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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13729
R&B FALCON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0544217
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Threadneedle, Houston, Texas 77079
(Address of principal executive offices)(Zip Code)
(281) 496-5000
(Registrant's telephone number, including area 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_X_ No___
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK
AT JULY 30, 1999: 193,637,361
=======================================================================
Forward-Looking Statements and Assumptions
This Quarterly Report on Form 10-Q may contain or incorporate
by reference certain forward-looking statements, including by way
of illustration and not of limitation, statements relating to
liquidity, revenues, expenses, margins and contract rates and
terms. The Company strongly encourages readers to note that some
or all of the assumptions, upon which such forward-looking
statements are based, are beyond the Company's ability to control
or estimate precisely, and may in some cases be subject to rapid
and material changes. Such assumptions include the contract status
of the Company's offshore units, general market conditions
prevailing in the marine drilling industry (including daily rates
and utilization) and various other trends affecting the marine
drilling industry, including world oil and gas prices, the
exploration and development programs of the Company's customers,
the actions of the Company's competitors and economic conditions
generally.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
R&B Falcon Corporation and Subsidiaries
The financial statements for the three and six month periods
ended June 30, 1999 and 1998, include, in the opinion of the
Company, all adjustments (which only consist of normal recurring
adjustments) necessary to present fairly the financial position and
results of operations for such periods. The financial data for the
three and six month periods ended June 30, 1999 included herein
have been reviewed in accordance with standards established by the
American Institute of Certified Public Accountants by Arthur
Andersen LLP, the registrant's independent public accountants,
whose report is included herein. Results of operations for the
three and six month periods ended June 30, 1999 are not necessarily
indicative of results of operations which will be realized for the
year ending December 31, 1999. The financial statements should be
read in conjunction with the Company's Form 10-K for the year ended
December 31, 1998.
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 505.6 $ 177.4
Short-term investments 175.7 -
Accounts receivable:
Trade, net 143.3 197.0
Other 62.5 62.1
Materials and supplies inventory 43.8 36.1
Drilling contracts in progress 26.7 29.5
Other current assets 14.9 25.0
--------- ---------
Total current assets 972.5 527.1
--------- ---------
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED INVESTEES 191.2 28.2
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 3,769.2 3,369.2
Other 220.9 180.8
--------- ---------
Total property and equipment 3,990.1 3,550.0
Accumulated depreciation (592.8) (519.4)
--------- ---------
Net property and equipment 3,397.3 3,030.6
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 71.4 70.6
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 70.3 45.8
--------- ---------
NET ASSETS OF BUSINESS HELD FOR SALE 4.6 7.0
--------- ---------
TOTAL ASSETS $ 4,707.3 $ 3,709.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations $ - $ 123.4
Long-term obligations due within one year 5.3 6.3
Accounts payable - trade 98.8 83.1
Accrued liabilities 170.6 139.0
--------- ---------
Total current liabilities 274.7 351.8
LONG-TERM OBLIGATIONS 2,710.0 1,866.2
OTHER NONCURRENT LIABILITIES 35.6 35.9
DEFERRED INCOME TAXES 120.0 142.4
--------- ---------
Total liabilities 3,140.3 2,396.3
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 40.6 62.8
--------- ---------
REDEEMABLE PREFERRED STOCK 243.8 -
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 1.9 1.9
Capital in excess of par value 1,112.6 1,061.5
Retained earnings 177.4 199.1
Other (9.3) (12.3)
--------- ---------
Total stockholders' equity 1,282.6 1,250.2
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,707.3 $ 3,709.3
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
OPERATING REVENUES:
Deepwater $ 86.3 $ 97.4 $ 176.5 $ 197.0
Shallow water 48.3 110.3 115.1 217.2
Inland water 25.4 73.3 56.4 146.0
Engineering services and land
operations 66.4 .1 122.2 .2
Development .1 - .1 -
------- ------- ------- -------
Total operating revenues 226.5 281.1 470.3 560.4
------- ------- ------- -------
COSTS AND EXPENSES:
Deepwater 38.9 46.1 82.2 88.1
Shallow water 33.7 40.6 82.0 79.6
Inland water 28.1 45.1 56.0 84.2
Engineering services and land
operations 50.7 .1 89.0 .2
Development 2.5 .2 3.5 8.0
Depreciation and amortization 38.1 22.6 74.6 44.0
General and administrative 25.6 15.3 41.4 29.4
Merger expenses - - - (1.0)
------- ------- ------- -------
Total costs and expenses 217.6 170.0 428.7 332.5
------- ------- ------- -------
OPERATING INCOME 8.9 111.1 41.6 227.9
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (42.8) (15.7) (71.2) (29.1)
Interest income 10.3 3.3 14.9 5.0
Income from equity investees
plus related income 5.7 - 6.3 -
Other, net (.1) .1 (.3) .2
------- ------- ------- -------
Total other income (expense) (26.9) (12.3) (50.3) (23.9)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST AND
EXTRAORDINARY LOSS (18.0) 98.8 (8.7) 204.0
------- ------- ------- -------
INCOME TAX EXPENSE (BENEFIT):
Current 10.8 5.6 18.6 12.4
Deferred (17.2) 30.5 (21.7) 65.1
------- ------- ------- -------
Total income tax
expense (benefit) (6.4) 36.1 (3.1) 77.5
------- ------- ------- -------
MINORITY INTEREST (2.6) (2.8) (5.3) (5.1)
------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY LOSS (14.2) 59.9 (10.9) 121.4
INCOME FROM DISCONTINUED OPERATIONS - .5 - 8.8
EXTRAORDINARY LOSS, NET OF
TAX BENEFIT - (22.0) (1.7) (22.0)
------- ------- ------- -------
NET INCOME (LOSS) (14.2) 38.4 (12.6) 108.2
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK 9.1 - 9.1 -
------- ------- ------- -------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (23.3) $ 38.4 $ (21.7) $ 108.2
======= ======= ======= =======
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Continuing operations $ (.12) $ .36 $ (.10) $ .74
Discontinued operations - .01 - .05
Extraordinary loss - (.13) (.01) (.13)
------- ------- ------- -------
Net income (loss) $ (.12) $ .24 $ (.11) $ .66
======= ======= ======= =======
Diluted:
Continuing operations $ (.12) $ .36 $ (.10) $ .74
Discontinued operations - - - .05
Extraordinary loss - (.13) (.01) (.13)
------- ------- ------- -------
Net income (loss) $ (.12) $ .23 $ (.11) $ .66
======= ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 192.6 165.3 192.5 165.1
======= ======= ======= =======
Diluted 193.7 166.6 193.5 167.5
======= ======= ======= =======
The accompanying notes are an inegral part of the consolidated financial
statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)(unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (12.6) $ 108.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74.6 44.0
Deferred income taxes (22.4) 64.9
Gain on dispositions of
property and equipment (4.9) (2.2)
Recognition of deferred expenses 5.8 5.9
Deferred compensation 3.4 .4
Income from equity investees plus related income (6.3) -
Minority interest in income of
consolidated subsidiaries 5.3 5.1
Dryhole and exploration expenses relating
to oil and gas properties - 7.0
Income from discontinued operations - (8.8)
Extraordinary loss from extinguishment
of debt, net of tax benefit 1.7 22.0
Changes in assets and liabilities:
Accounts receivable, net 61.6 (62.1)
Materials and supplies inventory (7.7) (6.8)
Drilling contracts in progress 2.8 -
Deferred charges and other assets (22.8) (23.6)
Accounts payable - trade 10.1 (24.8)
Accrued liabilities (11.5) (22.5)
Accrued interest 30.4 4.0
Income taxes 4.7 (18.5)
Other, net .6 (2.0)
------- -------
Net cash provided by operating activities 112.8 90.2
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment 5.7 3.1
Purchases of property and equipment,
exclusive of noncash items (440.3) (483.4)
Purchase of short-term investments (175.7) (17.7)
Increase in investments in and advances to
unconsolidated investees (156.7) -
------- -------
Net cash used in investing activities (767.0) (498.0)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit facilities (150.0) (432.0)
Increase (decrease) in short-term obligations (123.4) 96.7
Proceeds from long-term obligations 1,000.0 1,094.0
Net proceeds from issuance of preferred stock 288.8 -
Principal payments on long-term obligations (8.2) (285.5)
Premium paid on debt extinguishment - (25.1)
Distribution to minority shareholders of
consolidated subsidiaries (27.6) (4.0)
Other .4 1.2
------- -------
Net cash provided by financing activities 980.0 445.3
------- -------
CASH PROVIDED BY (USED IN) BUSINESS HELD FOR SALE 2.4 (23.5)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 328.2 14.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 177.4 55.5
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 505.6 $ 69.5
======= =======
Supplemental Cash Flow Disclosures:
Interest paid $ 74.3 $ 39.0
Income taxes paid $ 13.7 $ 27.6
Purchase of property and equipment in
exchange for debt or equity $ 9.2 $ 35.5
The accompanying notes are an integral part of the consolidated
financial statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - In the second quarter of 1999,
the Company's majority-owned subsidiary Arcade Drilling AS
("Arcade") declared a distribution of $27.8 million, of which
the Company received $17.6 million, net of withholding taxes. At
June 30, 1999, Arcade's cash, cash equivalents and short-term
investments balance was $17.5 million.
REVENUE RECOGNITION - In the first quarter of 1999, a
customer terminated a drilling contract for one of the Company's
third-generation semisubmersibles and the Company received an
early termination fee of $7.2 million. The semisubmersible was
immediately contracted to another customer and as a result the
Company recognized the early termination fee as revenue in the
first quarter of 1999.
CAPITALIZED INTEREST - The Company capitalizes interest
applicable to the construction and significant upgrades of its
marine equipment as a cost of such assets. Interest capitalized
for the three months ended June 30, 1999 and 1998 was $21.4
million and $9.1 million, respectively and for the six months
ended June 30, 1999 and 1998 was $36.0 million and $15.3
million, respectively. Interest capitalized is included as a
reduction of interest expense in the Consolidated Statement of
Operations.
EXTRAORDINARY LOSS - In the first quarter of 1999, the
Company incurred an extraordinary loss of $1.7 million, net of a
tax benefit of $.9 million, due to the early extinguishment of
debt obligations. Such loss consisted of the write-off of
unamortized debt issuance costs (see Note B).
RECLASSIFICATION - Certain prior period amounts in the
consolidated financial statements have been reclassified for
comparative purposes. Such reclassifications had no effect on
net income or the overall financial condition of the Company.
B) LONG-TERM OBLIGATIONS
(in millions)
-------------
Debt obligations at December 31, 1998 $ 1,872.5
Proceeds from debt offering (1) 1,000.0
Proceeds from credit facility (2) 200.0
Payment on retired credit facility (2) (350.0)
Payments on debt obligations other
than credit facility (8.2)
Other 1.0
---------
Debt obligations at June 30, 1999 2,715.3
Less long-term obligations due
within one year (5.3)
---------
Long-term obligations at June 30, 1999 $ 2,710.0
=========
(1) In March 1999, the Company issued $200.0 million of 12.25%
Senior Notes due 2006 (the "Senior Notes"). Also in March
1999, RBF Finance Co., a limited purpose finance company and
a consolidated affiliate of the Company, issued $400.0
million of 11% Senior Secured Notes due 2006 and $400.0
million of 11.375% Senior Secured Notes due 2009
(collectively the "Secured Notes"). The Company borrowed the
proceeds from the Secured Notes from RBF Finance Co.
pursuant to ten separate loan agreements, each of which is
secured by one of the Company's drilling rigs or the
construction contract to build a drilling rig. The Company
also guaranteed the payment of the Secured Notes issued by
RBF Finance Co. Interest is payable semiannually on March 15
and September 15 on both the Senior Notes and Secured Notes.
As a result, the Company received net proceeds of
approximately $971.5 million after deducting offering
expenses. The Company used the proceeds to repay existing
indebtedness of $350.0 million of long-term obligations,
$125.0 million of short-term obligations (see Note C) and
the Company's portion ($81.0 million) of an interim facility
for the construction of the Deepwater Frontier. Remaining
proceeds will be used for planned capital expenditures,
working capital and other general corporate purposes. As a
result of the repayment of existing indebtedness, the
Company incurred an extraordinary loss of $1.7 million, net
of tax, in the first quarter of 1999 which consisted of the
write-off of unamortized debt issuance costs.
(2) During the first quarter of 1999, the Company drew the
remaining $200.0 million available under its $350.0 million
revolving credit facility. The Company retired such
facility during the first quarter with proceeds from the
Senior Notes and Secured Notes.
C) SHORT-TERM OBLIGATIONS
During the first quarter of 1999, the Company drew the
remaining $1.6 million available under its $125.0 million short-
term credit facility for the construction of the Deepwater
Millennium. In March 1999, the Company repaid such facility
with proceeds from the Senior Notes and Secured Notes.
D) PREFERRED STOCK
On April 22, 1999, the Company issued 300,000 shares of
13.875% Senior Cumulative Redeemable Preferred Stock (the
"Preferred Stock") and warrants to purchase 10,500,000 shares of
the Company's common stock at an exercise price of $9.50 per
share (the "Warrants"). The Company received net proceeds of
approximately $288.8 million from the issuance of the Preferred
Stock and Warrants. Each share of Preferred Stock has a
liquidation preference of $1,000 per share and one Warrant to
purchase 35 shares of the Company's common stock. The Warrants
became exercisable on July 7, 1999, the date in which the
registration of the Preferred Stock with the Securities and
Exchange Commission was declared effective. The Warrants expire
on, and the Preferred Stock must be redeemed by, May 1, 2009.
Dividends are to be paid quarterly commencing on August 1,
1999 and at the Company's option may be paid in cash or, on or
before May 1, 2004, in additional shares of Preferred Stock.
Accrued and unpaid dividends for the three and six months ended
June 30, 1999 were $8.0 million. The Warrants' initial fair
value of $159.95 per Warrant, or approximately $48.0 million in
total, was recorded as a discount to the Preferred Stock and an
addition to capital in excess of par. The Warrants' initial
fair value and Preferred Stock offering expenses of $9.3 million
are being amortized on a straight line basis over the Warrants'
ten year term. Amortization expense for the three and six months
ended June 30, 1999 was $1.1 million. Preferred Stock dividends
and the amortization of the Warrants' initial value and
Preferred Stock offering expenses are deducted from net income
to arrive at net income applicable to common stockholders.
The Company may redeem the Preferred Stock beginning May 1,
2004. The initial redemption price is 106.938% of the
liquidation preference, declining thereafter to 100% on or after
May 1, 2007, in each case plus accrued and unpaid dividends to
the redemption date. In addition, on or before May 1, 2002, the
Company may redeem shares of the Preferred Stock having an
aggregate liquidation preference of up to $105.0 million at a
price equal to 113.875% of its liquidation preference, plus
accrued and unpaid dividends to the redemption date, with
proceeds from one or more public equity offerings.
E) COMMITMENTS AND CONTINGENCIES
In 1998, the Company cancelled four drillship conversion
projects in which the Company had purchased or committed to
purchase drilling equipment for such projects. Much of the
equipment originally ordered has already been directed to other
construction projects. As of June 30, 1999, the Company had
approximately $61.7 million remaining of such surplus drilling
equipment. The Company expects to use some of the surplus
equipment on other construction and/or upgrade projects and to
maintain the balance as inventory. The Company is continually
reviewing the value and utility of such equipment and if in the
future it is determined that some of the surplus equipment is
not usable for other projects or as spare parts, the Company
could incur a write-off or write-down of such equipment. At
present, it is not possible to determine the likelihood or
quantify the amount of any such potential write-off.
In June 1999, one of the Company's inland drilling barges
was lost as a result of a blowout and fire at a location in
inland waters approximately two miles southeast of Amelia,
Louisiana. No injuries of personnel were sustained. The
Company believes that such loss and clean-up expenses related
thereto will not have a material adverse impact on the Company's
financial condition. In addition, the Company believes that
adequate physical damage and liability insurance coverage is in
place to cover the loss of the drilling barge. The Company
expects to record a gain of approximately $17.0 million in the
third quarter of 1999 if receipt of insurance proceeds is
assured.
F) SEGMENT INFORMATION
Segment information for the three and six month periods
ended June 30, 1999 and 1998 is as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
Operating revenues by segment:
Deepwater $ 86.3 $ 97.4 $ 176.5 $ 197.0
Shallow water 50.5 110.3 117.8 217.2
Inland water 25.9 73.3 56.9 146.0
Engineering services
and land operations 66.4 .1 122.2 .2
Development .1 - .1 -
Intersegment (2.7) - (3.2) -
------- ------- ------- -------
Total operating revenues $ 226.5 $ 281.1 $ 470.3 $ 560.4
======= ======= ======= =======
Operating income (loss) by segment:
Deepwater $ 33.8 $ 40.7 $ 67.8 $ 87.6
Shallow water - 63.7 4.7 125.8
Inland water (9.6) 22.3 (13.4) 51.1
Engineering services
and land operations 13.6 - 29.2 -
Development (2.4) (.2) (3.5) (8.0)
------- ------- ------- -------
35.4 126.5 84.8 256.5
Unallocated depreciation
and amortization (.9) (.1) (1.8) (.2)
Unallocated general
and administrative (25.6) (15.3) (41.4) (29.4)
Unallocated merger
expenses - - - 1.0
------- ------- ------- -------
Operating income $ 8.9 $ 111.1 $ 41.6 $ 227.9
======= ======= ======= =======
Total assets by segment were as follows (in millions):
June 30, December 31,
1999 1998
--------- ------------
Deepwater $ 2,593.3 $ 2,078.6
Shallow water 959.0 1,038.5
Inland water 210.1 251.2
Engineering services
and land operations 156.8 156.9
Development 4.8 10.5
Corporate 783.3 173.6
--------- ---------
Total $ 4,707.3 $ 3,709.3
========= =========
For the three and six months ended June 30, 1999, revenues
from one customer in Venezuela (PDVSA Exploration and
Production) of $38.6 million and $82.0 million, respectively,
reported in the engineering services and land operations
segment, accounted for 17.0% and 17.4%, respectively, of the
Company's consolidated operating revenues.
G) EARNINGS PER SHARE
The following table summarizes the basic and diluted per
share computations for income from continuing operations before
extraordinary loss for the three and six month periods ended
June 30, 1999 and 1998 (in millions except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Income (loss) from continuing
operations before
extraordinary loss $ (14.2) $ 59.9 $ (10.9) $ 121.4
Dividends and accretion on
preferred stock (9.1) - (9.1) -
------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
loss - basic (23.3) 59.9 (20.0) 121.4
Interest on convertible debentures - - - 2.1
------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
loss - diluted $ (23.3) $ 59.9 $ (20.0) $ 123.5
======= ======= ======= =======
Denominator:
Weighted average common
shares outstanding - basic 192.6 165.3 192.5 165.1
Outstanding stock options and
restricted stock awards 1.1 1.3 1.0 1.4
Convertible debentures - - - 1.0
------- ------- ------- -------
Weighted average common
shares outstanding - diluted 193.7 166.6 193.5 167.5
======= ======= ======= =======
Earnings per share:
Income (loss) from continuing operations
before extraordinary loss:
Basic $ (.12) $ .36 $ (.10) $ .74
Diluted $ (.12) $ .36 $ (.10) $ .74
The Warrants were not included in diluted earnings per
share for the three and six month periods ended June 30, 1999 as
they were anti-dilutive during these periods.
H) STOCK AWARDS
During the first six months of 1999, the Company granted
stock options, with respect to the Company's common stock, of
approximately 7.4 million shares to certain employees of the
Company and approximately .5 million shares to non-employee
members of the board of directors. Such options vest at varying
times from six months to three years and were granted at prices
ranging from $6.15625 to $10.0625 per share (the market price on
the date of grants). All such options expire ten years from the
date of grant.
In the second quarter of 1999, a wholly-owned indirect
subsidiary of the Company made awards of restricted stock of the
subsidiary to certain directors, officers and employees of the
Company, as well as awards of restricted stock to certain former
directors of Reading & Bates Corporation who served in such
capacity prior to completion of the merger with Falcon Drilling
Company, Inc. in December 1997. Such award comprised of
approximately 13.75% of the outstanding common stock of such
subsidiary. The awards vested upon issuance, but are subject to
restrictions on sale or transfer for a period of six months
following the date of the award. As a result, the Company
incurred $1.5 million of expense which has been included in
general and administrative expenses for the three and six month
periods ended June 30, 1999.
I) RESTRUCTURING EXPENSES
On April 7, 1999, the Company announced that Mr. Steven
Webster, the Company's president and chief executive officer,
had agreed to resign from these officer positions effective May
31, 1999. On May 19, 1999, Mr. Paul B. Loyd, Jr., the Company's
chairman of the board, was elected as the Company's chief
executive officer, and Mr. Andrew Bakonyi was elected as
president and chief operating officer. Mr. Webster will remain a
director of the Company.
As a result of Mr. Webster's resignation and the
termination of certain other executive officers, the Company
incurred $6.6 million of expense in the second quarter of 1999.
Such expense is reported as general and administrative expense
in the Company's Consolidated Statement of Operations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
R&B Falcon Corporation
We have reviewed the accompanying consolidated balance sheet of
R&B Falcon Corporation (a Delaware corporation) and Subsidiaries as of
June 30, 1999, the related consolidated statement of operations for
the three and six month periods ended June 30, 1999 and 1998 and the
related consolidated statement of cash flows for the six months ended
June 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based upon our review, we are not aware of any material
modifications that should be made to the financial statements referred
to above for them to be in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Houston, Texas
July 23, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Industry Conditions
Activity in the contract drilling industry and related oil
service businesses has deteriorated significantly in the past year due
to decreased worldwide demand for drilling rigs and related services
resulting from a substantial decline in crude oil prices. In recent
months, crude oil prices have recovered somewhat, but there can be no
assurance that demand for drilling rigs and related services will
increase. The financial condition and results of operations of the
Company and other drilling contractors are dependent upon the price of
oil and natural gas, as demand for their services is primarily
dependent upon the level of spending by oil and gas companies for
exploration, development and production activities. In late 1998 and
early 1999, lower crude oil prices affected exploration and production
spending, which created significantly lower dayrates and utilization
for offshore drilling companies, particularly in the U.S. Gulf of
Mexico. Crude oil and natural gas prices have continued to fluctuate
over the last several years. If crude oil prices decline from current
levels, or a weakness in crude oil prices continued for an extended
period, there could be a further deterioration in both rig utilization
and dayrates.
Utilization of the Company's domestic jack-up fleet has declined
from approximately 93% in the second quarter of 1998 to approximately
40% in the second quarter of 1999, and dayrates have declined from an
average of $36,000 during the second quarter of 1998 to an average of
$12,000 during the second quarter of 1999. Dayrates for the Company's
domestic barge drilling rig fleet have not declined materially, but
utilization of the fleet declined from approximately 80% in the second
quarter of 1998 to approximately 25% in the second quarter of 1999. As
a result, the Company experienced a decline in operating revenues from
the first six months of 1998 to the first six months of 1999 (see
Results of Operations below).
Results of Operations
SIX MONTHS ENDED JUNE 30, 1999 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1998
The Company's net loss for the six months ended June 30, 1999 was
$12.6 million ($.11 loss per diluted share after preferred stock
dividends and accretion of $9.1 million) compared with net income of
$108.2 million ($.66 per diluted share) for the same period of 1998.
Included in the results for the six months ended June 30, 1999 was a
$1.7 million extraordinary loss due to the extinguishment of debt
obligations. Included in the results for the six months ended June
30, 1998 was a $22.0 million extraordinary loss due to the
extinguishment of debt obligations and $8.8 million of income related
to discontinued operations.
Operating revenues are primarily a function of dayrates and
utilization. Operating revenues decreased for the six months ended
June 30, 1999 compared to the same period in 1998 despite a $158.8
million revenue increase generated from the purchase of Cliffs
Drilling in December 1998. The revenue decrease is primarily due to
lower utilization and dayrates in the shallow water and inland water
segments. Partially offsetting the decrease was $7.2 million of
revenue recorded in the first quarter of 1999 for the early
termination of a drilling contract for one of its third-generation
semisubmersibles. For the six months ended June 30, 1999, revenues
from one customer in Venezuela (PDVSA Exploration and Production) of
$82.0 million, reported in the engineering services and land
operations segment, accounted for 17.4% of the Company's total
operating revenues.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues due to the continuation of personnel on
board and equipment maintenance when the Company's units are stacked.
It is only during prolonged stacked periods that the Company is able
to significantly reduce labor costs and equipment maintenance expense.
Additionally, labor costs fluctuate due to the geographic
diversification of the Company's units and the mix of labor between
expatriates and nationals as stipulated in the contracts. In general,
labor costs increase primarily due to higher salary levels and
inflation. Equipment maintenance expenses fluctuate depending upon
the type of activity the unit is performing and the age and condition
of the equipment. Scheduled maintenance and overhauls of equipment
are performed on the basis of number of hours operated in accordance
with the Company's preventive maintenance program. Operating expenses
for a unit are typically deferred or capitalized as appropriate during
periods of mobilization, contract preparation, major upgrades or
conversions unless corresponding revenue is recognized, in which case
such costs are expensed as incurred.
The increase in operating expenses for the six months ended June
30, 1999 as compared to the same period in 1998 is primarily due to
the purchase of Cliffs Drilling in December 1998, partially offset by
lower operating expenses in the shallow water and inland water
segments due to lower utilization. Included as a reduction of
operating expenses for the six months ended June 30, 1999 is an $8.3
million gain in the shallow water segment due to the W.D. Kent derrick
equipment casualty. Such casualty occurred in the third quarter of
1997 as a result of a blowout and fire. Also included in operating
expenses for the six months ended June 30, 1999 is $2.4 million of
expense in the inland water segment relating to a reserve for
potentially uncollectable receivables.
Depreciation and amortization expense increased for the six
months ended June 30, 1999 as compared to the same period in 1998.
Such increase is primarily due to the purchase of Cliffs Drilling in
December 1998 and the purchase and/or significant upgrades of offshore
and inland marine vessels during 1998.
General & administrative expense increased for the six months
ended June 30, 1999 as compared to the same period in 1998. Such
increase is due to $6.6 million of executive termination expense, $1.5
million of employee incentive compensation expense and the purchase of
Cliffs Drilling in December 1998.
Interest expense increased for the six months ended June 30, 1999
as compared to the same period in 1998 primarily due to increased
average debt balances outstanding and increased average interest
rates, partially offset by increased capitalized interest related to
significant upgrade and new build projects.
Interest income increased for the six months ended June 30, 1999
as compared to the same period in 1998 due to increased cash and short-
term investment balances during the period.
Income from equity investees plus related income increased for
the six months ended June 30, 1999 as compared to the same period in
1998 due to the Deepwater Pathfinder and the Deepwater Frontier both
of which commenced operations in the latter part of the first quarter
of 1999.
Income tax expense decreased for the six months ended June 30,
1999 as compared to the same period in 1998 due to the decrease in the
Company's pretax income.
Income from discontinued operations for the six months ended June
30, 1998 was the reversal of accrued estimated losses from operations
until disposal resulting from the accounting requirements for
recontinuance.
Extraordinary losses for the six months ended June 30, 1999 of
$1.7 million, after a tax benefit of $.9 million, (see Note B of Notes
to Consolidated Financial Statements) and for the six months ended
June 30, 1998 of $22.0 million, after a tax benefit of $11.9 million,
are both due to the extinguishment of prior debt obligations in
connection with the issuance of new debt obligations.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1998
The Company's net loss for the three months ended June 30, 1999
was $14.2 million ($.12 loss per diluted share after preferred stock
dividends and accretion of $9.1 million) compared with net income of
$38.4 million ($.23 per diluted share) for the same period of 1998.
Included in the results for the three months ended June 30, 1998 was a
$22.0 million extraordinary loss due to the extinguishment of debt
obligations.
Operating revenues are primarily a function of dayrates and
utilization. Operating revenues decreased for the three months ended
June 30, 1999 compared to the same period in 1998 despite a $79.0
million revenue increase generated from the purchase of Cliffs
Drilling in December 1998. The revenue decrease is primarily due to
lower utilization and dayrates in the shallow water and inland water
segments. For the three months ended June 30, 1999, revenues from one
customer in Venezuela (PDVSA Exploration and Production) of $38.6
million, reported in the engineering services and land operations
segment, accounted for 17.0% of the Company's total operating
revenues.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues due to the continuation of personnel on
board and equipment maintenance when the Company's units are stacked.
It is only during prolonged stacked periods that the Company is able
to significantly reduce labor costs and equipment maintenance expense.
Additionally, labor costs fluctuate due to the geographic
diversification of the Company's units and the mix of labor between
expatriates and nationals as stipulated in the contracts. In general,
labor costs increase primarily due to higher salary levels and
inflation. Equipment maintenance expenses fluctuate depending upon
the type of activity the unit is performing and the age and condition
of the equipment. Scheduled maintenance and overhauls of equipment
are performed on the basis of number of hours operated in accordance
with the Company's preventive maintenance program. Operating expenses
for a unit are typically deferred or capitalized as appropriate during
periods of mobilization, contract preparation, major upgrades or
conversions unless corresponding revenue is recognized, in which case
such costs are expensed as incurred.
The increase in operating expenses for the three months ended
June 30, 1999 as compared to the same period in 1998 is primarily due
to the purchase of Cliffs Drilling in December 1998, partially offset
by lower operating expenses in the shallow water and inland water
segments due to lower utilization. Included as a reduction of
operating expenses for the three months ended June 30, 1999 is an $8.3
million gain in the shallow water segment due to the W.D. Kent derrick
equipment casualty. Such casualty occurred in the third quarter of
1997 as a result of a blowout and fire. Also included in operating
expenses for the three months ended June 30, 1999 is $2.4 million of
expense in the inland water segment relating to a reserve for
potentially uncollectable receivables.
Depreciation and amortization expense increased for the three
months ended June 30, 1999 as compared to the same period in 1998.
Such increase is primarily due to the purchase of Cliffs Drilling in
December 1998 and the purchase and/or significant upgrades of offshore
and inland marine vessels during 1998.
General & administrative expense increased for the three months
ended June 30, 1999 as compared to the same period in 1998. Such
increase is due to $6.6 million of executive termination expense, $1.5
million of employee incentive compensation expense and the purchase of
Cliffs Drilling in December 1998.
Interest expense increased for the three months ended June 30,
1999 as compared to the same period in 1998 primarily due to increased
average debt balances outstanding and increased average interest
rates, partially offset by increased capitalized interest related to
significant upgrade and new build projects.
Interest income increased for the three months ended June 30,
1999 as compared to the same period in 1998 due to increased cash and
short-term investment balances during the period.
Income from equity investees plus related income increased for
the three months ended June 30, 1999 as compared to the same period in
1998 due to the Deepwater Pathfinder and the Deepwater Frontier both
of which commenced operations in the latter part of the first quarter
of 1999.
Income tax expense decreased for the three months ended June 30,
1999 as compared to the same period in 1998 due to the decrease in the
Company's pretax income.
Liquidity And Capital Resources
Cash Flows
Net cash provided by operating activities was $112.8 million for
the six months ended June 30, 1999 compared to $90.2 million for the
same period in 1998. Despite the decrease in net income, net cash
provided by operating activities increased primarily due to changes in
the components of working capital.
Net cash used in investing activities was $767.0 million for the
six months ended June 30, 1999 compared to $498.0 million for the same
period in 1998. The increase is primarily due to the purchase of
short-term investments coupled with investments and advances of
approximately $149.3 million made to the joint venture that operates
the Deepwater Frontier.
Net cash provided by financing activities was $980.0 million for
the six months ended June 30, 1999 compared to $445.3 million for the
same period in 1998. The increase is due to proceeds received from
the $1.0 billion debt offering and the $300.0 million preferred stock
offering, offset by the repayment of certain existing debt obligations
(see below).
Debt Issuance
On March 26, 1999, the Company issued three series of senior
notes with an aggregate principal amount of $1.0 billion. The senior
notes consisted of $400.0 million of 11% senior secured notes due
2006, $400.0 million of 11.375% senior secured notes due 2009 and
$200.0 million of 12.25% senior notes due 2006 (collectively, the
"Senior Notes"). The $800.0 million senior secured notes are
collateralized by ten of the Company's drilling rigs. As a result, the
Company received net proceeds of approximately $971.5 million after
deducting offering expenses. The Company used the proceeds to repay
existing indebtedness of approximately $556.0 million and the
remainder will be used to acquire, construct, repair and improve
drilling rigs and for general corporate purposes. See Note B of Notes
to Consolidated Financial Statements.
Preferred Stock Issuance
On April 22, 1999, the Company issued 300,000 shares of 13.875%
Senior Cumulative Redeemable Preferred Stock (the "Preferred Stock")
and warrants to purchase 10,500,000 shares of the Company's common
stock at an exercise price of $9.50 per share (the "Warrants"). The
Company received net proceeds of approximately $288.8 million from the
issuance of the Preferred Stock and Warrants. Each share of Preferred
Stock has a liquidation preference of $1,000 per share and one Warrant
to purchase 35 shares of the Company's common stock. The Warrants
became exercisable on July 7, 1999, the date in which the registration
of the Preferred Stock with the Securities and Exchange Commission was
declared effective. The Warrants expire on, and the Preferred Stock
must be redeemed by, May 1, 2009.
Dividends are to be paid quarterly commencing on August 1, 1999
and at the Company's option may be paid in cash or, on or before May
1, 2004, in additional shares of Preferred Stock. Accrued and unpaid
dividends for the three and six months ended June 30, 1999 were $8.0
million. The Warrants' initial fair value of $159.95 per Warrant, or
approximately $48.0 million in total, was recorded as a discount to
the Preferred Stock and an addition to capital in excess of par. The
Warrants' initial fair value and Preferred Stock offering expenses of
$9.3 million are being amortized on a straight line basis over the
Warrants' ten year term. Amortization expense for the three and six
months ended June 30, 1999 was $1.1 million. Preferred Stock dividends
and the amortization of the Warrants' initial value and Preferred
Stock offering expenses are deducted from net income to arrive at net
income applicable to common stockholders.
The Company may redeem the Preferred Stock beginning May 1, 2004.
The initial redemption price is 106.938% of the liquidation
preference, declining thereafter to 100% on or after May 1, 2007, in
each case plus accrued and unpaid dividends to the redemption date. In
addition, on or before May 1, 2002, the Company may redeem shares of
the Preferred Stock having an aggregate liquidation preference of up
to $105.0 million at a price equal to 113.875% of its liquidation
preference, plus accrued and unpaid dividends to the redemption date,
with proceeds from one or more public equity offerings.
Capital Expenditure Commitments
The Company has numerous projects under way involving the
construction or upgrade of drilling units. The following is a list of
such projects:
Water Depth Estimated Contract Expenditures
Capability Delivery Term Estimated through
(feet) Date (years) Cost June 30, 1999
------ ---- ------- ---- -------------
Drillships: (in millions)
DEEPWATER
PATHFINDER (1) 10,000 Delivered 5 $ 280.0 $ 269.3
DEEPWATER
FRONTIER (2) 10,000 Delivered 2.5 265.0 252.6
DEEPWATER
MILLENNIUM 10,000 Delivered 4 (3) 280.0 251.7
DEEPWATER
DISCOVERY 10,000 3rd quarter 2000 3 305.0 117.6
DEEPWATER
EXPEDITION 9,200 3rd quarter 1999 6 230.0 199.1
(formerly PEREGRINE IV)
PEREGRINE VII (4) 8,200 4th quarter 1999 - 300.0 243.2
Semisubmersibles:
FALCON 100 (5) 2,450 Delivered - 125.0 120.5
DEEPWATER NAUTILUS 8,000 4th quarter 1999 5 330.0 178.5
(formerly RBS8M)
DEEPWATER HORIZON 8,000 4th quarter 2000 3 335.0 21.0
(formerly RBS8D) --------- ---------
$ 2,450.0 $ 1,653.5
========= =========
(1) The Company owns a 50% interest in the limited liability company
that operates this drillship.
(2) The Company owns a 60% interest in the limited liability company
that operates this drillship. Under the drilling contract for
this drillship, the Company and Conoco have each committed to use
this rig for two and one half of the first five years after
delivery. Conoco used the rig to drill a well after the rig's
delivery, and the Company will use it for the next 12 months.
After this period, Conoco and the Company will alternate the use
of this rig. The Company is currently marketing the rig for the
periods during which it is obligated to use the rig.
(3) Statoil will use this drillship for the first three years after
delivery, then the Company will alternate use of the rig with
Statoil every six months for the next two years.
(4) On April 15, 1999, BP Amoco cancelled its contract with the
Company for this drillship in accordance with the contract's
terms because the drillship had not been delivered on time. The
Company is currently marketing this rig for work.
(5) In May 1999, Petrobras cancelled the drilling contract for the
Falcon 100 based on its interpretation of the cancellation
provisions of the contract. The Company does not believe that
Petrobras has the right to cancel such contract. The Company
has engaged Brazilian counsel to evaluate the Company's rights
under the contract.
The Company's construction and upgrade projects are subject to
the risks of delay and cost overruns inherent in any large
construction project, including shortages of equipment, unforeseen
engineering problems, work stoppages, weather interference,
unanticipated cost increases and shortages of materials or skilled
labor. Significant cost overruns or delays would adversely affect the
Company's liquidity, financial condition and results of operations.
Delays could also result in penalties under, or the termination of,
the long-term contracts under which the Company plans to operate these
rigs.
Liquidity
During the first six months of 1999, the Company received net
proceeds of approximately $1.3 billion from the issuance of the Senior
Notes and Preferred Stock. The Company used the proceeds to repay
existing indebtedness of approximately $556.0 million and the
remainder will be used to acquire, construct, repair and improve
drilling rigs and for general corporate purposes. As of June 30, 1999,
the Company had $681.3 million of cash, cash equivalents and short-
term investments.
The Company is currently in the process of completing two project
financings. One financing in the amount of approximately $270.0
million is in the form of a synthetic lease that would be
collateralized by the drillship Deepwater Frontier, drilling contract
revenues from such drillship and a $50.0 million letter of credit.
Proceeds of such financing would be used in part to repay advances
made to the joint venture which operates the Deepwater Frontier, which
is owned 60% by the Company and 40% by Conoco. The second financing in
the amount of approximately $250.0 million is a project financing that
would be collateralized by the semisubmersible Deepwater Nautilus
(formerly RBS8M), as well as the drilling contract revenues from such
rig. The Company is also considering certain asset sales, including
the Seillean, Iolair and domestic boat business.
The Company is currently constructing or significantly upgrading
nine deepwater drilling rigs. The Company estimates its capital
expenditure commitments on these projects and its other routine
capital expenditures for the remainder of 1999 to total approximately
$475.0 million.
The Company believes its projected level of cash flows from
operations, which assumes an industry recovery in 2000, cash on hand,
expected proceeds from the two project financings and potential asset
sales will be sufficient to satisfy the Company's short-term and long-
term working capital needs, planned investments, capital expenditures,
debt, lease and other payment obligations. If the Company were to
build excess cash balances from the various sources mentioned above,
it will most likely use a portion of the excess to retire debt
obligations.
Other
In December 1998, Mobil North Sea Limited ("Mobil") purportedly
terminated its contract for use of the Company's Jack Bates
semisubmersible rig based on failure of two mooring lines while anchor
recovery operations at a Mobil well location had been suspended during
heavy weather. The contract provided for Mobil's use of the rig at a
dayrate of approximately $115,000 for the primary term through January
1999 and approximately $200,000 for the extension term from February
1999 through December 2000. The Company does not believe that Mobil
had the right to terminate this contract. The Company has
recontracted the Jack Bates to Mobil for one well at a dayrate of
$156,000 and for another well at a dayrate of $69,000. These contracts
are without prejudice to either party's rights in the dispute over the
termination of the original contract. The Company has filed a request
for arbitration with the London Court of International Arbitration.
Year 2000
The Company has focused its Year 2000 ("Y2K") compliance efforts
in three areas: information technology systems, embedded technology
systems and systems used by third parties with which the Company has a
substantial relationship. The Company has substantially completed its
investigation and evaluation of these systems and is currently in the
process of correcting the identified problems.
Information Technology Systems. The testing and validation phase
for information technology systems includes testing of each individual
information technology system that could be affected. Through the
information technology systems investigation, the Company determined
that the accounting software utilized by Cliffs Drilling required
substantial modification or replacement. The domestic accounting
software was replaced with Y2K compliant software during the fourth
quarter of 1998 at a total cost of approximately $2.3 million, the
majority of which was capitalized. Software replacements in Cliffs
Drilling's foreign offices will be completed during 1999 at a total
cost of approximately $.5 million. The Company additionally
determined that certain of its remaining accounting software and
systems were not Y2K compliant. Company personnel have completed the
majority of these modifications and the remaining non-compliant
software will be undergoing a previously planned upgrade in August
1999.
Embedded Technology Systems. Embedded technology systems
primarily relate to the technology on board the Company's drilling
units. The testing and validation phase for the embedded technology
systems includes testing each high and medium priority system, which
consists primarily of all systems located on drilling units included
in the Deepwater and Shallow Water Divisions. For systems on board
the Inland Water units, confirmation of Y2K compliance has been
received from the manufacturers of these systems.
To facilitate the embedded technology systems investigation, the
Company hired an additional employee whose primary responsibility is
the evaluation of these technology systems. This evaluation was
completed in the second quarter of 1999. The equipment evaluated did
not demonstrate any equipment failures or other significant Y2K
compliance issues. Based on these evaluations, the Company estimates
that the total cost to replace or upgrade non-compliant embedded
technology systems will be less than $.5 million.
Third Party Systems. The Company is contacting third parties
with which it has substantial relationships to determine what actions
may be needed to mitigate its risks relating to the effects third
party technology failures may have on the Company. The Company sent
out requests for information to all of its electrical and electronic
contractors in August 1998 and has received information from 85% of
them regarding their Y2K efforts. Questionnaires were sent in the
first quarter of 1999 to all of the Company's suppliers and third
party vendors. Based on the responses received thus far, it is
evident that our contractors and suppliers are placing a priority on
achieving Y2K compliance. In the event the Company's major suppliers
or customers do not successfully and timely achieve Y2K compliance,
the Company's operations could be adversely affected.
Contingency Plans. The Company is continuing to monitor, on an
ongoing basis, the problems and uncertainties associated with its Y2K
issues and their potential consequences. The Company has accepted the
position that there will be some finite levels of risk that some
systems will not fully function after Y2K. A risk-based approach has
identified those items where absolute compliance is not guaranteed by
the vendor or supplier, and contingency plans are being developed to
deal with any safety related possibilities. These contingency plans
were completed in the second quarter of 1999.
In addition to the safety related contingency plans directly
related to uncertainties with equipment, the Company maintains plans
for all critical safety equipment as part of its normal business.
These critical safety plans are currently being modified to fit the
Y2K criteria. These modifications primarily include: having personnel
standing by at critical equipment stations before the specified time
changes, having no crane lifts in operation and having all drilling
units in a non-drilling mode. Failure of this type of equipment,
whether related to normal operational risk or Y2K problems, must be
managed with contingency planning. For this reason, additional risk
due to the Y2K issue does not measurably affect the risk to personnel
or equipment beyond the normal failure due to other causes.
Other
On April 7, 1999, the Company announced that Mr. Steven Webster,
the Company's president and chief executive officer, had agreed to
resign from these officer positions effective May 31, 1999. On May 19,
1999, Mr. Paul B. Loyd, Jr., the Company's chairman of the board, was
elected as the Company's chief executive officer, and Mr. Andrew
Bakonyi was elected as president and chief operating officer. Mr.
Webster will remain a director of the Company.
As a result of Mr. Webster's resignation and the termination of
certain other executive officers, the Company incurred $6.6 million of
expense in the second quarter of 1999. Such expense is reported as
general and administrative expense in the Company's Consolidated
Statement of Operations. See Results of Operations above.
In June 1999, one of the Company's inland drilling barges was
lost as a result of a blowout and fire at a location in inland waters
approximately two miles southeast of Amelia, Louisiana. No injuries
of personnel were sustained. The Company believes that such loss and
clean-up expenses related thereto will not have a material adverse
impact on the Company's financial condition. In addition, the Company
believes that adequate physical damage and liability insurance
coverage is in place to cover the loss of the drilling barge. The
Company expects to record a gain of approximately $17.0 million in the
third quarter of 1999 if receipt of insurance proceeds is assured.
In 1998, the Company cancelled four drillship conversion projects
in which the Company had purchased or committed to purchase drilling
equipment for such projects. Much of the equipment originally ordered
has already been directed to other construction projects. As of June
30, 1999, the Company had approximately $61.7 million remaining of
such surplus drilling equipment. The Company expects to use some of
the surplus equipment on other construction and/or upgrade projects
and to maintain the balance as inventory. The Company is continually
reviewing the value and utility of such equipment and if in the future
it is determined that some of the surplus equipment is not usable for
other projects or as spare parts, the Company could incur a write-off
or write-down of such equipment. At present, it is not possible to
determine the likelihood or quantify the amount of any such potential
write-off.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates with respect to
its debt obligations. The following table sets forth the average
interest rate for the scheduled maturity of the Company's debt
obligations as of June 30, 1999 (dollars in millions):
Estimated
Fair
Value at
June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999
------ ------ ------ ------ ------ ---------- --------- ---------
Fixed Rate Debt:
Amount $ - $ 1.5 $ 5.2 $ - $ 550.1 $ 2,150.0 $ 2,706.8 $ 2,449.2
Average
interest
rate 7.000% 8.000% 9.750% - 8.340% 9.392% 9.179%
Variable Rate Debt:
Amount $ 2.1 $ 4.3 $ 4.3 $ .4 $ - $ - $ 11.1 $ 11.1
Average
interest
rate 7.000% 7.000% 7.000% 7.000% - - 7.000%
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions arising in the
normal course of business. After taking into consideration the
evaluation of such actions by counsel for the Company, management is
of the opinion that the outcome of all known and potential claims and
litigation will not have a material adverse effect on the Company's
business or consolidated financial position or results of operations.
Item 4. Results of Votes of Security Holders
At the annual meeting of stockholders of R&B Falcon Corporation,
held on May 19, 1999, three Class II directors were elected by a vote
of common stockholders, as outlined in the Company's Proxy Statement
relating to such annual meeting. Proxies for the annual meeting were
solicited pursuant to Regulation 14 under the Securities and Exchange
Act of 1934, there was no solicitation in opposition to the
management's nominees as listed in the Proxy Statement and all of such
nominees were elected, with 161,516,285, 161,515,291 and 161,515,790
votes for each of Mr. Chavkin, Mr. Laqueur and Mr. Ziegler,
respectively, and 3,606,414, 3,607,408 and 3,606,909 votes withheld
from each of such nominees, respectively. In addition, three
proposals were voted upon: (i) a proposal to approve the Company's
1999 Employee Long-Term Incentive Plan, with 143,358,920 votes for the
proposal, 21,050,753 votes against the proposal and 713,025
abstentions, (ii) a proposal to approve the Company's 1999 Director
Long-Term Incentive Plan, with 157,627,609 votes for the proposal,
6,630,313 votes against the proposal and 864,775 abstentions and (iii)
a proposal to ratify and approve the appointment of Arthur Andersen
LLP as independent public accountants for the Company for its fiscal
year 1999, with 164,277,382 votes for the proposal, 487,332 votes
against the proposal and 357,985 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 - Certificate of Designation of R&B Falcon Corporation
filed with the Secretary of State of the State of
Delaware on April 22, 1999. (Filed as exhibit 4.3 to R&B
Falcon Corporation's Registration Statement on Form S-4,
registration number 333-81179 and incorporated herein by
reference.)
4.2 - Form of Registrant's 13-7/8% Senior Cumulative Redeemable
Preferred Stock Certificate.
10.1 - Termination Agreement dated as of May 31, 1999 between
Steven A. Webster and Registrant.
10.2 - Termination Agreement dated as of May 31, 1999 between
Robert F. Fulton and Registrant.
10.3 - Termination Agreement dated as of June 30, 1999 between
Leighton E. Moss and Registrant.
10.4 - Termination Agreement dated as of July 31, 1999 between
Douglas E. Swanson and Cliffs Drilling Company.
15 - Letter regarding unaudited interim financial information.
27 - Financial Data Schedule. (Exhibit 27 is being submitted
as an exhibit only in the electronic format of this
Quarterly Report on Form 10-Q being submitted to the
Securities and Exchange Commission.)
(b) Reports on Form 8-K
R&B Falcon filed four Current Reports on Form 8-K during the
three months ended June 30, 1999: (1) Report filed April 19, 1999
announcing the private placement of $300.0 million of preferred
stock; (2) Report filed April 21, 1999 announcing that BP Amoco
canceled its drilling contract with the Peregrine VII and that
Petrobras may seek to cancel its drilling contract with the
Falcon 100; (3) Report filed May 20, 1999 announcing a change in
auditors for Cliffs Drilling; (4) Report filed May 21, 1999
announcing that Petrobras canceled its drilling contract with the
Falcon 100.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
R&B FALCON CORPORATION
Date: August 11, 1999 By /s/T. W. Nagle
----------------------
T. W. Nagle
Executive Vice
President and
Chief Financial Officer
EXHIBIT 4.2
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
Global Certificate No . CUSIP No. 74912E200
R&B Falcon Corporation
13-7/8% Senior Cumulative Redeemable Preferred Stock
Liquidation Preference $1,000 Per Share - Par Value $.01 Per Share
This Certifies that __________ is the owner of ***_________*** fully paid
and non-assessable Shares of the above Corporation transferable only on the
books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal
of the Corporation.
Dated:
_________________________ SEAL _________________________
W. K. Hillin, Secretary Paul B. Loyd, Jr.,
Chairman
and Chief Executive
Officer
EXHIBIT 10.1
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement"), entered into
and effective as of May 31, 1999 (the "Effective Date"), is
between Steven A. Webster ("Webster") and R&B Falcon Corporation
("R&B Falcon").
Webster and R&B Falcon agree that the termination of
Webster's employment will be governed by the following terms and
conditions:
1. As of the Effective Date Webster tenders his
resignation as President and Chief Executive Officer of
R&B Falcon and as a director, officer and/or employee
of all direct and indirect subsidiaries and affiliated
companies of R&B Falcon (except that Webster shall
remain a director of RBF Finance Co.), as the case may
be, which R&B Falcon accepts on its behalf and on
behalf of such subsidiaries and affiliated companies.
2. Upon execution of this Agreement R&B Falcon agrees to
provide to Webster a severance package consisting of
the following:
a. A lump sum in cash, less deductions required
by law, the sum of Webster's annual base
salary through May 31, 1999, to the extent
not theretofore paid, (2) the product of (x)
Webster's targeted annual bonus for 1999 and
(y) a fraction (the numerator of which is the
number of days from January 1, 1999 through
May 31, 1999, and the denominator of which is
365) and (3) any compensation previously
deferred or earned by Webster (together with
any accrued interest or earnings thereon),
any unreimbursed expenses and any accrued
vacation pay, in each case to the extent not
theretofore paid;
b. A lump sum in cash, less deductions required
by law, the product of the (a) sum of the
highest annual base salary and the highest
annual bonus that has been payable to Webster
within the past three years (including such
salary and bonus paid by a previous employer
which is a direct subsidiary of R&B Falcon as
of the date of this Agreement and with
respect to the 1998 fiscal year Webster
received a bonus equivalent to $562,320)
times (b) three;
c. Through and including May 31, 2002, Webster
and his family shall be provided, at the
expense of R&B Falcon, all benefits under (or
substantially equivalent benefits to) R&B
Falcon's welfare benefit plans, practices,
policies and programs (including, without
limitation, medical, prescription, dental,
vision, disability, salary continuance, group
life and supplemental group life and
accidental death insurance plans and
programs, to the extent generally applicable
to other R&B Falcon executives;
d. Notwithstanding anything to the contrary in
Webster's Stock Option Agreement dated as of
April 7, 1999, the immediate vesting with
respect to the 1,080,000 options to purchase
the common stock of R&B Falcon awarded to Mr.
Webster thereunder with right to exercise
such options until April 7, 2009, R&B Falcon
hereby expressly waiving the provisions of
Paragraph 18 of such stock option agreement;
e. The period of time within which Webster shall
be entitled to exercise the outstanding stock
options granted to him under his Stock Option
Agreement dated January 23, 1996 shall be
extended from three months to January 23,
2008, notwithstanding the provisions of such
stock option agreement; and
f. R&B Falcon agrees to retain Mr. Webster as a
consultant to R&B Falcon for period of two
years commencing June 1, 1999, under and
pursuant to a Consulting Agreement in the
form attached as Exhibit "A" to this
Agreement.
All cash payments due to Webster under the terms of
this Agreement shall be paid by R&B Falcon within two
business days following the Effective Date.
3. Upon execution of this Agreement and subject to the
payment and other obligations of the Company set out in
Section 2 above, this Agreement constitutes full
satisfaction of all obligations of R&B Falcon under and
pursuant to Section 4 of that Employment Agreement
dated as of March 25, 1998 between Webster and R&B
Falcon.
4. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to R&B Falcon's directors,
officers and employees and to Webster's heirs,
executors, administrators, legal and personal
representatives and assigns.
5. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
6. This Agreement constitutes the complete and entire
agreement between the parties. This Agreement
supersedes and cancels all prior or contemporaneous
representations, promises or agreements between the
parties. This Agreement cannot be amended or modified
except by written agreement signed by each of the
parties hereto.
7. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
8. This Agreement is signed in Houston, Texas on May ,
1999.
________________________
Steven A. Webster
R&B FALCON CORPORATION
By:_____________________
Paul B. Loyd, Jr.
Chairman
EXHIBIT "A"
CONSULTING AGREEMENT
This Agreement is made and entered into effective the 1st
day of June, 1999, by and between R&B Falcon Corporation, a
Delaware (U.S.A.) corporation, having an office at 901 Thread
needle, Suite 200, Houston, Texas 77079, hereinafter called
COMPANY, and Steven A. Webster, an individual, having an address
at 3662 Piping Rock, Houston, Texas 77027, hereinafter called
CONSULTANT.
In consideration of the mutual covenants herein contained,
the parties agree as follows:
1. ENGAGEMENT. The Company hereby retains Consultant to
provide consulting services with respect to strategies and
policies, special projects, incentives, goals and other
matters related to the development and growth of the
Company. Such services shall be as directed by the Chief
Executive Officer of the Company or other person or persons
as designated by the Chief Executive Officer from time to
time.
2. TERM. The term of this Agreement shall commence on
June 1, 1999 and continue in effect thereafter through May
31, 2001. Unless either party gives 60 days prior written
notice to the other party of its intention not to extend,
the term shall be extended (thereafter automatically, from
time to time, for an additional 12 month period. If any
such notice shall be given, the term of this Agreement shall
not be extended thereafter.
3. COMPENSATION. As compensation for the performance by
Consultant of services under this Agreement, the Company
agrees to pay to Consultant the following:
(a) an annual retainer fee of $300,000.00, and
(b) Company agrees to pay direct to the vendor or
reimburse Consultant, as the case may be, reason
able expenses incurred by Consultant in connection
with the performance of his services under this
Agreement. These expenditures and expenses in
curred by and on behalf of Consultant shall be in
accordance with those policies currently in effect
for Company. These expenses shall include but
shall not be limited to:
(1) Transportation, meals and lodging, park
ing, tips or any other expenses incurred in
accordance with Company's policies and proce
dures;
(2) Telephone, facsimile or other communica
tion costs;
(3) The Company's current per mile rate for
Consultant's use of his personal automobile
on Company's business; and
(4) Professional and club fees and other
expenses approved by the Company's Chief
Executive Officer.
In addition, the Company agrees to provide Consultant
an office and secretarial assistance.
4. PAYMENTS.
(a) The annual retainer referred to in Article 3(a)
above shall be paid in monthly installments of $25,000.00 on
the last day of the calendar month for services performed
during the month.
(b) Expense statements shall be submitted by
Consultant with reasonable documentation. Reimbursement
shall be paid within ten (10) days of receipt of expense
statement by Company.
(c) Consultant may request cash advances for special
purposes such as trips incurred at Company's request. Such
cash advances shall be approved by Company's designated
person and such amount shall be deducted from Consultant's
first expense statement submitted after such cash advance or
any balance outstanding shall be repaid with submittal of
the expense statement.
5. GENERAL.
(a) Consultant agrees the extent and character of the
work to be done by Consultant shall be subject to the
general supervision, direction, control and approval of the
Company's Chief Executive Officer to whom Consultant shall
report and be responsible. In the performance of the work
and services hereunder Consultant shall be deemed an
independent contractor.
(b) Consultant shall be responsible for the payment of
all taxes imposed by any governmental authority on his
services and fees.
(c) Any suggestions, analyses, programs, products,
materials conceived, prepared or developed by Consultant
during the term of this Agreement, whether alone or jointly
with others, which relate to any aspect of Company's
business shall be Company's sole and exclusive property.
(d) All information obtained by Consultant or communi
cated to Consultant by Company in the course of conduct of
Consultant's work and services hereunder shall be considered
confidential and shall not be divulged by Consultant to any
person, firm or corporation other than the Company's
representative without the Company's prior written consent.
The Company shall furnish any information necessary for
Consultant to carry out Consultant's duties.
(e) Consultant shall not assign or sublet any of
Consultant's obligations hereunder without the prior written
consent of Company. This Agreement shall inure to the
benefit of and be binding on the executors, administrators,
personal representatives, permitted assigns and successors
of the respective parties.
(f) In acknowledgement of occasional transportation,
meals, lodgings and furnished office space being provided by
Company to enable and assist Consultant in the execution of
his duties and in exchange for Company's agreement to defend
and indemnify Consultant from any claims for personal injury
to Company and Company's clients' personnel or damage to
Company and Company's clients' property, regardless of
whether Consultant may be negligent or otherwise legally at
fault, Consultant agrees to defend and indemnify Company and
its clients, and other consultants from any claims for
personal injury to, or death resulting therefrom, to Consul
tant or damage to or loss of Consultant's property arising
out of the work, regardless of whether Company may be or may
be alleged to be negligent or otherwise legally at fault.
6. MODIFICATION. No modification, amendment or waiver of
any of the provisions of this Agreement shall be effective
unless made in writing, specifically refer to this
Agreement, and be signed by each of the parties hereto.
7. NOTICES. Any notices required or permitted hereunder
shall be in writing and shall be delivered in person or
mailed certified or registered mail, return receipt
requested, properly addressed:
(a) If to the Company, to R&B Falcon Corporation, 901
Threadneedle, Suite 200, Houston, Texas 77079, Attn:
Chairman and Chief Executive Officer; or
(b) If to Consultant, to Steven A. Webster, 3662
Piping Rock, Houston, Texas 77027.
Either party hereto may designate a different address by
written notice given to the other party.
8. ENTIRE AGREEMENT. This Agreement constitutes the
entire Agreement of the parties with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be duly executed as of the day and year first above
written.
__________________________
Steven A. Webster
R&B FALCON CORPORATION
By: _______________________
Paul B. Loyd, Jr.
Chairman
EXHIBIT 10.2
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement"), entered into
and effective as of May 31, 1999 (the "Effective Date"), is
between Robert F. Fulton ("Fulton") and R&B Falcon Corporation
("R&B Falcon").
Fulton and R&B Falcon agree that the termination of Fulton's
employment will be governed by the following terms and
conditions:
1. As of the Effective Date Fulton tenders his resignation
as Executive Vice President of R&B Falcon and as a
director, officer and/or employee of all direct and
indirect subsidiaries and affiliated companies of R&B
Falcon, as the case may be, which R&B Falcon accepts on
its behalf and on behalf of such subsidiaries and
affiliated companies.
2. Upon execution of this Agreement R&B Falcon agrees to
provide to Fulton a severance package consisting of the
following:
a. A lump sum in cash, less deductions required
by law, equal to the sum of (1) Fulton's
annual base salary through May 31, 1999, to
the extent not theretofore paid, (2) the
product of (x) Fulton's targeted annual bonus
for 1999 and (y) a fraction (the numerator of
which is the number of days from January 1,
1999 through May 31, 1999, and the
denominator of which is 365) and (3) any
compensation previously deferred or earned by
Fulton (together with any accrued interest or
earnings thereon), any unreimbursed expenses
and any accrued vacation pay, in each case to
the extent not theretofore paid;
b. A lump sum in cash, less deductions required
by law, equal to the product of (a) the sum
of the highest annual base salary and the
highest annual bonus that has been payable to
Fulton within the past three years (including
such salary and bonus paid by a previous
employer which is a direct subsidiary of R&B
Falcon as of the date of this Agreement and
with respect to the 1998 fiscal year Fulton
received a bonus equivalent to $146,939)
times (b) three;
c. Through and including May 31, 2002, Fulton
and his family shall be provided, at the
expense of R&B Falcon, all benefits under (or
substantially equivalent benefits to) R&B
Falcon's welfare benefit plans, practices,
policies and programs (including, without
limitation, medical, prescription, dental,
vision, disability, salary continuance, group
life and supplemental group life and
accidental death insurance plans and
programs), to the extent generally applicable
to other R&B Falcon executives;
d. Notwithstanding anything to the contrary in
Fulton's Stock Option Agreements dated as of
April 7, 1999 and May 19, 1999, the immediate
vesting with respect to the options to
purchase the common stock of R&B Falcon
awarded to Fulton thereunder, with the right
to exercise all such options at any time
until April 7, 2009 and May 19, 2009,
respectively, R&B Falcon hereby expressly
waiving the provisions of Paragraph 18 of
such stock option agreements; and
e. The period of time within which Fulton shall
be entitled to exercise the outstanding stock
options granted to him under his Amended and
Restated Stock Option Agreement dated
February 16, 1995 shall be extended from
three months to February 16, 2005,
notwithstanding the provisions of such stock
option agreement.
All cash payments due to Fulton under the terms of this
Agreement shall be paid by R&B Falcon within two
business days following the Effective Date.
3. Upon execution of this Agreement and subject to the
payment and other obligations of R&B Falcon set out in
Section 2 above, this Agreement constitutes full
satisfaction of all obligations of R&B Falcon under and
pursuant to Section 4 of that Employment Agreement
dated as of March 25, 1998 between Fulton and R&B
Falcon.
4. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to R&B Falcon's directors,
officers and employees and to Fulton's heirs,
executors, administrators, legal and personal
representatives and assigns.
5. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
6. This Agreement constitutes the complete and entire
agreement between the parties. This Agreement
supersedes and cancels all prior or contemporaneous
representations, promises or agreements between the
parties. This Agreement cannot be amended or modified
except by written agreement signed by each of the
parties hereto.
7. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
8. This Agreement is signed in Houston, Texas on May ,
1999.
__________________________
Robert F. Fulton
R&B FALCON CORPORATION
By:_______________________
Paul B. Loyd, Jr.
Chairman
EXHIBIT 10.3
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement"), entered into
and effective as of June 30, 1999 (the "Effective Date"), is
between Leighton E. Moss ("Moss") and R&B Falcon Corporation
("R&B Falcon").
Moss and R&B Falcon agree that the termination of Moss's
employment will be governed by the following terms and
conditions:
1. As of the Effective Date Moss tenders his resignation
as Senior Vice President and Co-Counsel of R&B Falcon
and as a director, officer and/or employee of all
direct and indirect subsidiaries and affiliated
companies of R&B Falcon, as the case may be, which R&B
Falcon accepts on its behalf and on behalf of such
subsidiaries and affiliated companies.
2. Upon execution of this Agreement R&B Falcon agrees to
provide to Moss a severance package consisting of the
following:
a. A lump sum in cash, less deductions required
by law, equal to the sum of (1) Moss's annual
base salary through June 30, 1999, to the
extent not theretofore paid, (2) the product
of (x) Moss's targeted annual bonus for 1999
and (y) a fraction (the numerator of which is
the number of days from January 1, 1999
through June 30, 1999, and the denominator of
which is 365) and (3) any compensation
previously deferred or earned by Moss
(together with any accrued interest or
earnings thereon), any unreimbursed expenses
and any accrued vacation pay, in each case to
the extent not theretofore paid;
b. A lump sum in cash, less deductions required
by law, equal to the product of (a) the sum
of the highest annual base salary and the
highest annual bonus that has been payable to
Moss within the past three years (including
such salary and bonus paid by a previous
employer which is a direct subsidiary of R&B
Falcon as of the date of this Agreement and
with respect to the 1998 fiscal year Moss
received a bonus equivalent to $120,425)
times (b) three;
c. Through and including June 30, 2002, Moss
shall be provided, at the expense of R&B
Falcon, all benefits under (or substantially
equivalent benefits to) R&B Falcon's welfare
benefit plans, practices, policies and
programs (including, without limitation,
medical, prescription, dental, vision,
disability, salary continuance, group life
and supplemental group life and accidental
death insurance plans and programs), to the
extent generally applicable to other R&B
Falcon executives; and
d. Notwithstanding anything to the contrary in
Moss's Stock Option Agreements dated as of
April 7, 1999 and May 19, 1999, the immediate
vesting with respect to the options to
purchase the common stock of R&B Falcon
awarded to Moss thereunder, with the right to
exercise all such options at any time until
April 7, 2009 and May 19, 2009, respectively,
R&B Falcon hereby expressly waiving the
provisions of Paragraph 18 of such stock
option agreements.
All cash payments due to Moss under the terms of this
Agreement shall be paid by R&B Falcon within two
business days following the Effective Date.
3. Upon execution of this Agreement and subject to the
payment and other obligations of R&B Falcon set out in
Section 2 above, this Agreement constitutes full
satisfaction of all obligations of R&B Falcon under and
pursuant to Section 4 of that Employment Agreement
dated as of March 25, 1998 between Moss and R&B Falcon.
4. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to R&B Falcon's directors,
officers and employees and to Moss's heirs, executors,
administrators, legal and personal representatives and
assigns.
5. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
6. This Agreement constitutes the complete and entire
agreement between the parties. This Agreement
supersedes and cancels all prior or contemporaneous
representations, promises or agreements between the
parties. This Agreement cannot be amended or modified
except by written agreement signed by each of the
parties hereto.
7. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
8. This Agreement is signed in Houston, Texas on May ,
1999.
________________________
Leighton E. Moss
R&B FALCON CORPORATION
By:_____________________
Paul B. Loyd, Jr.
Chairman
EXHIBIT 10.4
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement"), entered into and
effective as of July 31, 1999 (the "Effective Date"), is between
Douglas E. Swanson ("Swanson") and Cliffs Drilling Company
("CDC").
In consideration of the mutual obligations set out below and in
that agreement of the same effective date between Swanson and CDC
and substantially in the form attached as Exhibit "A" hereto (the
"Non-Compete Agreement"), the parties agree as follows:
1. As of the Effective Date Swanson tenders his
resignation as President, Chief Executive Officer and
Director of CDC and as a director, officer and/or
employee of all direct and indirect subsidiaries and
affiliated companies of CDC [other than R&B Falcon
Corporation ("RBF") of which Swanson shall continue to
be a director], as the case may be, which CDC accepts
on its behalf and on behalf of RBF, such subsidiaries
and affiliated companies.
2. Upon execution of this Agreement and subject to the
payment and other obligations of CDC and RBF set out in
this Agreement and in the Non-Compete Agreement, this
Agreement and the Non-Compete Agreement constitute full
satisfaction of all obligations of CDC under and
pursuant to Section 4 of that Employment Agreement
dated as of December 1, 1998 between Swanson and CDC
(the "Employment Agreement").
3. Notwithstanding anything to the contrary in (i) this
Agreement, (ii) Section 7 of the Employment Agreement,
or (iii) the Non-Compete Agreement, Swanson shall not
be entitled to, and CDC shall have no obligation to
make to Swanson, any Gross-Up Payment (as defined in
Section 7 of the Employment Agreement) with respect to
any Excise Tax (as defined in Section 7 of the
Employment Agreement) imposed on or with respect to the
stock options held by Swanson under the Stock Option
Agreements, which are referred to in Section 4 of the
Non-Compete Agreement, provided, however, the remaining
obligations of CDC in Section 7 of the Employment
Agreement shall continue to be in full force and
effect.
4. Swanson shall have the option, exercisable if at all
only by written notice to CDC given within 60 days
following the Effective Date, to acquire full ownership
of those certain split dollar insurance policies, being
Policy No. 13905796 dated January 1, 1997 and Policy
No. 13347465 dated January 1, 1995, each issued by The
Northwestern Mutual Life Insurance Company, together
with a release of the collateral assignments granted in
favor of CDC under and pursuant to the two Split Dollar
Insurance Agreements dated January 1, 1995 between
Swanson and CDC (the "Insurance Agreements"), upon
payment by Swanson of the Company's Policy Interest (as
defined in the Insurance Agreements). If such option
is exercised and upon payment of the sum referred in
the preceding sentence by Swanson and release of the
collateral assignments by CDC, neither Swanson nor the
Company shall thereafter have any obligation to the
other under the Insurance Agreements.
For purposes of this Section 4, such notice, if given,
shall be addressed as follows and sent via registered
or certified mail:
Cliffs Drilling Company
901 Threadneedle, Suite 200
Houston, Texas 77079
Attention: Mr. Paul B. Loyd, Jr.
5. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to CDC's directors,
officers and employees and to Swanson's heirs,
executors, administrators, legal and personal
representatives and assigns.
6. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
7. This Agreement and the Non-Compete Agreement
constitutes the complete and entire agreement between
the parties. Subject to Sections 4, 5 and 7 (as
modified by Section 3 of this Agreement) of the
Employment Agreement, this Agreement supersedes and
cancels all prior or contemporaneous representations,
promises or agreements between the parties. This
Agreement cannot be amended or modified except by
written agreement signed by each of the parties hereto.
8. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
This Agreement is signed in Houston, Texas on July , 1999.
________________________
Douglas E. Swanson
CLIFFS DRILLING COMPANY
By:_____________________
Its duly authorized
officer
EXHIBIT "A"
AGREEMENT
This Agreement (the "Agreement"), entered into and effective as
of July 31, 1999 (the "Effective Date"), is among Douglas E.
Swanson ("Swanson"), Cliffs Drilling Company ("CDC") and R&B
Falcon Corporation ("RBF").
In consideration of the mutual obligations set out below,
Swanson, CDC and RBF agree as follows:
1. Within two business days following the execution of
this Agreement CDC agrees to pay to Swanson a lump sum
in cash, less deductions required by law, of
$2,587,500.
2. From the Effective Date and continuing until December
1, 2001 CDC agrees to provide Swanson and his family,
at the expense of CDC, all benefits under (or
substantially equivalent benefits to) RBF's welfare
benefit plans, practices, policies and programs
(including, without limitation, medical, prescription,
dental, vision, disability, salary continuance, group
life and supplemental group life and accidental death
insurance plans and programs), to the extent generally
applicable to other RBF executives.
3. For a period of three (3) years following the Effective
Date (the "Restricted Period") Swanson agrees:
(a) Not to engage in Competition with CDC. For
purposes of this Section 3(a), "Competition" shall
mean Swanson engaging in or otherwise being a
director, officer, employee, principal, agent,
stockholder, member, owner or partner of, or
permitting his name to be used in connection with
the activities of any corporation or other
business organization in the offshore contract
drilling industry in direct or indirect
competition with CDC, its parent, subsidiary or
affiliated companies, but shall not preclude
Swanson from being or becoming the registered or
beneficial owner of up to five (5%) of any class
of capital voting stock (or equivalent voting
interest) of any corporation or other business
organization in the offshore contract drilling
industry, provided Swanson does not participate
actively in such business until the end of the
Restricted Period.
(b) Not to disclose to any third party not a member of
the Company Group (as hereinafter defined), its or
their legal counsel or independent auditors,
Confidential Information (as hereinafter defined)
or Trade Secrets (as hereinafter defined), except
any of the Confidential Information or Trade
Secrets which shall be or become in the public
domain other than by breach by Swanson of his
obligations set out in this Section 3(b) or shall
be required to be disclosed by applicable laws or
regulations, any judicial or administrative
authority or stock exchange rule or regulation.
For purposes of this Section 3(b): "Company
Group" shall mean CDC, its parent corporation,
subsidiaries and affiliates; "Confidential In-
formation" shall mean (r) internal policies and
procedures, (s) financial information, (t)
marketing strategies, (u) secret discoveries,
inventions, formulae, designs, methods, processes
and know-how not constituting Trade Secrets, and
(v) other non-public information relating to the
Company Group's business, the disclosure of which
would materially adversely affect the Company
Group's business or financial condition; and
"Trade Secrets" shall mean all secret discoveries,
inventions, formulae, designs, methods, processes
and know-how entitled to protection as trade
secrets under the laws of the state of Texas.
4. (a) The Stock Option Agreements between Swanson
and CDC referred to below are respectively
amended: (i) to revise the number of option
shares covered by each such agreement and to
revise the option exercise price per share to
reflect the adjustments necessary to take into
account the conversion of CDC shares to shares of
RBF effected as a result of the merger transaction
between CDC and RBF concluded December 1,1998, and
(ii) to extend the period of time within which
Swanson shall be entitled to exercise the
outstanding stock options granted to him
thereunder, notwithstanding the provisions of such
Stock Option Agreements, as follows:
Option
Date of Agreement No. of Options Exercise Price Period of Time
(per share) to Exercise
May 22, 1996 47,600 $ 8.24 May 21, 2006
May 21, 1997 34,000 19.27 May 20, 2007
May 13, 1998 85,000 29.71 May 12, 2008
(b) The Stock Option Agreement between Swanson and RBF
dated December 1, 1998 is amended to remove the
restrictions on vesting and extend the period of
time within which Swanson shall be entitled to
exercise the outstanding stock options granted to
him thereunder to December 1, 2008,
notwithstanding the provisions of such Stock
Option Agreement.
5. The Agreement shall be binding upon and shall inure to
the benefit of the parties, their respective
representatives, agents, attorneys, successors and
assigns, and, in particular, without limiting the
generality of the foregoing, to CDC's and RBF's
directors, officers and employees and to Swanson's
heirs, executors, administrators, legal and personal
representatives and assigns.
6. This Agreement shall be deemed to be a contract made
under and governed by, the laws of the State of Texas,
without reference to principles of conflicts of law.
7. The provisions of this Agreement are severable. If a
court or other tribunal of competent jurisdiction rules
any provision of this Agreement is invalid or
unenforceable, such ruling will not affect the validity
or enforceability of any other provision of the
Agreement, and this Agreement shall be deemed to be
modified and amended so as to be enforceable to the
extent permitted by law.
This Agreement is signed in Houston, Texas on July ,
1999.
_______________________
Douglas E. Swanson
CLIFFS DRILLING COMPANY
By:____________________
Its duly authorized
officer
R&B FALCON CORPORATION
By:____________________
Its duly authorized
officer
Exhibit 15
R&B Falcon Corporation
We are aware that R&B Falcon Corporation has incorporated by
reference in its Registration Statements No. 333-43475, 333-
67755, 333-67757, 333-68101, 333-81179, 333-81181 and 333-81381
its Form 10-Q for the quarter ended June 30, 1999, which includes
our report dated July 23, 1999 covering the unaudited interim
financial information contained therein. Pursuant to Regulation
C of the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Houston, Texas
August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of R&B Falcon Corporation for the six months ended
June 30, 1999 and 1998 as restated to reflect the recontinuance of the
oil and gas operations for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 681 133
<SECURITIES> 0 0
<RECEIVABLES> 227 259
<ALLOWANCES> 21 10
<INVENTORY> 44 21
<CURRENT-ASSETS> 973 421
<PP&E> 3,990 2,518
<DEPRECIATION> 593 466
<TOTAL-ASSETS> 4,707 2,531
<CURRENT-LIABILITIES> 275 273
<BONDS> 2,710 1,173
244 0
0 0
<COMMON> 2 2
<OTHER-SE> 1,281 860
<TOTAL-LIABILITY-AND-EQUITY> 4,707 2,531
<SALES> 0 0
<TOTAL-REVENUES> 470 560
<CGS> 0 0
<TOTAL-COSTS> 429 333
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 71 29
<INCOME-PRETAX> (9) 204
<INCOME-TAX> (3) 78
<INCOME-CONTINUING> (11) 121
<DISCONTINUED> 0 9
<EXTRAORDINARY> (2) (22)
<CHANGES> 0 0
<NET-INCOME> (22) 108
<EPS-BASIC> (.11) .66
<EPS-DILUTED> (.11) .66
</TABLE>
