<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 16, 1999
R&B FALCON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-13729 76-0544217
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
901 Threadneedle, Houston, TX 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 496-5000
<PAGE>
Item 5. Other Events.
A. Recent Developments
On December 1, 1998, the Company acquired Cliffs Drilling Company for
approximately 27.1 million shares of the Company's common stock in a
transaction accounted for as a purchase. This acquisition increased the size of
the Company's jack-up rig fleet from 26 to 42 rigs, and added three self-
contained platform rigs, four mobile offshore production units and 11 land rigs
to the Company's fleet.
In December 1998, the Company entered into a drilling contract with Vastar
Resources, Inc. pursuant to which the Company will construct and provide a
semisubmersible drilling rig, the RBS8D, for a primary term of three years at
an operating dayrate of $199,950, with five one-year options. In addition,
Vastar may elect to extend the primary term to five years with three one-year
options, in which case the dayrate would be between $189,200 and $199,200,
depending upon when the primary term is extended.
In December 1998, Mobil U.K. Ltd. terminated its contract to use the
Company's Jack Bates semisubmersible rig on the grounds that two of the rig's
anchor cables broke. 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 received a proposal from Mobil to
recontract the Jack Bates for an initial well in a drilling program. The
Company believes this program may last approximately six months. This proposal
is without prejudice to either party's rights in the dispute over the
termination of the original contract. If the Company is not successful in
settling its dispute over the termination of the original contract, the Company
intends to commence legal proceedings to enforce its rights under the contract.
The Company believes that it will be able to find other work for the Jack
Bates, but that any such work will be at dayrates lower than the $200,000 day
rate established for the extended term of the original contract.
In February 1999, the Company entered into a drilling contract with Texaco
Overseas Petroleum Company pursuant to which the Company will construct and
provide a drillship, the Deepwater IV, for a primary term of three years.
Texaco has the right to extend the primary term to five years and has five one-
year options to extend the term thereafter. This drillship will replace the
cancelled Peregrine VIII drillship that the Company was going to provide to
Texaco. Samsung Heavy Industries Co. Ltd. is constructing the Deepwater IV,
which will be similar to the Deepwater Pathfinder (which was delivered by
Samsung in September 1998), the Deepwater Frontier (which was delivered by
Samsung in March 1999) and the Deepwater Millennium (which is currently under
construction by Samsung for the Company).
Since May 1998, there has been a downturn in demand for marine drilling
rigs, resulting in a decline in rig utilization and dayrates. The decline has
been particularly dramatic in the domestic barge and jack-up rig markets, where
the Company is one of the largest contractors. Utilization has fallen from
approximately 100% to approximately 60% in our domestic jackup fleet, and from
approximately 100% to approximately 30% in our domestic barge fleet. Dayrates
for our jack-ups have fallen from $35,000-$40,000 to $10,000-$13,000. In
response to the downturn in demand for the Company's services, the Company has
stacked rigs, reduced its workforce through layoffs and hiring freezes, and
closed regional offices, and is evaluating further cost saving measures.
2
<PAGE>
The Company initially determined to pursue its deepwater drillship program
by building new drillships and by converting other vessels to drillships. The
Company has experienced significant delays and cost overruns on its conversion
projects. As a result, the Company cancelled two conversion projects in
September 1998, contracted for a newbuild drillship, the Deepwater IV, and
invested in Navis ASA, a Norwegian company that is building a new drillship.
In December 1998, the Company issued $100 million of its 9 1/8% Senior Notes
due 2003 and $300 million of its 9 1/2% Senior Notes due 2008. The Company used
the proceeds to reduce borrowings under its revolving credit facility.
In March 1998, the Company decided to divest its oil and gas business, and
in the Company's financial statements filed with the SEC for the three years
ended December 31, 1997, 1996 and 1995 and the first three quarters of 1998,
the business was accounted for as a discontinued operation. As of March 1999,
the Company has not been able to divest this business on terms it found
acceptable and in accordance with generally accepted accounting principles the
Company has reclassified its financial statements as if this business had not
been discontinued. The summary and selected financial data included in this
report reflects this reclassification. The Company does not intend to engage in
any material activities in this business and still intends to divest this
business.
3
<PAGE>
B. Summary Consolidated Financial Data
The summary consolidated financial data set forth below gives effect to the
merger of Falcon Drilling Company, Inc. and Reading & Bates Corporation, which
occurred on December 31, 1997, under the "pooling-of-interests" method of
accounting. This means that these companies are treated as if they have always
been combined for accounting and financial reporting purposes. The summary
financial data for the year ended December 31, 1995 was derived from the
Company's audited consolidated financial statements, and for the year ended
December 31, 1994 from the separate audited consolidated financial statements
of Reading & Bates and Falcon. The summary financial data for the years ended
December 31, 1996, 1997 and 1998 was derived from the Company's consolidated
financial statements, adjusted to reflect the previously discontinued oil and
gas exploration and production operations as continuing operations for
accounting purposes only. You should read this data together with the Company's
historical consolidated financial statements, and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998(5)
------ ------ ----------- ---------- ----------
(unaudited) (unaudited) (unaudited)
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues........ $307.6 $390.3 $ 609.6 $ 933.0 $1,032.6
Operating income.......... 22.4 64.9 178.8 160.4 215.8
Income (loss) from
continuing operations
before
extraordinary item....... (12.7) 23.5 106.7 29.8 91.0
Net income (loss)(1)...... (12.7) 26.9 106.7 (6.2) 102.8
Net income (loss) from
continuing operations per
common share:
Basic................... (.18) .16 .70 .18 .54
Diluted................. (.18) .15 .67 .18 .54
Net income (loss) per
common share:
Basic................... (.18) .19 .70 (.04) .61
Diluted................. (.18) .18 .67 (.04) .61
Weighted average common
shares outstanding:
Basic................... 98.8 115.7 147.4 164.1 167.5
Diluted................. 99.5 121.8 157.7 166.2 168.8
Other Data:
EBITDA(2)................. $ 59.4 $111.3 $ 236.8 $ 307.2 $ 421.7
Ratio of EBITDA to
interest expense(3)...... 2.2x 3.2x 5.8x 7.4x 6.6x
Ratio of earnings to fixed
charges(4)............... -- 1.8x 3.4x 2.6x 2.0x
Depreciation and
amortization............. $ 38.4 $ 46.9 $ 62.3 $ 84.7 $ 97.6
Capital expenditures and
acquisitions............. 124.7 186.9 383.2 600.2 1,189.6
Balance Sheet Data (end of
period):
Working capital........... $ 9.2 $ 57.7 $ 195.3 $ (15.2) $ 175.3
Total assets.............. 810.9 946.8 1,455.8 1,933.0 3,709.3
Total debt................ 288.6 296.7 514.2 827.4 1,995.9
Stockholders' equity...... 356.3 472.6 716.7 728.0 1,250.2
</TABLE>
- --------
(1) After extraordinary gain of $3.4 million in 1995 and extraordinary loss of
$24.2 million in 1998.
(2) "EBITDA" means income (loss) from continuing operations before
extraordinary gain (loss), interest expense, taxes, depreciation,
amortization, cancellation of conversion projects and merger expenses.
EBITDA should not be considered as an alternative to net income as an
4
<PAGE>
indicator of the Company's operating performance, or as an alternative to
cash flow as a better measure of liquidity. EBITDA measures presented may
not be comparable to other similarly titled measures of other companies.
The Company believes EBITDA is a widely accepted financial indicator of a
company's ability to service debt.
(3) The Company believes that the ratio of EBITDA to interest expense provides
an investor with information as to the Company's current ability to meet
its interest costs.
(4) For the purpose of this calculation "earnings" represents income (loss)
from continuing operations before income tax expense, minority interest,
and extraordinary gain, plus fixed charges exclusive of interest
capitalized. "Fixed charges" consist of interest, whether expensed or
capitalized, amortization of debt expense and an estimated portion of
rentals representing interest expense. As a result of the loss incurred in
1994, earnings were insufficient to cover fixed charges by $3.4 million in
that year. Fixed charges for the year ended December 31, 1997 and 1998
exclude interest cost of $7.3 million and $22.5 million, respectively,
related to the debt of joint venture companies guaranteed by the Company
or its subsidiaries.
(5) Includes results of Cliffs Drilling, which the Company acquired on
December 1, 1998, for the month of December 1998 as the Company accounted
for this acquisition under the purchase method.
5
<PAGE>
C. Summary Unaudited Pro Forma Combined Financial Data
The summary unaudited pro forma combined financial data set forth below for
the year ended December 31, 1998 was derived from the Company's historical
financial statements and from the historical financial statements of Cliffs
Drilling. The summary unaudited pro forma combined financial data is presented
as if the acquisition of Cliffs Drilling and certain other acquisition and
financing transactions were consummated at the beginning of the period. The
summary unaudited pro forma combined financial data does not purport to
represent what the Company's and Cliffs Drilling's combined results of
operations actually would have been if the acquisition of Cliffs Drilling had
occurred as of the date indicated or will be for any future periods. The
summary unaudited pro forma combined financial data should be read in
conjunction with the unaudited pro forma condensed statement of operations, the
Company's historical financial statements, and the historical financial
statements of Cliffs Drilling.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998(4)
------------
(in
millions,
unaudited)
<S> <C>
Statement of Operations Data:
Operating revenues........................................... $1,349.0
Operating income............................................. 305.1
Income from continuing operations............................ 138.9
Other Data:
EBITDA (1)................................................... $ 544.6
Ratio of EBITDA to interest expense (2)...................... 6.7x
Ratio of earnings to fixed charges (3)....................... 2.4x
Depreciation and amortization................................ $ 130.0
</TABLE>
- --------
(1) "EBITDA" means income from continuing operations before extraordinary loss,
interest expense, taxes, depreciation, amortization, cancellation of
conversion projects and merger expenses. EBITDA should not be considered as
an alternative to net income as an indicator of the Company's operating
performance, or as an alternative to cash flow as a better measure of
liquidity. EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. The Company believes EBITDA
is a widely accepted financial indicator of a company's ability to service
debt.
(2) The Company believes that the ratio of EBITDA to interest expense provides
an investor with information as to its current ability to meet its interest
costs.
(3) For the purpose of this calculation "earnings" represent income from
continuing operations before income tax expense, minority interest, and
extraordinary loss, plus fixed charges exclusive of interest capitalized.
"Fixed charges" consist of interest, whether expensed or capitalized,
amortization of debt expense, and an estimated portion of rentals
representing interest expense. Fixed charges for the year ended December
31, 1998 exclude interest cost of $22.5 million related to the debt of
joint venture companies guaranteed by the Company or its subsidiaries.
(4) The pro forma data does not reflect any of the proceeds from the Company's
$400 million senior notes offering completed in December 1998, or the
application of the net proceeds from that offering, as the Company used the
net proceeds for general corporate purposes, including funding its
deepwater construction program. The Company has and will continue to use
its available borrowings under the bank facility for planned capital
expenditures, working capital and other general and corporate purposes.
6
<PAGE>
D. Unaudited Pro Forma Condensed Combined Financial Data
The unaudited pro forma condensed combined financial data set forth below
for the year ended December 31, 1998 was derived from the Company's historical
financial statements, adjusted to reflect the previously discontinued oil and
gas exploration and production operations as continuing operations for
accounting purposes only, and from the historical financial statements of
Cliffs Drilling. The unaudited pro forma condensed combined statement of
operations is presented as if the acquisition of Cliffs Drilling and certain
other acquisition and financing transactions were consummated at the beginning
of the period. The unaudited pro forma condensed combined statement of
operations does not reflect any anticipated cost savings which may be realized
as a result of the acquisition of Cliffs Drilling.
The unaudited pro forma condensed combined statement of operations does not
purport to represent what the combined results of operations actually would
have been if the acquisition of Cliffs Drilling had occurred as of the date
indicated or will be for any future periods. The unaudited pro forma condensed
combined statement of operations should be read in conjunction with the
Company's historical financial statements, which are incorporated by reference
in this offering memorandum, and the historical financial statements of Cliffs
Drilling.
The unaudited pro forma condensed combined financial data does not reflect
any of the proceeds from the $400 million senior notes offering that the
Company completed in December 1998 or the application of the net proceeds from
that offering since the Company used those net proceeds to reduce borrowings
under its revolving credit facility. The Company has used its available
borrowings under the revolving credit facility for planned capital
expenditures, working capital and other general corporate purposes.
7
<PAGE>
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Combined Unaudited Pro Forma Condensed Statement of Operations
For the Twelve Months Ended December 31, 1998
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- --------------------
Cliffs
R&B Falcon Drilling(1) Adjustments Combined
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES................ $1,032.6 $316.4 -- $1,349.0
-------- ------ ----- --------
COSTS AND EXPENSES:
Operating expenses................ 547.5 182.9 -- 730.4
Cancellation of conversion
projects......................... 118.3 -- -- 118.3
Depreciation and amortization .... 97.6 25.7 6.7 130.0
General and administrative........ 61.4 11.8 73.2
Merger expenses................... (8.0) (8.0)
-------- ------ ----- --------
Total costs and expenses...... 816.8 220.4 6.7 1,043.9
-------- ------ ----- --------
OPERATING INCOME.................. 215.8 96.0 (6.7) 305.1
-------- ------ ----- --------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest............. (63.9) (18.7) 1.7 (80.9)
Interest income................... 9.6 1.9 11.5
Other, net........................ (0.3) (0.7) (1.0)
-------- ------ ----- --------
Total other income (expense).. (54.6) (17.5) 1.7 (70.4)
-------- ------ ----- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE AND
MINORITY INTEREST................ 161.2 78.5 (5.0) 234.7
Income tax expense................ 58.9 26.8 (1.2) 84.5
-------- ------ ----- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE
MINORITY INTEREST................ 102.3 51.7 (3.8) 150.2
-------- ------ ----- --------
Minority interest................. 11.3 11.3
-------- ------ ----- --------
INCOME FROM CONTINUING
OPERATIONS....................... $ 91.0 $ 51.7 $(3.8) $ 138.9
======== ====== ===== ========
INCOME FROM CONTINUING OPERATIONS
PER SHARE:
Basic............................. $ 0.54 $ 3.25 $ 0.72
======== ====== ========
Diluted........................... $ 0.54 $ 3.23 $ 0.72
======== ====== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic............................. 167.5 15.9 8.9 192.3
======== ====== ===== ========
Diluted........................... 168.8 16.0 8.8 193.6
======== ====== ===== ========
</TABLE>
- --------
<TABLE>
<S> <C>
Reclassification of Cliff Drilling's Statement of Operations:
Operating Expenses as reported.......................................... $181.7
Less Gain on Disposition of Assets...................................... (0.3)
Plus Exchange Rate (Gain)/Loss.......................................... 1.5
------
Operating Expenses Reclassified......................................... $182.9
======
</TABLE>
(1) The unaudited Cliffs Drilling statement of operations is for the 11 months
ended November 30, 1998. On December 1, 1998, the Company acquired Cliffs
Drilling and accounted for the transaction as a purchase.
See Schedule of Adjustments to Combined Unaudited Pro Forma Condensed
Statement of Operations
8
<PAGE>
R&B FALCON CORPORATION AND CLIFFS DRILLING COMPANY
Schedule of Adjustments to Combined Unaudited Pro Forma Condensed Statement of
Operations
(in millions)
<TABLE>
<CAPTION>
Weighted Average
Depreciation Common Shares
For the Year Ended and Interest Income tax ----------------
December 31, 1998 amortization expense expense Basic Diluted
------------------ ------------ -------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C>
a) To adjust interest
expense for R&B
Falcon as if the $1.1
billion senior notes
issued in April 1998
had been issued
January 1, 1998.
Interest rates on the
$1.1 billion senior
notes are less than
on the debt
retired.............. $ -- $1.7 $ 0.6
b) To record additional
depreciation due to
the additions to
property and
equipment as a result
of recording Cliffs
Drilling's assets at
their estimated fair
value................ 5.1 (1.8)
c) To record
amortization of
excess cost over net
assets acquired based
on a 40 year
amortization
period............... 1.6
d) Additional shares for
conversion of Cliffs
Drilling's shares at
a ratio of 1.7 to 1
for R&B Falcon
shares............... 8.9 8.8
---- ---- ----- -------- --------
Totals for the year
ended December 31,
1998.................... $6.7 $1.7 $(1.2) 8.9 8.8
==== ==== ===== ======== ========
</TABLE>
9
<PAGE>
E. Selected Historical Consolidated Financial Data
The following table sets forth the Company's selected historical
consolidated financial data as of and for each of the years in the five-year
period ended December 31, 1998, giving effect to the merger of Reading & Bates
Corporation and Falcon Drilling Company, Inc. under the "pooling-of-interests"
method of accounting. The selected financial data was derived for the year
ended December 31, 1995 from the Company's audited consolidated financial
statements, and for the year ended December 31, 1994 from the separate audited
consolidated financial statements of Reading & Bates and Falcon. The selected
financial data for the years ended December 31, 1996, 1997 and 1998 was derived
from the Company's consolidated financial statements, adjusted to reflect the
recent decision to continue, for accounting purposes, the Company's previously
discontinued oil and gas exploration and production operations. You should read
the following data in conjunction with the Company's historical consolidated
financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998(4)
------ ------ ----------- ---------- ----------
(unaudited) (unaudited) (unaudited)
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues......... $307.6 $390.3 $ 609.6 $ 933.0 $1,032.6
Operating expenses......... 217.0 249.3 331.5 565.8 547.5
Cancellation of conversion
projects.................. -- -- -- -- 118.3
Depreciation and
amortization.............. 38.4 46.9 62.3 84.7 97.6
Merger expenses............ -- -- -- 66.4 (8.0)
General and
Administrative............ 29.8 29.2 37.0 55.7 61.4
------ ------ ------- ------- --------
Operating income........... 22.4 64.9 178.8 160.4 215.8
Interest expense, net of
interest capitalized...... 26.4 34.6 40.8 41.6 63.9
Other (income) expense,
net....................... (1.2) (2.3) (2.4) (5.1) (9.3)
------ ------ ------- ------- --------
Income (loss) from
continuing operations
before income tax
expenses, minority
interest and extraordinary
gain (loss)............... (2.8) 32.6 140.4 123.9 161.2
Income tax expense......... 7.3 6.3 27.0 84.7 58.9
Minority interest.......... (2.6) (2.8) (6.7) (9.4) (11.3)
------ ------ ------- ------- --------
Income (loss) from
continuing operations
before
extraordinary gain
(loss).................... (12.7) 23.5 106.7 29.8 91.0
Income (loss) from
discontinued operations... -- -- -- (36.0) 36.0
Extraordinary gain (loss).. -- 3.4 -- -- (24.2)
------ ------ ------- ------- --------
Net income (loss)(1)....... (12.7) 26.9 106.7 (6.2) 102.8
Dividends and accretion on
preferred stock........... 5.4 5.2 3.6 -- --
------ ------ ------- ------- --------
Net income (loss)
applicable to common
stock..................... $(18.1) $ 21.7 $ 103.1 $ (6.2) $ 102.8
====== ====== ======= ======= ========
Net income (loss) from
continuing operations per
common share:
Basic.................... (.18) .16 .70 .18 .54
Diluted.................. (.18) .15 .67 .18 .54
Net income (loss) per
common share:
Basic.................... (.18) .19 .70 (.04) .61
Diluted.................. (.18) .18 .67 (.04) .61
Weighted average common and
common equivalent shares
outstanding:
Basic.................... 98.8 115.7 147.4 164.1 167.5
Diluted.................. 99.5 121.8 157.7 166.2 168.8
Other Data:
EBITDA(1).................. $ 59.4 $111.3 $ 236.8 $ 307.2 $ 421.7
Ratio of EBITDA to interest
expense(2)................ 2.2x 3.2x 5.8x 7.4x 6.6x
Ratio of earnings to fixed
charges(3)................ -- 1.8x 3.4x 2.6x 2.0x
Capital expenditures and
acquisitions.............. $124.7 $186.9 $ 383.2 $ 600.2 $1,189.6
Balance Sheet Data (end of
period):
Working capital............ $ 9.2 $ 57.7 $ 195.3 $ (15.2) $ 175.3
Total assets............... 810.9 946.8 1,455.8 1,933.0 3,709.3
Total debt................. 288.6 296.7 514.2 827.4 1,995.9
Stockholders' equity....... 356.3 472.6 716.7 728.0 1,250.2
</TABLE>
- --------
10
<PAGE>
(1) "EBITDA" means income (loss) from continuing operations before
extraordinary (loss) gain, interest expense, taxes, depreciation,
amortization, cancellation of conversion projects and merger expenses.
EBITDA should not be considered as an alternative to net income as an
indicator of the Company's operating performance, or as an alternative to
cash flow as a better measure of liquidity. EBITDA measures presented may
not be comparable to other similarly titled measures of other companies.
The Company believes EBITDA is a widely accepted financial indicator of a
company's ability to service debt.
(2) The Company believes that the ratio of EBITDA to interest expense provides
an investor with information as to its current ability to meet its interest
costs.
(3) For the purpose of this calculation "earnings" represents income (loss)
from continuing operations before income tax expense, minority interest,
and extraordinary gain, plus fixed charges exclusive of interest
capitalized. "Fixed charges" consist of interest, whether expensed or
capitalized, amortization of debt expense, and an estimated portion of
rentals representing interest expense. As a result of the loss incurred in
1994, earnings were insufficient to cover fixed charges by $3.4 million in
that year. Fixed charges for the year ended December 31, 1997 and 1998
exclude interest cost of $7.3 million and $22.5 million, respectively,
related to the debt of joint venture companies guaranteed by the Company
and its subsidiaries.
(4) Includes results of Cliffs Drilling, which the Company acquired on December
1, 1998, for the month of December 1998 as the Company accounted for this
acquisition under the purchase method.
11
<PAGE>
F. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Business Combinations
On July 10, 1997, Falcon Drilling Company, Inc. and Reading & Bates
Corporation announced that they had agreed to combine their companies under a
new company-- R&B Falcon Corporation (the "Merger"). On December 23, 1997, the
Merger was approved by both companies' shareholders and on December 31, 1997,
the Merger was consummated. Each outstanding share of common stock of Falcon
was converted into one share of common stock of the Company and each
outstanding share of common stock of Reading & Bates was converted into 1.18
shares of common stock of the Company. The Merger has been accounted for as a
pooling of interests and, accordingly, the consolidated financial statements
for the periods presented have been restated to include the accounts of Reading
& Bates and Falcon.
On December 1, 1998, the Company acquired all of the outstanding stock of
Cliffs Drilling Company. Cliffs Drilling is a provider of daywork and turnkey
drilling services, mobile offshore production units and well engineering and
management services. Cliffs Drilling's fleet consists of 16 jack-up rigs, three
self-contained platform rigs, four mobile offshore production units and 11 land
rigs. The acquisition was effected pursuant to an Agreement and Plan of Merger
dated August 21, 1998, whereby each share of Cliffs Drilling's common stock was
converted into 1.7 shares of the Company common stock and cash in lieu of
fractional shares. Total consideration for Cliffs Drilling was approximately
$405.1 million. The Company issued approximately 27.1 million shares of its
common stock valued at approximately $385.3 million. This valuation was based
upon a price of $14.2125 per share of the Company common stock, which was the
average closing price per share of the Company's common stock during the period
in which the principal terms of the merger were agreed upon and the merger was
announced. In addition, the Company assumed Cliffs Drilling's outstanding stock
options valued at approximately $6.2 million and the Company paid approximately
$13.6 million in acquisition costs. The acquisition of Cliffs Drilling was
recorded using the purchase method of accounting. The excess of the purchase
price over the estimated fair value of net assets acquired amounted to
approximately $70.7 million, which has been accounted for as goodwill and is
being amortized over 40 years using the straight-line method. The consolidated
financial statements include Cliffs Drilling since December 1, 1998.
Recontinuance of Oil and Gas Operations
In March 1998, the Company decided to divest its oil and gas business, and
in the Company's financial statements previously filed with the SEC for the
three years ended December 31, 1997, 1996 and 1995 and the first three quarters
of 1998, the business was accounted for as a discontinued operation. As of
March 1999, the Company has not been able to divest this business on terms it
found acceptable and in accordance with generally accepted accounting
principles the Company has reclassified its financial statements as if this
business had not been discontinued. The Company does not intend to engage in
any material activities in this business and still intends to divest this
business. See "--Oil & Gas Activities."
12
<PAGE>
Results of Operations
The Company reported net income for 1998 of $102.8 million ($.61 per diluted
share) compared to a net loss of $6.2 million ($.04 per diluted share) for 1997
and net income of $106.7 million ($.67 per diluted share after preferred stock
dividends of $3.6 million) for 1996. Included in the 1998 results was a $118.3
million expense due to the cancellation of four drillship conversion projects,
an extraordinary loss of $24.2 million due to the extinguishment of debt
obligations, the reversal of $8.0 million of merger expenses due to an Internal
Revenue Service ruling and the reversal of discontinued operations expense of
$36.0 million of accrued estimated losses from operations until disposal
resulting from the accounting requirements for recontinuance. Included in the
1997 results are merger expenses of $66.4 million and accrued losses related to
discontinued operations of $36.0 million.
Operating Revenues
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
Operating Revenues (in millions) 1998 1997 1996
-------------------------------- --------- ----------------
<S> <C> <C> <C>
Deepwater...................................... $ 392.5 $ 349.3 $ 211.2
Shallow water.................................. 382.9 333.2 224.9
Inland water................................... 244.3 249.9 172.9
Engineering services and land operations....... 12.5 -- --
Development.................................... .4 .6 .6
--------- ------- -------
Total...................................... $ 1,032.6 $ 933.0 $ 609.6
========= ======= =======
</TABLE>
Operating revenues are primarily a function of dayrates and utilization.
Operating revenues increased $99.6 million from 1997 to 1998 due to the
following: The deepwater fleet revenues increased $43.2 million primarily due
to an increase in dayrates and due to the activation of the C. Kirk Rhein, Jr.
The shallow water fleet revenues increased $49.7 million primarily due to an
increase in dayrates for the jack-up fleet, specifically the international
jack-up fleet. Although the inland water fleet's revenues remained constant
from 1997 to 1998, there was an increase in the marine transportation fleet
revenues primarily due to fleet additions offset by a decrease in the barge
fleet due to decreased utilization. The engineering services and land
operations revenues were attributable to the purchase of Cliffs Drilling on
December 1, 1998.
Operating revenues increased $323.4 million from 1996 to 1997 due to the
following: The deepwater fleet revenues increased $138.1 million primarily due
to an increase in dayrates for the semisubmersibles and due to the addition of
two drillships. The shallow water fleet revenues increased $108.3 million
primarily due to an increase in dayrates for the jack-up fleet. The inland
water fleet revenues increased $77.0 million primarily due to an increase in
dayrates and utilization for the domestic and workover barges, and due to the
purchase of 68 tugs and 44 utility barges during 1997.
Operating Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
Operating Expenses (in millions) 1998 1997 1996
-------------------------------- -------- -------- --------
<S> <C> <C> <C>
Deepwater..................................... $ 184.4 $ 140.2 $ 90.1
Shallow water................................. 161.5 158.7 128.3
Inland water.................................. 169.1 136.7 110.2
Engineering services and land operations...... 10.5 -- --
Development................................... 22.0 130.2 2.9
-------- -------- --------
Total..................................... $ 547.5 $ 565.8 $ 331.5
======== ======== ========
</TABLE>
13
<PAGE>
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 of equipment and overhauls are performed on a basis of number of
hours operated in accordance with the Company's preventive maintenance program.
Operating expenses for an offshore unit are typically deferred or capitalized
as appropriate during periods of mobilization, contract preparation, major
upgrades or conversions unless corresponding mobilization revenue is
recognized, in which case such operating expenses are expensed as incurred.
Operating expenses decreased $18.3 million from 1997 to 1998 due to the
following: The development division expenses decreased $108.2 million due to
dryhole costs and impairment charges relating to oil and gas properties in
1997. Offsetting this decrease was a $44.2 million increase in the deepwater
fleet expenses primarily due to the activation of the C. Kirk Rhein, Jr. and
increased wage rates, a $32.4 million increase in the inland water fleet
expenses primarily due to the additions to the marine transportation fleet, a
$10.5 million increase in engineering services and land operations due to the
purchase of Cliffs Drilling and a $2.8 million increase in shallow water
expenses.
Operating expenses increased $234.3 million from 1996 to 1997 due to the
following: The development division expenses increased $127.3 million due to
dryhole costs and impairment charges relating to oil and gas properties. The
deepwater fleet expenses increased $50.1 million primarily due to the addition
of two drillships and the purchase of an FPSS vessel. The shallow water fleet
expenses increased $30.4 million primarily due to the change in the geographic
location of the jack-up fleet from one year to the next. The inland water fleet
expenses increased $26.5 million primarily due to the increased utilization of
the domestic barges, and due to the purchase of 68 tugs and 44 utility barges
during 1997.
Cancellation of Conversion Projects
Cancellation of conversion projects expense of $118.3 million in 1998 was
the result of the termination of the Peregrine VI, Peregrine VIII and two other
drillship conversion projects that were in the preliminary phases. Such expense
includes shipyard costs (for services performed and in settlement of contract
cancellation), Company personnel and contractor costs, engineering costs,
capitalized interest, and write down of the vessels that were purchased for
conversion. Such projects were cancelled due to continuing uncertainty as to
the final cost and expected delivery dates.
Depreciation and Amortization
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Depreciation and amortization (in
millions).................................. $ 97.6 $ 84.7 $ 62.3
======== ======== ========
</TABLE>
Despite the reduction in depreciation expense for the year ended December
31, 1998 of approximately $20.7 million due to the extension of the expected
useful lives of the Company's
14
<PAGE>
marine units effective January 1, 1998, depreciation expense increased $12.9
million in 1998 from 1997 due to the purchase and/or significant upgrades of
offshore and inland marine vessels during 1998 and late 1997.
The $22.4 million increase in depreciation and amortization expense in 1997
from 1996 was primarily due to the purchase and/or significant upgrades of
offshore and inland marine vessels.
General and Administrative Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
General and administrative expenses (in
millions).................................. $ 61.4 $ 55.7 $ 37.0
======== ======== ========
</TABLE>
General and administrative expenses increased $5.7 million in 1998 as
compared to 1997 primarily due to increases in payroll and related expenses.
General and administrative expenses increased $18.7 million in 1997 as
compared to 1996 primarily due to increases in payroll and related expenses
associated with employee incentive plans.
Merger Expenses
In connection with the Merger between Reading & Bates and Falcon, the
Company recorded $66.4 million of merger expenses in the fourth quarter of
1997. Merger expenses consisted primarily of employment contract termination
payments associated with executives of Reading & Bates, the acceleration of
unearned compensation of certain stock grants previously awarded to certain
Reading & Bates employees, fees for investment bankers, attorneys, and
accountants, and printing and other related costs. In 1998, the Company
recorded an $8.0 million reduction of merger expenses primarily due to an
Internal Revenue Service ruling received relating to taxes on executive
termination payments.
Interest Expense
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest expense, net of interest
capitalized (in millions).................. $ 63.9 $ 41.6 $ 40.8
======== ======== ========
</TABLE>
The $22.3 million increase in interest expense in 1998 as compared to 1997
was primarily attributable to the issuance of $1.1 billion in senior notes in
April 1998. This increase was partially offset by increased capitalized
interest related to significant upgrade and new build projects. Noncash
interest expense attributable to amortization of discounts associated with the
Company's debt obligations for the year ended December 31, 1998 was $3.4
million.
Despite an increase in capitalized interest during 1997 as compared to 1996
primarily to due the capitalization of interest related to significant upgrade
and new build projects, interest expense increased by $.8 million. This
increase was primarily attributable to increased borrowings under the Company's
credit facilities. Noncash interest expense attributable to amortization of
discount and deferrals associated with the 8% Senior Subordinated Convertible
Debentures due 1998 for the year ended December 31, 1997 was $2.6 million.
15
<PAGE>
Income Tax Expense
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (in millions).............. $ 58.9 $ 84.7 $ 27.0
======== ======== ========
</TABLE>
The $25.8 million decrease in income tax expense in 1998 as compared to 1997
was due to the non-deductible merger expenses, which were incurred in 1997, and
the tax benefits related to the recontinued operations being fully reserved in
1997. Despite a decrease in taxable income in 1997 as compared to 1996, income
tax expense increased $57.7 million in 1997 due to the permanent differences in
1997 discussed in the previous sentence and the use of previously reserved tax
benefits in 1996.
In 1998, the Company began recording income taxes at the full statutory
rates as future tax benefit carryforwards will no longer be reserved.
Minority Interest
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
-------- ----------------
<S> <C> <C> <C>
Minority Interest (in millions)................. $ 11.3 $ 9.4 $ 6.7
======== ======= =======
</TABLE>
Minority interest relates primarily to the results of Arcade Drilling and
the 25.6% attributable to stockholders other than the Company. Arcade Drilling
reported income in 1998, 1997 and 1996 of $44.2 million, $36.9 million and
$26.3 million, respectively.
Extraordinary Loss
Extraordinary loss, net of tax, for 1998 was due to the extinguishment of
debt obligations in connection with the issuance of new debt obligations.
Oil & Gas Activities
The Company's oil and gas business is operated primarily through its wholly
owned subsidiary Reading & Bates Development Co. ("Devco"), and to an
insignificant extent, through its wholly owned subsidiary Raptor Exploration
Company, Inc.
In 1998, Devco incurred dry holes costs of $11.7 million and asset
impairment charges of $11.3 million. In 1997, Devco incurred dry holes costs of
$65.1 million and asset impairment charges of $42.8 million. At December 31,
1998, none of the Company's oil and gas properties contained proved reserves
and all such properties had been written off. It is the Company's intention to
dispose of this operation.
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.
16
<PAGE>
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 $2.0 million, the majority of which was capitalized
in 1998. Software replacements in Cliffs Drilling's foreign offices will be
completed during 1999 at a total cost of approximately $.3 million. The Company
additionally determined that certain of its remaining accounting software and
systems were not Y2K compliant. Previously existing Company personnel have
completed the majority of these modifications and the remaining non-compliant
software will be undergoing a previously planned upgrade in the second quarter
of 1999.
To facilitate the embedded technology systems investigation, which primarily
relates to technology aboard the Company's drilling units, the Company hired an
additional employee whose primary responsibility is the evaluation of these
technology systems. This evaluation should be completed by the second quarter
of 1999. The equipment evaluated thus far has not demonstrated any equipment
failures or other Y2K compliance issues. Based on the number and type of
drilling units tested thus far, the Company estimates that the total cost to
replace or upgrade non-compliant embedded technology systems will be less than
$.5 million.
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. 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.
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.
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. 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.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $260.9 million for 1998, as
compared to $331.4 million and $167.6 million for 1997 and 1996, respectively.
Fluctuations between the years is primarily due to the result of improved
dayrates and fleet additions, net of changes in the components of working
capital.
Net cash used in investing activities was $1,075.2 million for 1998, as
compared to $610.9 million for 1997 and $365.1 million for 1996. The increases
in each year were due to increasing levels of capital expenditures, primarily
related to the significant capital projects involving the construction or
upgrade of drilling units and rig and vessel acquisitions.
17
<PAGE>
Net cash provided by financing activities was $934.4 million for 1998, as
compared to $301.2 million for 1997 and $319.6 million for 1996. The increase
in net cash provided by financing activities in 1998 over 1997 was primarily
due to proceeds from two senior note offerings during 1998. The decrease in net
cash provided by financing activities in 1997 over 1996 was primarily the
result of a decline in proceeds from the issuance of common stock more than
offsetting increased borrowings under two credit facilities with two syndicates
of commercial banks.
Net cash provided by business held for sale was $1.8 million for 1998 as
compared to net cash used in business held for sale of $94.0 million for 1997
and $39.5 million for 1996. The cash provided in 1998 was primarily due to the
sale of oil and gas properties and the collection of accounts receivable. The
increase in use of cash from 1996 to 1997 was primarily due to the increased
level of purchases of oil and gas properties.
Capital Expenditure Commitments
The Company has numerous significant capital expenditure projects under way
involving the construction or upgrade of drilling units. The following is a
list of such projects:
<TABLE>
<CAPTION>
Expenditures
Water Depth Estimated Contract Made thru
Capability Delivery Term Estimated December 31,
(feet) Date (years) Cost 1998
----------- ---------------- -------- --------- ------------
(in millions)
<S> <C> <C> <C> <C> <C>
Drillships:
DEEPWATER PATHFINDER
(1) 10,000 Delivered 5 $ 275.0 $ 257.7
DEEPWATER FRONTIER (2) 10,000 Delivered 2.5 270.0 191.9
DEEPWATER MILLENNIUM 10,000 2nd quarter 1999 4(3) 270.0 151.8
DEEPWATER IV 10,000 3rd quarter 2000 3 305.0 84.0
PEREGRINE IV 9,200 2nd quarter 1999 6 210.0 152.8
PEREGRINE VII (4) 7,800 3rd quarter 1999 3 270.0 181.1
Semisubmersibles:
FALCON 100 2,450 2nd quarter 1999 4 118.0 91.4
RBS8M (formerly RBS6) 8,000 1st quarter 2000 5 315.0 130.9
RBS8D 10,000 4th quarter 2000 3 325.0 0.2
-------- --------
$2,358.0 $1,241.8
======== ========
</TABLE>
- --------
(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 2 1/2 of the
first 5 years after delivery. Conoco will use 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 3 years after delivery, then
the Company will alternate use of the rig with Statoil every 6 months for
the next 2 years.
(4) BP Amoco has indicated that it may cancel this contract because the rig has
not been delivered on time. The Company is currently marketing this rig for
work if BP Amoco cancels this contract.
18
<PAGE>
In the third quarter of 1998, the Company cancelled the Peregrine VI and the
Peregrine VIII drillship conversion projects due to continuing uncertainty as
to final cost and expected delivery dates. As a result, the drilling contract
on the Peregrine VIII was terminated on September 24, 1998, and the drilling
contract on the Peregrine VI was terminated on January 1, 1999. Both
terminations were without prejudice to any rights of the oil companies. The
Company believes that, based on provisions of the contracts that preclude
recovery of indirect or consequential damages and projected rig availability in
the offshore drilling industry, the Company will not have any material
liability under these drilling contracts as a result of the termination
thereof. The contracts with the shipyard for conversion of the Peregrine VI and
the Peregrine VIII have been cancelled. In addition, in the fourth quarter of
1998, the Company cancelled two additional drillship conversion projects that
were in the preliminary phases. As a result of the termination of these four
drillship conversion projects, the Company expensed $118.3 million in related
costs in 1998. See "--Results of Operations".
In October 1998, the Company entered into a contract with Samsung to
construct a drillship (the Deepwater IV) that will be similar to the Deepwater
Pathfinder (which was delivered by Samsung to the Company in September 1998)
and the Deepwater Frontier (which was delivered by Samsung in March 1999) and
the Deepwater Millennium (which is currently under construction by Samsung for
the Company). Immediately following delivery of the Deepwater IV from the
shipyard, the drillship is contracted for three years to Texaco. This contract
is a substitute for the previously contracted Peregrine VIII.
In December 1998, the Company and Vastar Resources, Inc. ("Vastar") entered
into a contract pursuant to which the Company will construct and provide a
semisubmersible drilling rig (the RBS8D) for a term of three years (with five
one-year options), at an operating dayrate of $199,950. In addition, Vastar may
elect to extend the primary term to five years, with three one-year options, in
which case the dayrate would be between $189,200 and $199,200, depending upon
when the primary term is extended.
In September 1998, the Company and Navis ASA ("Navis"), a Norwegian public
company which is constructing a dynamically positioned drillship (the Navis
Explorer I), entered into an agreement pursuant to which the Company agreed to
make a capital contribution to Navis of $50.0 million in exchange for stock in
Navis. The Navis Explorer I is designed to drill in 10,000 feet of water and is
being constructed by Samsung at an estimated cost of $280.0 million, with a
scheduled delivery in the second quarter of 2000. The Company has contributed
$20 million in cash and will contribute an additional $30.0 million of
equipment and equipment purchase orders. It is expected that the Company will
own approximately 38% of the outstanding stock of Navis following such
contributions. Most of the equipment and equipment purchase orders that will be
contributed by the Company were acquired by the Company in connection with the
Peregrine VI and Peregrine VIII projects and are no longer required for such
projects in light of their cancellation. Navis and the Company have entered
into an agreement pursuant to which the Company will supervise construction of
the drillship and manage it following its delivery.
In connection with the Peregrine VI and Peregrine VIII projects and a third
drillship project, the Company purchased or committed to purchase drilling
equipment with an aggregate cost of approximately $285.0 million. This
equipment constitutes all of the material drilling equipment necessary to
outfit two deepwater drillships (although a substantial portion of such
equipment can be used on semisubmersible rigs). The Company expects to use
approximately half of this equipment to outfit the Deepwater IV, and
approximately $30.0 million as a portion of its contribution to Navis. The
balance of the equipment is expected to be maintained by the Company as
inventory.
19
<PAGE>
The Peregrine IV, Peregrine VII, and Falcon 100 will be completed later than
the required commencement dates under the drilling contracts for such rigs and
at costs significantly in excess of original estimates. The customer for the
Peregrine VII has indicated that it may cancel the drilling contract due to
construction delays. The Company believes that it will be able to find work for
the Peregrine VII at dayrates similar to its previously contracted levels.
However, the Company expects that any new contracts will likely be short-term
or on a well-to-well basis. Also, the Company will be subject to late delivery
penalties under the applicable drilling contracts for the Peregrine IV and
Falcon 100, (approximately $41,500 per day, up to a maximum of approximately
$38.6 million, for the Peregrine IV, and approximately $26,500 per day, up to a
maximum of approximately $14.7 million, for the Falcon 100). If the Peregrine
IV and Falcon 100 are not delivered within 240 and 180 days, respectively, of
the commencement date of the applicable drilling contract, the customer may
cancel its contract.
In December 1998, Mobil U.K. Ltd. terminated its contract to use the
Company's Jack Bates semisubmersible rig on the grounds that two of the rig's
anchor cables broke. 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 received a proposal from Mobil to
recontract the Jack Bates at a dayrate of approximately $156,000 for an initial
well in a drilling program. The Company believes this program may last
approximately six months. This proposal is without prejudice to either party's
rights in the dispute over the termination of the original contract. If the
Company is not successful in settling its dispute over the termination of the
original contract, the Company intends to commence legal proceedings to enforce
its rights under the contract. The Company believes that it will be able to
find other work for the Jack Bates, but that any such work will be at lower
dayrates than the $200,000 day rate established for the extended term of the
original contract.
Liquidity
At December 31, 1998, the Company had approximately $413.6 million in the
aggregate of cash, cash equivalents and borrowing capacity under its revolving
credit facilities.
At December 31, 1998, approximately $99.4 million of total consolidated cash
and cash equivalents of $177.4 million were restricted from the Company's use
outside of Arcade Drilling's activities.
The Company is currently constructing or significantly upgrading seven
wholly owned deepwater drilling rigs. The Company estimates the gross capital
expenditures on these projects will be approximately $1.8 billion, of which
approximately $1.0 billion remains to be funded by the Company. Since May 1998,
however, there has been a downturn in demand for marine drilling rigs resulting
in a decline in rig utilization and day rates. The decline has been
particularly dramatic in the domestic barge and jack-up rig markets where the
Company is one of the largest contractors. As a result, although the Company's
operating revenues and EBITDA increased by $99.6 million and $114.5 million,
respectively, from 1997 to 1998, on a quarterly basis during 1998 the Company
experienced a decline in operating revenues from $279.4 million for the first
quarter of 1998 to $228.7 million for the fourth quarter of 1998 and a decline
in EBITDA from $143.8 million to $66.1 million for the same periods. As a
result, the Company's cash flow from operations, cash on hand, and funds
available under its existing credit facilities will not be sufficient to
satisfy the Company's short-term and long-term working capital needs, planned
investments, capital expenditures, debt,
20
<PAGE>
lease and other payment obligations. In order to meet these requirements it
will be necessary for the Company to raise additional capital in the form of
equity, debt, or both. Its failure to do so will require it to sell assets,
terminate projects, or both.
The Company is currently evaluating two project financings to meet a portion
of its additional capital requirements. The first is an approximately $270.0
million financing in the form of a synthetic lease that would be collateralized
by the drillship Deepwater Frontier and drilling contract revenues from such
drillship. Proceeds of such financing, if obtained, would be used in part to
repay an interim financing facility, under which $135.0 million is currently
outstanding. The foregoing interim loan has been made to a limited liability
company which will operate the Deepwater Frontier and which is owned 60% by the
Company and 40% by Conoco. The Company has guaranteed repayment of 60% of this
interim loan. The second financing being contemplated is an approximately
$250.0 million project financing that would be collateralized by the
semisubmersible RBS8M (formerly the RBS6), as well as the drilling contract
revenues from such rig.
There can be no assurance that these or any other additional financings can
be obtained or, if obtained, that they will be on terms favorable to the
Company or for the amounts needed. The Company's indenture covenants limit its
ability to incur additional indebtedness and to secure that debt. In the event
that the Company is unable to obtain its requisite financing, the Company would
have to sell assets or terminate or suspend one or more construction projects.
Termination or suspension of a project may subject the Company to claims for
penalties or damages under the construction contracts or drilling contracts for
rigs that are being constructed. In addition, asset sales made under duress in
today's drilling market may not yield attractive sales prices. Accordingly, the
inability of the Company to complete such financings would have a material
adverse effect on the Company's financial condition.
The liquidity of the Company should also be considered in light of the
significant fluctuations in demand that may be experienced by drilling
contractors as changes in oil and gas producers' expectations and budgets
occur, primarily in response to declines in prices for oil and gas. These
fluctuations can rapidly impact the Company's liquidity as supply and demand
factors directly affect utilization and dayrates, which are the primary
determinants of cash flow from the Company's operations. The decline in oil and
gas prices since 1997 has negatively impacted the Company's performance,
particularly in the shallow water U.S. Gulf market. The Company believes a
continued depression in oil and gas prices will have a material adverse effect
on the Company's financial position and results from operations.
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.
The Company has based its estimates regarding its financing needs on the
assumption that conditions in the marine contract drilling industry will remain
approximately the same as currently exist through 1999 and will improve in
2000. If conditions during these periods are less favorable than the Company
has assumed, the Company may be required to such additional financing. Any
additional financing would be subject to the risks and contingencies described
above.
21
<PAGE>
The impact of inflation on the Company's operations for the three years
ended December 31, 1998 has not been material.
Debt Offerings
1998
.Pursuant to an offering in April 1998, the Company issued $1.1 billion
principal amount of senior notes resulting in net proceeds of
approximately $1,082.9 million. The senior notes bear interest at
varying rates from 6.5% to 7.375%.
.Pursuant to an offering in December 1998, the Company issued $400.0
million principal amount of senior notes resulting in net proceeds of
approximately $392.3 million. The senior notes bear interest at
9.125% and 9.5%.
Credit Facilities
The Company has four bank facilities. The first is a $350.0 million
revolving credit facility with a syndicate of banks. The first $100.0 million
of borrowing under this credit facility is secured by a pledge of the stock of
one of the Company's three major operating subsidiaries. At December 31, 1998,
interest was accruing under this credit facility at LIBOR plus .75% for
borrowings up to $100.0 million and at LIBOR plus 1.375% for borrowings in
excess of $100.0 million. This credit facility matures on January 24, 2002. As
of the date hereof, the Company has drawn the full $350.0 million under this
facility.
The second bank facility is a $125.0 million interim construction facility
with a syndicate of banks for the construction of the Deepwater Millennium.
This facility matures on June 30, 1999, and bears interest at LIBOR plus 1.25%.
As of the date hereof, the Company has drawn the full $125.0 million under this
facility.
The third bank facility is an interim construction facility with a syndicate
of banks for the construction of the Deepwater Frontier. This interim loan has
been made to a limited liability company which operates the Deepwater Frontier
and which is owned 60% by the Company and 40% by Conoco. The Company has
guaranteed repayment of 60% of this interim loan. This facility matures on
March 31, 1999, and bears interest at LIBOR plus .5%. As of the date hereof,
$135 million is outstanding under this facility.
The fourth bank facility is a $35.0 million revolving credit facility
maintained by Cliffs Drilling. This facility matures on May 31, 2000 and bears
interest at .25% plus the greater of the prevailing Federal Funds Rate plus .5%
or a referenced average prime; or at the adjusted LIBOR rate plus 2%. At
December 31, 1998, Cliffs Drilling had $.4 million in letters of credit
outstanding, thereby leaving $34.6 million available under this credit
facility.
22
<PAGE>
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 of the
undersigned thereunto duly authorized.
R&B FALCON CORPORATION
/s/ L. E. Moss
By___________________________________
Leighton E. Moss
Senior Vice President
Dated: March 16, 1999
23
