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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 March 31, 2000
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 a director 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 March 31, 2000 and
for the period from inception (March 19,1999) to March 31, 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 March 31, 2000 are not
necessarily indicative of results of operations which will be realized for
the year ending December 31, 2000. The financial statements should be read
in conjunction with the Company's Form 10-K for the period ended December
31,1999.
RBF FINANCE CO.
BALANCE SHEET
(in thousands)
MARCH 31, DECEMBER 31,
2000 1999
--------- -----------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 1
Interest receivable 3,736 26,151
--------- ---------
Total current assets 3,737 26,152
RECEIVABLE FROM R&B FALCON CORPORATION 540 460
LOANS TO R&B FALCON CORPORATION 800,000 800,000
--------- ---------
TOTAL ASSETS $ 804,277 $ 826,612
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accrued interest expense $ 3,978 $ 26,353
Accrued income taxes 104 90
--------- ---------
Total current liabilities 4,082 26,443
--------- ---------
LONG-TERM OBLIGATIONS 800,000 800,000
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - -
Capital in excess of par value 1 1
Retained earnings 194 168
--------- ---------
Total stockholders' equity 195 169
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 804,277 $ 826,612
========= =========
The accompanying notes are an integral part of the interim financial
statements.
RBF FINANCE CO.
STATEMENT OF OPERATIONS
(in thousands)
FOR THE FOR THE PERIOD
THREE FROM INCEPTION
MONTHS ENDED (MARCH 19, 1999) TO
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(unaudited)
REVENUES:
Interest income $ 22,415 $ 1,021
Commitment fee - 295
--------- ---------
Total revenues 22,415 1,316
--------- ---------
EXPENSES:
Interest expense 22,375 1,226
--------- ---------
Total expenses 22,375 1,226
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 40 90
INCOME TAX EXPENSE 14 32
--------- ---------
NET INCOME $ 26 $ 58
========= =========
The accompanying notes are an integral part of the interim financial
statements.
RBF FINANCE CO.
STATEMENT OF CASH FLOWS
(in thousands)
FOR THE PERIOD
FOR THE FROM INCEPTION
THREE (MARCH 19, 1999)
MONTHS ENDED TO
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26 $ 58
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in assets and liabilities:
Interest receivable 22,415 (1,316)
Receivable from R&B Falcon Corporation (80) -
Accrued interest expense (22,375) 1,226
Accrued income taxes 14 32
-------- ---------
Net cash provided by operating activities - -
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans to R&B Falcon Corporation - (496,900)
-------- ---------
Net cash used in investing activities - (496,900)
-------- ---------
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 - 303,101
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 -
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1 $ 303,101
======== =========
The accompanying notes are an integral part of the interim financial
statements.
RBF FINANCE CO.
NOTES TO INTERIM 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 a director of R&B Falcon. R&B Falcon
provides for the administrative costs of the Company. 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. The proceeds from the Senior Secured Notes
were then loaned to R&B Falcon.
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.
Activity in the contract drilling industry and related oil and
gas service businesses deteriorated significantly in 1999 due
primarily to decreased worldwide demand for drilling rigs and related
services resulting from a substantial decline in crude oil prices
experienced in 1998 through the first quarter of 1999. In mid 1999,
crude oil prices began a recovery, but there can be no assurance that
demand for drilling rigs and related services will recover in a
similar manner. To date, demand for drilling rigs has not recovered to
the levels experienced in 1996-1998. Oil and gas companies' demand
for offshore drilling services are a function of: 1) current and
projected oil and gas prices, 2) government taxation and
concession/leasing policies, 3) the oil and gas company's lease
inventory and existing drilling commitments on leases held, 4) the oil
and gas company's free cash flow and general funding availability, 5)
the oil and gas company's internal reserve replacement requirements,
6) geopolitical factors (e.g., the drive for national hydrocarbons
self sufficiency). The first factor is generally the most important.
In particular, the domestic shallow water market tends to be primarily
driven by the price of natural gas. Changes in demand for exploration
and production services can impact R&B Falcon's liquidity as supply
and demand factors directly affect utilization and dayrates, which are
the primary determinants of cash flow from R&B Falcon's operations. In
late 1998 and early 1999, lower crude oil and gas prices reduced
exploration and production spending, which led to significantly lower
dayrates and utilization for offshore drilling companies, particularly
in the U.S. Gulf of Mexico. Management believes such decline in demand
also contributed to terminated or renegotiated contracts for certain
of R&B Falcon's deepwater rigs. Crude oil and natural gas prices have
continued to fluctuate over the last several years. If crude oil and
gas prices decline or a weakness in crude oil and gas prices continued
for an extended period, there could be a further deterioration in both
rig utilization and dayrates which could have a material adverse
effect on R&B Falcon's liquidity, financial position and results of
operations.
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 2000 to total approximately $430.0 million. As of March 31, 2000,
R&B Falcon had $509.6 million of cash, cash equivalents, cash
dedicated to capital projects and short-term investments. Also, R&B
Falcon is considering certain asset sales, including the Seillean and
Iolair.
R&B Falcon has limited ability under its indenture covenants to
incur additional recourse indebtedness. However, R&B Falcon believes
its projected level of cash flows from operations, which assumes an
industry recovery in 2000, cash on hand, potential asset sales and/or
new financings 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 and/or preferred 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 (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 two 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 two 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. R&B Falcon has met the conditions
on all of the ten loans.
Loans to R&B Falcon at March 31, 2000 consisted of the following
(in thousands):
7-year 10-year Total Collateral
------ ------- ----- ----------
Loan to R&B Falcon $ 112,800 $ 112,800 $ 225,600 Deepwater Navigator
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 March 31, 2000 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 all 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 March 31, 2000, the Company estimates the fair value of its
debt obligations to be $850.7 million.
The following are the unaudited consolidated financial statements of
R&B Falcon as of March 31, 2000 and for the three months ended March 31,
2000 and 1999.
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 March
31, 2000, and the related consolidated statements of operations and cash
flows for the three months ended March 31, 2000 and 1999. 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 on 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 accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Houston, Texas
May 2, 2000
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents, gross $ 355.8 $ 415.5
Less cash dedicated to capital projects (79.8) (160.4)
--------- ---------
Cash and cash equivalents, net 276.0 255.1
Short-term investments 153.8 301.5
Accounts receivable:
Trade, net 139.5 141.3
Other 63.2 86.0
Materials and supplies inventory 61.3 52.6
Drilling contracts in progress 7.7 16.7
Other current assets 19.3 19.7
--------- ---------
Total current assets 720.8 872.9
--------- ---------
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
INVESTEES 81.7 82.7
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 4,150.0 4,041.1
Other 269.8 256.1
--------- ---------
Total property and equipment 4,419.8 4,297.2
Accumulated depreciation (704.4) (662.0)
--------- ---------
Net property and equipment 3,715.4 3,635.2
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 87.3 84.8
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 178.6 246.3
--------- ---------
TOTAL ASSETS $ 4,783.8 $ 4,921.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Long-term obligations due within one year $ 34.0 $ 20.1
Accounts payable - trade 36.7 110.7
Accrued liabilities 209.6 227.8
--------- ---------
Total current liabilities 280.3 358.6
LONG-TERM OBLIGATIONS 2,919.5 2,933.4
OTHER NONCURRENT LIABILITIES 43.0 39.7
DEFERRED INCOME TAXES 38.6 53.2
--------- ---------
Total liabilities 3,281.4 3,384.9
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 57.8 56.6
--------- ---------
REDEEMABLE PREFERRED STOCK 288.8 276.0
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 1.9 1.9
Capital in excess of par value 1,117.3 1,113.4
Retained earnings 43.9 95.9
Other (7.3) (6.8)
--------- ---------
Total stockholders' equity 1,155.8 1,204.4
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,783.8 $ 4,921.9
========= =========
The accompanying notes are an integral part of the interim consolidated
financial statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- -------
OPERATING REVENUES:
Deepwater $ 70.4 $ 90.2
Shallow water 45.1 66.8
Inland water 26.5 31.0
Engineering services and land operations 63.6 55.8
Development 1.9 -
------- -------
Total operating revenues 207.5 243.8
------- -------
COSTS AND EXPENSES:
Deepwater 45.1 43.3
Shallow water 32.2 48.3
Inland water 27.4 27.9
Engineering services and land operations 50.5 38.3
Development .8 1.0
Depreciation and amortization 44.2 36.5
General and administrative 14.5 15.8
------- -------
Total costs and expenses 214.7 211.1
------- -------
OPERATING INCOME (LOSS) (7.2) 32.7
------- -------
OTHER INCOME (EXPENSE):
Interest expense, net of capitalized interest (51.9) (28.4)
Interest income 9.2 4.6
Income (loss) from equity investees plus related income (3.6) .6
Other, net (.4) (.2)
------- -------
Total other income (expense) (46.7) (23.4)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS (53.9) 9.3
------- -------
INCOME TAX EXPENSE (BENEFIT):
Current (2.1) 7.8
Deferred (14.5) (4.5)
------- -------
Total income tax expense (benefit) (16.6) 3.3
------- -------
MINORITY INTEREST (1.8) (2.7)
------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (39.1) 3.3
EXTRAORDINARY LOSS, NET OF TAX BENEFIT - (1.7)
------- -------
NET INCOME (LOSS) (39.1) 1.6
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 12.9 -
------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (52.0) $ 1.6
======= =======
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Income (loss) before extraordinary loss and after
preferred stock dividends $ (.27) $ .02
Extraordinary loss - (.01)
------- -------
Net income (loss) $ (.27) $ .01
======= =======
Diluted:
Income (loss) before extraordinary loss and after
preferred stock dividends $ (.27) $ .02
Extraordinary loss - (.01)
------- -------
Net income (loss) $ (.27) $ .01
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 193.0 192.5
======= =======
Diluted 193.0 193.5
======= =======
The accompanying notes are an integral part of the interim consolidated
financial statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (39.1) $ 1.6
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 44.2 36.5
Deferred income taxes (14.5) (5.1)
Recognition of deferred expenses 3.7 2.6
Deferred compensation .9 1.2
(Income) loss from equity investees plus related income 3.6 (.6)
Minority interest in income of consolidated subsidiaries 1.8 2.7
Extraordinary loss from extinguishment of
debt, net of tax benefit - 1.7
Changes in assets and liabilities:
Accounts receivable, net 24.6 32.3
Materials and supplies inventory (6.2) (4.2)
Drilling contracts in progress 9.0 1.7
Deferred charges and other assets (16.5) (25.6)
Accounts payable - trade (74.0) (7.4)
Accrued liabilities (17.8) (4.9)
Accrued interest 6.3 34.5
Income taxes (9.8) 5.4
Other, net 1.5 3.3
------- -------
Net cash (used in) provided by operating activities (82.3) 75.7
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment - 1.4
Purchases of property and equipment (126.1) (236.3)
Decrease in cash dedicated to capital projects 80.6 -
Sale (purchase) of short-term investments 147.7 (34.0)
Increase in investments in and advances to
unconsolidated investees (2.6) (142.3)
------- -------
Net cash provided by (used in) investing activities 99.6 (411.2)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit facilities - (150.0)
Net payments on short-term obligations - (123.4)
Proceeds from long-term obligations - 1,000.0
Principal payments on long-term obligations - (2.0)
Distribution to minority shareholders of
consolidated subsidiaries, net of contributions (.6) (21.0)
Exercise of stock options 4.2 -
Other - (.4)
------- -------
Net cash provided by financing activities 3.6 703.2
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20.9 367.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 255.1 177.4
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 276.0 $ 545.1
======= =======
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest $ 60.5 $ 7.6
Income taxes paid $ 13.4 $ 3.0
The accompanying notes are an integral part of the interim consolidated
financial statements.
R&B FALCON CORPORATION
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - At March 31, 2000, $33.9 million of
cash, cash equivalents and short-term investments related to the
Company's majority-owned subsidiary Arcade Drilling AS ("Arcade").
Arcade's cash, cash equivalents and short-term investments are
available to Arcade for all purposes subject to restrictions under the
Standstill Agreement dated as of August 31, 1991. Such restrictions
preclude the Company from borrowing any cash from Arcade.
In the third quarter of 1999, the Company completed the project
financing for the Deepwater Nautilus and the Deepwater Frontier (which
the Company owns 60%) and as a result $79.8 million of the Company's
cash at March 31, 2000 was restricted as to use. Such amount consists
of $29.8 million related to the financing of the Deepwater Nautilus
and will be used for capital expenditures and certain principal and
interest payments. The remaining $50.0 million relates to the
financing for the construction of the Deepwater Frontier which
collateralizes a five year standby letter of credit that the Company
was required to secure for the limited liability company to obtain
such financing. As a result of the above, the cash dedicated to these
capital projects has been reclassified to Other Assets.
GOODWILL - Goodwill was recorded as a result of the purchase of
Cliffs Drilling Company ("Cliffs Drilling") in December 1998.
Goodwill has increased $3.0 million since December 31, 1999 as the
result of a previously unrecognized income tax contingency incurred by
Cliffs Drilling prior to December 1998. For the three months ended
March 31, 2000 and 1999 amortization of goodwill was $.5 million and
$.4 million, respectively.
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 March 31, 2000 and 1999 was $17.2 million and $14.6
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.
NEWLY ISSUED ACCOUNTING STANDARDS - In December 1999, SEC Staff
Accounting Bulletin: No. 101 - Revenue Recognition in Financial
Statements ("SAB 101") was issued. SAB 101 summarizes certain of the
staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, an
amendment to SAB 101 was issued allowing the Company to extend its
evaluation of SAB 101 by three months. The Company believes its
accounting practices are consistent with this rule but will complete
its evaluation in the second quarter of 2000.
RECLASSIFICATION - Certain prior period amounts in the
consolidated financial statements have been reclassified for
comparative purposes. Such reclassifications had no effect on the net
income (loss) or the overall financial condition of the Company.
B) CONTINGENCIES
GENERAL - 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 Falcon 100, Deepwater Navigator and Deepwater Expedition were
completed later than the required commencement dates under the
drilling contracts for such rigs and at costs significantly in excess
of original estimates. The customers for the Falcon 100 and Deepwater
Navigator have cancelled the drilling contracts for such rigs based on
the rigs not being delivered on time. The Company does not believe
that Petrobras, the customer for the Falcon 100, had the right to
cancel such contract. The Company is considering the Company's rights
with respect to termination of the contract. The Company has
received a letter of intent from another customer for the Falcon 100
to commence a six-month drilling contract in the third quarter of
2000. Also, the Company has received a three-year drilling contract
from Petrobras for the use of the Deepwater Navigator offshore Brazil.
The customer for the Deepwater Expedition did not cancel its drilling
contract and the Company has received a notice of claims amounting in
the aggregate of $9.6 million and R$1.1 million in penalties under the
contracts for delay in commencement of operations. The Company is
preparing a response contesting such claim. However, if late penalties
are imposed on the Deepwater Expedition, such amounts will be
capitalized and amortized over the term of the initial drilling
contract, subject to a determination of realizability.
LITIGATION - In November 1988, a lawsuit was filed in the U.S.
District Court for the Southern District of West Virginia against
Reading & Bates Coal Co., a wholly-owned subsidiary of the Company, by
SCW Associates, Inc. claiming breach of an alleged agreement to
purchase the stock of Belva Coal Company, a wholly-owned subsidiary of
Reading & Bates Coal Co. with coal properties in West Virginia. When
those coal properties were sold in July 1989 as part of the
disposition of the Company's coal operations, the purchasing joint
venture indemnified Reading & Bates Coal Co. and the Company against
any liability Reading & Bates Coal Co. might incur as the result of
this litigation. A judgment for the plaintiff of $32,000 entered in
February 1991 was satisfied and Reading & Bates Coal Co. was
indemnified by the purchasing joint venture. On October 31, 1990, SCW
Associates, Inc., the plaintiff in the above-referenced action, filed
a separate ancillary action in the Circuit Court, Kanawha County, West
Virginia against the Company, Caymen Coal, Inc. (former owner of the
Company's West Virginia coal properties), as well as the joint
venture, Mr. William B. Sturgill personally (former President of
Reading & Bates Coal Co.), three other companies in which the Company
believes Mr. Sturgill holds an equity interest, two employees of the
joint venture, First National Bank of Chicago and First Capital
Corporation. The lawsuit seeks to recover compensatory damages of
$50.0 million and punitive damages of $50.0 million for alleged
tortious interference with the contractual rights of the plaintiff and
to impose a constructive trust on the proceeds of the use and/or sale
of the assets of Caymen Coal, Inc. as they existed on October 15,
1988. The Company intends to defend its interests vigorously and
believes the damages alleged by the plaintiff in this action are
highly exaggerated. In any event, the Company believes that it has
valid defenses and that it will prevail in this litigation.
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 recontracted the Jack Bates to Mobil in 1999 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 and the arbitration proceedings are
continuing.
In March 1997, an action was filed by Mobil Exploration and
Producing U.S. Inc. and affiliates, St. Mary Land & Exploration
Company and affiliates and Samuel Geary and Associates, Inc. against
Cliffs Drilling, its underwriters and insurance broker in the 16th
Judicial District Court of St. Mary Parish, Louisiana. The plaintiffs
alleged damages amounting to in excess of $50.0 million in connection
with the drilling of a turnkey well in 1995 and 1996. The case was
tried before a jury in January and February 2000, and the jury
returned a verdict of approximately $30.0 million in favor of the
plaintiffs for excess drilling costs, loss of insurance proceeds, loss
of hydrocarbons and interest. However, the trial court has not entered
a judgment on the verdict, as there are a number of matters to be
ruled upon before doing so. If a judgment is entered on such verdict,
Cliffs Drilling intends to appeal and believes its efforts to do so
will be successful. The Company believes all but the portion of the
verdict representing excess drilling costs of approximately $4.7
million is covered by relevant primary and excess liability insurance
policies of Cliffs Drilling; however, two insurers have denied
coverage and the others have reserved their rights. If necessary,
Cliffs Drilling and the Company intend to take appropriate legal
action to enforce Cliffs Drilling's rights with respect to such
policies. At this time Cliffs Drilling and the Company believe
adequate reserves have been established to protect the interests of
Cliffs Drilling and the Company in this matter.
The Company is involved in various other legal actions arising in
the normal course of business. A substantial number of these actions
involve claims arising out of injuries to employees of the Company who
work on the Company's rigs and power vessels. After taking into
consideration the evaluation of such actions by counsel for the
Company and the Company's insurance coverage, 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
consolidated financial position or results of operations.
C) SEGMENT INFORMATION
Segment information for the three months ended March 31, 2000 and
1999 is as follows (in millions):
Three Months Ended
March 31,
-----------------
2000 1999
------- -------
Operating revenues by segment:
Deepwater $ 70.7 $ 90.2
Shallow water 47.5 67.3
Inland water 27.9 31.0
Engineering services and land operations 63.6 55.8
Development 1.9 -
Intersegment (4.1) (.5)
------- -------
Total operating revenues $ 207.5 $ 243.8
======= =======
Operating income (loss) by segment:
Deepwater $ 6.3 $ 34.0
Shallow water (1.7) 4.7
Inland water (6.5) (3.8)
Engineering services and land operations 10.0 15.6
Development .7 (1.1)
------- -------
8.8 49.4
Unallocated depreciation and amortization (1.5) (.9)
Unallocated general and administrative (14.5) (15.8)
------- -------
Operating income (loss) $ (7.2) $ 32.7
======= =======
For the three months ended March 31, 2000, revenues from PDVSA
Exploration and Production of $32.5 million ($31.9 million reported in
the engineering services and land operations segment and $.6 million
reported in the inland water segment) accounted for 15.7% of the
Company's consolidated operating revenues. For the three months ended
March 31, 1999, revenues from PDVSA Exploration and Production of
$43.4 million (reported in the engineering services and land
operations segment) accounted for 17.8% of the Company's consolidated
operating revenues.
Total assets by segment were as follows (in millions):
March 31, December 31,
2000 1999
--------- ---------
Deepwater $ 2,878.3 $ 2,942.5
Shallow water 1,203.0 1,263.5
Inland water 344.4 227.7
Engineering services and land operations 134.4 172.5
Development 56.4 49.5
Corporate 167.3 266.2
--------- ---------
Total $ 4,783.8 $ 4,921.9
========= =========
D) EARNINGS PER SHARE
The following table summarizes the basic and diluted per share
computations for income (loss) before extraordinary loss and after
preferred stock dividends for the three months ended March 31, 2000
and 1999 (in millions except per share amounts):
Three Months
Ended March 31,
-----------------
2000 1999
------- -------
Numerator:
Income (loss) before extraordinary loss $ (39.1) $ 3.3
Dividends and accretion on preferred stock (12.9) -
------- -------
Income (loss) before extraordinary loss
and after preferred stock dividends -
basic and diluted $ (52.0) $ 3.3
======= =======
Denominator:
Weighted average common shares
outstanding - basic 193.0 192.5
Outstanding stock options and restricted
stock awards - 1.0
------- -------
Weighted average common shares outstanding
- diluted 193.0 193.5
======= =======
Earnings per share:
Income (loss) before extraordinary loss
and after preferred stock dividends:
Basic $ (.27) $ .02
Diluted $ (.27) $ .02
E) STOCK AWARDS
During the first three months of 2000, the Company granted stock
options, with respect to the Company's common stock, of approximately
2,122,461 shares to executive officers and certain employees of the
Company and approximately 109,500 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 $12.469
to $12.719 per share (the market price on the date of grants). All
such options expire ten years from the date of grant. Also in the
first three months of 2000, restricted stock awards with respect to
135,300 shares were granted to certain employees of the Company. Such
shares awarded are restricted as to transfer until fully vested four
years from the date of grant. The market value at the date of grant
of the common stock granted was recorded as unearned compensation and
will be expensed ratably over the period during which the shares vest.
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 a director 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. The proceeds from the Senior Secured Notes were then loaned
to R&B Falcon. All of the Company's future cash flows and long-term
obligations are guaranteed by R&B Falcon. See Notes A, B and C of Notes to
Interim Financial Statements.
Results of Operations
The Company's results of operations for the three months ended March
31, 2000 and for the period from inception (March 19, 1999) to March 31,
1999 consists of interest and commitment fee revenues from the loans to R&B
Falcon offset by interest expense on the Senior Secured Notes. Interest
income and interest expense increased for the three months ended March 31,
2000 as compared to the same period in 1999 as a result of the Company
issuing the Senior Secured Notes and loans to R&B Falcon in the latter part
of March 1999.
Liquidity And Capital Resources
Cash Flows
Cash flows from operating activities are the result of interest income
from R&B Falcon completely offset by interest expense to the holders of the
Senior Secured Notes.
Net cash used in investing activities was $496.9 million for the
period from inception (March 19, 1999) to March 31, 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 March 31, 1999 and was the result
of proceeds from the issuance of debt obligations. R&B Falcon paid all
expenses related to the issuance of such debt obligations.
Liquidity
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.
Activity in the contract drilling industry and related oil and gas
service businesses deteriorated significantly in 1999 due primarily to
decreased worldwide demand for drilling rigs and related services resulting
from a substantial decline in crude oil prices experienced in 1998 through
the first quarter of 1999. In mid 1999, crude oil prices began a recovery,
but there can be no assurance that demand for drilling rigs and related
services will recover in a similar manner. To date, demand for drilling
rigs has not recovered to the levels experienced in 1996-1998. Oil and gas
companies' demand for offshore drilling services are a function of: 1)
current and projected oil and gas prices, 2) government taxation and
concession/leasing policies, 3) the oil and gas company's lease inventory
and existing drilling commitments on leases held, 4) the oil and gas
company's free cash flow and general funding availability, 5) the oil and
gas company's internal reserve replacement requirements, 6) geopolitical
factors (e.g., the drive for national hydrocarbons self sufficiency). The
first factor is generally the most important. In particular, the domestic
shallow water market tends to be primarily driven by the price of natural
gas. Changes in demand for exploration and production services can impact
R&B Falcon's liquidity as supply and demand factors directly affect
utilization and dayrates, which are the primary determinants of cash flow
from R&B Falcon's operations. In late 1998 and early 1999, lower crude oil
and gas prices reduced exploration and production spending, which led to
significantly lower dayrates and utilization for offshore drilling
companies, particularly in the U.S. Gulf of Mexico. Management believes
such decline in demand also contributed to terminated or renegotiated
contracts for certain of R&B Falcon's deepwater rigs. Crude oil and natural
gas prices have continued to fluctuate over the last several years. If
crude oil and gas prices decline or a weakness in crude oil and gas prices
continued for an extended period, there could be a further deterioration in
both rig utilization and dayrates which could have a material adverse
effect on R&B Falcon's liquidity, financial position and results of
operations.
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 2000 to total approximately
$430.0 million. As of March 31, 2000, R&B Falcon had $509.6 million of
cash, cash equivalents, cash dedicated to capital projects and short-term
investments. Also, R&B Falcon is considering certain asset sales, including
the Seillean and Iolair.
R&B Falcon has limited ability under its indenture covenants to incur
additional recourse indebtedness. However, R&B Falcon believes its
projected level of cash flows from operations, which assumes an industry
recovery in 2000, cash on hand, potential asset sales and/or new financings
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
and/or preferred obligations.
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 March 31, 2000
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 March 31, 2000 was $850.7 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 March 31, 2000.
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: May 12, 2000 By /s/T. W. Nagle
-----------------------
T. W. Nagle
Vice President and Treasurer
(Principal Accounting and Financial
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of RBF Finance Co. for the three months ended March 31,
2000 and for period from inception (March 19, 1999) to March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-START> JAN-01-2000 MAR-19-1999
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