UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): July 19, 2004
HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 1-3492 75-2677995
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
1401 MCKINNEY, SUITE 2400
HOUSTON, TEXAS 77010
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 759-2600
ITEM 5. OTHER EVENTS
On July 19, 2004, Halliburton Company filed Amendment No. 2 to its
Registration Statement on Form S-4 (Registration No. 333-112977) (as so amended,
the "Registration Statement") with the Securities and Exchange Commission. The
Registration Statement includes the following information:
PROPOSED PLAN OF REORGANIZATION
DII Industries, LLC, Kellogg Brown & Root Inc. and six other
subsidiaries filed Chapter 11 proceedings on December 16, 2003 in bankruptcy
court in Pittsburgh, Pennsylvania. The cases have been assigned to the Honorable
Judith K. Fitzgerald. On May 10, 2004, the bankruptcy court completed hearings
on confirmation of the proposed plan of reorganization. On July 16, 2004, the
bankruptcy court issued an order confirming the plan of reorganization. We are
currently reviewing and may seek clarification of portions of the order. We
expect that, by the end of the summer 2004, the district court will affirm the
order issued by the bankruptcy court.
The bankruptcy court also issued an order denying standing to insurance
carriers' objections to confirmation of the plan of reorganization except on
limited issues. The insurers have the right to appeal this order. These appeals
could be withdrawn if proposed insurance settlements, including those discussed
below under "-- Other Recent Developments -- Agreements in Principle with
Insurance Carriers," become effective.
The proposed plan of reorganization provides that, if and when an order
confirming the proposed plan of reorganization becomes final and non-appealable:
o up to approximately $2.3 billion in cash, 59.5 million shares of
Halliburton common stock (valued at approximately $1.7 billion for
accrual purposes using a stock price of $29.37 per share, which is
based on the average trading price for the five days immediately
prior to and including March 31, 2004) and notes currently valued at
approximately $52.0 million will be contributed to trusts for the
benefit of current and future asbestos and silica personal injury
claimants; and
o the trust for asbestos claimants will receive a payment equal to the
amount of insurance recoveries received by DII Industries and
Kellogg Brown & Root if and to the extent aggregate recoveries
exceed $2.3 billion, subject to a cap of $700.0 million to be paid
to the trust out of insurance recoveries. However, if the proposed
settlements with our insurance carriers described below under "--
Other Recent Developments -- Agreements in Principle with Insurance
Carriers" are completed on the terms announced or proposed,
insurance recoveries will not exceed $2.3 billion.
In connection with reaching an agreement with representatives of
asbestos and silica claimants to limit the cash required to settle pending
claims to $2.775 billion, DII Industries paid $311.0 million to the claimants in
December 2003. Halliburton also agreed to guarantee the payment of certain
claims, and, in accordance with settlement agreements, Halliburton made
additional payments of $119.0 million (plus $4.0 million in additions in lieu of
interest) in June
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2004. We expect Halliburton to pay an additional approximately $50.0 million in
pending claims under these settlement agreements 30 days after the proposed plan
of reorganization becomes final and non-appealable. We may not be entitled to
reimbursement for these payments if the proposed plan of reorganization does not
become effective in accordance with its terms.
AGREEMENTS IN PRINCIPLE WITH INSURANCE CARRIERS
In May 2004, we entered into non-binding agreements in principle with
representatives of the London Market insurance carriers that, if implemented,
would settle insurance disputes with substantially all the solvent London Market
insurance carriers for asbestos- and silica-related claims and all other claims
under the applicable insurance policies. These agreements in principle are
subject to board of directors' approval of all parties, agreement by all
remaining London Market insurers, and an order by the bankruptcy court
confirming our proposed plan of reorganization that has become final and
non-appealable.
We also expect to shortly enter into a non-binding agreement in
principle with our solvent domestic insurance carriers that, if implemented,
would settle asbestos- and silica-related claims and all other claims under the
applicable insurance policies and terminate all the applicable insurance
policies. This agreement in principle would be subject to board of directors'
approval of all parties, agreement by Federal-Mogul Products, Inc., approval by
the Federal-Mogul bankruptcy court, and an order by the bankruptcy court
confirming our proposed plan of reorganization that has become final and
non-appealable.
These proposed settlements with our insurance carriers are subject to
numerous conditions, including the conditions of the previously announced
Equitas settlement, which includes the condition that the United States Congress
does not pass national asbestos litigation reform legislation before January 5,
2005. Although we are working toward implementation of these proposed
settlements, there can be no assurance that the transactions contemplated by
these agreements in principle can be completed on the terms announced.
Under the terms of our announced insurance settlements and proposed
insurance settlements, we expect to receive cash proceeds with a present value
of approximately $1.4 billion for our asbestos- and silica-related insurance
receivables. Our December 31, 2003 estimate of our asbestos- and silica-related
insurance receivables already included the charge for the settlement amount
under the Equitas agreement reached in January 2004, as well as certain other
probable settlements with carriers for which we could reasonably estimate the
amount of the settlement. In the second quarter of 2004, we reduced the amount
recorded as insurance receivables for asbestos- and silica-related liabilities
insured by domestic carriers, resulting in a pre-tax charge to discontinued
operations of approximately $680.0 million.
BARRACUDA-CARATINGA OPERATING LOSSES
In June 2004, we announced that we will take additional operating
losses on our Barracuda-Caratinga project in the second quarter of 2004 of
approximately $200.0 million after tax ($310.0 million before tax). The
additional charge follows a detailed review of the project, indicating higher
cost estimates, schedule delays and increased contingencies for the balance of
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the project until completion. See "Risk Factors -- Risks Relating to Our
Business -- The Barracuda-Caratinga project is currently behind schedule, has
substantial cost overruns and will likely result in liquidated damages payable
by us and our inability to recover our costs associated with the project."
NEW REVOLVING CREDIT FACILITY
In July 2004, we entered into a new secured $500.0 million 364-day
revolving credit facility for general working capital purposes with terms
substantially similar to our existing $700.0 million revolving credit facility.
See "Description of Selected Settlement-Related Indebtedness."
ESG SECURITIZATION FACILITY
In June 2004, we sold undivided interests in specified receivables
totaling $268.0 million under our Energy Services Group securitization facility.
For additional information about this, please see Note 6 of the consolidated
financial statements in our Annual Report on Form 10-K/A for the year ended
December 31, 2003 filed on May 12, 2004.
KBR RECEIVABLES PURCHASE AGREEMENT
In May 2004, Kellogg Brown & Root Services, Inc. entered into an
agreement to sell, assign and transfer its entire title and interest in
specified accounts receivable to a third party. The face value of the
receivables sold to the third party will be reflected as a reduction of accounts
receivable in our consolidated balance sheets. The amount of receivables that
can be sold under the facility varies based on the amount of eligible KBR
receivables at any given time and other factors. However, each receivable sold
pursuant to this agreement must have a net face value (as defined in this
agreement) of at least $500,000, and the maximum amount that may be outstanding
under this agreement at any given time is $650.0 million. The total amount of
receivables sold under this agreement as of July 15, 2004 was approximately
$450.0 million.
RISKS RELATING TO ASBESTOS AND SILICA LIABILITY
WE MAY BE UNABLE TO FULFILL THE CONDITIONS NECESSARY TO COMPLETE THE
PROPOSED PLAN OF REORGANIZATION, AND THERE IS NO ASSURANCE THAT THE PLAN
OF REORGANIZATION IN THE CHAPTER 11 PROCEEDINGS OF DII INDUSTRIES, KELLOGG
BROWN & ROOT AND OUR OTHER AFFECTED SUBSIDIARIES WILL BE APPROVED AND
BECOME EFFECTIVE.
As contemplated by our proposed plan of reorganization, DII Industries,
Kellogg Brown & Root and six other subsidiaries (collectively referred to herein
as the "debtors") filed Chapter 11 proceedings on December 16, 2003 in
bankruptcy court in Pittsburgh, Pennsylvania. Although the bankruptcy court in
July 2004 confirmed the proposed plan of reorganization, completion of the plan
of reorganization remains subject to several conditions, including the
requirements that the federal district court affirm the bankruptcy court's order
confirming the plan of reorganization, and that the bankruptcy court and federal
district court orders become final and non-appealable. Completion of the
proposed plan of reorganization is also conditioned on continued availability of
financing on terms acceptable to us in order to allow us to fund the
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cash amounts to be paid in the plan of reorganization. There can be no assurance
that such conditions will be met.
The hearing on confirmation of the proposed plan of reorganization was
completed on May 10, 2004 and the bankruptcy court entered an order confirming
the plan of reorganization on July 16, 2004. Some of the insurance carriers of
DII Industries and Kellogg Brown & Root objected to confirmation of the proposed
plan of reorganization and to the extent announced or proposed settlements with
these insurance carriers are not finalized or approved by the bankruptcy court,
we believe that these insurance carriers may take additional steps to prevent or
delay effectiveness of a plan of reorganization, including appealing the rulings
of the bankruptcy court. In that event, there can be no assurance that the
insurance carriers would not be successful or that such efforts would not result
in delays in the reorganization process. There can be no assurance that we will
obtain the required judicial approval of the proposed plan of reorganization or
any amended plan of reorganization that we may propose if a final order
affirming the proposed plan of reorganization is not issued.
If the currently proposed plan of reorganization is not affirmed by the
district court and the Chapter 11 proceedings are not dismissed, the debtors
could propose a new plan of reorganization. Chapter 11 permits a company to
remain in control of its business, protected by a stay of all creditor action,
while that company attempts to negotiate and confirm a plan of reorganization
with its creditors. However, it is uncertain for how long a period of time the
bankruptcy court would permit the debtors to retain their exclusive right to
file an amended plan of reorganization. If the debtors are unsuccessful in
obtaining confirmation of the currently proposed plan of reorganization or an
amended plan of reorganization, the assets of the debtors could be liquidated in
the Chapter 11 proceedings, a third party may obtain the right to file a plan of
reorganization, the Chapter 11 proceedings could be converted to proceedings
under Chapter 7 of the United States Bankruptcy Code or the cases could be
dismissed. In the event of a liquidation of the debtors, or a plan of
reorganization proposed by a third party, Halliburton could lose its controlling
interest in DII Industries and Kellogg Brown & Root. Moreover, if the plan of
reorganization is not confirmed and the debtors have insufficient assets to pay
the creditors, Halliburton's assets could be drawn into the liquidation
proceedings because Halliburton guarantees certain of the debtors' obligations.
IF PROPOSED FEDERAL LEGISLATION TO PROVIDE NATIONAL ASBESTOS LITIGATION
REFORM BECOMES LAW, WE MAY BE REQUIRED TO PAY MORE TO RESOLVE OUR ASBESTOS
LIABILITIES THAN WE WOULD HAVE PAID IF THE CHAPTER 11 FILING HAD NOT BEEN
MADE, AND OUR SETTLEMENT WITH EQUITAS AND POSSIBLE SETTLEMENTS WITH OTHER
INSURANCE CARRIERS MAY NOT BE COMPLETED IF SUCH LEGISLATION IS PASSED BY
THE UNITED STATES CONGRESS.
We understand that the United States Congress may consider adopting
legislation that would set up a national trust fund as the exclusive means for
recovery for asbestos-related disease. We are uncertain as to what contributions
we would be required to make to a national trust, if any, although it is
possible that they could be substantial and that they could continue for several
years. Our level of participation in and contribution to a national trust could
be greater or less than it otherwise would have been as a result of having
subsidiaries that have filed Chapter 11 proceedings due to asbestos liabilities.
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Under the terms of our announced insurance settlements and proposed
insurance settlements (see "--Although we are working toward implementation of
settlements with our insurance carriers, there can be no assurance that such
settlements can be completed on the terms proposed" below), we expect to receive
cash proceeds with a present value of approximately $1.4 billion for our
asbestos- and silica-related insurance receivables. However, one of the
conditions to the effectiveness of our announced and proposed insurance
settlements is or, with respect to the proposed settlements, is expected to be,
that no law shall be passed by the United States Congress that relates to,
regulates, limits or controls the prosecution of asbestos claims in United
States state or federal courts or any other forum. If national asbestos
litigation legislation in the form presently being considered is passed by the
United States Congress on or before January 5, 2005 and becomes law, and our
plan of reorganization has become final and non-appealable before passage of the
new legislation, we would not receive the $1.4 billion in cash provided by these
settlements, but we would retain the rights we currently have against our
insurance carriers, which includes coverage with a face amount of more than $3.0
billion.
JUDICIAL RELIEF AGAINST ASBESTOS AND SILICA EXPOSURE MAY NOT BE AS BROAD
AS IS CONTEMPLATED BY THE PROPOSED PLAN OF REORGANIZATION, AND A COMPLETED
PLAN OF REORGANIZATION MAY NOT ADDRESS ALL ASBESTOS AND SILICA EXPOSURE.
Our proposed plan of reorganization includes resolution of asbestos and
silica personal injury claims against DII Industries, Kellogg Brown & Root and
their current and former subsidiaries, as well as Halliburton and its
subsidiaries and the predecessors and successors of them. While the bankruptcy
court issued an order confirming the proposed plan of reorganization in July
2004, the plan of reorganization remains subject to approval by the federal
district court, which we expect to occur by the end of summer 2004. No assurance
can be given that the court reviewing and approving the plan of reorganization
will grant relief as broad as contemplated by the proposed plan of
reorganization.
In addition, a confirmed plan of reorganization and injunctions under
Section 524(g) and Section 105 of the United States Bankruptcy Code may not
apply to protect against all asbestos and silica claims asserted against us in
jurisdictions outside the United States. For example, while we have historically
not received a significant number of claims outside the United States, any such
future claims would be subject to the applicable legal system of the
jurisdiction where the claim was made. The enforceability of injunctions under
the United States Bankruptcy Code in such jurisdictions is uncertain. In
addition, the Section 524(g) injunction would not apply to some claims under
workers' compensation arrangements. Although we do not believe that we have
material exposure to foreign or workers' compensation claims, there can be no
assurance that material claims would not be made in the future. Further, to our
knowledge, the constitutionality of an injunction under Section 524(g) of the
United States Bankruptcy Code has not been tested in a court of law. We can
provide no assurance that, if the constitutionality is challenged, the
injunction would be upheld.
In addition, although we would have other significant affirmative
defenses, the injunctions issued under the United States Bankruptcy Code may not
cover all silica personal injury claims arising as a result of future silica
exposure after the effective date of the proposed plan of reorganization.
Moreover, the proposed plan of reorganization does not resolve claims for
property damage as a result of materials containing asbestos. Accordingly,
although we have
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historically received no such claims, claims could still be made as to damage to
property or property value as a result of asbestos containing products having
been used in a particular property or structure.
ALTHOUGH WE ARE WORKING TOWARD IMPLEMENTATION OF SETTLEMENTS WITH OUR
INSURANCE CARRIERS, THERE CAN BE NO ASSURANCE THAT SUCH SETTLEMENTS CAN BE
COMPLETED ON THE TERMS PROPOSED.
In January 2004, we reached a comprehensive agreement with Equitas to
settle our insurance claims against certain underwriters at Lloyd's of London,
reinsured by Equitas, for asbestos- and silica-related claims and all other
claims under the applicable insurance policies. There are conditions to
completion of the settlement with Equitas, and there can be no assurance that
this settlement will be completed on the terms announced. We are also
negotiating settlement agreements with other insurance carriers. In May 2004, we
entered into non-binding agreements in principle with representatives of the
London Market insurance carriers that, if implemented, would settle insurance
disputes with substantially all the solvent London Market insurance carriers for
asbestos- and silica-related claims and all other claims under the applicable
insurance policies. The agreements in principle with the London Market insurance
carriers are subject to board of directors' approval of all parties, agreement
by all remaining London Market insurers and an order by the bankruptcy court
confirming our proposed plan of reorganization that has become final and
non-appealable. We also expect to shortly enter into a non-binding agreement in
principle with our solvent domestic insurance carriers that, if implemented,
would settle asbestos- and silica- related claims and all other claims under the
applicable insurance policies and terminate all the applicable insurance
policies. The agreement in principle with the domestic insurance carriers would
be subject to board of directors' approval of all parties, agreement by
Federal-Mogul Products, Inc., approval by the Federal-Mogul bankruptcy court,
and an order by the bankruptcy court confirming our proposed plan of
reorganization that has become final and non-appealable. These proposed
settlements with our insurance carriers are subject to numerous conditions,
including the conditions of the Equitas settlement, which include the condition
that the United States Congress does not pass national asbestos litigation
reform legislation before January 5, 2005.
Under the terms of our announced insurance settlements and proposed
insurance settlements, we expect to receive cash proceeds with a present value
of approximately $1.4 billion for our asbestos- and silica-related insurance
receivables. Our December 31, 2003 estimate of our asbestos- and silica-related
insurance receivables already included the charge for the settlement amount
under the Equitas agreement reached in January 2004, as well as certain other
probable settlements with carriers for which we could reasonably estimate the
amount of the settlement. In the second quarter of 2004, we reduced the amount
recorded as insurance receivables for asbestos- and silica-related liabilities
insured by domestic carriers, resulting in a pre-tax charge to discontinued
operations of approximately $680.0 million.
Although we are working toward implementation of these announced and
proposed insurance settlements, there can be no assurance that such settlements
can be completed on the terms as either announced or proposed. In addition, if
we are unable to complete our announced and proposed insurance settlements, we
may be unable to recover, or we may be delayed in
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recovering, insurance reimbursements related to asbestos and silica claims due
to, among other things:
o the inability or unwillingness of insurers to timely reimburse for
claims in the future;
o disputes as to documentation requirements for DII Industries,
Kellogg Brown & Root or other subsidiaries in order to recover
claims paid;
o the inability to access insurance policies shared with, or the
dissipation of shared insurance assets by, Harbison-Walker
Refractories Company, Federal Mogul Products or others;
o the possible insolvency or reduced financial viability of our
insurers;
o the cost of litigation to obtain insurance reimbursement; and
o possible adverse court decisions as to our rights to obtain
insurance reimbursement.
PROLONGED CHAPTER 11 PROCEEDINGS OF SOME OF OUR SUBSIDIARIES MAY
NEGATIVELY AFFECT THEIR ABILITY TO OBTAIN NEW BUSINESS AND CONSEQUENTLY
MAY HAVE A NEGATIVE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Because our financial condition and our results of operations depend on
distributions from our subsidiaries, any prolonged Chapter 11 proceedings of
those subsidiaries, including DII Industries and Kellogg Brown & Root, may have
a negative impact on our cash flow and distributions from those subsidiaries.
These subsidiaries are not able to make distributions of profits to Halliburton
during the Chapter 11 proceedings without court approval. In addition, the
Chapter 11 proceedings could materially and adversely affect the ability of our
subsidiaries in Chapter 11 proceedings to obtain new orders from current or
prospective customers. As a result of any prolonged Chapter 11 proceedings, some
current and prospective customers, suppliers and other vendors may assume that
our subsidiaries are financially weak and will be unable to honor obligations,
making those customers, suppliers and other vendors reluctant to do business
with our subsidiaries. In particular, some governments may be unwilling to
conduct business with a subsidiary in a Chapter 11 proceeding. Consequently, our
financial condition and results of operations could be materially and adversely
affected.
Further, prolonged Chapter 11 proceedings could materially and
adversely affect the relationship that DII Industries, Kellogg Brown & Root and
their subsidiaries involved in the Chapter 11 proceedings have with their
customers, suppliers and employees, which in turn could materially and adversely
affect their competitive positions, financial conditions and results of
operations. A weakening of their financial conditions and results of operations
could materially and adversely affect their ability to implement the plan of
reorganization.
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FEDERAL BANKRUPTCY LAW AND STATE STATUTES MAY, UNDER SPECIFIC
CIRCUMSTANCES, VOID PAYMENTS MADE BY OUR SUBSIDIARIES TO US AND VOID
PRINCIPAL AND INTEREST PAYMENTS MADE BY US.
Under federal bankruptcy law and various state fraudulent transfer
laws, payments and distributions made by our subsidiaries participating in the
Chapter 11 proceedings prior to the Chapter 11 filing could, under specific
circumstances, be avoided as preferential transfers if the statutory
requirements with respect to the recovery of avoidable preferential transfers
are met. It is also possible that claims may be brought against transferees of
the debtors for the recovery of distributions made by such debtors under the
state fraudulent conveyance laws or the provisions for the recovery of
fraudulent conveyance contained in the United States Bankruptcy Code. Since we
rely primarily on dividends from our subsidiaries and other intercompany
transactions to meet our obligations for payment of principal and interest on
our outstanding debt obligations, any voidance of such payments made to us by
our subsidiaries could limit our ability to make principal and interest payments
on the new notes. Dividend payments from DII Industries to us could also, under
specific circumstances, be voided as illegal dividends, fraudulent transfers or
conveyances to the extent that a court determines that DII Industries was
insolvent at the time these dividend payments were made. Furthermore, during the
DII Industries Chapter 11 proceeding, DII Industries likely will be unable to
make any dividend or other payments to us. The occurrence of these events may
severely limit our ability to meet our obligations for payment of principal and
interest on the new notes.
A COURT COULD DETERMINE THAT THE DISTRIBUTION OF HALLIBURTON ENERGY
SERVICES STOCK TO HALLIBURTON WAS A FRAUDULENT TRANSFER UNDER STATE LAW OR
FEDERAL BANKRUPTCY LAW WHICH WOULD IMPAIR OUR ABILITY TO MAKE PAYMENTS ON
THE NEW NOTES.
Just prior to the filing of Chapter 11 proceedings, Halliburton Energy
Services, Inc. was a wholly owned subsidiary of DII Industries. As part of the
plan of reorganization, prior to its Chapter 11 filing, DII Industries
distributed all of the capital stock of Halliburton Energy Services to
Halliburton. Halliburton then distributed all of its ownership interests in DII
Industries to Halliburton Energy Services, after which DII Industries became a
wholly owned subsidiary of Halliburton Energy Services.
Although the transfer was disclosed in, among other documents, the
disclosure statement for the proposed plan of reorganization, which on July 16,
2004 was confirmed by the bankruptcy court, if the proposed plan of
reorganization does not become effective, it is possible that a claim may be
made by a person with standing to assert such claim that the transfer of
Halliburton Energy Services capital stock to Halliburton by DII Industries prior
to the Chapter 11 filing constitutes a fraudulent transfer. If a court were to
determine that the distribution of Halliburton Energy Services stock by DII
Industries to Halliburton constituted a fraudulent transfer, then Halliburton
Energy Services may be required to remain a subsidiary of DII Industries or we
may be required to pay the creditors the lesser of the relevant value of (1) the
avoided transfer (in this case the value of the Halliburton Energy Services
stock) or obligation and (2) the amount necessary to satisfy the claims of the
creditors. It is also possible that other remedies may be fashioned by the court
adjudicating such fraudulent conveyance claims. Due to bankruptcy rules which
are applicable to DII Industries under the Chapter 11 proceedings and that limit
or prohibit the payment of dividends or other distributions by DII Industries
and its
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subsidiaries (including Halliburton Energy Services, if Halliburton Energy
Services were to remain a subsidiary of DII Industries), we would effectively be
prohibited from receiving funds from Halliburton Energy Services during any
period of time in which DII Industries is in Chapter 11 proceedings. The
occurrence of this event could severely limit our ability to meet our
obligations for payment of principal and interest on the new notes and our other
debt instruments.
The successful prosecution of a claim by or on behalf of a debtor or
its creditor under the applicable fraudulent transfer laws generally would
require a determination that the debtor effected a transfer of an asset or
incurred an obligation to an entity either:
o with an actual intent to hinder, delay or defraud its existing or
future creditors (a case of "actual fraud"); or
o in exchange otherwise than for a "reasonably equivalent" value or a
"fair consideration," and that the debtor:
-- was insolvent or rendered insolvent by reason of the transfer or
incurrence;
-- was engaged or about to engage in a business or transaction for
which its remaining assets would constitute unreasonably small
capital; or
-- intended to incur, or believed that it would incur, debts beyond
its ability to pay as they mature (a case of "constructive
fraud").
In the case of either actual fraud or constructive fraud, the unsecured
creditors affected thereby might be entitled to equitable relief against the
transferee of the assets or the obligee of the incurred obligation in the form
of a recovery of the lesser of (1) the relevant value of the avoided transfer or
obligation or (2) the amount necessary to satisfy their claims.
The measure of insolvency for purposes of a constructive-fraud action
would depend on the fraudulent transfer law being applied. Generally, an entity
would be considered insolvent if either, at the relevant time:
o the sum of its debts and liabilities, including contingent
liabilities, was greater than the value of its assets, at a fair
valuation; or
o the fair salable value of its assets was less than the amount
required to pay the probable liability on its total existing debts
and other liabilities, including contingent liabilities, as they
become absolute and mature.
CERTAIN OF OUR LETTERS OF CREDIT HAVE TRIGGERING EVENTS (SUCH AS THE
FILING OF CHAPTER 11 PROCEEDINGS BY SOME OF OUR SUBSIDIARIES OR REDUCTIONS
IN OUR CREDIT RATINGS) THAT WOULD ALLOW THE BANKS TO REQUIRE CASH
COLLATERALIZATION OR ALLOW THE HOLDER TO DRAW UPON THE LETTER OF CREDIT.
We entered into a master letter of credit facility in the fourth
quarter of 2003 that is intended to replace any cash collateralization rights of
issuers of substantially all our existing
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letters of credit during the pendency of the Chapter 11 proceedings of DII
Industries and Kellogg Brown & Root and our other filing subsidiaries. The
master letter of credit facility is now in effect and governs at least 90% of
the face amount of our existing letters of credit. See "Description of Selected
Settlement-Related Indebtedness."
Under the master letter of credit facility, if any letters of credit
that are covered by the facility are drawn on or before December 31, 2004, the
facility will provide the cash needed for such draws, as well as for any
collateral or reimbursement obligations, in respect thereof, with any such
borrowings being converted into term loans. However, with respect to the letters
of credit that are not subject to the master letter of credit facility, we could
be subject to reimbursement and cash collateral obligations. In addition, if the
proposed plan of reorganization does not become effective in accordance with its
terms by December 31, 2004 and we are unable to negotiate a renewal or extension
of the master letter of credit facility, the letters of credit that are now
governed by that facility will be governed by the arrangements with the banks
that existed prior to the effectiveness of the facility. In many cases, those
pre-existing arrangements impose reimbursement and/or cash collateral
obligations on us and/or our subsidiaries.
Uncertainty may also hinder our ability to access new letters of credit
in the future. This could impede our liquidity and/or our ability to conduct
normal operations.
A LOWERING OF OUR CREDIT RATINGS WOULD INCREASE OUR BORROWING COST AND MAY
RESULT IN OUR INABILITY TO OBTAIN ADDITIONAL FINANCING ON REASONABLE
TERMS, TERMS ACCEPTABLE TO US OR AT ALL.
Investment grade ratings are BBB- or higher for Standard & Poor's and
Baa3 or higher for Moody's. Our current ratings are one level above BBB- on
Standard & Poor's and one level above Baa3 on Moody's. In December 2003,
Standard & Poor's revised its credit watch listing for us from "negative" to
"developing" in response to our announcement that DII Industries, Kellogg Brown
& Root and other of our subsidiaries filed Chapter 11 proceedings to implement
the proposed asbestos and silica settlement. In May 2004, Moody's Investors
Services confirmed its ratings, but revised its outlook from "positive" to
"stable."
If our debt rating falls below investment grade, we will be required to
provide additional collateral to secure our credit facilities. With respect to
the outstanding letters of credit that are not subject to the master letter of
credit facility, we may be in technical breach of the bank agreements governing
those letters of credit and we may be required to reimburse the bank for any
draws or provide cash collateral to secure those letters of credit. In addition,
if the proposed plan of reorganization does not become effective in accordance
with its terms by December 31, 2004 and we are unable to negotiate a renewal or
extension of the terms of the master letter of credit facility, advances under
our master letter of credit facility will no longer be available and will no
longer override the reimbursement, cash collateral or other agreements or
arrangements relating to any of the letters of credit that existed prior to the
effectiveness of the master letter of credit facility. In that event, we may be
required to provide reimbursement for any draws or cash collateral to secure our
or our subsidiaries' obligations under arrangements in place prior to our
entering into the master letter of credit facility.
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In addition, our elective deferral compensation plan has a provision
which states that if the Standard & Poor's credit rating falls below BBB, the
amounts credited to participants' accounts will be paid to participants in a
lump-sum within 45 days. At March 31, 2004, this amount was approximately $52.0
million.
In the event our debt ratings are lowered by either agency, we may have
to issue additional debt or equity securities or obtain additional credit
facilities in order to meet our liquidity needs. We anticipate that any such new
financing or credit facilities would not be on terms as attractive as those we
have currently and that we would also be subject to increased costs of capital
and interest rates. We also may be required to provide cash collateral to obtain
surety bonds or letters of credit, which would reduce our available cash or
require additional financing. Further, if we are unable to obtain financing for
our proposed plan of reorganization on terms that are acceptable to us, we may
be unable to complete the proposed plan of reorganization.
RISKS RELATING TO GEOPOLITICAL AND INTERNATIONAL EVENTS
INTERNATIONAL AND POLITICAL EVENTS MAY ADVERSELY AFFECT OUR OPERATIONS.
A significant portion of our revenue is derived from our non-U.S.
operations, which exposes us to risks inherent in doing business in each of the
more than 100 other countries in which we transact business. The occurrence of
any of the risks described below could have a material adverse effect on our
consolidated results of operations and consolidated financial condition.
Our operations in more than 100 countries other than the United States
accounted for approximately 76% of our consolidated revenues during the first
quarter of 2004 and approximately 73% of our consolidated revenues during 2003.
Operations in countries other than the United States are subject to various
risks peculiar to each country. With respect to any particular country, these
risks may include:
o expropriation and nationalization of our assets in that country;
o political and economic instability;
o social unrest, acts of terrorism, force majeure, war or other armed
conflict;
o inflation;
o currency fluctuations, devaluations and conversion restrictions;
o confiscatory taxation or other adverse tax policies;
o governmental activities that limit or disrupt markets, restrict
payments or limit the movement of funds;
o governmental activities that may result in the deprivation of
contract rights; and
12
o trade restrictions and economic embargoes imposed by the United
States and other countries, including current restrictions on our
ability to provide products and services to Iran, which is a
significant producer of oil and gas.
Due to the unsettled political conditions in many oil producing
countries and countries in which we provide governmental logistical support, our
revenues and profits are subject to the adverse consequences of war, the effects
of terrorism, civil unrest, strikes, currency controls and governmental actions.
Countries where we operate that have significant amounts of political risk
include: Argentina, Afghanistan, Algeria, Indonesia, Iran, Iraq, Nigeria, Russia
and Venezuela. In addition, military action or continued unrest in the Middle
East could impact the demand and pricing for oil and gas, disrupt our operations
in the region and elsewhere and increase our costs for security worldwide. In
addition, investigations by governmental authorities (see "-- Risks Relating to
Our Business -- A joint venture in which a Halliburton unit participates is
under investigation as a result of payments made in connection with a liquefied
natural gas project in Nigeria"), as well as the social, economic and political
climate in Nigeria, could materially and adversely affect our Nigerian business
and operations.
MILITARY ACTION, OTHER ARMED CONFLICTS OR TERRORIST ATTACKS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Military action in Iraq, increasing military tension involving North
Korea, as well as the terrorist attacks of September 11, 2001 and subsequent
terrorist attacks, threats of attacks and unrest, have caused instability in the
world's financial and commercial markets and have significantly increased
political and economic instability in some of the geographic areas in which we
operate. Acts of terrorism and threats of armed conflicts in or around various
areas in which we operate, such as the Middle East and Indonesia, could limit or
disrupt markets and our operations, including disruptions resulting from the
evacuation of personnel, cancellation of contracts or the loss of personnel or
assets.
Such events may cause further disruption to financial and commercial
markets and may generate greater political and economic instability in some of
the geographic areas in which we operate. In addition, any possible reprisals as
a consequence of the war with and ongoing military action in Iraq, such as acts
of terrorism in the United States or elsewhere, could materially and adversely
affect us in ways we cannot predict at this time.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS DEPENDS ON THE LEVEL OF ACTIVITY IN THE OIL AND NATURAL GAS
INDUSTRY, WHICH IS SIGNIFICANTLY AFFECTED BY VOLATILE OIL AND GAS PRICES.
Demand for our services and products depends on oil and natural gas
industry activity and expenditure levels that are directly affected by trends in
oil and natural gas prices. A prolonged downturn in oil and gas prices could
have a material adverse effect on our consolidated results of operations and
consolidated financial condition.
Demand for our products and services is particularly sensitive to the
level of development, production and exploration activity of, and the
corresponding capital spending by,
13
oil and natural gas companies, including national oil companies. Prices for oil
and natural gas are subject to large fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of other factors that are beyond our control. Any
prolonged reduction in oil and natural gas prices will depress the level of
exploration, development and production activity, often reflected as changes in
rig counts. Lower levels of activity result in a corresponding decline in the
demand for our oil and natural gas well services and products that could have a
material adverse effect on our revenues and profitability. Factors affecting the
prices of oil and natural gas include:
o governmental regulations;
o global weather conditions;
o worldwide political, military and economic conditions, including the
ability of OPEC to set and maintain production levels and prices for
oil;
o the level of oil production by non-OPEC countries;
o the policies of governments regarding the exploration for and
production and development of their oil and natural gas reserves;
o the cost of producing and delivering oil and gas; and
o the level of demand for oil and natural gas, especially demand for
natural gas in the United States.
Historically, the markets for oil and gas have been volatile and are
likely to continue to be volatile in the future.
Spending on exploration and production activities and capital
expenditures for refining and distribution facilities by large oil and gas
companies have a significant impact on the activity levels of our businesses.
OUR GOVERNMENT CONTRACTS WORK HAS BEEN THE FOCUS OF ALLEGATIONS AND
INQUIRIES, AND THERE CAN BE NO ASSURANCE THAT ADDITIONAL ALLEGATIONS AND
INQUIRIES WILL NOT BE MADE OR THAT OUR GOVERNMENT CONTRACT BUSINESS MAY
NOT BE ADVERSELY AFFECTED.
We provide substantial work under our government contracts business to
the United States Department of Defense and other governmental agencies,
including worldwide United States Army logistics contracts, known as LogCAP, and
contracts to rebuild Iraq's petroleum industry, known as RIO I and RIO II. Our
government services revenue related to Iraq totaled approximately $2.4 billion
in the first quarter of 2004 and approximately $3.6 billion in 2003. Our units
operating in Iraq and elsewhere under government contracts such as LogCAP and
RIO consistently review the amounts charged and the services performed under
these contracts. Our operations under these contracts are also regularly
reviewed and audited by the Defense Contract Audit Agency (DCAA) and other
governmental agencies.
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The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have overcharged the Department of Defense by $61.0 million in
importing fuel into Iraq. After a review, the Army Corps of Engineers, which is
our client and oversees the project, concluded that we obtained a fair price for
the fuel. However, Department of Defense officials thereafter referred the
matter to the agency's inspector general, which we understand has commenced an
investigation. The Criminal Division of the United States Department of Justice
is also investigating this matter and had issued a subpoena to a former employee
of KBR. If criminal wrongdoing were found, criminal penalties could range up to
the greater of $500,000 in fines per count for a corporation, or twice the gross
pecuniary gain or loss.
We have had inquiries in the past by the DCAA and the civil fraud
division of the United States Department of Justice into possible overcharges
for work performed during 1996 through 2000 under a contract in the Balkans,
which inquiry has not yet been completed by the Department of Justice. Based on
an internal investigation, we credited our customer approximately $2.0 million
during 2000 and 2001 related to our work in the Balkans as a result of billings
for which support was not readily available. We believe that the preliminary
Department of Justice inquiry relates to potential overcharges in connection
with a part of the Balkans contract under which approximately $100.0 million in
work was done. The Department of Justice has not alleged any overcharges, and we
believe that any allegation of overcharges would be without merit.
In January 2004, we announced the identification by our internal audit
function of a potential overbilling of approximately $6.0 million by one of our
subcontractors under the LogCAP contract in Iraq for services performed during
2003. In accordance with our policy and government regulation, the potential
overcharge was reported to the Department of Defense Inspector General's office
as well as to our customer, the Army Materiel Command. In January 2004, we
issued a check in the amount of $6.0 million to the Army Materiel Command to
cover that potential overbilling while we conducted our own investigation into
the matter. Later in the first quarter of 2004, we determined the subcontractor
billing should have been $2.0 million for the services provided. An Assistant
U.S. Attorney based in Illinois is also investigating two former employees and
our subcontractor and has convened a grand jury and taken testimony in
connection with this matter. We are continuing to investigate whether
third-party subcontractors paid, or attempted to pay, one or two of our former
employees in connection with the billing.
During 2003, the DCAA raised issues relating to our invoicing to the
Army Materiel Command for food services for soldiers and supporting civilian
personnel in Iraq and Kuwait. We believe the issues raised by the DCAA relate to
the difference between the number of meals ordered by the Army Materiel Command
and the number of soldiers actually served at dining facilities for United
States troops and supporting civilian personnel in Iraq and Kuwait. In the first
quarter of 2004, we reviewed our dining facilities and administration centers
(DFACs) in our Iraq and Kuwait areas of operation and have billed and continue
to bill for all current DFAC costs. During the second quarter of 2004, we
received notice from the DCAA that it is recommending withholding a portion of
all our DFAC billings. The amount withheld totaled approximately $206.5 million
as of July 12, 2004. The DCAA is continuing to recommend withholding 19.35% of
payments on future DFAC billings relating to subcontracts entered into prior to
February 2004.
15
During the first quarter of 2004, the Army Materiel Command issued a
mandate that could cause it to withhold 15% from our invoices to be paid after
March 31, 2004 until our task orders under the LogCAP III contract are
definitized. The Army Materiel Command has now extended this period to August
15, 2004. We do not believe the potential 15% withholding will have a
significant or sustained impact on our liquidity because the withholding is
temporary and ends once the definitization process is complete.
During the second quarter of 2004, the Army Corps of Engineers withheld
$57.4 million of our invoices related to a portion of our RIO I contract until
we provide a revised estimate of the total costs related to certain task orders
in order to complete the definitization process. These withholdings represent
the amount invoiced in excess of 85% of the currently estimated amounts. The
Army Corps of Engineers also could withhold similar amounts from future invoices
under our RIO I contract until our task orders under the RIO I contract are
definitized.
All of these matters are still under review by the applicable
government agencies. Additional review is likely, and the dollar amounts at
issue could change significantly. We could also be subject to future DCAA
inquiries for other services we provide in Iraq under the current LogCAP
contract or the RIO contracts. For example, as a result of an increase in the
level of work performed in Iraq or the DCAA's review of additional aspects of
our services performed in Iraq, it is possible that we may, or may be required
to, withhold additional invoicing or make refunds to our customer, some of which
could be substantial, until these matters are resolved. This could materially
and adversely affect our liquidity.
Typically, when issues are found during the governmental agency audit
process, they are discussed and reviewed by the governmental agency with the
contractor in order to reach a resolution. However, to the extent we or our
subcontractors make mistakes in our government contract operations, even if
unintentional, insignificant or subsequently self-reported to the applicable
government agency, we have been and will likely continue to be subject to more
intense scrutiny. Some of this scrutiny is a result of the Vice President of the
United States being a former chief executive officer of Halliburton. This
scrutiny has recently centered on our government contracts work, especially in
Iraq and other parts of the Middle East. In part because of the heightened level
of scrutiny under which we operate, audit issues between us and government
auditors like the DCAA or the inspector general of the Department of Defense may
arise and are more likely to become public. We could be asked to reimburse
payments made to us that are determined to be in excess of those allowed by the
applicable contract, or we could agree to delay billing for an indefinite period
of time for work we have performed until any billing and cost issues are
resolved. Our ability to secure future government contracts business or renewals
of current government contracts business in the Middle East or elsewhere could
be materially and adversely affected. In addition, we may be required to expend
a significant amount of resources explaining and/or defending actions we have
taken under our government contracts.
THE BARRACUDA-CARATINGA PROJECT IS CURRENTLY BEHIND SCHEDULE, HAS
SUBSTANTIAL COST OVERRUNS AND WILL LIKELY RESULT IN LIQUIDATED DAMAGES
PAYABLE BY US AND OUR INABILITY TO RECOVER OUR COSTS ASSOCIATED WITH THE
PROJECT.
16
In June 2000, Kellogg Brown & Root entered into a contract with
Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the
Barracuda and Caratinga crude oilfields, which are located off the coast of
Brazil. The construction manager and project owner's representative is
Petrobras, the Brazilian national oil company. When completed, the project will
consist of two converted supertankers, Barracuda and Caratinga, which will be
used as floating production, storage, and offloading units, commonly referred to
as FPSOs, 32 hydrocarbon production wells, 22 water injection wells, and all
subsea flow lines, umbilicals and risers necessary to connect the underwater
wells to the FPSOs. The original completion date for the Barracuda vessel was
December 2003, and the original completion date for the Caratinga vessel was
April 2004. The project is significantly behind the original schedule, due in
large part to change orders from the project owner as well as a significant
reduction in shipyard subcontractor productivity and vessel rework, and is in a
financial loss position. We expect that the Barracuda vessel will likely be
completed by June 2005, and the Caratinga vessel will likely be completed by
November 2005. However, there can be no assurance that further delays will not
occur.
At June 30, 2004, the project was estimated to be approximately 87%
complete. To date, we have recorded an inception-to-date pretax loss of
approximately $762.0 million related to the project of which, based on June 2004
project forecasts, approximately $310.0 million was recorded in the second
quarter of 2004, $97.0 million was recorded in the first quarter of 2004, $238.0
million was recorded in 2003, and $117.0 million was recorded in 2002. In
determining the amount of the charge we recorded in the second quarter of 2004,
we assumed that the April 2004 agreement in principle (described below) will be
successfully finalized. If the April 2004 agreement in principle were not
finalized, based on June 2004 project forecasts, Kellogg Brown & Root could be
subject to an additional approximately $159.0 million in liquidated damages
beyond the $85.0 million of liquidated damages recorded as of June 30, 2004 in
the event that the delay in the project is determined to be attributable to us.
Kellogg Brown & Root and Petrobras continue to work toward finalization of a
definitive agreement but there can be no guarantee that a definitive agreement
will be achieved or approved.
Our performance under the contract is secured by:
o performance letters of credit, which together have an available
credit of approximately $272.0 million as of June 30, 2004 and which
will continue to be adjusted to represent approximately 10% of the
contract amount, as amended to date by change orders;
retainage letters of credit, which together have available credit of
approximately $170.0 million as of June 30, 2004 and which will
increase in order to continue to represent 10% of the cumulative
cash amounts paid to us; and
o a guarantee of Kellogg Brown & Root's performance under the
agreement by Halliburton in favor of the project owner.
April 2004 Agreement in Principle. In early April 2004, Kellogg Brown &
Root and Petrobras, on behalf of the project owner, entered into a non-binding
agreement in principle. The April 2004 agreement in principle is the basis for
settlement of the various claims between the parties and would amend existing
agreements, including the November 2003 agreements
17
described below. Implementation of the agreement in principle requires final
approval of the Board of Directors of Petrobras and Halliburton, the project
lenders, and possibly the bankruptcy court reviewing our proposed plan of
reorganization. Discussions among all parties, including the project lenders,
are underway. The April 2004 agreement in principle provides for:
o the release of all claims of all parties that arise prior to the
effective date of a final definitive agreement;
o the payment to us of $79.0 million as a result of change orders for
remaining claims;
o payment by Petrobras of any value added taxes on the project, except
for $8.0 million which has been paid by us;
o the assumption by Petrobras of certain work under the original
contract;
o the repayment on December 7, 2004 by Kellogg Brown & Root of a
portion of $300.0 million of advance payments (as was agreed in the
November 2003 agreements described below), without interest; and
o an extension of time to the original completion dates and other
milestone dates that average approximately 18 months, thereby
granting an additional approximately six months beyond the
extensions granted in the November 2003 agreements (described below)
before liquidated damages for project delays will be assessed.
November 2003 Agreements. If the April 2004 agreement in principle is
not implemented, we would remain subject to agreements entered into in November
2003 with the project owner in which the project owner agreed to:
o pay $69.0 million to settle a portion of our claims, thereby
reducing the amount of probable unapproved claims to $114.0 million;
o extend the original project completion dates and other milestone
dates, reducing our original exposure to liquidated damages; and
o delay Kellogg Brown & Root's repayment of approximately $300.0
million in advance payments until December 2004, although we and the
project owner did not resolve whether Kellogg Brown & Root would be
obligated to pay interest on this amount.
In addition, we would remain subject to the following risks under the
November 2003 agreements:
Unapproved Claims. We have asserted claims for compensation
substantially in excess of the $114.0 million of probable unapproved
claims, as well as claims for additional time to complete the project
before liquidated damages become applicable. The project owner and
Petrobras asserted claims against us that are in addition to the
project owner's potential claims for liquidated damages. In the
November 2003
18
agreements, the parties agreed to arbitrate these remaining disputed
claims. In addition, we agreed to cap our financial recovery to a
maximum of $375.0 million, and the project owner and Petrobras agreed
to cap their recovery to a maximum of $380.0 million plus liquidated
damages.
Liquidated Damages. In the event that any portion of the
project delay is determined to be attributable to us and any phase of
the project is completed after the milestone dates specified in the
contract, we could be required to pay liquidated damages. These damages
were initially (prior to the November 2003 agreements) calculated on an
escalating basis rising ultimately to approximately $1.0 million per
day of delay caused by us, subject to a total cap on liquidated damages
of 10% of the final contract amount, yielding a cap of approximately
$272.0 million as of June 30, 2004.
Under the November 2003 agreements, the project owner granted
an extension of time to the original completion dates and other
milestone dates that average approximately 12 months. In addition, the
project owner agreed to delay any attempt to assess the original
liquidated damages against us for project delays beyond 12 months and
up to 18 months and delay any drawing of letters of credit with respect
to such liquidated damages until the earliest of December 7, 2004, the
completion of any arbitration proceedings or the resolution of all
claims between the project owner and us. Although the November 2003
agreements do not delay the drawing of letters of credit for liquidated
damages for delays beyond 18 months, our master letter of credit
facility will provide funding for any such draw before December 31,
2004. The November 2003 agreements also provide for a separate
liquidated damages calculation of $450,000 per day for each of the
Barracuda and the Caratinga vessels if delayed beyond 18 months from
the original schedule. That amount is subject to the total cap on
liquidated damages of 10% of the final contract amount. Based upon the
November 2003 agreements and our June 2004 project forecasts, we
estimate that if we were to be completely unsuccessful in our claims
for additional time, we would be obligated to pay approximately $244.0
million in liquidated damages. If the April 2004 agreement in principle
were not finalized, based on June 2004 project forecasts, Kellogg Brown
& Root could be subject to an additional approximately $159.0 million
in liquidated damages beyond the $85.0 million of liquidated damages
recorded as of June 30, 2004 in the event that the delay in the project
is determined to be attributable to us. We have accrued $85.0 million
for this exposure as of June 30, 2004. There can be no assurance that
further project delays will not occur.
Value Added Taxes. On December 16, 2003, the State of Rio de
Janeiro issued a decree recognizing that Petrobras is entitled to a
credit for the value added taxes paid on the project. The decree also
provided that value added taxes that may have become due on the
project, but which had not yet been paid, could be paid in January 2004
without penalty or interest. In response to the decree, Petrobras
agreed to:
o directly pay the value added taxes due on all imports on the
project (including Petrobras' January 2004 payment of
approximately $150.0 million); and
19
o reimburse us for value added taxes paid on local purchases, of
which approximately $100.0 million will become due during 2004.
Since the credit to Petrobras for these value added taxes is
on a delayed basis, the issue of whether we must bear the cost of money
for the period from payment by Petrobras until receipt of the credit
has not been determined.
The validity of the December 2003 decree has now been
challenged in court in Brazil. Our legal advisers in Brazil believe
that the decree will be upheld. If it is overturned or rescinded, or
the Petrobras credits are lost for any other reason not due to
Petrobras, the issue of who must ultimately bear the cost of the value
added taxes will have to be determined based upon the law prior to the
December 2003 decree. We believe that the value added taxes are
reimbursable under the contract and prior law, but, until the December
2003 decree was issued, Petrobras and the project owner had been
contesting the reimbursability of up to $227.0 million of value added
taxes. There can be no assurance that we will not be required to pay
all or a portion of these value added taxes. In addition, penalties and
interest of $40.0 million to $100.0 million could be due if the
December 2003 decree is invalidated. We have paid $8.0 million for
these amounts as of June 30, 2004.
Default Provisions. In the event that we were determined to be in
default under the contract, and if the project was not completed by us as a
result of such default (i.e., our services are terminated as a result of such
default), the project owner may seek direct damages. Those damages could include
completion costs in excess of the contract price and interest on borrowed funds,
but would exclude consequential damages. The total damages could be up to $500.0
million plus the return of up to $300.0 million in advance payments previously
received by us to the extent they have not been repaid. The original contract
terms require repayment of the $300.0 million in advance payments by crediting
the last $350.0 million of our invoices related to the contract by that amount,
but the November 2003 agreements delay the repayment of any of the $300.0
million in advance payments until at least December 7, 2004. The April 2004
agreement in principle provides that interest on this amount is not due and
payable. A termination of the contract by the project owner could have a
material adverse effect on our financial condition and results of operations.
Cash Flow Considerations. The project owner has procured project
finance funding obligations from various lenders to finance the payments due to
us under the contract. In addition, the project financing includes borrowing
capacity in excess of the original contract amount.
Under the loan documents, the availability date for loan draws expired
December 1, 2003 and, therefore, the project owner drew down all remaining
available funds on that date. As a condition to the draw-down of the remaining
funds, the project owner was required to escrow the funds for the exclusive use
of paying project costs. The availability of the escrowed funds can be suspended
by the lenders if applicable conditions are not met. With limited exceptions,
these funds may not be paid to Petrobras or its subsidiary, which is funding the
drilling costs of the project, until all amounts due to us, including amounts
due for the claims, are liquidated and paid. While this potentially reduces the
risk that the funds would not be available for payment to
20
us, we are not party to the arrangement between the lenders and the project
owner and can give no assurance that there will be adequate funding to cover
current or future claims and change orders.
We have begun to fund operating cash shortfalls on the project and are
obligated to fund total shortages over the remaining project life. Approximately
$342.0 million of this amount will be paid during the second half of 2004 (which
includes approximately half of the second quarter 2004 charge described
previously), and approximately $171.0 million of this amount will be paid during
2005. That funding level assumes that, pursuant to amended project agreements
implementing the April 2004 agreement in principle, neither we nor the project
owner recover additional claims against the other, other than liquidated damages
for project delays. The operating cash shortfalls set forth in this paragraph
may increase and we may be required to fund additional amounts over the
remaining project life.
A JOINT VENTURE IN WHICH A HALLIBURTON UNIT PARTICIPATES IS UNDER
INVESTIGATION AS A RESULT OF PAYMENTS MADE IN CONNECTION WITH A LIQUEFIED
NATURAL GAS PROJECT IN NIGERIA.
The SEC has commenced a formal investigation into payments made in
connection with the construction and subsequent expansion by TSKJ of a
multibillion dollar natural gas liquefaction complex and related facilities at
Bonny Island in Rivers State, Nigeria. A French magistrate has also been
investigating this matter. TSKJ and other similarly owned entities have entered
into various contracts to build and expand the liquefied natural gas project for
Nigeria LNG Limited, which is owned by the Nigerian National Petroleum
Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip
International B.V. TSKJ is a private limited liability company registered in
Madeira, Portugal whose members are Technip SA of France, Snamprogetti
Netherlands B.V., which is an affiliate of ENI SpA of Italy, JGC Corporation of
Japan, and Kellogg Brown & Root, each of which owns 25% of the venture.
In June 2004, we terminated all relationships with Mr. A. Jack Stanley,
who most recently served as a consultant and chairman of Kellogg Brown & Root,
and another consultant and former employee of M.W. Kellogg, Ltd., a joint
venture in which Kellogg Brown & Root has a 55% interest. The terminations
occurred because of violations of Halliburton's code of business conduct that
allegedly involve the receipt of improper personal benefits in connection with
TSKJ's construction of the natural gas liquefaction facility in Nigeria. We
understand that Mr. Stanley has received a subpoena from the SEC. It has also
been reported recently in the French press that the French magistrate has
officially placed an agent of TSKJ under investigation for corruption of a
foreign public official.
The United States Department of Justice and the SEC have met with
Halliburton to discuss these matters and have asked Halliburton for cooperation
and access to information in reviewing these matters in light of the
requirements of the United States Foreign Corrupt Practices Act. Halliburton has
engaged outside counsel to investigate any allegations and is cooperating with
the United States government's inquiries and will make its employees available
for testimony. While Halliburton does not believe it has violated the Foreign
Corrupt Practices Act, Halliburton's own internal investigation of these matters
is on-going and there can be no assurance that the government's or Halliburton's
investigation will not conclude otherwise. Representatives of Halliburton have
also recently met with the French magistrate to express their
21
willingness to cooperate with the magistrate's investigation. In Nigeria, a
legislative committee of the National Assembly and the Economic and Financial
Crimes Commission, which is organized as part of the executive branch of the
government, are also investigating these matters. Halliburton intends to
cooperate with these investigations as well. As of March 31, 2004, we had not
accrued any amounts related to this investigation.
WE ARE SUBJECT TO SEC INVESTIGATIONS, WHICH COULD MATERIALLY AFFECT US.
In addition to the SEC investigation described in the immediately
preceding risk factor, we are currently the subject of a formal investigation by
the SEC, which we believe is focused on the accuracy, adequacy and timing of our
disclosure of the change in our accounting practice for revenues associated with
estimated cost overruns and unapproved claims for specific long-term engineering
and construction projects. The resolution of these investigations could have a
material adverse effect on us and result in:
o the institution of administrative, civil or injunctive proceedings;
o sanctions and the payment of fines and penalties; and
o increased review and scrutiny of us by regulatory authorities, the
media and others.
WE MAY PURSUE ACQUISITIONS, DISPOSITIONS, INVESTMENTS AND JOINT VENTURES,
WHICH COULD AFFECT OUR RESULTS OF OPERATIONS.
We may actively seek opportunities to maximize efficiency and value
through various transactions, including purchases or sales of assets,
businesses, investments or contractual arrangements or joint ventures. These
transactions would be intended to result in the realization of savings, the
creation of efficiencies, the generation of cash or income or the reduction of
risk. Acquisition transactions may be financed by additional borrowings or by
the issuance of our common stock. These transactions may also affect our
consolidated results of operations.
These transactions also involve risks and we cannot assure you that:
o any acquisitions would result in an increase in income;
o any acquisitions would be successfully integrated into our
operations;
o any disposition would not result in decreased earnings, revenue or
cash flow;
o any dispositions, investments, acquisitions or integrations would
not divert management resources; or
o any dispositions, investments, acquisitions or integrations would
not have a material adverse effect on our results of operations or
financial condition.
We conduct some operations through joint ventures, where control may be
shared with unaffiliated third parties. As with any joint venture arrangement,
differences in views among the joint venture participants may result in delayed
decisions or in failures to agree on major issues.
22
We also cannot control the actions of our joint venture partners, including any
nonperformance, default or bankruptcy of our joint venture partners. These
factors could potentially materially and adversely affect the business and
operations of the joint venture and, in turn, our business and operations.
A SIGNIFICANT PORTION OF OUR ENGINEERING AND CONSTRUCTION PROJECTS IS ON A
FIXED-PRICE BASIS, SUBJECTING US TO THE RISKS ASSOCIATED WITH COST
OVER-RUNS AND OPERATING COST INFLATION.
We contract to provide services either on a time-and-materials basis or
on a fixed-price basis, with fixed-price (or lump sum) contracts accounting for
approximately 10% of KBR's revenues for the first quarter of 2004 and
approximately 24% for the year ended December 31, 2003. We bear the risk of cost
overruns, operating cost inflation, labor availability and productivity and
supplier and subcontractor pricing and performance in connection with projects
covered by fixed-price contracts. Our failure to estimate accurately the
resources and time required for a fixed-price project, or our failure to
complete our contractual obligations within the time frame and costs committed,
could have a material adverse effect on our business, results of operations and
financial condition.
CHANGES IN GOVERNMENTAL SPENDING AND CAPITAL SPENDING BY OUR CUSTOMERS MAY
ADVERSELY AFFECT US.
Our business is directly affected by changes in governmental spending
and capital expenditures by our customers. Some of the changes that may
materially and adversely affect us include:
o a decrease in the magnitude of governmental spending and outsourcing
for military and logistical support of the type that we provide. For
example, the current level of government services being provided in
the Middle East may not continue for an extended period of time;
o an increase in the magnitude of governmental spending and
outsourcing for military and logistical support, which can
materially and adversely affect our liquidity needs as a result of
additional or continued working capital requirements to support this
work;
o a decrease in capital spending by governments for infrastructure
projects of the type that we undertake;
o the consolidation of our customers, which has (1) caused customers
to reduce their capital spending, which has in turn reduced the
demand for our services and products, and (2) resulted in customer
personnel changes, which in turn affects the timing of contract
negotiations and settlements of claims and claim negotiations with
engineering and construction customers on cost variances and change
orders on major projects;
o adverse developments in the businesses and operations of our
customers in the oil and gas industry, including write-downs of
reserves and reductions in capital spending for
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exploration, development, production, processing, refining, and
pipeline delivery networks; and
o ability of our customers to timely pay the amounts due us.
THE LOSS OF ONE OR MORE SIGNIFICANT CUSTOMERS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND OUR CONSOLIDATED RESULTS OF OPERATIONS.
Both our Energy Services Group and KBR depend on a limited number of
significant customers. While, except for the United States Government, none of
these customers represented more than 10% of consolidated revenues in any recent
period, the loss of one or more significant customers could have a material
adverse effect on our business and our consolidated results of operations.
WE ARE SUSCEPTIBLE TO ADVERSE WEATHER CONDITIONS IN OUR REGIONS OF
OPERATIONS.
Our businesses could be materially and adversely affected by severe
weather, particularly in the Gulf of Mexico where we have significant
operations. Repercussions of severe weather conditions may include:
o evacuation of personnel and curtailment of services;
o weather-related damage to offshore drilling rigs resulting in
suspension of operations;
o weather-related damage to our facilities;
o inability to deliver materials to jobsites in accordance with
contract schedules; and
o loss of productivity.
Because demand for natural gas in the United States drives a
disproportionate amount of our Energy Services Group's United States business,
warmer than normal winters in the United States are detrimental to the demand
for our services to gas producers.
WE ARE RESPONDING TO AN INQUIRY FROM THE OFFICE OF FOREIGN ASSETS CONTROL
REGARDING ONE OF OUR NON-UNITED STATES SUBSIDIARIES' OPERATIONS IN IRAN.
We have a Cayman Islands subsidiary with operations in Iran, and other
European subsidiaries that manufacture goods destined for Iran and/or render
services in Iran. The United States imposes trade restrictions and economic
embargoes that prohibit United States incorporated entities and United States
citizens and residents from engaging in commercial, financial or trade
transactions with some foreign countries, including Iran, unless authorized by
the Office of Foreign Assets Control (OFAC) of the United States Treasury
Department or exempted by statute.
We received and responded to an inquiry in mid-2001 from OFAC with
respect to the operations in Iran by a Halliburton subsidiary that is
incorporated in the Cayman Islands. The OFAC inquiry requested information with
respect to compliance with the Iranian Transaction
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Regulations. Our 2001 written response to OFAC stated that we believed that we
were in full compliance with applicable sanction regulations. In January 2004,
we received a follow-up letter from OFAC requesting additional information. We
responded fully to this request on March 19, 2004. We understand this matter has
now been referred by OFAC to the Department of Justice. In July 2004,
Halliburton received from an Assistant U.S. Attorney for the Southern District
of Texas a grand jury subpoena requesting the production of documents. We intend
to cooperate with the government's investigation. As of March 31, 2004, we had
not accrued any amounts related to this investigation.
Separate from the OFAC inquiry, we completed a study in 2003 of our
activities in Iran during 2002 and 2003 and concluded that these activities were
in full compliance with applicable sanction regulations. These sanction
regulations require isolation of entities that conduct activities in Iran from
contact with United States citizens or managers of United States companies.
We have been asked to and could be required to respond to other
questions and inquiries about operations in countries with trade restrictions
and economic embargoes.
WE ARE SUBJECT TO TAXATION IN MANY JURISDICTIONS AND THERE ARE INHERENT
UNCERTAINTIES IN THE FINAL DETERMINATION OF OUR TAX LIABILITIES.
We have operations in more than 100 countries other than the United
States and as a result are subject to taxation in many jurisdictions. Therefore,
the final determination of our tax liabilities involves the interpretation of
the statutes and requirements of taxing authorities worldwide. Foreign income
tax returns of foreign subsidiaries, unconsolidated affiliates and related
entities are routinely examined by foreign tax authorities. These tax
examinations may result in assessments of additional taxes or penalties or both.
Additionally, new taxes, such as the proposed excise tax in the United States
targeted at heavy equipment of the type we own and use in our operations, could
negatively affect our results of operations.
WE ARE SUBJECT TO SIGNIFICANT FOREIGN EXCHANGE AND CURRENCY RISKS THAT
COULD ADVERSELY AFFECT OUR OPERATIONS AND OUR ABILITY TO REINVEST EARNINGS
FROM OPERATIONS.
A sizable portion of our consolidated revenues and consolidated
operating expenses are in foreign currencies. As a result, we are subject to
significant risks, including:
o foreign exchange risks resulting from changes in foreign exchange
rates and the implementation of exchange controls such as those
experienced in Argentina in late 2001 and early 2002; and
o limitations on our ability to reinvest earnings from operations in
one country to fund the capital needs of our operations in other
countries.
We conduct business in countries that have non-traded or "soft"
currencies which, because of their restricted or limited trading markets, may be
more difficult to exchange for "hard" currency. We may accumulate cash in soft
currencies and we may be limited in our ability to convert our profits into
United States dollars or to repatriate the profits from those countries.
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OUR ABILITY TO LIMIT OUR FOREIGN EXCHANGE RISK THROUGH HEDGING
TRANSACTIONS MAY BE LIMITED.
We selectively use hedging transactions to limit our exposure to risks
from doing business in foreign currencies. For those currencies that are not
readily convertible, our ability to hedge our exposure is limited because
financial hedge instruments for those currencies are nonexistent or limited. Our
ability to hedge is also limited because pricing of hedging instruments, where
they exist, is often volatile and not necessarily efficient.
In addition, the value of the derivative instruments could be impacted
by:
o adverse movements in foreign exchange rates;
o interest rates;
o commodity prices; or
o the value and time period of the derivative being different than the
exposures or cash flows being hedged.
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL REQUIREMENTS THAT IMPOSE ON
US OBLIGATIONS OR RESULT IN OUR INCURRING LIABILITIES THAT WILL ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS OR FOR WHICH OUR FAILURE TO COMPLY COULD
ADVERSELY AFFECT US.
Our businesses are subject to a variety of environmental laws, rules
and regulations in the United States and other countries, including those
covering hazardous materials and requiring emission performance standards for
facilities. For example, our well service operations routinely involve the
handling of significant amounts of waste materials, some of which are classified
as hazardous substances. We also use radioactive and explosive materials in
certain of our operations. Environmental requirements include, for example,
those concerning:
o the containment and disposal of hazardous substances, oilfield waste
and other waste materials;
o the importation and use of radioactive materials;
o the use of underground storage tanks; and
o the use of underground injection wells.
Environmental and other similar requirements generally are becoming
increasingly strict. Sanctions for failure to comply with these requirements,
many of which may be applied retroactively, may include:
o administrative, civil and criminal penalties;
o revocation of permits to conduct business; and
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o corrective action orders, including orders to investigate and/or
clean up contamination.
Failure on our part to comply with applicable environmental
requirements could have a material adverse effect on our consolidated financial
condition. We are also exposed to costs arising from environmental compliance,
including compliance with changes in or expansion of environmental requirements,
such as the potential regulation in the United States of our Energy Services
Group's hydraulic fracturing services and products as underground injection,
which could have a material adverse effect on our business, financial condition,
operating results or cash flows.
We are exposed to claims under environmental requirements and from time
to time such claims have been made against us. In the United States,
environmental requirements and regulations typically impose strict liability.
Strict liability means that in some situations we could be exposed to liability
for cleanup costs, natural resource damages and other damages as a result of our
conduct that was lawful at the time it occurred or the conduct of prior
operators or other third parties. Liability for damages arising as a result of
environmental laws could be substantial and could have a material adverse effect
on our consolidated results of operations.
Changes in environmental requirements may negatively impact demand for
our services. For example, oil and natural gas exploration and production may
decline as a result of environmental requirements (including land use policies
responsive to environmental concerns). Such a decline, in turn, could have a
material adverse effect on us.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a variety of intellectual property rights that we use in our
products and services. We may not be able to successfully preserve these
intellectual property rights in the future and these rights could be
invalidated, circumvented or challenged. In addition, the laws of some foreign
countries in which our products and services may be sold do not protect
intellectual property rights to the same extent as the laws of the United
States. Our failure to protect our proprietary information and any successful
intellectual property challenges or infringement proceedings against us could
materially and adversely affect our competitive position.
IF WE DO NOT DEVELOP NEW COMPETITIVE TECHNOLOGIES AND PRODUCTS OR IF OUR
PROPRIETARY TECHNOLOGIES, EQUIPMENT, FACILITIES OR WORK PROCESSES BECOME
OBSOLETE, OR IF WE HAVE PROBLEMS IMPLEMENTING NEW TECHNOLOGY, OUR BUSINESS
AND REVENUES MAY BE ADVERSELY AFFECTED.
The market for our products and services is characterized by continual
technological developments to provide better and more reliable performance and
services. If we are not able to design, develop and produce commercially
competitive products and to implement commercially competitive services in a
timely manner in response to changes in technology, our business and revenues
could be materially and adversely affected and the value of our intellectual
property may be reduced. Likewise, if our proprietary technologies, equipment
and facilities or work processes become obsolete, we may no longer be
competitive and our business and revenues could be materially and adversely
affected.
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WE MAY BE UNABLE TO EMPLOY A SUFFICIENT NUMBER OF TECHNICAL PERSONNEL.
Many of the services that we provide and the products that we sell are
complex and highly engineered and often must perform or be performed in harsh
conditions. We believe that our success depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products and services. In addition, our ability to expand our operations depends
in part on our ability to increase our skilled labor force. The demand for
skilled workers is high and the supply is limited. A significant increase in the
wages paid by competing employers could result in a reduction of our skilled
labor force, increases in the wage rates that we must pay or both. If either of
these events were to occur, our cost structure could increase, our margins could
decrease and our growth potential could be impaired.
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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 hereunto duly authorized.
HALLIBURTON COMPANY
By: /s/ Margaret E. Carriere
-------------------------------------
Margaret E. Carriere
Vice President and Secretary
Date: July 19, 2004
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