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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
of 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___
======================================================================
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 month periods ended June
30, 2000 and 1999, for the six months ended June 30, 2000 and for
the period from inception (March 19,1999) to June 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
and six month periods ended June 30, 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)
JUNE 30, DECEMBER 31,
2000 1999
-------- ---------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 1
Interest receivable 26,151 26,151
--------- ---------
Total current assets 26,152 26,152
RECEIVABLE FROM R&B FALCON CORPORATION 540 460
LOANS TO R&B FALCON CORPORATION 800,000 800,000
--------- ---------
TOTAL ASSETS $ 826,692 $ 826,612
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accrued interest expense $ 26,353 $ 26,353
Accrued income taxes 118 90
--------- ---------
Total current liabilities 26,471 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 220 168
--------- ---------
Total stockholders' equity 221 169
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 826,692 $ 826,612
========= =========
The accompanying notes are an integral part of the interim
financial statements.
RBF FINANCE CO.
STATEMENT OF OPERATIONS
(in thousands)
(unaudited)
FOR THE
PERIOD
FROM
SIX INCEPTION
THREE MONTHS ENDED MONTHS (MARCH 19,
JUNE 30, ENDED 1999) TO
------------------ JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES:
Interest income $ 22,415 $ 20,935 $ 44,830 $ 21,956
Commitment fee - 1,451 - 1,746
-------- -------- -------- --------
Total revenues 22,415 22,386 44,830 23,702
-------- -------- -------- --------
EXPENSES:
Interest expense 22,375 22,392 44,750 23,618
-------- -------- -------- --------
Total expenses 22,375 22,392 44,750 23,618
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 40 (6) 80 84
INCOME TAX EXPENSE (BENEFIT) 14 (2) 28 30
-------- -------- -------- --------
NET INCOME (LOSS) $ 26 $ (4) $ 52 $ 54
======== ======== ======== ========
The accompanying notes are an integral part of the interim financial
statements.
RBF FINANCE CO.
STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE
PERIOD
FOR THE FROM
SIX INCEPTION
MONTHS (MARCH 19,
ENDED 1999) TO
JUNE 30, JUNE 30,
2000 1999
----- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52 $ 54
Adjustments to reconcile net income to net
cash provided by operating activities:
Changes in assets and liabilities:
Interest receivable - (22,491)
Receivable from R&B Falcon Corporation (80) -
Accrued interest expense - 23,618
Accrued income taxes 28 30
----- --------
Net cash provided by operating activities - 1,211
----- --------
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 - 1,212
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 -
----- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1 $ 1,212
===== =========
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. 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. R&B Falcon provides for the
administrative costs of the Company. Such administrative
costs are not considered material.
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, and demand for drilling services
started to recover as well. However, there can be no
assurance that demand for drilling rigs and related services
will reach utilization and dayrate levels of 1996-1998. To
date, while certain markets have improved substantially,
taken as a whole, 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. Continued strength in natural gas
prices has recently bolstered this market.
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. While
there has been some improvement in utilization and dayrates
in certain segments of drilling activity in which R&B Falcon
participates since the beginning of 2000, if crude oil
and/or gas prices were to decline substantially from current
levels, there could be a deterioration in 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 $305.0 million. As of June 30, 2000, R&B
Falcon had $427.0 million of cash, cash equivalents, cash
dedicated to capital projects and short-term investments.
Also, in July 2000, R&B Falcon completed the sale of its
Gulf of Mexico oil and gas properties for approximately
$127.2 million in cash and as a result R&B Falcon received
$117.2 million and expects to receive the remaining $10.0
million in August 2000. R&B Falcon no longer expects to sell
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.
Loans to R&B Falcon at June 30, 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 June 30, 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 June 30, 2000, the Company estimates the fair
value of its debt obligations to be $866.5 million.
The following are the unaudited consolidated financial statements
of R&B Falcon as of June 30, 2000 and for the three and six month
periods ended June 30, 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
June 30, 2000, the related consolidated statement of operations for
the three and six month periods ended June 30, 2000 and 1999 and the
related consolidated statement of cash flows for the six months ended
June 30, 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
July 31, 2000
R&B FALCON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
JUNE 30, DECEMBER 31,
2000 1999
-------- ---------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents, gross $ 362.4 $ 415.5
Less cash dedicated to capital projects (67.6) (160.4)
--------- ---------
Cash and cash equivalents, net 294.8 255.1
Short-term investments 64.6 301.5
Accounts receivable:
Trade, net 141.5 141.3
Other 50.5 86.0
Materials and supplies inventory 69.2 52.6
Drilling contracts in progress 5.3 16.7
Other current assets 29.8 19.7
--------- ---------
Total current assets 655.7 872.9
--------- ---------
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED INVESTEES 87.2 82.7
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 4,225.6 4,041.1
Other 270.1 256.1
--------- ---------
Total property and equipment 4,495.7 4,297.2
Accumulated depreciation (747.3) (662.0)
--------- ---------
Net property and equipment 3,748.4 3,635.2
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 86.7 84.8
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 170.3 246.3
--------- ---------
TOTAL ASSETS $ 4,748.3 $ 4,921.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Long-term obligations due within one year $ 39.9 $ 20.1
Accounts payable - trade 61.4 110.7
Accrued liabilities 194.6 227.8
--------- ---------
Total current liabilities 295.9 358.6
LONG-TERM OBLIGATIONS 2,910.3 2,933.4
OTHER NONCURRENT LIABILITIES 47.1 39.7
DEFERRED INCOME TAXES 12.7 53.2
--------- ---------
Total liabilities 3,266.0 3,384.9
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 58.2 56.6
--------- ---------
REDEEMABLE PREFERRED STOCK 302.0 276.0
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 1.9 1.9
Capital in excess of par value 1,124.9 1,113.4
Retained earnings 1.3 95.9
Other (6.0) (6.8)
--------- ---------
Total stockholders' equity 1,122.1 1,204.4
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,748.3 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
OPERATING REVENUES:
Deepwater $ 88.1 $ 86.3 $ 158.5 $ 176.5
Shallow water 56.7 47.8 101.8 114.6
Inland water 32.7 25.9 59.2 56.9
Engineering services
and land operations 31.6 66.4 95.2 122.2
Development 2.8 .1 4.7 .1
------- ------- ------- -------
Total operating revenues 211.9 226.5 419.4 470.3
------- ------- ------- -------
COSTS AND EXPENSES:
Deepwater 47.9 40.0 93.0 83.3
Shallow water 41.6 33.3 73.8 81.6
Inland water 26.1 28.8 53.5 56.7
Engineering services
and land operations 26.5 50.7 77.0 89.0
Development 1.2 1.2 2.0 2.2
Depreciation and amortization 45.0 38.3 89.2 74.8
General and administrative 15.2 25.1 29.7 40.9
------- ------- ------- -------
Total costs and expenses 203.5 217.4 418.2 428.5
------- ------- ------- -------
OPERATING INCOME 8.4 9.1 1.2 41.8
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (50.6) (43.0) (102.5) (71.4)
Interest income 7.7 10.3 16.9 14.9
Income (loss) from equity
investees plus related
revenues and expenses (5.2) 5.7 (8.8) 6.3
Other, net .6 (.1) .2 (.3)
------- ------- ------- -------
Total other income (expense) (47.5) (27.1) (94.2) (50.5)
------- ------- ------- -------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS (39.1) (18.0) (93.0) (8.7)
------- ------- ------- -------
INCOME TAX EXPENSE (BENEFIT):
Current 14.7 10.8 12.6 18.6
Deferred (26.0) (17.2) (40.5) (21.7)
------- ------- ------- -------
Total income tax
expense (benefit) (11.3) (6.4) (27.9) (3.1)
------- ------- ------- -------
MINORITY INTEREST (1.5) (2.6) (3.3) (5.3)
------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY LOSS (29.3) (14.2) (68.4) (10.9)
EXTRAORDINARY LOSS,
NET OF TAX BENEFIT - - - (1.7)
------- ------- ------- -------
NET LOSS (29.3) (14.2) (68.4) (12.6)
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK 13.3 9.1 26.2 9.1
------- ------- ------- -------
NET LOSS APPLICABLE
TO COMMON STOCKHOLDERS $ (42.6) $ (23.3) $ (94.6) $ (21.7)
======= ======= ======= =======
NET LOSS PER COMMON SHARE:
Basic:
Loss before extraordinary
loss and after preferred
stock dividends $ (.22) $ (.12) $ (.49) $ (.10)
Extraordinary loss - - - (.01)
------- ------- ------- -------
Net loss $ (.22) $ (.12) $ (.49) $ (.11)
======= ======= ======= =======
Diluted:
Loss before extraordinary
loss and after preferred
stock dividends $ (.22) $ (.12) $ (.49) $ (.10)
Extraordinary loss - - - (.01)
------- ------- ------- -------
Net loss $ (.22) $ (.12) $ (.49) $ (.11)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 193.5 192.6 193.2 192.5
======= ======= ======= =======
Diluted 193.5 192.6 193.2 192.5
======= ======= ======= =======
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)
SIX MONTHS ENDED
JUNE 30,
-----------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (68.4) $ (12.6)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 89.2 74.8
Deferred income taxes (40.5) (22.4)
Loss (gain) on dispositions of
property and equipment 1.7 (4.9)
Recognition of deferred expenses 10.0 5.8
Deferred compensation 1.7 3.4
(Income) loss from equity investees
plus related revenues and expenses 8.8 (6.3)
Minority interest in income of
consolidated subsidiaries 3.3 5.3
Extraordinary loss from extinguishment
of debt, net of tax benefit - 1.7
Changes in assets and liabilities:
Accounts receivable, net 35.3 65.5
Materials and supplies inventory (14.1) (7.7)
Drilling contracts in progress 11.3 2.8
Deferred charges and other assets (38.0) (23.0)
Accounts payable - trade (51.8) 9.5
Accrued liabilities (36.5) (10.7)
Accrued interest 1.5 30.4
Income taxes (1.2) 4.7
Other, net 5.8 .6
------- -------
Net cash (used in) provided by
operating activities (81.9) 116.9
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment .2 5.7
Purchases of property and equipment (202.2) (442.0)
Decrease in cash dedicated to capital projects 92.8 -
Sale (purchase) of short-term investments 236.9 (175.7)
Increase in investments in and advances
to unconsolidated investees (13.2) (156.7)
------- -------
Net cash provided by (used in)
investing activities 114.5 (768.7)
------- -------
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
Net proceeds from issuance of preferred stock - 288.8
Principal payments on long-term obligations (3.3) (8.2)
Distribution to minority shareholders of
consolidated subsidiaries, net of contributions (1.7) (27.6)
Exercise of stock options 9.9 -
Exercise of warrants 2.3 -
Other (.1) .4
------- -------
Net cash provided by financing activities 7.1 980.0
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39.7 328.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 255.1 177.4
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 294.8 $ 505.6
======= =======
Supplemental Cash Flow Disclosures:
Interest paid, net of capitalized interest $ 132.5 $ 74.3
Income taxes paid $ 20.7 $ 13.7
Purchase of property and equipment in
exchange for debt or equity $ 2.5 $ 9.2
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 June 30, 2000, $37.9
million of cash and cash equivalents related to the
Company's majority-owned subsidiary Arcade Drilling AS
("Arcade"). Arcade's cash and cash equivalents 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 (in which the Company has a 60% interest)
and as a result $67.6 million of the Company's cash at June
30, 2000 was restricted as to use. Such amount consists of
$17.6 million related to the financing of the Deepwater
Nautilus and will be used for 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.
PROPERTY AND EQUIPMENT - On June 30, 2000, the Company
completed a series of refinancing transactions on the
Deepwater Nautilus which resulted in the Company receiving
$13.0 million, which has been recorded as a reduction of the
Deepwater Nautilus' cost, and the Company has the potential
to receive an additional $19.0 million over the next 20
years.
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 June 30, 2000 and
1999 amortization of goodwill was $.6 million and $.5
million, respectively. For the six months ended June 30,
2000 and 1999 amortization of goodwill was $1.1 million and
$.9 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 June 30, 2000 and
1999 was $18.4 million and $21.4 million, respectively.
Interest capitalized for the six months ended June 30, 2000
and 1999 was $35.6 million and $36.0 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. SAB 101 has been
amended allowing the Company to extend its implementation of
SAB 101 until the fourth quarter of 2000. The Company is
currently reviewing its accounting practices and if any
necessary adjustments are needed to comply, such adjustments
will be made in the fourth 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 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 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
continuing to review its rights with respect to termination
of the contract. The Company has received a six-month
drilling contract from another customer for the Falcon 100
to commence drilling 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. Petrobras, 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,
and the Company is contesting same. 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.
In 1998, the Company cancelled four drillship
conversion projects in which the Company had purchased or
committed to purchase drilling equipment for such projects.
The Company had expected to use some of the surplus
equipment on other construction and/or upgrade projects and
to maintain the balance as inventory. A majority of the
equipment originally ordered was directed to other
construction projects. As of June 30, 2000, the Company had
approximately $55.3 million remaining of such surplus
drilling equipment. The Company is continually reviewing the
value and utility of such equipment and if in the future it
is determined the Company cannot realize the recorded value
of the surplus equipment, the Company could incur additional
write-offs or write-downs of such equipment.
In April 1998, Cliffs Drilling entered into a turnkey
contract with PDVSA Exploration and Production ("PDVSA") to
drill 60 turnkey wells in Venezuela. The drilling program
commenced in March 1998 and the program was expected to
extend over approximately three and one-half years and to
utilize seven of the Company's land drilling rigs.
However, during the first quarter of 1999, in response to
the downturn in the market and changes in both PDVSA's
management and its operating policies, PDVSA and the Company
renegotiated prices at reduced margins and in the fourth
quarter of 1999, renegotiations were made at further reduced
margins. By the end of the second quarter of 2000, the
Company had completed 35 of the 60 wells. In February 2000,
PDVSA cancelled the turnkey contract for the remaining 25
wells. Although PDVSA cancelled its turnkey contract, three
of the land drilling rigs that were working on a turnkey
basis have been subsequently contracted to work for PDVSA on
a dayrate basis. Also, in December 1999, the Company
commenced work under a new one-year dayrate drilling
contract with PDVSA utilizing Rig 55 which had been
previously stacked and has obtained drilling contracts with
PDVSA for two jointly owned land drilling rigs. The Company
is currently bidding on other dayrate contracts with PDVSA.
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 continues 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 a
judgment has been entered based on the jury verdict awarding
the plaintiffs damages of approximately $30.0 million for
excess drilling costs, loss of insurance proceeds, loss of
hydrocarbons and interest. The Company has filed motions
for a new trial and a judgment notwithstanding the verdict
in contemplation of perfecting its appeal of such judgment
and believes it will be successful upon appeal. The Company
further 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, the insurers
and underwriters have denied coverage. Cliffs Drilling has
instituted litigation against those insurers and
underwriters to enforce its rights under the relevant
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 and six month periods
ended June 30, 2000 and 1999 is as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Operating revenues by segment:
Deepwater $ 88.1 $ 86.3 $ 158.8 $ 176.5
Shallow water 57.0 49.2 104.5 116.5
Inland water 35.7 25.9 63.6 56.9
Engineering services
and land operations 31.8 66.4 95.4 122.2
Development 2.8 .1 4.7 .1
Intersegment eliminations (3.5) (1.4) (7.6) (1.9)
------ ------ ------ -------
Total operating revenues $ 211.9 $ 226.5 $ 419.4 $ 470.3
======= ======= ======= =======
Operating income (loss) by segment:
Deepwater $ 20.9 $ 32.6 $ 27.2 $ 66.5
Shallow water .4 (.2) (1.3) 4.5
Inland water 1.3 (9.8) (5.2) (13.6)
Engineering services
and land operations 1.9 13.6 11.9 29.2
Development .1 (1.2) .8 (2.3)
Other and eliminations .4 .1 .4 .2
------- ------- ------ -------
25.0 35.1 33.8 84.5
Unallocated depreciation
and amortization (1.4) (.9) (2.9) (1.8)
Unallocated general
and administrative (15.2) (25.1) (29.7) (40.9)
------- ------- ------- -------
Operating income $ 8.4 $ 9.1 $ 1.2 $ 41.8
======= ======= ======= =======
For the three months ended June 30, 2000 and 1999,
revenues from PDVSA Exploration and Production of $11.6
million ($11.3 million reported in the engineering services
and land operations segment and $.3 million reported in the
inland water segment) and $42.9 million ($38.7 million
reported in the engineering services and land operations
segment and $4.2 million reported in the inland water
segment), respectively, accounted for 5.5% and 18.9%,
respectively, of the Company's consolidated operating
revenues. For the six months ended June 30, 2000 and 1999,
revenues from PDVSA Exploration and Production of $44.1
million ($43.2 million reported in the engineering services
and land operations segment and $.9 million reported in the
inland water segment) and $90.9 million ($82.0 million
reported in the engineering services and land operations
segment and $8.9 million reported in the inland water
segment), respectively, accounted for 10.5% and 19.3%,
respectively, of the Company's consolidated operating
revenues.
Total assets by segment were as follows (in millions):
June 30, December 31,
2000 1999
--------- ---------
Deepwater $ 2,858.8 $ 2,942.5
Shallow water 1,193.4 1,263.5
Inland water 355.3 227.7
Engineering services
and land operations 107.2 172.5
Development 56.7 49.5
Corporate 176.9 266.2
--------- ---------
Total $ 4,748.3 $ 4,921.9
========= =========
D) EARNINGS PER SHARE
The following table summarizes the basic and diluted
per share computations for loss before extraordinary loss
and after preferred stock dividends for the three and six
month periods ended June 30, 2000 and 1999 (in millions
except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Numerator:
Loss before extraordinary loss $ (29.3) $ (14.2) $ (68.4) $ (10.9)
Dividends and accretion on preferred stock (13.3) (9.1) (26.2) (9.1)
------- ------- ------- -------
Loss before extraordinary loss and
after preferred stock dividends
- basic and diluted $ (42.6) $ (23.3) $ (94.6) $ (20.0)
======= ======= ======= =======
Denominator:
Weighted average common shares
outstanding - basic and diluted 193.5 192.6 193.2 192.5
======= ======= ======= =======
Earnings per share:
Loss before extraordinary loss
and after preferred stock dividends:
Basic $ (.22) $ (.12) $ (.49) $ (.10)
Diluted $ (.22) $ (.12) $ (.49) $ (.10)
E) STOCK AWARDS
During the first six months of 2000, the Company
granted stock options, with respect to the Company's common
stock, of approximately 2,474,381 shares to executive
officers and certain employees of the Company and
approximately 115,000 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 $20.625 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 quarter of 2000,
restricted stock awards with respect to 137,350 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.
F) SUBSEQUENT EVENTS
In July 2000, the Company's wholly-owned subsidiary R&B
Falcon Subsea Development Inc. and its majority-owned
subsidiary Reading & Bates Development Co. ("Devco") sold
their Gulf of Mexico oil and gas properties to Enterprise
Oil for approximately $127.2 million in cash. The Company
expects to record a pre-tax gain of approximately $65-$70
million in the third quarter of 2000 from the sale of such
oil and gas properties. Approximately 13.6% of Devco is
owned by minority shareholders, including directors and
employees of the Company and Devco. Net proceeds to the
Company are impacted accordingly by sales of Devco
properties.
Also in the third quarter of 2000, the Company expects
to complete the sale of its 38.6% ownership interest in
Navis ASA for approximately $83.0 million. Navis ASA is a
Norwegian public company which owns the dynamically
positioned drillship, Navis Explorer I.
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 six months ended June
30, 2000 and for the period from inception (March 19, 1999) to June
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. Interest income and interest expense increased for the six
months ended June 30, 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.
The Company's results of operations for the three month periods
ended June 30, 2000 and 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
Cash flows from operating activities are the result of interest
income from R&B Falcon offset by interest expense to the holders of
the Senior Secured Notes.
Net cash used in investing activities was $800.0 million for the
period from inception (March 19, 1999) to June 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 June 30, 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, and demand for drilling services
started to recover as well. However, there can be no assurance that
demand for drilling rigs and related services will reach utilization
and dayrate levels of 1996-1998. To date, while certain markets have
improved substantially, taken as a whole, 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. Continued strength in natural gas
prices has recently bolstered this market.
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. While there has been some improvement in utilization
and dayrates in certain segments of drilling activity in which R&B
Falcon participates since the beginning of 2000, if crude oil and/or
gas prices were to decline substantially from current levels, there
could be a deterioration in 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 $305.0 million. As of June 30, 2000,
R&B Falcon had $427.0 million of cash, cash equivalents, cash
dedicated to capital projects and short-term investments. Also, in
July 2000, R&B Falcon completed the sale of its Gulf of Mexico
oil and gas properties for approximately $127.2 million in cash and as
a result R&B Falcon received $117.2 million and expects receive the
remaining $10.0 million in August 2000. R&B Falcon no longer expects
to sell 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 June
30, 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 June 30, 2000 was
$866.5 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 June 30, 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: August 11, 2000 By /s/T. W. Nagle
-----------------------
T. W. Nagle
Vice President and Treasurer
(Principal Accounting and
Financial Officer)
