives		$	21
Other Current Liabilities		$	15,286			Other Current Liabilities		$	15,669
Other Liabilities			3,037			Other Liabilities			7,324
Total Liability Derivatives		$	18,323			Total Liability Derivatives		$	22,993

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     The following table provides the effect of the Company’s interest rate derivatives on the Consolidated Statements of Operations (in thousands):

		I.										III.										V.
		Three Months										Three Months										Three Months
		Ended										Ended										Ended
		September 30,										September 30,										September 30,
Derivatives(a)		2009				2008				II.		2009				2008				IV.		2009				2008
Interest rate contracts		$	2,226			$	65			Interest Expense		$	(4,398	)		$	(3,020	)		Interest Expense		$	(1,156	)		$	—

		I.										III.										V.
		Nine Months										Nine Months										Nine Months
		Ended										Ended										Ended
		September 30,										September 30,										September 30,
Derivatives(a)		2009				2008				II.		2009				2008				IV.		2009				2008
Interest rate contracts		$	(1,654	)		$	(4,383	)		Interest Expense		$	(12,801	)		$	(7,287	)		Interest Expense		$	(1,156	)		$	—

A summary of the changes in Accumulated Other Comprehensive Loss (in thousands):

Cumulative unrealized loss, net of tax of $8,040, as of December 31, 2008		$	(14,932	)
Reclassification of losses into net income, net of tax of $4,480			8,321
Other comprehensive losses, net of tax of $891			(1,654	)
Cumulative unrealized loss, net of tax of $4,451, as of September 30, 2009		$	(8,265	)

7. Fair Value Measurements

     FASB Codification Topic 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements; however, it does not require any new fair value measurements, rather, its application is made pursuant to other accounting pronouncements that require or permit fair value measurements.

     Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. FASB Codification Topic 820-10, Fair Value Measurements and Disclosures includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy consists of the following three levels:

Level 1		—		Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2		—		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3		—		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

The valuation techniques that may be used to measure fair value are as follows:

	(A)		Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
	(B)		Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method
	(C)		Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

     The following table represents our derivative assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

Quoted Prices in

Total

Active Markets for

Fair Value

Identical Asset or

Significant Other

Significant

Measurement

Liability

Observable Inputs

Unobservable Inputs

Valuation

September 30, 2009

(Level 1)

(Level 2)

(Level 3)

Technique

Derivative Assets

$

53

$

—

$

53

$

—

A

Derivative Liabilities

18,323

—

18,323

—

A

     The following table represents our assets measured at fair value on a non-recurring basis for which an impairment measurement was made as of September 30, 2009 (in thousands):

Quoted Prices in

Significant

Total

Active Markets for

Other

Significant

Fair Value

Identical Asset or

Observable

Unobservable

Measurement

Liability

Inputs

Inputs

Valuation

Total

September 30, 2009

(Level 1)

(Level 2)

(Level 3)

Technique

Gain (Loss)

Assets Held for Sale

$

—

$

—

$

—

$

—

A

$(26,882)

     Long-lived assets held for sale at December 31, 2008 were written down to their fair value of $10.0 million, less cost to sell of $0.2 million (or net $9.8 million) in the second quarter of 2009, resulting in an impairment charge of approximately $26.9 million ($13.1 million, net of tax) related to the write-down of the Hercules 110 to fair value less cost to sell (See Note 4). The sale of the Hercules 110 was completed in August 2009 (See Note 4).

8. Stock-based Compensation

     The Company’s 2004 Long-Term Incentive Plan (the “2004 Plan”) provides for the granting of stock options, restricted stock, performance stock awards and other stock-based awards to selected employees and non-employee directors of the Company. At September 30, 2009, approximately 4.3 million shares were available for grant or award under the 2004 Plan.

     During the nine months ended September 30, 2009, the Company granted 1,788,125 stock options with a weighted average exercise price of $1.69 and 5,000 restricted stock awards with a weighted average grant-date fair value per share of $4.82.

     The Company recognized $2.1 million and $6.2 million in stock-based compensation expense during the three and nine months ended September 30, 2009, respectively, and $2.5 million and $10.4 million during the three and nine months ended September 30, 2008, respectively. The excess income tax benefit, the tax deduction that is in excess of the tax benefit recognized in the consolidated financial statements related to stock-based compensation, recognized for the three and nine months ended September 30, 2009 was $0.3 million and $4.5 million, respectively, and $0.1 million and $5.5 million for the three and nine months ended September 30, 2008, respectively.

     The unrecognized compensation cost related to the Company’s unvested stock options and restricted stock grants as of September 30, 2009 was $4.3 million and $5.6 million, respectively, and is expected to be recognized over a weighted-average period of 2.0 years and 1.0 years, respectively.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

9. Supplemental Cash Flow Information

     During the nine months ended September 30, 2009 and 2008, the Company had non-cash activities related to its interest rate derivatives of $6.7 million and $0.4 million, respectively. In addition, the Company had non-cash financing activities related to its June 2009 retirement of $45.8 million aggregate principal amount of its 3.375% Convertible Senior Notes in exchange for the issuance of 7,755,440 Common Stock valued at $4.38 per share ($34.0 million) and payment of accrued interest, resulting in a gain of $4.4 million (See Note 5).

		Nine Months Ended September 30,
		2009				2008
		(In thousands)
Cash paid during the period for:
Interest, net of capitalized interest of $333 and $5,378, respectively		$	28,814			$	25,441
Income taxes			19,565				39,785

10. Income Tax

     In connection with the July 2007 acquisition of TODCO, the Company, as successor to TODCO, and TODCO’s former parent, Transocean Ltd., are parties to a tax sharing agreement that was originally entered into in connection with TODCO’s initial public offering in 2004. The tax sharing agreement was amended and restated in November 2006 in a negotiated settlement of disputes between Transocean and TODCO over the terms of the original tax sharing agreement. The tax sharing agreement continues to require that additional payments be made to Transocean based on a portion of the expected tax benefit from the exercise of certain compensatory stock options to acquire Transocean common stock attributable to current and former TODCO employees and board members. The estimated amount of payments to Transocean related to compensatory options that remain outstanding at September 30, 2009, assuming a Transocean stock price of $85.53 per share at the time of exercise of the compensatory options (the actual price of Transocean’s common stock at September 30, 2009), is approximately $1.3 million. The Company accounts for the exercise of Transocean stock options held by current and former TODCO employees and board members in the period in which such option is exercised. As tax deductions are generated from the exercise of the stock options the Company takes a current tax deduction for the value of the stock option tax deduction, pays Transocean for 55% of the value of the deduction and increases additional paid-in capital by 45% of the deduction. Because of the Company’s current NOL position, the tax benefit of the stock option deduction is reclassified as a reduction in net deferred tax liability. There is no certainty that the Company will realize future economic benefits from TODCO’s tax benefits equal to the amount of the payments required under the tax sharing agreement.

     The Company’s tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. Internationally, income tax returns from 1998 through 2006 are currently under examination. In addition, several state examinations have commenced or will soon commence. The timing and effect on the Company’s consolidated financial statements of the resolution of these income tax examinations is highly uncertain due to various underlying factors. These factors include, among other things, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a reasonable and appropriate settlement through an administrative process; and the impartiality of the local courts. The amounts ultimately paid, if any, upon the resolution of the issues raised by the tax authorities in any audit may differ materially from the amounts accrued for each year. While it is possible that some of these examinations may be resolved in the next 12 months, the Company cannot predict or provide assurance as to the ultimate outcome of existing or future tax assessments.

     In December 2002, TODCO received an assessment from SENIAT, the national Venezuelan tax authority, for approximately $20.7 million (based on the current exchange rates at the time of the assessment and inclusive of penalties) relating to calendar years 1998 through 2001. In March 2003, TODCO paid approximately $2.6 million of the assessment, plus approximately $0.3 million in interest, and we are contesting the remainder of the assessment with the Venezuelan Tax Court. After TODCO made the partial assessment payment, it received a revised assessment in September 2003 of approximately $16.7 million (based on the current exchange rates at the time of the assessment and inclusive of penalties). Thereafter, TODCO filed an administrative tax appeal with SENIAT and the tax authority rendered a decision that reduced the tax assessment to $8.1 million (based on the current exchange rates at the time of the decision). TODCO then initiated a judicial tax court appeal with the Venezuelan Tax Court to set aside the $8.1 million administrative tax assessment. In August 2008, the Venezuelan Tax Court ruled in favor of TODCO; however, SENIAT has the right to appeal this case to the Venezuelan Supreme Court. In July 2009, the Company settled the taxes and interest portion of the assessment for approximately 3.3 million Bolivares Fuertes, or approximately $1.5 million (based on the official exchange rate at the date of settlement). The Company is disputing any residual penalties which are currently assessed at 3.4 million Bolivares Fuertes, or $1.6 million (based on the official exchange rate at the date of assessment). The Company, as successor to TODCO, is fully indemnified by TODCO’s former parent, Transocean Ltd. related to this settlement. The Company does not expect the ultimate resolution of this tax assessment and settlement to have a material impact on its consolidated results of operations, financial condition

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

or cash flows. In January 2008, SENIAT commenced an audit for the 2003 calendar year, which was completed in the fourth quarter of 2008. The Company has not yet received any proposed adjustments from SENIAT for that year.

     In March 2007, a subsidiary of the Company received an assessment from the Mexican tax authorities related to its operations for the 2004 tax year. This assessment contests the Company’s right to certain deductions and also claims it did not remit withholding tax due on certain of these deductions. The Company is pursuing its alternatives to resolve this assessment. In accordance with local statutory requirements, we have provided a surety bond for an amount equal to $13.0 million as of September 30, 2009, to contest these assessments. In 2008, the Mexican tax authorities commenced an audit for the 2005 tax year. Depending on the ultimate outcome of the 2004 assessment and the 2005 audit, the Company anticipates that the Mexican tax authorities could make similar assessments for other open tax years.

11. Segments

     The Company reports its business activities in six business segments: (1) Domestic Offshore, (2) International Offshore, (3) Inland, (4) Domestic Liftboats, (5) International Liftboats and (6) Delta Towing. The financial information of the Company’s discontinued operation is not included in the financial information presented for the Company’s reporting segments. The Company eliminates inter-segment revenue and expenses, if any.

     In January 2009, the Company reclassified four of its cold-stacked jackup rigs located in the U.S. Gulf of Mexico and 10 of its cold-stacked inland barges as retired. These rigs would require extensive refurbishment and currently are not expected to re-enter active service. In September 2009, the Company sold one of the retired inland barges. The following describes the Company’s reporting segments as of September 30, 2009:

     Domestic Offshore — includes 20 jackup rigs and three submersible rigs in the U.S. Gulf of Mexico that can drill in maximum water depths ranging from 85 to 350 feet. Eleven of the jackup rigs are either working on short-term contracts or available for contracts. Nine jackup rigs and all three submersibles are cold-stacked.

     International Offshore — includes 10 jackup rigs and one platform rig outside of the U.S. Gulf of Mexico. The Company has one jackup rig working offshore in each of Malaysia and Angola, as well as one jackup rig warm-stacked in each of Bahrain and Gabon. The Company has two jackup rigs working offshore in each of India and Saudi Arabia and two jackup rigs and one platform rig operating in Mexico. In August 2009, the company closed the sale of the Hercules 110 (See Note 4).

     Inland — includes a fleet of six conventional and 11 posted barge rigs that operate inland in marshes, rivers, lakes and shallow bay or coastal waterways along the U.S. Gulf Coast. Three of the Company’s inland barges are either operating on short-term contracts or available and 14 are cold-stacked.

     Domestic Liftboats — includes 41 liftboats in the U.S. Gulf of Mexico. Thirty-eight are operating in the U.S. Gulf of Mexico and three are cold-stacked. Four liftboats, which previously operated and were reported in the Domestic Liftboats segment during 2008 and through a significant portion of the nine months ended September 30, 2009, are now being managed by the International Liftboats segment pending their transfer to West Africa in October 2009.

     International Liftboats — includes 24 liftboats. Eighteen are operating offshore West Africa, including five liftboats owned by a third party. One liftboat is operating in the Middle East region and one liftboat is in the Middle East region available for contracts. In addition, four liftboats are being managed by the International Liftboats segment pending their transfer to West Africa in October 2009. These four liftboats are expected to be available for work between November 2009 and January 2010.

     Delta Towing — the Company’s Delta Towing business operates a fleet of 29 inland tugs, 12 offshore tugs, 34 crew boats, 46 deck barges, 17 shale barges and four spud barges along and in the U.S. Gulf of Mexico and along the Southeastern coast. As of September 30, 2009, 24 crew boats, 16 inland tugs and four offshore tugs were cold-stacked, and the remaining are working or available for contracts.

     The Company’s jackup rigs, submersible rigs and platform rigs are used primarily for exploration and development drilling in shallow waters. The Company’s liftboats are self-propelled, self-elevating vessels that support a broad range of offshore maintenance and construction services throughout the life of an oil or natural gas well.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     Information regarding reportable segments is as follows (in thousands):

		Three Months Ended September 30, 2009												Nine Months Ended September 30, 2009
						Income (Loss)												Income (Loss)
						from				Depreciation &								from				Depreciation &
		Revenue				Operations				Amortization				Revenue				Operations				Amortization
Domestic Offshore		$	18,959			$	(35,250	)		$	15,118			$	115,110			$	(67,370	)		$	45,250
International Offshore (a)			90,041				26,746				16,769				295,250				86,806				48,702
Inland			2,437				(13,531	)			8,166				15,446				(47,147	)			24,442
Domestic Liftboats			19,268				956				5,048				60,762				4,187				15,844
International Liftboats			22,320				2,574				4,010				61,709				17,812				8,672
Delta Towing			6,237				(3,922	)			1,892				18,167				(11,244	)			6,318
			159,262				(22,427	)			51,003				566,444				(16,956	)			149,228
Corporate			—				(10,285	)			799				—				(32,476	)			2,511
Total Company		$	159,262			$	(32,712	)		$	51,802			$	566,444			$	(49,432	)		$	151,739

		Three Months Ended September 30, 2008												Nine Months Ended September 30, 2008
						Income (Loss)												Income (Loss)
						from				Depreciation &								from				Depreciation &
		Revenue				Operations				Amortization				Revenue				Operations				Amortization
Domestic Offshore		$	112,733			$	31,334			$	17,546			$	272,618			$	53,021			$	49,085
International Offshore			95,283				34,213				9,498				234,813				95,987				26,394
Inland			44,436				(1,229	)			11,350				124,966				(6,083	)			31,530
Domestic Liftboats			25,351				5,828				5,135				63,564				4,250				16,469
International Liftboats			20,323				5,054				3,143				58,919				19,954				7,495
Delta Towing			17,612				4,459				2,782				43,458				6,420				8,057
			315,738				79,659				49,454				798,338				173,549				139,030
Corporate			—				(12,602	)			802				—				(44,276	)			2,120
Total Company		$	315,738			$	67,057			$	50,256			$	798,338			$	129,273			$	141,150

		Total Assets
		September 30,				December 31,
		2009				2008
Domestic Offshore		$	831,574			$	930,988
International Offshore			1,010,583				955,911
Inland			166,609				217,477
Domestic Liftboats			97,526				148,307
International Liftboats			164,524				168,356
Delta Towing			63,689				92,371
Corporate			162,614				77,485
Total Company		$	2,497,119			$	2,590,895

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

12. Commitments and Contingencies

Legal Proceedings

     The Company is involved in various claims and lawsuits in the normal course of business. As of September 30, 2009, management did not believe any accruals were necessary in accordance with FASB Codification Topic 450-20, Contingencies — Loss Contingencies.

     In connection with the July 2007 acquisition of TODCO, the Company assumed certain material legal proceedings from TODCO and its subsidiaries.

     In October 2001, TODCO was notified by the U.S. Environmental Protection Agency (“EPA”) that the EPA had identified a subsidiary of TODCO as a potentially responsible party under CERCLA in connection with the Palmer Barge Line superfund site located in Port Arthur, Jefferson County, Texas. Based upon the information provided by the EPA and the Company’s review of its internal records to date, the Company disputes the Company’s designation as a potentially responsible party and does not expect that the ultimate outcome of this case will have a material adverse effect on our consolidated results of operations, financial position or cash flows. The Company continues to monitor this matter.

     Robert E. Aaron et al. vs. Phillips 66 Company et al. Circuit Court, Second Judicial District, Jones County, Mississippi. This is the case name used to refer to several cases that have been filed in the Circuit Courts of the State of Mississippi involving 768 persons that allege personal injury or whose heirs claim their deaths arose out of asbestos exposure in the course of their employment by the defendants between 1965 and 2002. The complaints name as defendants, among others, certain of TODCO’s subsidiaries and certain subsidiaries of TODCO’s former parent to whom TODCO may owe indemnity, and other unaffiliated defendant companies, including companies that allegedly manufactured drilling-related products containing asbestos that are the subject of the complaints. The number of unaffiliated defendant companies involved in each complaint ranges from approximately 20 to 70. The complaints allege that the defendant drilling contractors used asbestos-containing products in offshore drilling operations, land based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability, and claims authorized under the Jones Act. The plaintiffs seek, among other things, awards of unspecified compensatory and punitive damages. All of these cases were assigned to a special master who has approved a form of questionnaire to be completed by plaintiffs so that claims made would be properly served against specific defendants. As of the date of this report, approximately 700 questionnaires were returned and the remaining plaintiffs, who did not submit a questionnaire reply, have had their suits dismissed without prejudice. Of the respondents, approximately 100 shared periods of employment by TODCO and its former parent which could lead to claims against either company, even though many of these plaintiffs did not state in their questionnaire answers that the employment actually involved exposure to asbestos. After providing the questionnaire, each plaintiff was further required to file a separate and individual amended complaint naming only those defendants against whom they had a direct claim as identified in the questionnaire answers. Defendants not identified in the amended complaints were dismissed from the plaintiffs’ litigation. To date, three plaintiffs named TODCO as a defendant in their amended complaints. It is possible that some of the plaintiffs who have filed amended complaints and have not named TODCO as a defendant may attempt to add TODCO as a defendant in the future when case discovery begins and greater attention is given to each individual plaintiff’s employment background. The Company continues to monitor a small group of these other cases. The Company has not determined which entity would be responsible for such claims under the Master Separation Agreement between TODCO and its former parent. The Company intends to defend vigorously and, based on the limited information available at this time, does not expect the ultimate outcome of these lawsuits to have a material adverse effect on its consolidated results of operations, financial position or cash flows.

     The Company and its subsidiaries are involved in a number of other lawsuits, all of which have arisen in the ordinary course of business. The Company does not believe that ultimate liability, if any, resulting from any such other pending litigation will have a material adverse effect on its business or consolidated financial position.

     The Company cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any other pending litigation. There can be no assurance that the Company’s belief or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct, and the eventual outcome of these matters could materially differ from management’s current estimates.

Insurance

     The Company is self-insured for the deductible portion of its insurance coverage. Management believes adequate accruals have been made on known and estimated exposures up to the deductible portion of the Company’s insurance coverage. Management believes that claims and liabilities in excess of the amounts accrued are adequately insured. However, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will adequately protect us against liability from all potential consequences.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     The Company maintains insurance coverage that includes coverage for physical damage, third party liability, workers’ compensation and employers’ liability, general liability, vessel pollution and other coverages.

     In May 2009, the Company completed the renewal of all of its key insurance policies. The Company’s primary marine package provides for hull and machinery coverage for the Company’s rigs and liftboats up to a scheduled value for each asset. The maximum coverage for these assets is $2.2 billion; however, coverage for U.S. Gulf of Mexico named windstorm damage is subject to an annual aggregate limit on liability of $100.0 million. The policies are subject to exclusions, limitations, deductibles, self-insured retention and other conditions. Deductibles for events that are not U.S. Gulf of Mexico named windstorm events are 12.5% of insured values per occurrence for drilling rigs, and $1.0 million per occurrence for liftboats, regardless of the insured value of the particular vessel. The deductibles for drilling rigs and liftboats in a U.S. Gulf of Mexico named windstorm event are the greater of $25.0 million or the operational deductible for each U.S. Gulf of Mexico named windstorm. The Company is self-insured for 15% above the deductibles for removal of wreck, sue and labor, collision, protection and indemnity general liability and hull and physical damage policies. The protection and indemnity coverage under the primary marine package has a $5.0 million limit per occurrence with excess liability coverage up to $200.0 million. The primary marine package also provides coverage for cargo and charterer’s legal liability. Vessel pollution is covered under a Water Quality Insurance Syndicate policy with a $3 million deductible proving limits as required. In addition to the marine package, the Company has separate policies providing coverage for onshore general liability, employer’s liability, auto liability and non-owned aircraft liability, with customary deductibles and coverage as well as a separate primary marine package for its Delta Towing business.

     In 2009, in connection with the renewal of certain of its insurance policies, the Company entered into agreements to finance a portion of its annual insurance premiums. Approximately $23.3 million was financed through these arrangements, and $14.8 million was outstanding at September 30, 2009. The interest rate on the $21.4 million note is 4.15% and the note is scheduled to mature in March 2010. The interest rate on the $1.9 million note is 3.75% and it is scheduled to mature in July 2010. The amounts financed in connection with the prior year renewal were fully paid as of March 31, 2009.

Surety Bonds and Unsecured Letters of Credit

     The Company has $36.9 million outstanding related to surety bonds at September 30, 2009. The surety bonds guarantee our performance as it relates to the Company’s drilling contracts, insurance, tax and other obligations in various jurisdictions. These obligations could be called at any time prior to the expiration dates. The obligations that are the subject of the surety bonds are geographically concentrated primarily in Mexico.

     The Company had $0.1 million in an unsecured letter of credit outstanding at September 30, 2009.

13. Accounting Pronouncements

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS No. 168”). SFAS No. 168 modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also know collectively as the “Codification” is considered the single source of authoritative U.S. accounting and reporting standards, excepts for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Accordingly, accounting references have been updated.

     In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU No. 2009-5”), which amends Subtopic 820-10, Fair Value Measurements and Disclosures-Overall for the fair value measurement of liabilities. ASU No. 2009-5 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: (1) a valuation technique that uses the quoted price of the identical liability or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of Topic 820, such as a present value technique or market approach. ASU No. 2009-5 is effective for the first reporting period after issuance. Accordingly, the Company adopted ASU No. 2009-5 in the third quarter 2009 with no impact to its financial statements.

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which was primarily codified into Topic 855, Subsequent Events in the ASC. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. SFAS No. 165 requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This statement is effective for interim or annual financial periods ending after June 15, 2009. Accordingly, the Company adopted SFAS No. 165 in June 2009 with no impact to its financial statements.

     In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”), which was primarily codified into Topic 825, Financial Instruments in the ASC. This FSP extends the disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), to interim financial statements of publicly traded companies as defined in APB Opinion No. 28, Interim Financial reporting.

     In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”) which was primarily codified into Topic 820, Fair Value Measurements and Disclosures in the ASC. This FSP provides additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. This statement is effective for interim or annual financial periods ending after June 15, 2009. Accordingly, the Company adopted FSP 157-4 in June 2009 with no impact to its financial statements (See Note 7).

     In May 2008, the FASB issued FSP 14-1, which was primarily codified into Topic 470-20, Debt — Debt with Conversion and Other Options in the ASC. FSP 14-1 clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP 14-1 requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in the Company’s consolidated statement of operations. The interest rate to be used under FSP 14-1 will therefore be significantly higher than the rate on the Company’s Convertible Senior Notes due 2038 that was previously used, which was equal to the coupon rate of 3.375 percent. As of January 1, 2009, the Company adopted FSP 14-1 with retrospective application to the terms of instruments as they existed for all periods presented (See Note 5).

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”), which was primarily codified into Topic 815, Derivatives and Hedging in the ASC. SFAS No. 161 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) requiring enhanced disclosures about an entity’s derivative and hedging activities, thereby improving the transparency of financial reporting. SFAS No. 161’s disclosures provide additional information on how and why derivative instruments are being used. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Accordingly, the Company adopted SFAS No. 161 as of January 1, 2009 (See Note 6).

     In January 2008, the Company adopted, without material impact to its consolidated financial statements, the provisions of SFAS No. 157, which was primarily codified into Topic 820, Fair Value Measurements and Disclosures in the ASC, related to financial assets and liabilities and to nonfinancial assets and liabilities measured at fair value on a recurring basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, rather, its application is made pursuant to other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157, primarily codified into Topic 820, Fair Value Measurements and Disclosures in the ASC, which defers the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Effective January 1, 2009, the Company adopted, without material impact on its consolidated financial statements, the provision for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, which include those measured at fair value in impairment testing and those initially measured at fair value in a business combination.

14. Subsequent Events

     The Company evaluated all events or transactions that occurred after September 30, 2009 up through October 29, 2009, the date the Company issued these financial statements. During this period the Company did not have any material recognizable subsequent events. However, the Company did have nonrecognizable subsequent events related to the following:

•

In September 2009, the Company sold 17,500,000 shares of its common stock in a public offering (See Note 1). On October 9, 2009, the Company sold an additional 1,313,590 shares of its common stock pursuant to the partial exercise of the underwriters’ over-allotment option and raised an additional $6.3 million in net proceeds (See Note 1). The Company used

HERCULES OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UNAUDITED

			50% of the net proceeds from these sales of common stock to repay a portion of its outstanding indebtedness under its term loan facility, and may use some or all of the remaining proceeds to repay additional indebtedness.
	•		In October 2009, the Company sold $300.0 million of Senior Secured Notes due 2017 through a private placement, which will bear interest at a rate of 10.5% per annum. The notes were sold at 97.383% of their face amount to yield 11.0%. The Company used the net proceeds from the offering to repay a portion of the indebtedness outstanding under its term loan facility (See Note 5).
	•		Subsequent to September 30, 2009, the Company made the following payments on its term loan facility:

	(i)		the Company used the net proceeds from the partial exercise of the underwriters’ over-allotment option and the Senior Secured Notes due 2017, which approximated $287.5 million, to repay a portion of the outstanding balance on the Company’s term loan facility; and
	(ii)		the Company utilized approximately $94.3 million of cash on hand which is reflected in the Company’s September 30, 2009 Balance Sheet, to repay a portion of the outstanding balance on the Company’s term loan facility.

•

As of October 29, 2009, the balance outstanding under the Company’s term loan facility totaled $484.1 million, which reduces the margin applicable to the Company’s outstanding term loan facility borrowings under Eurodollar Loans from 6.50% to 4.00% and under ABR Loans from 5.50% to 3.00%.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and September 30, 2008, included elsewhere herein, and with our Annual Report on Form 10-K for the year ended December 31, 2008, as amended on Form 8-K, filed September 23, 2009. The following information contains forward-looking statements. Please read “Forward-Looking Statements” below for a discussion of certain limitations inherent in such statements. Please also read “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, Item 1A of Part II of our quarterly report on Form 10-Q for the quarter ended June 30, 2009 and Item 1A of Part II of this quarterly report for a discussion of certain risks facing our company.

OVERVIEW

          We provide shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the U.S. Gulf of Mexico and internationally. We provide these services to major integrated energy companies, independent oil and natural gas operators and national oil companies.

          We operate our business as six divisions: (1) Domestic Offshore, (2) International Offshore, (3) Inland, (4) Domestic Liftboats, (5) International Liftboats, and (6) Delta Towing. Previously, we reported an “Other” segment that included Delta Towing and certain land rigs. The land rigs were sold in December 2007, and the results of the land rig operations are included in Discontinued Operation.

          As of October 27, 2009, our business segments included the following:

          Domestic Offshore — includes 20 jackup rigs and three submersible rigs in the U.S. Gulf of Mexico that can drill in maximum water depths ranging from 85 to 350 feet. Eleven of the jackup rigs are either working on short-term contracts or available for contracts. Nine jackup rigs and all three submersibles are cold-stacked.

          International Offshore — includes 10 jackup rigs and one platform rig outside of the U.S. Gulf of Mexico. We have one jackup rig working offshore in each of Malaysia and Angola as well as one jackup rig warm-stacked in each of Bahrain and Gabon. We have two jackup rigs working offshore in each of India and Saudi Arabia. We have one jackup rig and one platform rig operating and one jackup rig ready-stacked in Mexico. In August 2009, we closed the sale of the Hercules 110 which was cold-stacked in Trinidad.

          Inland — includes a fleet of six conventional and 11 posted barge rigs that operate inland in marshes, rivers, lakes and shallow bay or coastal waterways along the U.S. Gulf Coast. Three of our inland barges are either operating on short-term contracts or available and 14 are cold-stacked.

          Domestic Liftboats — includes 41 liftboats in the U.S. Gulf of Mexico. Thirty-eight are operating in the U.S. Gulf of Mexico and three are cold-stacked. Four liftboats are mobilizing from the U.S. Gulf of Mexico to West Africa in October 2009.

          International Liftboats — includes 24 liftboats. Eighteen are operating offshore West Africa, including five liftboats owned by a third party. Two liftboats are operating in the Middle East region. Four liftboats are mobilizing from the U.S. Gulf of Mexico to West Africa in October 2009. These four liftboats are expected to be available for work between November 2009 and January 2010.

          Delta Towing — our Delta Towing business operates a fleet of 29 inland tugs, 12 offshore tugs, 34 crew boats, 46 deck barges, 17 shale barges and four spud barges along and in the U.S. Gulf of Mexico and along the Southeastern coast. In addition, 22 crew boats, 16 inland tugs and five offshore tugs are cold-stacked, and the remaining are working or available for contracts.

          In January 2009, we entered into agreements with Mosvold Middle East Jackup I Ltd. and Mosvold Middle East Jackup II Ltd. whereby we would market, manage and operate two high-specification new-build jackup drilling rigs each with a maximum water depth of 300 feet. However, in October 2009, the agreements with Mosvold Middle East Jackup I Ltd. and Mosvold Middle East Jackup II Ltd. were terminated by mutual agreement due to uncertainties in the timing of the delivery of the rigs and disputes between the owner and builder of the rigs.

          In January 2009, we reclassified four of our cold-stacked jackup rigs located in the U.S. Gulf of Mexico and 10 of our cold-stacked inland barges as retired. These rigs would require extensive refurbishment and currently are not expected to re-enter active service. In September 2009, the Company sold one of the retired inland barges.

          Our jackup and submersible rigs and our barge rigs are used primarily for exploration and development drilling in shallow waters. Under most of our contracts, we are paid a fixed daily rental rate called a “dayrate,” and we are required to pay all costs associated with our own crews as well as the upkeep and insurance of the rig and equipment.

          Our liftboats are self-propelled, self-elevating vessels that support a broad range of offshore support services, including platform maintenance, platform construction, well intervention and decommissioning services throughout the life of an oil or natural gas well. Under most of our liftboat contracts, we are paid a fixed dayrate for the rental of the vessel, which typically includes the costs of a small crew of four to eight employees, and we also receive a variable rate for reimbursement of other operating costs such as catering, fuel, rental equipment and other items.

          Our revenues are affected primarily by dayrates, fleet utilization, the number and type of units in our fleet and mobilization fees received from our customers. Utilization and dayrates, in turn, are influenced principally by the demand for rig and liftboat services from the exploration and production sectors of the oil and natural gas industry. Our contracts in the U.S. Gulf of Mexico tend to be short-term in nature and are heavily influenced by changes in the supply of units relative to the fluctuating expenditures for both drilling and production activity. Our international drilling contracts and some of our liftboat contracts in West Africa are longer-term in nature.

          Our backlog at October 27, 2009 totaled approximately $538.9 million for our executed contracts. Approximately $82.1 million of this backlog is expected to be realized during the remainder of 2009. We calculate our backlog, or future contracted revenue, as the contract dayrate multiplied by the number of days remaining on the contract, assuming full utilization. Backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. The amount of actual revenues earned and the actual periods during which revenues are earned will be different than the backlog disclosed or expected due to various factors. Downtime due to various operational factors, including unscheduled repairs, maintenance, weather and other factors (some of which are beyond our control), may result in lower dayrates than the full contractual operating dayrate. In some of the contracts, our customer has the right to terminate the contract without penalty and in certain instances, with little or no notice.

          Our operating costs are primarily a function of fleet configuration and utilization levels. The most significant direct operating costs for our Domestic Offshore, International Offshore and Inland segments are wages paid to crews, maintenance and repairs to the rigs, and insurance. These costs do not vary significantly whether the rig is operating under contract or idle, unless we believe that the rig is unlikely to work for a prolonged period of time, in which case we may decide to “cold-stack” or “warm-stack” the rig. Cold-stacking is a common term used to describe a rig that is expected to be idle for a protracted period and typically for which routine maintenance is suspended and the crews are either redeployed or laid-off. When a rig is cold-stacked, operating expenses for the rig are significantly reduced because the crew is smaller and maintenance activities are suspended. Placing rigs in service that have been cold-stacked typically requires a lengthy reactivation project that can involve significant expenditures and potentially additional regulatory review, particularly if the rig has been cold-stacked for a long period of time. Warm-stacking is a term used for a rig expected to be idle for a period of time that is not as prolonged as is the case with a cold-stacked rig. Maintenance is continued for warm-stacked rigs. Crews are reduced but a small crew is retained. Warm-stacked rigs generally can be reactivated in three to four weeks.

          The most significant costs for our Domestic Liftboats and International Liftboats segments are the wages paid to crews and the amortization of regulatory drydocking costs. Unlike our Domestic Offshore, International Offshore and Inland segments, a significant portion of the expenses incurred with operating each liftboat are paid for or reimbursed by the customer under contractual terms and prices. This includes catering, fuel, oil, rental equipment, crane overtime and other items. We record reimbursements from customers as revenues and the related expenses as operating costs. Our liftboats are required to undergo regulatory inspections every year and to be drydocked two times every five years; the drydocking expenses and length of time in drydock vary depending on the condition of the vessel. All costs associated with regulatory inspections, including related drydocking costs, are deferred and amortized over a period of twelve months.

RESULTS OF OPERATIONS

          The following table sets forth financial information by operating segment and other selected information for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Dollars in thousands)
						(As Adjusted)								(As Adjusted)
Domestic Offshore:
Number of rigs (as of end of period) (a)			23				27				23				27
Revenues		$	18,959			$	112,733			$	115,110			$	272,618
Operating expenses			36,476				62,849				131,635				166,896
Depreciation and amortization expense			15,118				17,546				45,250				49,085
General and administrative expenses			2,615				1,004				5,595				3,616
Operating income (loss)		$	(35,250	)		$	31,334			$	(67,370	)		$	53,021
International Offshore:
Number of rigs (as of end of period) (b)			11				12				11				12
Revenues		$	90,041			$	95,283			$	295,250			$	234,813
Operating expenses			44,209				50,518				127,478				110,618
Impairment of property and equipment			—				—				26,882				—
Depreciation and amortization expense			16,769				9,498				48,702				26,394
General and administrative expenses			2,317				1,054				5,382				1,814
Operating income		$	26,746			$	34,213			$	86,806			$	95,987
Inland:
Number of barges (as of end of period) (a)			17				27				17				27
Revenues		$	2,437			$	44,436			$	15,446			$	124,966
Operating expenses			7,442				33,437				36,563				96,669
Depreciation and amortization expense			8,166				11,350				24,442				31,530
General and administrative expenses			360				878				1,588				2,850
Operating loss		$	(13,531	)		$	(1,229	)		$	(47,147	)		$	(6,083	)
Domestic Liftboats:
Number of liftboats (as of end of period) (c)			41				45				41				45
Revenues		$	19,268			$	25,351			$	60,762			$	63,564
Operating expenses			12,725				13,788				39,277				41,128
Depreciation and amortization expense			5,048				5,135				15,844				16,469
General and administrative expenses			539				600				1,454				1,717
Operating income		$	956			$	5,828			$	4,187			$	4,250
International Liftboats:
Number of liftboats (as of end of period) (c)			24				20				24				20
Revenues		$	22,320			$	20,323			$	61,709			$	58,919
Operating expenses			14,457				10,660				31,677				27,776
Depreciation and amortization expense			4,010				3,143				8,672				7,495
General and administrative expenses			1,279				1,466				3,548				3,694
Operating income		$	2,574			$	5,054			$	17,812			$	19,954

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
						(Dollars in thousands)
						(As Adjusted)								(As Adjusted)
Delta Towing:
Revenues		$	6,237			$	17,612			$	18,167			$	43,458
Operating expenses			8,049				9,726				22,069				27,051
Depreciation and amortization expense			1,892				2,782				6,318				8,057
General and administrative expenses			218				645				1,024				1,930
Operating income (loss)		$	(3,922	)		$	4,459			$	(11,244	)		$	6,420
Total Company:
Revenues		$	159,262			$	315,738			$	566,444			$	798,338
Operating expenses			123,358				180,978				388,699				470,138
Impairment of property and equipment			—				—				26,882				—
Depreciation and amortization expense			51,802				50,256				151,739				141,150
General and administrative expenses			16,814				17,447				48,556				57,777
Operating income (loss)			(32,712	)			67,057				(49,432	)			129,273
Interest expense			(24,131	)			(16,807	)			(54,481	)			(47,985	)
Expense of Credit Agreement Fees			(15,073	)			—				(15,073	)			—
Gain on early retirement of debt, net			—				—				13,747				—
Other, net			70				543				2,760				2,818
Income (loss) before income taxes			(71,846	)			50,793				(102,479	)			84,106
Income tax benefit (provision)			24,876				(18,938	)			39,211				(30,988	)
Income (loss) from continuing operations			(46,970	)			31,855				(63,268	)			53,118
Loss from discontinued operation, net of taxes			(1,290	)			(168	)			(1,965	)			(766	)
Net income (loss)		$	(48,260	)		$	31,687			$	(65,233	)		$	52,352