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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____TO_____
 
 
 
 

ROWAN COMPANIES, INC.
(Exact name of registrant as specified in its charter)


Delaware
 
1-5491
 
75-0759420
(State or other jurisdiction of
 
Commission File
 
(I.R.S. Employer
incorporation or organization)
 
Number
 
Identification No.)



2800 Post Oak Boulevard, Suite 5450 Houston, Texas
77056-6127
(Address of principal executive offices)
(Zip Code)
 

(713) 621-7800
Registrant's telephone number, including area code
 
 
Inapplicable
(Former name, former address and former fiscal year, if changed since last report)


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 o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x    No o 

The number of shares of common stock, $.125 par value, outstanding at October 31, 2004 was 107,234,571.



 
     
 

 

ROWAN COMPANIES, INC.
 
INDEX
 
 
 
Page No.
 
 
PART I.
Financial Information:
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Consolidated Balance Sheet -- September 30, 2004 and December 31, 2003
2
 
 
 
 
Consolidated Statement of Operations -- Three and Nine Months Ended September 30, 2004 and 2003
4
 
 
 
 
Consolidated Statement of Cash Flows -- Nine Months Ended September 30, 2004 and 2003
5
 
 
 
 
Notes to Consolidated Financial Statements
6
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
 
 
 
Item 4.
Controls and Procedures
18
 
 
 
PART II.
Other Information:
 
 
 
 

 Item 1.

 Legal Proceedings

19

     

 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

19

     
Item 6.
Exhibits
19
   
SIGNATURES
20

 

 
     
 
 

PART I. FINANCIAL INFORMATION
           
Item 1. Financial Statements
ROWAN COMPANIES, INC. AND SUBSIDIARIES
             

 CONSOLIDATED BALANCE SHEET

(IN THOUSANDS EXCEPT SHARE AMOUNTS)
 
     

September 30, 

    

December 31, 

  
 
2004
2003
   
 
 
ASSETS
   
(Unaudited)  
  
 
    
 
    
 
  
CURRENT ASSETS:
   
 
    
 
  
Cash and cash equivalents
 
$
292,983
  
$
58,227
  
Receivables - trade and other
   
170,958
    
135,538
  
Inventories - at cost:
   
 
    
 
  
Raw materials and supplies
   
145,929
    
140,413
  
Work-in-progress
   
41,023
    
29,421
  
Finished goods
   
14,046
    
11,203
  
Prepaid expenses
   
8,761
    
2,948
  
Deferred tax assets - net
   
8,816
    
66,474
  
   
 
 
Total current assets
   
682,516
    
444,224
  
   
 
 
 
    
 
    
 
  
PROPERTY, PLANT AND EQUIPMENT - at cost:
   
 
    
 
  
Drilling equipment
   
2,267,128
    
2,133,365
  
Aircraft and related equipment
   
241,684
    
265,165
  
Manufacturing plant and equipment
   
144,070
    
138,803
  
Construction in progress
   
79,437
    
135,707
  
Other property and equipment
   
163,963
    
162,010
  
   
 
 
Total
   
2,896,282
    
2,835,050
  
Less accumulated depreciation and amortization
   
1,154,885
    
1,106,831
  
   
 
 
Property, plant and equipment - net
   
1,741,397
    
1,728,219
  
   
 
 
GOODWILL AND OTHER ASSETS
    
16,772
    
18,366
  
   
 
 
TOTAL
  
$
2,440,685
  
$
2,190,809
  
   
 
 
See Notes to Consolidated Financial Statements.
   
 
    
 
  
 
 

 
  -2-  
 

 
 
ROWAN COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

 
  
September 30,
December 31,
 
    
2004
2003
 
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
   
(Unaudited)
 
 
    
 
    
 
  
CURRENT LIABILITIES:
   
 
    
 
  
Current maturities of long-term debt
 
$
60,243
  
$
55,267
  
Accounts payable - trade
   
34,562
    
25,898
  
Other current liabilities
   
57,868
    
69,200
  
   
 
 
Total current liabilities
   
152,673
    
150,365
  
   
 
 
LONG-TERM DEBT - less current maturities
   
577,053
    
569,067
  
   
 
 
OTHER LIABILITIES
   
136,909
    
116,268
  
   
 
 
DEFERRED INCOME TAXES - net
   
158,177
    
218,279
  
   
 
 
STOCKHOLDERS' EQUITY:
   
 
    
 
  
Preferred stock, $1.00 par value:
   
 
    
 
  
Authorized 5,000,000 shares issuable in series:
   
 
    
 
  
Series III Preferred Stock, authorized 10,300 shares, none outstanding
   
 
    
 
  
Series A Preferred Stock, authorized 4,800 shares, none outstanding
   
 
    
 
  
Series B Preferred Stock, authorized 4,800 shares, none outstanding
   
 
    
 
  
Series C Preferred Stock, authorized 9,606 shares, none outstanding
   
 
    
 
  
Series D Preferred Stock, authorized 9,600 shares, none outstanding
   
 
    
 
  
Series E Preferred Stock, authorized 1,194 shares, none outstanding
   
 
    
 
  
Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued 
    
 
    
 
  
Common stock, $.125 par value:
   
 
    
 
  
Authorized 150,000,000 shares; issued 107,137,976 shares at September 30, 2004 and 95,845,180 shares at December 31, 2003
   
13,392
    
11,981
  
Additional paid-in capital
   
910,918
    
659,849
  
Retained earnings
   
546,248
    
549,749
  
Cost of 1,734,440 treasury shares at December 31, 2003
    
-
 
  
(30,064
)
Accumulated other comprehensive income (loss)
    
(54,685
)
 
(54,685
)
   
 
 
Total stockholders' equity
   
1,415,873
    
1,136,830
  
   
 
 
TOTAL
 
$
2,440,685
  
$
2,190,809
  
   
 
 
See Notes to Consolidated Financial Statements.
   
 
    
 
  
 
 

 
  -3-  
 


 
ROWAN COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
     

For the Three Months  

For the Nine Months  

 

 

 

 

Ended September 30, 

Ended September 30, 

  
   
 
 
 
    
2004
2003
2004
2003
 
   
 
 
 
 
   

 (Unaudited)

  
REVENUES:
   
 
    
 
    
 
    
 
  
Drilling services
 
$
142,234
  
$
124,582
  
$
363,468
  
$
297,606
  
Manufacturing sales and services
   
46,261
    
27,067
    
136,245
    
86,738
  
Aviation services
   
46,138
    
42,234
    
96,257
    
98,994
  
   
 
 
 
 
Total
   
234,633
    
193,883
    
595,970
    
483,338
  
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
COSTS AND EXPENSES:
   
 
    
 
    
 
    
 
  
Drilling services
   
95,722
    
86,162
    
272,326
    
242,793
  
Manufacturing sales and services
   
42,009
    
25,199
    
125,193
    
80,518
  
Aviation services
   
47,502
    
33,327
    
102,981
    
86,697
  
Depreciation and amortization
   
24,341
    
21,740
    
71,375
    
62,973
  
General and administrative
   
6,898
    
6,126
    
19,282
    
19,420
  
   
 
 
 
 
Total
   
216,472
    
172,554
    
591,157
    
492,401
  
   
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
   
18,161
    
21,329
    
4,813
 
  
(9,063
)
   
 
 
 
 
OTHER INCOME (EXPENSE):
   
 
    
 
    
 
    
 
  
Interest expense
   
(5,329
)
 
(5,213
)
 
(15,433
)
 
(14,869
)
Less interest capitalized
   
330
    
1,004
    
1,662
    
3,457
  
Interest income
   
1,160
    
139
    
2,688
    
1,023
  
Other - net
   
217
    
38
    
547
    
417
  
   
 
 
 
 
Other income (expense) - net
   
(3,622
)
 
(4,032
)
 
(10,536
)
 
(9,972
 ) 
   
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
   
14,539
    
17,297
  
(5,723
)
 
(19,035
 ) 
Provision (credit) for income taxes
   
4,607
  
5,710
    
(2,222
)
 
(6,816
 ) 
   
 
 
 
 
                           
NET INCOME (LOSS)
 
$
9,932
$
11,587
$
(3,501
)
$
(12,219
 ) 
   
 
 
 
 
NET INCOME (LOSS) PER SHARE OF COMMON STOCK (Note 3):
   
 
    
 
    
 
    
 
  
 
    
 
    
 
    
 
    
 
  
Basic
 
$
.09
 
$
.12
  
$
(.03
)
$
(.13
 ) 
   
 
 
 
 
Diluted
 
$
.09
  
$
.12
$
(.03
)
$
(.13
 ) 
   
 
 
 
 
See Notes to Consolidated Financial Statements.
 
 

 
  -4-  
 


 
ROWAN COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

     

For the Nine Months

  
Ended September 30,
  
   
 
 
    
2004
2003
   
 
 
   

 (Unaudited)

  
CASH PROVIDED BY (USED IN):
   
 
    
 
  
Operations:
   
 
    
 
  
Net income (loss)
 
$
(3,501
)
$
(12,219
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
   
 
    
 
  
Depreciation and amortization
   
71,375
    
62,973
  
Provision for pension and postretirement benefits
   
26,489
 
  
21,571
 
                  Charge in connection with planned sale of aviation operations    
10,680
        
                  Compensation expense    
5,120
5,278
  
Deferred income taxes
    
(2,444
 )   
(6,727
 ) 
                  Postretirement benefit claims paid    
(2,598
 )    
(1,731
 ) 
Gain on disposals of property, plant and equipment
   
(6,312
)
 
(4,096
)
                  Contributions to pension plans    
(18,576
 )   
(22,607
)
Changes in current assets and liabilities:
   
 
    
 
  
Receivables- trade and other
   
(35,420
)
  
(11,586
)
Inventories
   
(19,961
)
 
(36,960
)
Other current assets
   
(5,813
)
 
1,395
 
Current liabilities
   
12,645
    
1,949
 
Net changes in other noncurrent assets and liabilities
   
1,237
 
  
(1,124
)
   
 
 
Net cash provided by (used in) operations
   
32,921
 
  
(3,884
)
   
 
 
 
    
 
    
 
  
Investing activities:
   
 
    
 
  
Property, plant and equipment additions
    
(102,458
)
 
(184,711
)
Proceeds from disposals of property, plant and equipment
   
13,894
    
6,360
  
   
 
 
Net cash used in investing activities
   
(88,564
)
 
(178,351
)
   
 
 
 
    
 
    
 
  
Financing activities:
   
 
    
 
  
Proceeds from borrowings
   
58,101
    
84,350
  
Repayments of borrowings
   
(45,139
)
 
(34,733
)
            Proceeds from common stock offering, net of issue costs    
264,980
        
Proceeds from stock option and convertible debenture plans
   
12,457
    
3,876
  
   
 
 
Net cash provided by financing activities
   
290,399
    
53,493
  
   
 
 
 
    
 
    
 
  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
234,756
 
  
(128,742
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
58,227
    
178,756
  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
292,983
  
$
50,014
  
   
 
 
See Notes to Consolidated Financial Statements.
   
 
    
 
  
 
 

 
  -5-  
 

 

ROWAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
1.   The consolidated financial statements of Rowan included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. Certain information and notes have been condensed or omitted as permitted by those rules and regulations. We believe that the disclosures included herein are adequate, but suggest that you read these consolidated financial statements in conjunction with the financial statements and related notes included in our 2003 Annual Report to Stockholders and incorporated by reference in our Form 10-K for the year ended December 31, 2003.

We believe the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly Rowan’s financial position as of September 30, 2004 and December 31, 2003, and the results of its operations for the three and nine months ended September 30, 2004 and 2003 and its cash flows for the nine months ended September 30, 2004 and 2003.

      Rowan’s results of operations and cash flows for the nine months ended September 30, 2004 are not necessarily indicative of results to be expected for the full year.
 
2.   Rowan has had three principal operating segments: contract drilling of oil and gas wells, both onshore and offshore (“Drilling”), helicopter and fixed-wing aircraft services (“Aviation”) and the manufacture and sale of heavy equipment for the mining, timber and transportation industries, alloy steel and steel plate and drilling products (“Manufacturing”). As discussed more fully below, Rowan recently agreed to sell its Aviation operations.  The following table presents certain financial information of Rowan by operating segment as of September 30, 2004 and 2003 and for the nine month periods then ended (in thousands).

 
  
Drilling
Manufacturing
Aviation
Consolidated
2004
   
 
    
 
    
 
    
 
  
Total assets
 
$
2,001,349
  
$
297,178
  
$
142,158
  
$
2,440,685
  
Goodwill
   
1,493
   
10,863
   
-
   
12,356
 
Revenues
   
363,468
    
136,245
    
96,257
    
595,970
  
Operating profit (loss) (1)
   
39,868
    
4,401
  
(20,174
)
 
24,095
 
 
    
 
    
 
    
 
    
 
  
2003
   
 
    
 
    
 
    
 
  
Total assets
 
$
1,682,792
  
$
289,317
  
$
169,379
  
$
2,141,488
  
Goodwill
   
1,493
   
10,863
   
-
   
12,356
 
Revenues
   
297,606
    
86,738
    
98,994
    
483,338
  
Operating profit (loss) (1)
   
11,142
 
  
(185
)
  
(600
)
 
10,357
 
  
   		  
 (1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.  
 
 

 
  -6-  
 
 
Excluded from the preceding table are the effects of transactions between segments. During the nine months September 30, 2004 and 2003, Rowan’s manufacturing division provided approximately $63 million and $92 million, respectively, of products and services to its drilling division and Rowan’s aviation division provided approximately $1.6 million of flight services to its drilling division in each period.
 
The 2004 Aviation operating loss shown in the preceding table includes a $10.7 million impairment charge recognized in the third quarter related to Rowan’s planned sale of Era Aviation, Inc. (“Era”), its wholly-owned subsidiary, and a $4.3 million reduction in estimated airline revenue accruals recognized in the second quarter. On October 14, 2004, Rowan announced an agreement to sell 100% of the common stock of Era to SEACOR Holdings Inc. for approximately $118.1 million in cash, subject to post-closing working capital adjustments. The transaction is expected to be completed during the fourth quarter, subject to customary conditions and regulatory reviews.
 
 
3.   Rowan’s computations of basic and diluted income (loss) per share for the three and nine months ended September 30, 2004 and 2003 are as follows (in thousands except per share amounts):
 
 

 
  
Three Months Ended
Nine Months Ended
 
  
September 30,
September 30,
   
 		  
 		  
 
    
2004
2003
2004
2003
  
   
 
 
 
 
Weighted average shares of common stock outstanding
    
106,620
    
93,877
    
104,863
    
93,738
  
                           
Dilutive securities:
    
 
    
 
    
 
    
 
  
Convertible debentures
    
498
    
936
    
-
   
-
 
Stock options
    
936
    
1,064
    
-
   
-
 
   
 
 
 
 
Weighted average shares for diluted calculation
    
108,054
    
95,877
    
104,863
    
93,738
  
   
 
 
 
 
Net income (loss) for basic and diluted calculation
  
$
9,932
 
$
11,587
 
$
(3,501
)
$
(12,219
)
   
 
 
 
 
Net income (loss) per share:
    
 
    
 
    
 
    
 
  
Basic
  
$
.09
$
.12
 
$
(.03
)
$
(.13
)
   
 
 
 
 
Diluted
  
$
.09
$
.12
 
$
(.03
)
$
(.13
)
   
 
 
 
 
 
 
Incremental shares related to convertible debentures and stock options as set forth in the following table are excluded from the preceding computations of diluted income (loss) per share as their inclusion would have reduced the per share amount of loss for each period.
 

   
Nine Months Ended
  
   
September 30,
  
     
2004
    
2003
  
               
Convertible debentures
    
782
   
905
 
Stock options
    
904
   
802
 
 

 
  -7-  
 
 
Rowan uses the intrinsic value method of accounting for stock-based employee compensation, whereby the cost of each option is measured as the difference between the market price per share and the option price per share on the date of grant, in accordance with Accounting Principles Board Opinion No. 25. The following table is provided pursuant to Statement of Financial Accounting Standards No. 148 to illustrate the effect on Rowan’s net income (loss) and net income (loss) per share of measuring stock-based compensation cost based upon estimated fair values in accordance with Statement of Financial Accounting Standards No. 123 for the three and nine month periods ended September 30, 2004 and 2003:
   
Three Months Ended September 30,
  
   
 
         

 Per Share

  
         
 
 
  
Total 
    
Basic
    
Diluted
  
   
 
 
 
2004
    
 
    
 
    
 
  
                    
Net income (loss), as reported
  
$
9,932
 
$
.09
 
$
.09
Stock-based compensation, net of related tax effects:
    
 
    
 
    
 
  
As recorded under APB 25
    
1,038
    
 
    
 
  
Pro forma under SFAS 123
    
(2,041
)
  
 
    
 
  
   
     
Pro forma net income (loss)
  
$
8,929
 
$
.08
 
$
.08
 
   
  		  
 
    
 
    
 
    
 
  
2003
    
 
    
 
    
 
  
                    
Net income (loss), as reported
  
$
11,587
 
$
.12
$
.12
 
Stock-based compensation, net of related tax effects:
    
 
    
 
    
 
  
As recorded under APB 25
    
1,221
    
 
    
 
  
Pro forma under SFAS 123
    
(2,482
)
  
 
    
 
  
   
     
         
Pro forma net income (loss)
  
$
10,326
 
$
.11
 
$
.11
 
   
  		  
 
   
Nine Months Ended September 30,
  
   
 
         

 Per Share

  
         
 
 
  
Total 
    
Basic
    
Diluted
  
   
 
 
 
2004
    
 
    
 
    
 
  
                    
Net income (loss), as reported
  
$
(3,501
)
$
(.03
)
$
(.03
)
Stock-based compensation, net of related tax effects:
    
 
    
 
    
 
  
As recorded under APB 25
    
3,132
    
 
    
 
  
Pro forma under SFAS 123
    
(5,798
)
  
 
    
 
  
   
     
Pro forma net income (loss)
  
$
(6,167
)
$
(.06
)
$
(.06
)
   
  		  
 
    
 
    
 
    
 
  
2003
    
 
    
 
    
 
  
                    
Net income (loss), as reported
  
$
(12,219
)
$
(.13
)
$
(.13
)
Stock-based compensation, net of related tax effects:
    
 
    
 
    
 
  
As recorded under APB 25
    
3,388
    
 
    
 
  
Pro forma under SFAS 123
    
(6,464
)
  
 
    
 
  
   
     
         
Pro forma net income (loss)
  
$
(15,295
)
$
(.16
)
$
(.16
)
   
  		  
 
4.   Rowan had no items of other comprehensive income during the nine months ended September 30, 2004 and 2003.  

 
  -8-  
 

 
5.   Since 1952, Rowan has sponsored defined benefit pension plans covering substantially all of its employees. In addition, Rowan provides certain health care and life insurance benefits for retired drilling and aviation employees.

 
      Net periodic pension cost for the three and nine months ended September 30, 2004 and 2003 included the following components (in thousands):
 
 
  
Three Months Ended
Nine Months Ended
 
  
September 30,
September 30,
   
 
    
2004
2003
2004
2003
  
   
 
 
 
 
Service cost
  
$
3,487
  
$
2,854
  
$
10,387
  
$
8,470
  
Interest cost
    
5,256
    
4,506
    
15,655
    
13,372
  
Expected return on plan assets
    
(4,203
)
  
(3,887
)
  
(12,519
)
  
(11,534
)
Recognized actuarial loss
    
2,073
    
2,222
    
6,369
    
5,408
  
Amortization of prior service cost
    
53
    
49
    
157
    
144
  
   
 		  
 		  
Total
 
$
6,666
  
$
5,744
  
$
20,049
  
$
15,860
  
   
 		  
 		  
 
Net postretirement benefits cost for the three and nine months ended September 30, 2004 and 2003 included the following components (in thousands):
 
 
  
Three Months Ended
Nine Months Ended
 
  
September 30,
September 30,
   
 
    
2004
2003
2004
2003
  
   
 
 
 
 
Service cost
  
$
687
  
$
602
  
$
2,045
  
$
1,807
  
Interest cost
    
1,044
    
976
    
3,109
    
2,895
  
Recognized actuarial loss
    
316
 
  
277
 
  
954
 
  
682
 
Amortization of transition obligation    
190
    
181
    
566
    
556
  
Amortization of prior service cost
    
(79
) 
  
(74
 )   
(234
 )   
(229
) 
   
 		  
 		  
Total
 
$
2,158
  
$
1,962
  
$
6,440
  
$
5,711
  
   
 		  
 		  
 

Rowan has contributed $21.2 million for its pension and other benefit plans during the first nine months of 2004 and currently expects to contribute another $1.8 million during the fourth quarter.  Recent actuarial calculations indicate that, assuming plan assets perform as expected and interest rates are unchanged from present levels, significant additional pension contributions will be required over the next several years, in average annual amounts that exceed the 2004 level. For this reason, we intend to utilize a significant portion of the net proceeds from the sale of Era, when and if that transaction closes, to make an additional contribution of $60 million to our pension plans.
 

 
  -9-  
 

 
6.  The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed into law on December 8, 2003 (the “Act”), introduced a prescription drug benefit under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare plans that provide benefits at least actuarially equivalent to Part D. We believe that are our post-65 drug coverage is at least actuarially equivalent to Part D and, accordingly, that we will be entitled to the subsidy. A remeasurement of our accumulated plan benefit obligations to include the effects of the Act yielded a $46,000 reduction in estimated 2004 net postretirement benefits cost, which we will recognize in the fourth quarter.  
 
7.  In the third quarter of 2004, the Company learned that a unit of the U. S. Department of Justice is conducting a criminal investigation of environmental matters involving several of Rowan’s offshore drilling rigs. Rowan is cooperating with the investigation. The Company does not have sufficient information at this time to comment on the outcome of the investigation. 
 
 

 
   -10-  
 

 

 
ROWAN COMPANIES, INC. AND SUBSIDIARIES


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


RESULTS OF OPERATIONS
 
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Rowan incurred a net loss of $3.5 million, or $.03 per diluted share, in the first nine months of 2004 compared to a net loss of $12.2 million, or $.13 per share, in the same period of 2003. The improvement in operating results between periods was largely due to the effects of increased average drilling day rates and higher manufacturing sales, which combined to more than offset a decline in aviation division performance.
 
A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first nine months of 2004 and 2003, respectively, is reflected below (dollars in thousands):
 
 
  
Drilling
Manufacturing
Aviation
Consolidated
 
  
2004
2003
2004
2003
2004
2003
2004
2003
                   
Revenues
  
$  363,468
$    297,606
$    136,245
$    86,738
$    96,257
$    98,994
$   595,970
$   483,338
 
  
 
 
 
 
 
 
 
 
Percent of Consolidated
  
 
 
 
 
 
 
 
 
Revenues
  
61%
62%
23%
18%
16%
20%
100%
100%
 
  
 
 
 
 
 
 
 
 
Operating Profit (Loss) (1)
  
$    39,868
$     11,142
$      4,401
$      (185)
$   (20,174)
$      (600)
$     24,095
$     10,357
 
 (1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.  
 
As reflected above, Rowan’s consolidated operating results improved by $13.7 million when comparing the first nine months of 2004 and 2003. Drilling revenues increased by $65.9 million or 22% as our offshore fleet of 24 jack-ups and one semi-submersible was 90% utilized during the first nine months of 2004, compared to 88% over the same period of 2003, and achieved a 16% increase in average day rates between periods. Rowan’s fleet of 18 land rigs was 79% utilized during the first nine months of 2004, compared to 72% over the same period of 2003, and achieved an 11% increase in average day rates between periods. Drilling expenses increased by $29.5 million between periods, primarily due to the addition to our offshore fleet of the Bob Palmer in August 2003 and the Scooter Yeargain in May 2004 , an increase in the number of land rigs operating, the relocation of Gorilla V from Canada to the North Sea during the current period and higher pension costs.
 
The $4.6 million increase in Rowan’s manufacturing results shown in the preceding table primarily reflects a $30.7 million or 71% increase in equipment group revenues, a $10.0 million or 88% increase in steel group sales and an $8.8 million or 27% increase in drilling products revenues between periods. The equipment group shipped 13 mining loaders and log stackers in the first nine months of 2004, compared to six units in 2003, and achieved an 11% increase in parts sales between periods. Manufacturing operations exclude approximately $63 million of products and services provided to the drilling division during the first nine months of 2004, most of which was attributable to construction progress on the first two Tarzan Class rigs, the Scooter Yeargain and the Bob Keller, compared to abou t $92 million over the same period of 2003. The division’s external backlog was approximately $76 million at September 30, 2004, up from about $45 million one year earlier.
 

 
  -11-  
 

Rowan’s aviation operating results in the first nine months of 2004 and 2003 reflect a $5.3 million or 13% increase in energy-related revenues, particularly in support of deepwater drilling operations in the Gulf of Mexico, offset by a $3.4 million or 38% decrease in fire response revenues between periods. Airline revenues decreased by $5.5 million or 20% between periods primarily due to a $4.3 million reduction in estimated airline revenue accruals in 2004, following the introduction of a new passenger ticket tracking system. Contributing to the decline in aviation operating results between periods as shown in the preceding table were effects of increased excise taxes and higher pension and fuel costs, while gains on helicopter sales reduced aviation operating expenses by $5.1 million in 2004 compared to $2.4 million in 200 3. The 2004 operating loss includes a $10.7 million impairment charge related to Rowan’s planned sale of its aviation operations.  On October 14, 2004, Rowan announced an agreement to sell 100% of the common stock of Era Aviation, Inc. to SEACOR Holdings Inc. for approximately $118.1 million in cash, subject to post-closing working capital adjustments. The transaction is expected to be completed during the fourth quarter, subject to customary conditions and regulatory reviews.

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
 
Rowan achieved net income of $9.9 million, or $.09 per diluted share, in the third quarter of 2004 compared to net income of $11.6 million, or $.12 per share, in the same period of 2003. The reduction in income between periods was largely due to a decline in aviation division performance, which more than offset the effects of our expanded offshore drilling fleet and higher manufacturing sales.
 
A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the third quarters of 2004 and 2003, respectively, is reflected below (dollars in thousands):
 
 
  
Drilling
Manufacturing
Aviation
Consolidated
 
  
2004
2003
2004
2003
2004
2003
2004
2003
                   
Revenues
  
$   142,234
$    124,582
$     46,261
$      27,067
$      46,138
$    42,234
$    234,633
$    193,883
 
  
 
 
 
 
 
 
 
 
Percent of Consolidated
  
 
 
 
 
 
 
 
 
Revenues
  
60%
64%
20%
14%
20%
22%
100%
100%
 
  
 
 
 
 
 
 
 
 
Operating Profit (Loss) (1)
  
$     28,827
$     23,404
$      2,045
$        (482)
$     (5,813)
$     4,533
$      25,059
$      27,455
 
 (1) General and administrative expenses, which are incurred in support of all segments, are added back to Income (loss) from operations to arrive at Operating profit (loss), which Rowan believes is a better measure of segment financial performance.  
 
As reflected above, Rowan’s consolidated operating results declined by $2.4 million when comparing the third quarters of 2004 and 2003. Drilling revenues increased by $17.6 million or 14% as our offshore fleet of 24 jack-ups and one semi-submersible was 97% utilized during the third quarter of 2004, compared to 94% in the third quarter of 2003, and achieved a 3% increase in average day rates between periods. The addition to our offshore fleet of the Bob Palmer in August 2003 and the Scooter Yeargain in May 2004 yielded over one-half of the increase in drilling revenues between periods. Rowan’s fleet of 18 land rigs was 83% utilized during the third quarter of 2004, compared to 72% in the third quarter of 2003, and achieved a 13% increase in average day rates between periods. Drilling expense s increased by $9.6 million or 11% between periods, primarily due to the addition of the Bob Palmer and the Scooter Yeargain, the relocation of Gorilla V from Canada to the North Sea during the current period and higher pension costs.

 
  -12-  
 
 

The $2.5 million increase in Rowan’s manufacturing results shown in the preceding table primarily reflects a $7.9 million or 60% increase in equipment group revenues, a $7.0 million or 69% increase in drilling products revenues and a $4.3 million or 115% increase in steel group sales between periods. Shipments during the third quarter of 2004 included three mining loaders, one log stacker and ten pumps, while only one pump was shipped during the third quarter of 2003. Manufacturing operations exclude approximately $12 million of products and services provided to the drilling division during the third quarter of 2004, most of which was attributable to construction progress on the second Tarzan Class rig, the Bob Keller, compared to about $22 million in the same period of 2003.

Rowan’s aviation operating results in the third quarters of 2004 and 2003 reflect a $4.5 million or 34% increase in energy-related revenues, primarily associated with deepwater activities in the Gulf of Mexico, offset by a $3.1 million or 42% decrease in fire response revenues between periods. Contributing to the decline in operating results between periods as shown in the preceding table are the effects of increased excise taxes and higher pension and fuel costs. The 2004 operating loss includes a $10.7 million impairment charge related to Rowan’s planned sale of its aviation operations, which is expected to be completed during the fourth quarter. On October 14, 2004, Rowan announced an agreement to sell 100% of the common stock of Era Aviation, Inc. to SEACOR Holdings Inc. for approximately $118.1 million in cash, subject to post-closing working capital adjustments. The transaction is expected to be completed during the fourth quarter, subject to customary conditions and regulatory reviews.
 
On March 23, 2004, we lost a Sikorsky S-76 helicopter in the Gulf of Mexico with two crew members and eight passengers onboard. The National Transportation Safety Board is conducting an investigation into the crash with our full cooperation. The impact of this incident on our financial statements has not been and should not be material due to our prevailing insurance coverage.

Expected near-term conditions in our principal drilling markets, based upon recent bid inquiries and other indications from our energy company customers, and the numbers of our rigs in each of those markets are set forth in the following table. We continue to pursue opportunities for our jack-up rigs, particularly our Gorilla and Super Gorilla class jack-ups, in other overseas markets, including Qatar, Trinidad and Venezuela.
 
AREA
 
RIGS
 
EXPECTED NEAR-TERM CONDITIONS
Gulf of Mexico
 
23
 
Generally improving exploration and development activity, with continued emphasis on potential deep-well natural gas reserves on the outer continental shelf
 
 
 
 
 
North Sea
 
2 
 
Generally improving jack-up drilling activity, with increasing participation by independent operators
 
 
 
 
 
Eastern Canada
 
- 
 
Uncertain demand for harsh environment jack-up rigs
 
Worldwide rig demand is inherently volatile and generally varies from one market to the next, as does the supply of competitive equipment. Exploration and development expenditures on the part of energy companies are affected by many factors beyond oil and natural gas price levels and trends, such as political and regulatory policies, seasonal weather patterns, lease expirations, mergers and acquisitions and new oil and gas discoveries. The outlook for most worldwide drilling markets appears to be stable or improving. However, the volatility inherent in the drilling business prevents us from being able to accurately predict whether existing market conditions will continue beyond the near term, or whether any expected improvements, as reflected in the preceding table, will materialize. In response to fluctuating market c onditions, we can, as we have done in the past, relocate drilling rigs from one geographic area to another, but only when we believe such moves are economically justified over the longer term. Currently, Rowan’s drilling operations are profitable, but they will be adversely affected should market conditions begin to deteriorate.
 

 
  -13-  
 


Rowan’s drilling operating results for the first nine months of 2004 were considerably enhanced by our North Sea drilling contract for Rowan Gorilla VII. The contract, under which operations began in June 2003, specified an 18-month minimum term, provided Rowan with a day rate tied to an average oil price and contained options for up to an additional 42 months of work. In March 2004, due to declining oil production caused by well bore and geological difficulties encountered in the first three wells, we agreed, in an attempt to extend the field’s economic life, to reduce the day rate under the contract for a five-month period through June 30, 2004. We also agreed at that time to defer receipt of day rate charges for the January through March 2004 period until the first well could be recompleted an d production resumed. Our agreement to temporarily reduce the day rate remains in effect, and we have received payment for our day rate charges through June 2004 in accordance with the extension agreement. Gorilla VII continues to produce two of the wells it has drilled in the North Sea’s Ardmore Field while a third well is being recompleted. The drilling of a fourth well is under consideration, which could extend the productive life of the field through 2005. However, there is a risk that the contract could terminate earlier if the fourth well is not drilled or if production from the field is otherwise inadequate. In either case, we could be faced with a write-off of receivables related to this contract,  of which approximately $13 million from September 30, 2004 are currently outstanding. Ultimately, Rowan is dependent upon the productive life of the Ardmore Field for payment.
 
Though considerably less volatile than our drilling operations, our manufacturing operations, especially the equipment group, had, for a number of years, been adversely impacted by a prolonged period of unfavorable world commodity prices, especially those for copper, iron ore, coal and gold. Over the past two years, prices for many commodities have increased due to growing worldwide industrial demand. Rowan’s external manufacturing backlog has grown in recent months, and we are optimistic that a recovery in the demand for mining equipment may be underway. We cannot, however, accurately predict whether or not any such recovery will be sustained beyond the near term.
 
 
LIQUIDITY AND CAPITAL RESOURCES

A comparison of key balance sheet figures and ratios as of September 30, 2004 and December 31, 2003 is as follows (dollars in thousands):

 
     September 30, 2004    December 31, 2003
   
 
Cash and cash equivalents
 
$
292,983
  
$
58,227
  
Current assets
 
$
682,516
  
$
444,224
  
Current liabilities
 
$
152,673
  
$
150,365
  
Current ratio
   
4.47
    
2.95
  
Long-term debt - less current current maturities
  
$
577,053
  
$
569,067
  
Stockholders' equity
 
$
1,415,873
  
$
1,136,830
  
Long-term debt/total capitalization
   
.29
    
.33
 

Reflected in the comparison above are the effects in the first nine months of 2004 of net cash provided by operations of $32.9 million, net proceeds from the issuance of 11.5 million shares of common stock of $265 million, proceeds from borrowings of $58.1 million, capital expenditures of $102.5 million, proceeds from fixed asset disposals of $13.9 million and debt repayments of $45.1 million.
 

 
  -14-  
 

Capital expenditures during the first nine months of 2004 were primarily related to the construction of the first two Tarzan Class jack-up rigs, the Scooter Yeargain and the Bob Keller. The Tarzan Class was designed specifically for deep drilling in water depths up to 300 feet on the outer continental shelf in the Gulf of Mexico, offering drilling capabilities similar to our Super Gorilla class jack-ups, but with reduced environmental criteria (wind, wave and current) and at less than one-half the construction cost.
 
The Scooter Yeargain was delivered on April 29, 2004. We financed $91.2 million of the cost of the Scooter Yeargain through a 15-year floating-rate bank loan guaranteed by the U. S. Department of Transportation’s Maritime Administration (“MARAD”) under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on November 10, 2004, and the Scooter Yeargain secures the government guarantee. At September 30, 2004, we had the full $91.2 million outstanding under this loan, which bore interest at an annual rate of about 1.88%.
 
The Bob Keller is being constructed at Vicksburg, Mississippi with delivery expected during the third quarter of 2005. We are financing up to $89.7 million of the cost of the Bob Keller through a 15-year floating-rate bank loan guaranteed by MARAD under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on May 10, 2005, and the Bob Keller secures the government guarantee. At September 30, 2004, we had borrowed about $39.0 million under this loan, which bore interest at an annual rate of about 1.88%.
 
Construction of two additional Tarzan Class jack-ups is tentatively planned, subject to current and anticipated market conditions, at an aggregate cost of around $200 million. We have applied to MARAD for Title XI government-guaranteed financing for up to $176 million of the cost of Tarzans III and IV on terms and conditions similar to those in effect for the first two Tarzan Class rigs. However, there can be no assurance that we will obtain such financing or that other outside financing or working capital will be available.
 
Rowan currently estimates that remaining 2004 capital expenditures will be between $35 million and $45 million, including approximately $15-20 million towards the construction of the Bob Keller.
 
Rowan’s debt agreements contain provisions that require minimum levels of working capital and stockholders’ equity, limit the amount of long-term debt and, in the event of noncompliance, restrict investment activities, asset purchases and sales, lease obligations, borrowings and mergers or acquisitions. We believe that the Company was in compliance with each of its debt covenants at September 30, 2004.
 
In December 2003, Rowan filed a $500 million universal shelf registration statement. In early 2004, we sold 11.5 million shares of common stock, consisting of approximately 1.7 million shares of treasury stock and 9.8 million newly issued shares. The net proceeds of approximately $265 million were retained for general corporate purposes, including working capital and capital expenditures.
 
On October 14, 2004, Rowan announced an agreement to sell 100% of the common stock of Era Aviation, Inc., ("ERA") its wholly-owned subsidiary, to SEACOR Holdings Inc. for approximately $118.1 million in cash, subject to post-closing working capital adjustments. The transaction is expected to be completed during the fourth quarter, subject to customary conditions and regulatory reviews.

 
  -15-  
 
 
During the 2001-2003 period, Rowan contributed about $47 million to its defined benefit pension plans. Such contribution amounts are determined based upon actuarial calculations of pension assets and liabilities that involve, among other things, assumptions about long-term asset returns and interest rates. Similar calculations were used to estimate pension costs and obligations as reflected in our consolidated financial statements, which showed an accumulated other comprehensive loss resulting from unfunded pension liabilities of $54.7 million at September 30, 2004. We currently estimate that our 2004 pension costs will increase by about $4.3 million or 19% over 2003. We have contributed $18.6 million to our pension plans thus far in 2004, including $17.4 million during the third quarter, and expect to contribute another approximately $1 million during the fourth quarter. Recent actuarial calculations indicate that, assuming plan assets perform as expected and interest rates are unchanged from present l evels, significant additional pension contributions will be required over the next several years, in average annual amounts that exceed the contribution rate of the past four years. For this reason, we intend to utilize a significant portion of the net proceeds expected to be received upon the sale of Era, when and if that transaction closes, to make an additional contribution of $60 million to our pension plans.

Rowan did not pay any dividends during the first nine months of 2004 or 2003 and, at September 30, 2004, had approximately $511 million of retained earnings available for distribution to stockholders under the most restrictive provisions of its debt agreements. Rowan intends to utilize a portion of the net proceeds expected to be received upon the sale of Era, when and if that transaction closes, to pay a special dividend to shareholders of 25¢ per share. The record and payment dates for the dividend will be determined later by the Board of Directors. Additional dividends, if any, will only be paid at the discretion of the Board of Directors.

Based upon current and anticipated near-term operating levels, we believe that 2004 operations, together with existing working capital and available financial resources, will be adequate to sustain planned capital expenditures and debt service and other requirements at least through the remainder of 2004. We currently have no other available credit facilities, but believe financing could be obtained if deemed necessary.

In the third quarter of 2004, the Company learned that a unit of the U. S. Department of Justice is conducting a criminal investigation of environmental matters involving several of Rowan’s offshore drilling rigs. Rowan is cooperating with the investigation. The Company does not have sufficient information at this time to comment on the outcome of the investigation.


 
  -16-   
 

Rowan uses the intrinsic value method of accounting for stock-based employee compensation pursuant to Accounting Principles Board Opinion No. 25. We estimate that use of the fair value method outlined by Statement of Financial Accounting Standards Nos. 123 and 148 would have reduced reported amounts of net income and net income per share by approximately $2.7 million, or $.03 per share, for the nine months ended September 30, 2004 and by approximately $3.1 million, or $.03 per share, for the nine months ended September 30, 2003. Similarly, Rowan’s third quarter net income would have been reduced by approximately $.01 per share in both 2004 and 2003.
 
The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed into law on December 8, 2003 (the “Act”), introduced a prescription drug benefit under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare plans that provide benefits at least actuarially equivalent to Part D. We believe that are our post-65 drug coverage is at least actuarially equivalent to Part D and, accordingly, that we will be entitled to the subsidy. A remeasurement of our accumulated plan benefit obligations to include the effects of the Act yielded a $46,000 reduction in estimated 2004 net postretirement benefits cost, which we will recognize in the fourth quarter.

Critical Accounting Policies and Management Estimates
Rowan’s significant accounting policies are outlined in Note 1 to our financial statements included in our 2003 Annual Report to Stockholders, which is incorporated by reference in our Form 10-K for the year ended December 31, 2003. Such policies, and management judgments, assumptions and estimates made in their application, underlie reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We believe our most critical accounting policies and management estimates involve property and depreciation, specifically capitalizable costs, useful lives and salvage values, and pension liabilities and costs, specifically assumptions used in actuarial calculations, as changes in such policies and/or estimates would produce sign ificantly different amounts from those reported herein.
 
Rowan provides depreciation under the straight-line method from the date an asset is placed into service until it is sold or becomes fully depreciated based upon estimated lives and salvage values. Such estimates of lives and salvage values include 25 years and 20%, respectively, for each of our Super Gorilla and Tarzan Class rigs, which collectively comprise more than 80% of our offshore drilling equipment carrying value. Expenditures for new property or enhancements to existing property are capitalized and expenditures for routine maintenance and major repairs are charged to operations as incurred. On construction projects, Rowan capitalizes a portion of interest cost incurred during the period required to complete the asset. Long-lived assets are reviewed for impairment whenever circu mstances indicate their carrying amounts may not be recoverable.
 
 
This report contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements as to the expectations, beliefs and future expected financial performance of Rowan that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by us. Among the factors that could cause actual results to differ materially are the following: oil, natural gas and other commodity prices; the level of offshore expenditures by energy companies; energy demand; the general economy, including inflation; weather conditions in our principal operating areas; and environmental and other laws and regulations. Other relevant factors have been disclosed in Rowan’s filings with the U. S. Securities and Exchange Commission.
 

 
  -17-  
 

 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Rowan’s outstanding debt at September 30, 2004 was comprised as follows: $330.2 million of fixed-rate notes bearing a weighted average annual interest rate of 4.66% and $307.1 million of floating-rate notes bearing a weighted average annual interest rate of 1.94%. Rowan believes that its exposure to risk of earnings loss due to changes in market interest rates is limited in that the Company may fix the interest rate on its outstanding floating-rate debt at any time. In addition, virtually all of Rowan’s transactions are carried out in U. S. dollars, thus the Company’s foreign currency exposure is not material. Fluctuating commodity prices affect Rowan’s future earnings materially to the extent that they influence demand for the Company’s products and services. Rowan does not hold or issue deriv ative financial instruments.
 
 
Item 4. Controls and Procedures
 
The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer, along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Exchange Act reports. There have been no changes in the Company’s internal control over financial reporting that occurred during the Comp any’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
 
 

 
  -18-  
 

 
 

PART II. OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
In the third quarter of 2004, the Company learned that a unit of the U. S. Department of Justice is conducting a criminal investigation of environmental matters involving several of Rowan’s offshore drilling rigs. Rowan is cooperating with the investigation. The Company does not have sufficient information at this time to comment on the outcome of the investigation.
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The Company did not repurchase any shares of its outstanding common stock during the first nine months of 2004 or 2003. Under the terms of a Share Repurchase Program begun in June 1998, the Company was authorized, at September 30, 2004, to buy back up to approximately 1.5 million shares of its common stock.
 
Rowan did not pay any dividends during the first nine months of 2004 or 2003 and, at September 30, 2004, had approximately $511 million of retained earnings available for distribution to stockholders under the most restrictive provisions of its debt agreements. Rowan intends to utilize a portion of the proceeds expected to be received upon the sale of its aviation operations, when and if that transaction closes, to pay a special dividend to shareholders of 25¢ per share. The record and payment dates for the dividend will be determined later by the Board of Directors. Additional dividends, if any, will only be paid at the discretion of the Board of Directors.
 
 
Item 6. Exhibits
 
The following is a list of Exhibits filed with this Form 10-Q:
 
 
31
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002)
 
 
32
Section 1350 Certifications (Section 906 of the Sarbanes-Oxley Act of 2002)
 

 
  -19-  
 

 

 
SIGNATURES

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.

 
ROWAN COMPANIES, INC.
 
(Registrant)
 
 
 
 
Date: November 9, 2004
/s/ E. E. THIELE
 
E. E. Thiele
 
Senior Vice President- Finance,
 
Administration and Treasurer
 
(Chief Financial Officer)
 
 
 
 
Date: November 9, 2004
/s/ W. H. WELLS
 
W. H. Wells
 
Controller
 
(Chief Accounting Officer)

-20-