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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 September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-79363
RBF FINANCE CO.
(Exact name of registrant as specified in its charter)
Delaware 76-0599699
(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___
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Forward-Looking Statements and Assumptions
RBF Finance Co. (the "Company") is a limited purpose Delaware
corporation organized on March 19, 1999 solely for the purpose of
and limited to issuing secured notes as full recourse obligations
of the Company and loaning the proceeds from the sale of the
secured notes to R&B Falcon Corporation ("R&B Falcon"). The
Company is an affiliate of R&B Falcon through common management,
and all of the Company's shares are owned by management and
shareholders of R&B Falcon. All of the Company's future cash flows
and long-term obligations are guaranteed by R&B Falcon.
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 R&B Falcon'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 R&B Falcon's customers,
the actions of R&B Falcon's competitors and economic conditions
generally.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
RBF Finance Co.
The financial statements for the three months ended September
30, 1999 and for the period from inception (March 19,1999) to
September 30, 1999, 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 such periods
included herein have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Results of operations for the three months ended September 30,
1999 and for the period from inception (March 19,1999) to
September 30, 1999 are not necessarily indicative of results of
operations which will be realized for the period from inception
(March 19, 1999) to December 31, 1999. The financial statements
should be read in conjunction with the Company's audited financial
statements as of March 31, 1999 and for the period from inception
(March 19, 1999) to March 31, 1999 which are included in the
Company's Form S-4 (registration no. 333-79363) as filed with the
Securities and Exchange Commission on May 26, 1999.
RBF FINANCE CO.
BALANCE SHEET
(in thousands)
(unaudited)
AS OF
SEPTEMBER 30,
1999
-------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1
Interest receivable 3,736
---------
Total current assets 3,737
RECEIVABLE FROM R&B FALCON CORPORATION 450
LOANS TO R&B FALCON CORPORATION 800,000
---------
TOTAL ASSETS $ 804,187
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accrued interest expense $ 3,972
Accrued income taxes 76
---------
Total current liabilities 4,048
---------
LONG-TERM OBLIGATIONS 800,000
---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Capital in excess of par value 1
Retained earnings 138
---------
Total stockholders' equity 139
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 804,187
=========
The accompanying notes are an integral part of the financial statements.
RBF FINANCE CO.
STATEMENT OF OPERATIONS
(in thousands)
(unaudited)
FOR THE FOR THE PERIOD
THREE FROM INCEPTION
MONTHS ENDED (MARCH 19, 1999) TO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------- -------------------
REVENUES:
Interest income $ 22,534 $ 44,490
Commitment fee - 1,746
--------- ---------
Total revenues 22,534 46,236
--------- ---------
EXPENSES:
Interest expense 22,375 45,993
Other expense 29 29
--------- ---------
Total expenses 22,404 46,022
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 130 214
INCOME TAX EXPENSE 46 76
--------- ---------
NET INCOME $ 84 $ 138
========= =========
The accompanying notes are an integral part of the financial statements.
RBF FINANCE CO.
STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE PERIOD
FROM INCEPTION
(MARCH 19, 1999) TO
SEPTEMBER 30, 1999
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 138
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in assets and liabilities:
Accrued interest income (3,736)
Receivable from R&B Falcon Corporation (450)
Accrued interest expense 3,972
Accrued income taxes 76
---------
Net cash provided by operating activities -
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to R&B Falcon Corporation (800,000)
---------
Net cash used in investing activities (800,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations 800,000
Issuance of common stock 1
---------
Net cash provided by financing activities 800,001
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1
=========
The accompanying notes are an intregral part of the financial statements.
RBF FINANCE CO.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
A) BUSINESS, INDUSTRY CONDITIONS AND LIQUIDITY
RBF Finance Co. (the "Company") is a limited purpose Delaware
corporation organized on March 19, 1999 solely for the purpose of
and limited to issuing secured notes as full recourse obligations
of the Company and loaning the proceeds from the sale of the
secured notes to R&B Falcon Corporation ("R&B Falcon"). The
Company is an affiliate of R&B Falcon through common management,
and all of the Company's shares are owned by management and
shareholders of R&B Falcon. On March 26, 1999, the Company issued
two series of senior secured notes with an aggregate principal
amount of $800.0 million (the "Senior Secured Notes"). The Senior
Secured Notes consist of $400.0 million of 11% senior secured
notes due 2006 and $400.0 million of 11.375% senior secured notes
due 2009.
All of the Company's future cash flows and long-term
obligations are guaranteed by R&B Falcon. The following is a
description of R&B Falcon's industry conditions and liquidity.
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
experienced in 1998 and through the first quarter of 1999. 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 R&B Falcon 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 led
to 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.
Liquidity
During the first nine months of 1999, R&B Falcon received net
proceeds of approximately $1.5 billion from the issuance of senior
notes, preferred stock and the project financing for the
construction of the Deepwater Nautilus. R&B Falcon 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. In addition, in September 1999, the limited liability
company which operates the Deepwater Frontier, which is owned 60%
by R&B Falcon and 40% by Conoco, completed a $270.0 million
project financing. As a result of such financing, R&B Falcon
received $123.3 million for the repayment of advances made to the
limited liability company. Also, R&B Falcon is considering
certain asset sales, including the Seillean and Iolair. As of
September 30, 1999, R&B Falcon had $862.8 million of cash, cash
equivalents, short-term investments and cash dedicated to capital
projects.
R&B Falcon has substantially completed or is currently
constructing or significantly upgrading nine deepwater drilling
rigs. R&B Falcon estimates its capital expenditure commitments on
these projects and its other routine capital expenditures for the
remainder of 1999 and 2000 to total approximately $663.0 million.
R&B Falcon believes its projected level of cash flows from
operations, which assumes an industry recovery in 2000, cash on
hand and potential asset sales will be sufficient to satisfy R&B
Falcon's short-term and long-term working capital needs, planned
investments, capital expenditures, debt, lease and other payment
obligations. If R&B Falcon were to build excess cash balances, it
will most likely use a portion of the excess to retire debt
obligations.
B) LOANS TO R&B FALCON
On March 26, 1999, the Company entered into ten Senior
Secured Loan Agreements with R&B Falcon each of which is secured
by one of R&B Falcon's drilling rigs or the construction contract
to build a drilling rig (the "Loans to R&B Falcon"). Interest on
the Loans to R&B Falcon is receivable semiannually on March 15 and
September 15. Each loan is equally divided into a 7-year tranche
and a 10-year tranche. The 7-year tranche of the loans bear
interest on the unpaid principal amount thereof from the date
funded through maturity at a rate equal to 11% per annum plus 2
basis points per annum. The 10-year tranche of the loans bear
interest on the unpaid principal amount thereof from the date
funded through maturity at a rate equal to 11.375% per annum plus
2 basis points per annum. In addition, the Company charged R&B
Falcon a commitment fee of 7% per annum from March 26, 1999 to the
date the loans were funded. The loan agreements contained
conditions that were to be met by R&B Falcon before the loans were
to be funded. As of September 30, 1999, R&B Falcon had met the
conditions on all of the ten loans.
Loans to R&B Falcon at September 30, 1999 consisted of the
following (in thousands):
7-year 10-year Total Collateral
--------- --------- --------- ----------
Loan to R&B Falcon $ 112,800 $ 112,800 $ 225,600 Peregrine VII
Loan to R&B Falcon 104,950 104,950 209,900 Deepwater Millennium
Loan to R&B Falcon 83,000 83,000 166,000 Deepwater Expedition
Loan to R&B Falcon 52,650 52,650 105,300 Falcon 100
Loan to R&B Falcon 14,250 14,250 28,500 Peregrine II
Loan to R&B Falcon 11,000 11,000 22,000 Deepwater Discovery
Loan to R&B Falcon 8,000 8,000 16,000 Peregrine I
Loan to R&B Falcon 5,950 5,950 11,900 W.D. Kent
Loan to R&B Falcon 5,400 5,400 10,800 FALRIG 82
Loan to R&B Falcon 2,000 2,000 4,000 Harvey H. Ward
--------- --------- ---------
Total $ 400,000 $ 400,000 $ 800,000
========= ========= =========
C) LONG-TERM OBLIGATIONS
Long-term obligations at September 30, 1999 consisted of the
following (in thousands):
11% Senior Secured Notes due March 2006 $ 400,000
11.375% Senior Secured Notes due March 2009 400,000
---------
Long-term obligations $ 800,000
=========
In March 1999, the Company issued the Senior Secured Notes.
As a result, the Company received proceeds of approximately $800.0
million. The Senior Secured Notes are secured by the Loans to R&B
Falcon. R&B Falcon also guaranteed the payment of the Senior
Secured Notes by the Company. Interest is payable semiannually on
March 15 and September 15 on the Senior Secured Notes. R&B Falcon
paid expenses related to the offering. The Company used the
proceeds to loan $800.0 million to R&B Falcon. The Senior Secured
Notes have covenants, related to R&B Falcon, which limit or
prohibit R&B Falcon's ability to incur additional indebtedness,
create liens and sell assets.
As of September 30, 1999, the Company estimates the fair
value of its debt obligations to be $839.0 million.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
RBF Finance Co. (the "Company") is a limited purpose Delaware
corporation organized on March 19, 1999 solely for the purpose of and
limited to issuing secured notes as full recourse obligations of the
Company and loaning the proceeds from the sale of the secured notes to
R&B Falcon Corporation ("R&B Falcon"). The Company is an affiliate of
R&B Falcon through common management, and all of the Company's shares
are owned by management and shareholders of R&B Falcon. On March 26,
1999, the Company issued two series of senior secured notes with an
aggregate principal amount of $800.0 million (the "Senior Secured
Notes"). The Senior Secured Notes consist of $400.0 million of 11%
senior secured notes due 2006 and $400.0 million of 11.375% senior
secured notes due 2009.
Industry Conditions
All of the Company's future cash flows and long-term obligations
are guaranteed by R&B Falcon. The following is a description of R&B
Falcon's 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 experienced in 1998 and through the first
quarter of 1999. 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 R&B Falcon 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 led to 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.
Results of Operations
As the Company was organized on March 19, 1999 (see General
above), there are no comparable periods for the previous year. The
Company's results of operations for the three months ended September
30, 1999 and for the period from inception (March 19, 1999) to
September 30, 1999 consists of interest and commitment fee revenues
from the loans to R&B Falcon offset by interest expense on the Senior
Secured Notes.
Liquidity And Capital Resources
Cash Flows
Net cash used in investing activities was $800.0 million for the
period from inception (March 19, 1999) to September 30, 1999 and was
the result of loans to R&B Falcon.
Net cash provided by financing activities was $800.0 million for
the period from inception (March 19, 1999) to September 30, 1999 and
was the result of proceeds from the issuance of debt obligations.
Liquidity
During the first nine months of 1999, R&B Falcon received net
proceeds of approximately $1.5 billion from the issuance of senior
notes, preferred stock and the project financing for the construction
of the Deepwater Nautilus. R&B Falcon 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. In addition, in
September 1999, the limited liability company which operates the
Deepwater Frontier, which is owned 60% by R&B Falcon and 40% by
Conoco, completed a $270.0 million project financing. As a result of
such financing, R&B Falcon received $123.3 million for the repayment
of advances made to the limited liability company. Also, R&B Falcon
is considering certain asset sales, including the Seillean and Iolair.
As of September 30, 1999, R&B Falcon had $862.8 million of cash, cash
equivalents, short-term investments and cash dedicated to capital
projects.
R&B Falcon has substantially completed or is currently
constructing or significantly upgrading nine deepwater drilling rigs.
R&B Falcon estimates its capital expenditure commitments on these
projects and its other routine capital expenditures for the remainder
of 1999 and 2000 to total approximately $663.0 million.
R&B Falcon believes its projected level of cash flows from
operations, which assumes an industry recovery in 2000, cash on hand
and potential asset sales will be sufficient to satisfy R&B Falcon's
short-term and long-term working capital needs, planned investments,
capital expenditures, debt, lease and other payment obligations. If
R&B Falcon were to build excess cash balances, it will most likely use
a portion of the excess to retire debt obligations.
Year 2000
The Company is dependent upon R&B Falcon for its Year 2000
("Y2K") compliance and the following is a description of R&B Falcon's
Y2K compliance efforts. R&B Falcon has focused its Y2K compliance
efforts in three areas: information technology systems, embedded
technology systems and systems used by third parties with which R&B
Falcon has a substantial relationship. R&B Falcon has completed its
investigation and evaluation of these systems and has substantially
completed 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, R&B Falcon determined
that the accounting software utilized by Cliffs Drilling (a wholly-
owned subsidiary of R&B Falcon) 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 has been
completed during 1999 at a total cost of approximately $.2 million.
R&B Falcon additionally determined that certain of its remaining
accounting software and systems were not Y2K compliant. R&B Falcon
personnel have completed the majority of these modifications and the
remaining non-compliant software will phased out.
Embedded Technology Systems. Embedded technology systems
primarily relate to the technology on board R&B Falcon'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, R&B Falcon completed on site testing and
received confirmation of Y2K compliance from the manufactures of these
systems.
To facilitate the embedded technology systems investigation, R&B
Falcon 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, R&B Falcon estimates
that the total cost to replace or upgrade non-compliant embedded
technology systems will be less than $.5 million.
Third Party Systems. R&B Falcon 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 R&B Falcon. R&B Falcon 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 R&B Falcon'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 R&B Falcon's major suppliers or
customers do not successfully and timely achieve Y2K compliance, R&B
Falcon's operations could be adversely affected.
Contingency Plans. R&B Falcon is continuing to monitor, on an
ongoing basis, the problems and uncertainties associated with its Y2K
issues and their potential consequences. R&B Falcon 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, R&B Falcon 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.
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 Company's debt obligations as of September
30, 1999 consist of $400.0 million at a fixed rate of 11% due March
2006 and $400.0 million at a fixed rate of 11.375% due March 2009.
The estimated fair value of both debt obligations at September 30,
1999 was $839.0 million.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
There were no Current Reports on Form 8-K filed during the
three months ended September 30, 1999.
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.
RBF FINANCE CO.
---------------
Date: November 10, 1999 By /s/T. W. Nagle
--------------------
T. W. Nagle
Vice President
(Principal Financial Officer)
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of RBF Finance Co. for the period from inception
(March 19, 1999) to September 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-19-1999
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