=============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5587
READING & BATES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0642271
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
901 Threadneedle, Suite 200, Houston, Texas 77079
(Address of principal executive offices)(Zip Code)
(713)496-5000
(Registrant's telephone number, including area code)
NONE
(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___
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK
AT JULY 12, 1996 : 62,349,078
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Company or Group of Companies for Which Report is Filed:
Reading & Bates Corporation and Subsidiaries
The financial statements for the three and six month periods ended June 30,
1996 and 1995, include, in the opinion of the Company, all adjustments
(which consist only of normal recurring adjustments) necessary to present
fairly the financial position and results of operations for such periods.
The financial data for the three and six month periods ended June 30, 1996
included herein have been subjected to a limited review by Arthur Andersen
LLP, the registrant's independent public accountants, whose report is
included herein. Results of operations for the three and six month periods
ended June 30, 1996 are not necessarily indicative of results of
operations which will be realized for the year ending December 31, 1996.
The financial statements should be read in conjunction with the Company's
Form 10-K for the year ended December 31, 1995.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,501 $ 36,171
Accounts receivable:
Trade, net 47,604 41,324
Other 9,622 4,815
Materials and supplies inventory 11,237 8,911
Other current assets 2,852 4,567
--------- ---------
Total current assets 115,816 95,788
--------- ---------
PROPERTY AND EQUIPMENT:
Drilling 804,840 758,688
Other 40,603 29,898
--------- ---------
Total property and equipment 845,443 788,586
Accumulated depreciation and
amortization (284,446) (282,981)
--------- ---------
Net property and equipment 560,997 505,605
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 4,211 4,387
--------- ---------
TOTAL ASSETS $ 681,024 $ 605,780
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations $ 3,348 $ 12,000
Long-term obligations
due within one year 16,500 18,333
Accounts payable - trade 4,148 3,639
Accrued liabilities 19,029 20,518
--------- ---------
Total current liabilities 43,025 54,490
LONG-TERM OBLIGATIONS 143,895 95,040
OTHER NONCURRENT LIABILITIES 59,390 51,718
DEFERRED INCOME TAXES 2,977 2,977
--------- ---------
Total liabilities 249,287 204,225
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 43,355 44,504
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value 2,983 2,985
Common stock, $.05 par value 3,117 3,095
Capital in excess of par value 365,990 362,910
Retained earnings (deficit)
from March 31, 1991 23,865 (3,017)
Other (7,573) (8,922)
--------- ---------
Total stockholders' equity 388,382 357,051
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 681,024 $ 605,780
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 61,700 $ 50,382 $ 122,890 $ 98,357
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 26,126 31,234 56,957 63,145
Depreciation 7,740 7,380 15,308 14,813
General and administrative 5,394 4,354 9,984 8,435
--------- --------- --------- ---------
Total costs and expenses 39,260 42,968 82,249 86,393
--------- --------- --------- ---------
OPERATING INCOME 22,440 7,414 40,641 11,964
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (3,643) (3,939) (6,424) (7,753)
Interest income 484 480 983 905
Other, net (1,062) (472) (1,158) (682)
--------- --------- --------- ---------
Total other income (expense) (4,221) (3,931) (6,599) (7,530)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 18,219 3,483 34,042 4,434
INCOME TAX EXPENSE 1,179 569 2,272 1,732
--------- --------- --------- ---------
INCOME AFTER INCOME TAX EXPENSE
AND BEFORE MINORITY INTEREST 17,040 2,914 31,770 2,702
MINORITY INTEREST (1,205) (482) (2,463) (639)
--------- --------- --------- ---------
NET INCOME 15,835 2,432 29,307 2,063
DIVIDENDS ON PREFERRED STOCK 1,212 1,215 2,425 2,430
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 14,623 $ 1,217 $ 26,882 $ (367)
========= ========= ========= =========
PRIMARY NET INCOME (LOSS)
PER COMMON SHARE $ .23 $ .02 $ .43 $ (.01)
========= ========= ========= =========
FULLY DILUTED NET INCOME
PER COMMON SHARE $ .22 $ n/a $ .41 $ n/a
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,307 $ 2,063
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 15,308 14,813
Loss (gain) on dispositions of
property and equipment (4,681) 335
Recognition of deferred expenses 1,836 4,609
Minority interest in income of
consolidated subsidiaries 2,463 639
Changes in assets and liabilities:
Accounts receivable, net (11,027) (7,435)
Materials and supplies inventory (1,618) (1,095)
Deferred charges and other assets 53 (2,979)
Accounts payable - trade 509 (2,033)
Accrued liabilities (1,563) (874)
Accrued interest 2,503 2,690
Deferred mobilization revenue 7,042 -
Income taxes (662) (91)
Deferred income taxes - (98)
Other, net 1,732 665
--------- ---------
Net cash provided by operating activities 41,202 11,209
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment 8,785 281
Purchases of property and equipment (75,932) (15,862)
Business acquisitions - (356)
Increase in investments in and
advances to unconsolidated investees (165) (554)
--------- ---------
Net cash used in investing activities (67,312) (16,491)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on short-term obligations (8,653) 7,955
Net proceeds from revolving credit facility 51,000 -
Proceeds from long-term obligations - 12,500
Principal payments on long-term obligations (5,000) (15,037)
Exercise of stock options 3,180 361
Dividends paid on preferred stock (2,425) (2,430)
Distribution to minority shareholders of
consolidated subsidiary (3,662) -
--------- ---------
Net cash provided by financing activities 34,440 3,349
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,330 (1,933)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,171 42,319
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,501 $ 40,386
========= =========
Supplemental Cash Flow Disclosures:
Interest paid $ 4,415 $ 5,319
Income taxes paid $ 2,790 $ 1,947
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A) SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZED INTEREST - The Company capitalizes interest
applicable to the acquisition, exploration and development of
offshore oil and gas properties as a cost of such assets. Interest
capitalized for the three and six month periods ended June 30, 1996
was $.7 million and $1.2 million, respectively and is shown net of
interest expense in the Consolidated Statement of Operations. No
interest was capitalized during the three and six month periods
ended June 30, 1995.
NET INCOME (LOSS) PER COMMON SHARE - Primary net income
(loss) per common share is computed by dividing net income (loss),
after deducting the preferred stock dividend, by the weighted
average number of common shares outstanding during the period.
Fully diluted net income per common share assumes the conversion of
the preferred stock and is computed by dividing net income by the
weighted average number of common shares outstanding during the
period and the additional shares from the assumption of the
conversion of the preferred stock. The effects of common equivalent
shares were immaterial for all periods presented and, accordingly,
no adjustment was made for these common equivalent shares.
B) COMMITMENTS AND CONTINGENCIES
COMMITMENTS - In June 1996, the Company entered into an
agreement to purchase the floating storage and shuttle vessel the
"SEILLEAN" for approximately $42.2 million. The Company expects to
finalize the agreement and take delivery of the vessel in September
1996.
LITIGATION - The Company is one of the defendants in certain
litigation brought in July 1984 by the Cheyenne-Arapaho Tribes of
Oklahoma in the U.S. District Court for the Western District of
Oklahoma, seeking to set aside two communitization agreements with
respect to three leases involving tribal lands in which the Company
previously owned interests and to have those leases declared
expired. In June 1989, the U.S. District Court entered an interim
order in favor of the plaintiffs. On appeal, the U.S. Court of
Appeals for the Tenth Circuit upheld the decision of the trial
court and petitions for rehearing of that decision were denied.
Petitions for writs of certiorari filed by the parties with the
U.S. Supreme Court have been denied, and the case has been remanded
to the trial court for determination of damages. In June 1996,
this matter was settled, and the litigation was dismissed with
prejudice, without significant financial statement impact.
On March 17, 1995, an action was filed by Louis Silverman,
individually and on behalf of all other shareholders of Reading &
Bates Corporation similarly situated, against the Company and the
individual members of its board of directors in the Court of
Chancery of the State of Delaware, New Castle County. On April 7,
1995 three additional actions were filed on behalf of Congregation
Beth Joseph, Harry Lewis and Mortimer Shulman against the Company
and its directors in the Court of Chancery of the State of
Delaware. In each of the four actions, the plaintiff alleged,
inter alia, that the directors breached their fiduciary duties by
rejecting the previously announced unsolicited merger proposal made
by Sonat Offshore Drilling Inc. and by adopting the previously
announced shareholder rights plan. Each of the named plaintiffs in
the four actions purported to be an owner of the Company's Common
Stock and sought to represent a class of shareholders of the
Company who are similarly situated. Each of the plaintiffs sought
injunctive relief, damages in unspecified amounts and certain other
relief, including costs and expenses. In March 1996, the
plaintiffs in each of the four actions voluntarily dismissed same
on a without prejudice basis, and the court entered orders
accordingly.
EMPLOYMENT CONTRACTS - The Company has committed under
employment contracts to provide each of two key executives with
severance benefits (the aggregate of such benefits to both
executives amounting to approximately $3.7 million) which vest in
September 2003 or earlier if an entity in which each such executive
has an interest reduce its ownership of the Company's common stock
below a specified level and such executive gives notice of
termination of his employment in accordance with the terms of his
employment contract. The Company amortizes the cost of the
severance benefits over the ten year period from September 1993 to
September 2003, unless the relevant reduction of stock ownership
and termination of employment contract occurs prior to September
2003 in which case the unamortized severance cost would be
expensed. In the second quarter of 1996, one of the two key
executives gave such notice of termination following the relevant
reduction of stock ownership by the entity in which he had an
interest. In the same period, the Company paid the key executive
severance benefits in accordance with his employment contract and
expensed the related unamortized severance cost of approximately
$.6 million. The unaccrued severance benefits for the remaining
key executive at June 30, 1996 was approximately $2.1 million.
C) OTHER NONCURRENT LIABILITIES
The components of "OTHER NONCURRENT LIABILITIES" were as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Postretirement benefit obligations $ 15,812 $ 15,993
Accrued interest expense related to the
8% Senior Subordinated Convertible
Debentures due December 1998 11,151 10,410
Deferred mobilization revenue 7,042 -
Gain on sale of drilling unit 6,842 7,229
Foreign income taxes 6,004 5,893
Net liabilities associated with
discontinued operations 5,949 5,818
Pension obligations 5,360 5,090
Other 1,230 1,285
--------- ---------
Total $ 59,390 $ 51,718
========= =========
</TABLE>
In the first quarter of 1996, the Company recorded
deferred mobilization revenue as a result of receiving a partial
payment of a mobilization fee in advance for one of its drilling
units which will mobilize from one operating area to another later
this year.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Reading & Bates Corporation
We have reviewed the accompanying consolidated balance sheet of
Reading & Bates Corporation (a Delaware corporation) and Subsidiaries as
of June 30, 1996, and the related consolidated statements of operations
for the three and six month periods ended June 30, 1996 and 1995 and the
consolidated statement of cash flows for the six month periods ended June
30, 1996 and 1995. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our review, we are not aware of any material
modifications that should be made to the financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Houston, Texas
July 10, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company intends to continue to modernize and expand its fleet, in
order to meet the requirements of competitive conditions in the offshore
drilling industry and the changing needs of its customers. In this
regard, the Company made significant capital expenditures, $75.9 million,
in the first six months of 1996 primarily related to capital upgrades to
the fleet to fulfill obligations under existing contracts or to improve
the marketability of certain of the Company's drilling units. Also in
this regard, the Company has from time to time in the past engaged in, and
currently continues to engage in, preliminary discussions with other
industry participants with respect to business combinations that would
potentially strengthen its competitive position in the offshore drilling
industry. Moreover, the Company continues to consider the selective
acquisition of existing rigs, directly or through business combination
transactions.
In October 1995, the Company purchased an approximately 20% working
interest in the Green Canyon 254 Allegheny oil and gas development project
in the U.S. Gulf of Mexico from the operator, Enserch Exploration, Inc.
("Enserch"). Mobil Exploration & Producing Inc., an affiliate of Mobil
Corporation, has a 40% working interest in the project. Enserch retained
the remaining 40% working interest. The Company's third-generation
semisubmersible, the "M. G. HULME, JR." has been contracted for three
years to drill the development wells upon completion of an upgrade of the
unit for operation in up to 3,300 feet of water. Also, the Company may
act as contractor in the conversion of a second-generation semisubmersible
rig to a floating production vessel capable of processing up to 70,000
barrels of oil per day. Originally, it was expected that the working
interest owners would utilize the Company's "RIG 41" for this project.
However, at the Company's request the working interest owners have
purchased a different second-generation semisubmersible rig for the
project thus freeing up "RIG 41" to be used as a drilling unit by the
Company. As of June 30, 1996, the Company had accumulated costs related
to its ownership in the project of approximately $33.7 million. The
Company continues to consider selective expansion in floating production
through additional management contracts, alliances with other companies,
the acquisition of floating production equipment and/or participation in
field development projects.
In April 1996, the Company sold its mat-supported jackup drilling
unit, the "D. K. McINTOSH", for $8.5 million in cash and recognized a gain
on the sale in the second quarter of 1996 of approximately $3.5 million.
The gain appears as an offset to operating expenses in the Consolidated
Statement of Operations.
In June 1996, the Company entered into an agreement to purchase the
floating storage and shuttle vessel, the "SEILLEAN" for approximately
$42.2 million. The vessel was built in 1990 for extended well testing,
early production and life of field production and is currently working in
the U.K. sector of the North Sea. Following the closing of the purchase,
the vessel will remain under its current operational contract which is
anticipated to have a remaining term of approximately 1.5 years, subject
to earlier cessation of production from the field in which the vessel is
operating. The Company expects to finalize the agreement and take
delivery of the vessel in September 1996.
In April 1996, the Company increased its credit facility agreement
with Christiania Bank og Kreditkasse (the "CBK Facility") from $55 million
(inclusive of up to a $10 million letter of credit facility) to $100
million (inclusive of up to a $20 million letter of credit facility). In
July 1996, the Company increased the CBK Facility to $120 million
(inclusive of up to a $20 million letter of credit facility). The current
CBK Facility is collateralized by vessel mortgages on eight of the
drilling units owned by the Company and related assignments of insurance
and earnings. An additional $20 million will be available upon
finalization of the purchase of the "SEILLEAN" and will be collateralized
by a vessel mortgage and related assignments of insurance and earnings of
the drilling unit.
Liquidity of the Company should be considered in light of the
fluctuations in demand experienced by drilling contractors as changes in
oil and gas producers' expectations, budgets and drilling plans occur.
These fluctuations can impact the Company's liquidity as supply and
demand factors directly affect utilization and dayrates, which are the
primary determinants of cash flow from the Company's operations. As of
June 30, 1996, approximately $11.9 million of total consolidated cash and
cash equivalents of $44.5 million are restricted from the Company's use
outside of Arcade Drilling AS, a majority owned subsidiary of the Company.
The Company received $10.6 million in the first quarter of 1996 with
respect to a distribution to stockholders declared by Arcade Drilling AS.
The Company's management currently expects that its cash flow from
operations, in combination with cash on hand and other sources, including
new debt, new equity, asset disposals and/or by proper scheduling of its
planned capital or other expenditures, will be sufficient to satisfy the
Company's 1996 working capital needs, dividends on and the redemption of
the Preferred Stock, planned investments, capital expenditures on its
existing fleet, debt, lease and other payment obligations. The Company
currently expects to call for redemption its Preferred Stock in accordance
with its terms on September 30, 1996. The Company expects that most, if
not all, holders of the Preferred Stock will convert their shares into
Common Stock rather than allow the Company to redeem their shares. At
present, the Company would expect to fund the Preferred Stock redemption,
if any, out of working capital.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1995
The Company's net income for the six months ended June 30, 1996 was
$29.3 million ($.43 earnings per share after preferred stock dividends of
$2.4 million) compared with net income of $2.1 million ($.01 loss per
share after preferred stock dividends of $2.4 million) for the same period
of 1995. Income from operations for the six months ended June 30, 1996
was $40.6 million compared to income from operations of $12.0 million in
1995. The Company's fleet utilization for the six months ended June 30,
1996 and 1995 was 92% and 84%, respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $24.5 million increase in operating revenues for the six
months ended June 30, 1996 over the same period in 1995 is due to
increased dayrates and utilization of the semisubmersible fleet and
increased dayrates of the jackup fleet. Average dayrates for the
Company's fourth-generation semisubmersible fleet, third-generation
semisubmersible fleet, and jackup fleet increased 34.4%, 38.9%, and
10.8%, respectively, for the six months ended June 30,1996 as compared
to the same period in 1995, which accounted for the largest part of the
increase in operating revenues. Also, the addition of the "IOLAIR", a
third-generation semisubmersible and the "J. W. McLEAN", a second-
generation semisubmersible to the fleet, contributed to the increase in
operating revenues in the first half of 1996. A decrease in the average
dayrates earned by the Company's two tenders slightly offset the
improvements contributed by the semisubmersible and jackup fleets.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues. The continuation of personnel on board and
equipment maintenance is generally still necessary when the Company's
drilling units are stacked. It is only during prolonged stacked periods
that the Company is significantly able to reduce labor costs and equipment
maintenance expense. Additionally, labor costs fluctuate due to the
geographic diversification of the Company's drilling units and the mix of
labor between expatriates and nationals as stipulated in the drilling
contracts. In general, labor costs increase primarily due to higher
salary levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the drilling unit is performing and
the age and condition of the equipment. Scheduled maintenance of
equipment and overhauls are performed in accordance with the Company's
preventive maintenance program. Operating expenses for a drilling unit
are typically deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $6.2 million decrease in operating expenses for the six months
ended June 30, 1996 as compared to the same period in 1995 is primarily
due to the sale of the "D. K. McINTOSH" in 1996 and reduced expenses
associated with several drilling units. In particular, operating expenses
for the sold rig decreased as a result of the recognition of a $3.5
million gain on the sale in the first six months of 1996. Also, the "RON
TAPPMEYER" and the "HARVEY H. WARD" incurred reduced operating expenses
for the first six months of 1996 as the drilling units operated in less
expensive operating areas as compared to the first six months of 1995 when
the rigs operated in Australia, a relatively more expensive operating
area. Additional decreases occurred on the "HARVEY H. WARD" due to
significantly lower levels of contract preparation and mobilization
amortization in the first six months of 1996. Further, management fees
for the "PAUL B. LOYD, JR." effectively decreased since the management
contract previously held by Sonat Offshore Drilling Inc. expired in
December 1995 and is now held by a subsidiary of the Company. As an
offset to these operating expense reductions, the Company had increases in
operating expenses for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995 due to the addition of the "IOLAIR" to
the fleet and increased lease expense associated with the sale/lease-back
of the "M. G. HULME, JR.".
General & administrative expense for the six months ended June 30,
1996 included a $.6 million charge related to severance benefits for a key
executive whose employment was terminated during the period. See Note B
of Notes to Consolidated Financial Statements.
Other, net for the six months ended June 30, 1996 included $1.2
million of expenses associated with the business combination discussions
with Transocean AS.
Income tax expense increased for the six months ended June 30, 1996 as
compared to the same period in 1995 primarily due to a change in the
Company's foreign geographic areas of operations.
Minority interest relates primarily to the results of Arcade Drilling
and the percentage attributable to stockholders other than the Company.
Arcade Drilling reported net income of $9.7 million and $2.4 million for
the six months ended June 30, 1996 and 1995, respectively.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1995
The Company's net income for the three months ended June 30, 1996 was
$15.8 million ($.23 earnings per share after preferred stock dividends of
$1.2 million) compared with net income of $2.4 million ($.02 earnings per
share after preferred stock dividends of $1.2 million) for the same period
of 1995. Income from operations for the three months ended June 30, 1996
was $22.4 million compared to income from operations of $7.4 million in
1995. The Company's fleet utilization for the three months ended June 30,
1996 and 1995 was 89% and 83%, respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $11.3 million increase in operating revenues for the
three months ended June 30, 1996 over the same period in 1995 is due to
increased dayrates and utilization of the semisubmersible fleet. Average
dayrates for the Company's fourth-generation semisubmersible fleet and
third-generation semisubmersible fleet increased 37.0% and 31.4%,
respectively, for the three months ended June 30,1996 as compared to the
same period in 1995, which accounted for the largest part of the increase
in operating revenues. Also, the addition of the "IOLAIR", a third-
generation semisubmersible and the "J. W. McLEAN", a second-generation
semisubmersible to the fleet, contributed to the increased operating
revenues in the second quarter of 1996.
Operating expenses do not necessarily fluctuate in proportion to
changes in operating revenues. The continuation of personnel on board and
equipment maintenance is generally still necessary when the Company's
drilling units are stacked. It is only during prolonged stacked periods
that the Company is significantly able to reduce labor costs and equipment
maintenance expense. Additionally, labor costs fluctuate due to the
geographic diversification of the Company's drilling units and the mix of
labor between expatriates and nationals as stipulated in the drilling
contracts. In general, labor costs increase primarily due to higher
salary levels and inflation. Equipment maintenance expenses fluctuate
depending upon the type of activity the drilling unit is performing and
the age and condition of the equipment. Scheduled maintenance of
equipment and overhauls are performed in accordance with the Company's
preventive maintenance program. Operating expenses for a drilling unit
are typically deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $5.1 million decrease in operating expenses for the three months
ended June 30, 1996 as compared to the same period in 1995 is primarily
due to the sale of the "D. K. McINTOSH" in 1996 and reduced expenses
associated with several drilling units. In particular, operating expenses
for the sold rig decreased as a result of the recognition of a $3.5
million gain on the sale in the second quarter of 1996. Also, the "RON
TAPPMEYER" and the "HARVEY H. WARD" incurred reduced operating expenses
for the second quarter of 1996 as the drilling units operated in less
expensive operating areas as compared to the second quarter of 1995 when
the rigs operated in Australia, a relatively more expensive operating
area. Additional decreases occurred on the "HARVEY H. WARD" due to
significantly lower levels of contract preparation and mobilization
amortization in the second quarter of 1996. The "M.G. HULME, JR."
incurred reduced operating expenses due to the 1996 capitalization of
expenses related to major upgrades. Further, management fees for the
"PAUL B. LOYD, JR." effectively decreased since the management contract
previously held by Sonat Offshore Drilling Inc. expired in December 1995
and is now held by a subsidiary of the Company. As an offset to these
operating expense reductions, the Company had increases in operating
expenses for the quarter ended June 30, 1996 as compared to the quarter
ended June 30, 1995 due to the addition of the "IOLAIR" to the fleet and
increased lease expense associated with the sale/lease-back of the "M. G.
HULME, JR.".
General & administrative expense for the three months ended June 30,
1996 included a $.6 million charge related to severance benefits for a key
executive whose employment was terminated during the period. See Note B
of Notes to Consolidated Financial Statements.
Other, net for the three months ended June 30, 1996 included $1.2
million of expenses associated with the business combination discussions
with Transocean AS.
Income tax expense increased for the three months ended June 30, 1996
as compared to the same period in 1995 primarily due to a change in the
Company's foreign geographic areas of operations.
FORWARD LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q may contain or incorporate by
reference certain forward-looking statements, including by way of
illustration and not of limitation, statements relating to liquidity,
revenues, expenses, margins and contract rates and terms. The Company
strongly encourages readers to note that some or all of the assumptions,
upon which such forward-looking statements are based, are beyond the
Company's ability to control or estimate precisely, and may in come cases
be subject to rapid and material changes. Such assumptions include the
contract status of the Company's drilling units, general market conditions
prevailing in the offshore drilling industry (including daily rates and
utilization) and various other trends affecting the offshore drilling
industry, including world oil prices, the exploration and development
programs of the Company's customers, the actions of the Company's
competitors and economic conditions generally.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
LITIGATION - The Company is one of the defendants in certain
litigation brought in July 1984 by the Cheyenne-Arapaho Tribes of Oklahoma
in the U.S. District Court for the Western District of Oklahoma, seeking
to set aside two communitization agreements with respect to three leases
involving tribal lands in which the Company previously owned interests and
to have those leases declared expired. In June 1989, the U.S. District
Court entered an interim order in favor of the plaintiffs. On appeal, the
U.S. Court of Appeals for the Tenth Circuit upheld the decision of the
trial court and petitions for rehearing of that decision were denied.
Petitions for writs of certiorari filed by the parties with the U.S.
Supreme Court have been denied, and the case has been remanded to the
trial court for determination of damages. In June 1996, this matter was
settled, and the litigation was dismissed with prejudice, without
significant financial statement impact.
In November 1988, a lawsuit was filed in the U.S. District Court for
the Southern District of West Virginia against Reading & Bates Coal Co., a
wholly owned subsidiary of the Company, by SCW Associates, Inc. claiming
breach of an alleged agreement to purchase the stock of Belva Coal
Company, a wholly owned subsidiary of Reading & Bates Coal Co. with coal
properties in West Virginia. When those coal properties were sold in July
1989 as part of the disposition of the Company's coal operations, the
purchasing joint venture indemnified Reading & Bates Coal Co. and the
Company against any liability Reading & Bates Coal Co. might incur as the
result of this litigation. A judgment for the plaintiff of $32,000
entered in February 1991 was satisfied and Reading & Bates Coal Co. was
indemnified by the purchasing joint venture. On October 31, 1990, SCW
Associates, Inc., the plaintiff in the above-referenced action, filed a
separate ancillary action in the Circuit Court, Kanawha County, West
Virginia against the Company and a wholly owned subsidiary of Reading &
Bates Coal Co., Caymen Coal, Inc. (former owner of the Company's West
Virginia coal properties), as well as the joint venture, Mr. William B.
Sturgill personally (former President of Reading & Bates Coal Co.), three
other companies in which the Company believes Mr. Sturgill holds an equity
interest, two employees of the joint venture, First National Bank of
Chicago and First Capital Corporation. The lawsuit seeks to recover
compensatory damages of $50 million and punitive damages of $50 million
for alleged tortious interference with the contractual rights of the
plaintiff and to impose a constructive trust on the proceeds of the use
and/or sale of the assets of Caymen Coal, Inc. as they existed on
October 15, 1988. Subsequently, the court entered an order dismissing the
Company's indirect subsidiary. The Company intends to defend its
interests vigorously and believes the damages alleged by the plaintiff in
this action are highly exaggerated. In any event, the Company believes
that it has valid defenses and that it will prevail in this litigation.
On March 17, 1995, an action was filed by Louis Silverman,
individually and on behalf of all other shareholders of Reading & Bates
Corporation similarly situated, against the Company and the individual
members of its board of directors in the Court of Chancery of the State of
Delaware, New Castle County. On April 7, 1995 three additional actions
were filed on behalf of Congregation Beth Joseph, Harry Lewis and Mortimer
Shulman against the Company and its directors in the Court of Chancery of
the State of Delaware. In each of the four actions, the plaintiff
alleged, inter alia, that the directors breached their fiduciary duties by
rejecting the previously announced unsolicited merger proposal made by
Sonat Offshore Drilling Inc. and by adopting the previously announced
shareholder rights plan. Each of the named plaintiffs in the four actions
purported to be an owner of the Company's Common Stock and sought to
represent a class of shareholders of the Company who are similarly
situated. Each of the plaintiffs sought injunctive relief, damages in
unspecified amounts and certain other relief, including costs and
expenses. In March 1996, the plaintiffs in each of the four actions
voluntarily dismissed same on a without prejudice basis, and the court
entered orders accordingly.
The Company is involved in these and various other legal actions
arising in the normal course of business. After taking into consideration
the evaluation of such actions by counsel for the Company, management is
of the opinion that the outcome of all known and potential claims and
litigation will not have a material adverse effect on the Company's
business or consolidated financial position or results of operations.
Item 4. Results of Votes of Security Holders
At the annual meeting of stockholders of Reading & Bates
Corporation, held on May 14, 1996, three Class II directors were elected
by a vote of common stock shareholders, as outlined in the Company's Proxy
Statement relating to the annual meeting. Proxies for the annual meeting
were solicited pursuant to Regulation 14 under the Securities and Exchange
Act of 1934, there was no solicitation in opposition to the management's
nominees as listed in the Proxy Statement and all of such nominees were
elected, with 55,089,331, 55,089,327 and 55,087,752 votes for each of Mr.
Kalborg, Mr. Laqueur and Mr. McLean, respectively, and 230,786, 230,790
and 232,365 votes withheld from each of such nominees, respectively. In
addition one proposal was voted upon to ratify and approve the appointment
of Arthur Andersen LLP as independent public accountants for the Company
for its fiscal year 1996, with 55,192,635 votes for the proposal, 75,251
votes against the proposal and 52,231 abstentions.
Item 6(a). Exhibits
Exhibit 11 - Computation of Net Income (Loss) Per Common Share,
Primary and Fully Diluted.
Exhibit 15 - Letter regarding unaudited interim financial
information.
Exhibit 27 - Financial Data Schedule. (Exhibit 27 is being
submitted as an exhibit only in the electronic format of this
Quarterly Report on Form 10-Q being submitted to the Securities and
Exchange Commission.)
Item 6(b). Reports on Form 8-K
There were eleven Current Reports on Form 8-K filed during the
three months ended June 30, 1996. A Current Report on Form 8-K was:
filed April 3, 1996 disclosing the Company's receipt of a letter of
intent from BP Exploration for the continued utilization of the "PAUL
B. LOYD, JR."; filed April 15, 1996 disclosing the Company's first
quarter 1996 earnings; filed May 7, 1996 disclosing the confirmation of
a proposal to Transocean regarding a combination of the Company and
Transocean, and the receipt of a letter of intent from BP Exploration
for a long-term contract for the "HENRY GOODRICH"; filed May 7, 1996
disclosing the submission of a letter to Transocean revising the terms
of the proposal to combine the Company and Transocean; filed May 10,
1996 disclosing the Company's intent to press forward with the
combination of the Company and Transocean despite lack of support from
Transocean's board of directors and a clarification of the Company's
position with respect to the Company's proposal to acquire Transocean;
filed May 13, 1996 disclosing a fact sheet with respect to the
Company's proposal to acquire Transocean; filed May 21, 1996 disclosing
the Company's receipt of a letter of intent from Statoil, Den norske
stats oljeselskap a.s. for the utilization of the "J.W. McLEAN",
formerly "RIG 42" for a development program offshore Ireland; filed
June 5, 1996 disclosing that the Company was suspending its efforts to
acquire Transocean; filed June 6, 1996 disclosing that the Company has
reached an agreement with Britoil (Beta) Limited to purchase the
floating production storage and shuttle vessel "SEILLEAN"; filed June
10, 1996 disclosing that Steven A. Webster of Falcon Drilling Company,
Inc. ("Falcon") resigned as a member of the Company's Board of
Directors and that Paul B. Loyd, Jr. of the Company resigned from
Falcon's board of directors as a result of both companies possibly
becoming competitors in the future; and filed June 24, 1996 disclosing
the extended commitment of the "JIM CUNNINGHAM" with Elf Exploration
Angola.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING & BATES CORPORATION
Date: July 22, 1996 By /s/T. W. Nagle
------------------------
T. W. Nagle
Executive Vice President,
Finance and Administration
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
Exhibit
Number Description
11 Computation of Net Income (Loss) Per Common Share, Primary and
Fully Diluted.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule. (Exhibit 27 is being submitted as an
exhibit only in the electronic format of this Quarterly Report
on Form 10-Q being submitted to the Securities and Exchange
Commission.)
Exhibit 11
READING & BATES CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE,
PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE:
Weighted average number of
common shares outstanding 62,281,169 59,737,170 62,123,924 59,725,307
========== ========== ========== ==========
Net income $ 15,835 $ 2,432 $ 29,307 $ 2,063
Less dividends paid on $1.625
Convertible Preferred Stock (1,212) (1,215) (2,425) (2,430)
---------- ---------- ---------- ----------
Adjusted net income (loss)
applicable to common shares
outstanding $ 14,623 $ 1,217 $ 26,882 $ (367)
========== ========== ========== ==========
Primary net income (loss)
per common share $ .23 $ .02 $ .43 $ (.01)
========== ========== ========== ==========
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of
common shares outstanding 62,281,169 n/a 62,123,924 n/a
Assume conversion of:
$1.625 Convertible
Preferred Stock 8,647,485 n/a 8,647,485 n/a
---------- ---------- ---------- ----------
Adjusted common shares
outstanding-fully diluted 70,928,654 n/a 70,771,409 n/a
========== ========== ========== ==========
Adjusted net income
applicable to common
shares outstanding $ 14,623 $ n/a $ 26,882 $ n/a
Adjustments:
Dividends paid on $1.625
Convertible Preferred Stock 1,212 n/a 2,425 n/a
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 15,835 $ n/a $ 29,307 $ n/a
========== ========== ========== ==========
Fully diluted net income per
common share (considering
only dilutive convertible
securities) $ .22 $ n/a $ .41 $ n/a
========== ========== ========== ==========
</TABLE>
READING & BATES CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE, PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FULLY DILUTED NET INCOME PER SHARE:*
Weighted average number of
common shares outstanding 62,281,169 59,737,170 62,123,924 59,725,307
Assume exercise of outstanding
stock options (based on the
treasury stock method) 1,295,865 236,044 1,230,797 118,022
Assume conversion of securities:
$1.625 Convertible
Preferred Stock 8,647,485 8,668,010 8,647,485 8,668,010
8% Senior Subordinated
Convertible Debentures 823,631 783,686 823,631 783,686
8% Convertible Subordinated
Debentures - 16,661 - 16,661
---------- ---------- ---------- ----------
Adjusted common shares
outstanding-fully diluted 73,048,150 69,441,571 72,825,837 69,311,686
========== ========== ========== ==========
Adjusted net income (loss)
applicable to common
shares outstanding $ 14,623 $ 1,217 $ 26,882 $ (367)
Adjustments:
Interest on 8% Senior
Subordinated Convertible
Debentures 901 775 1,768 1,514
Interest on 8% Convertible
Subordinated Debentures - 557 - 1,093
Dividends paid on $1.625
Convertible Preferred Stock 1,212 1,215 2,425 2,430
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 16,736 $ 3,764 $ 31,075 $ 4,670
========== ========== ========== ==========
Net income per common share
- assuming full dilution
(antidilutive) $ .23 $ .05 $ .43 $ .07
========== ========== ========== ==========
</TABLE>
* This calculation considers all convertible securities and is submitted in
accordance with Regulation S-K item 601(b)(11) although it is contrary to
paragraph 40 of APB Opinion No. 15.
Exhibit 15
Reading & Bates Corporation
We are aware that Reading & Bates Corporation has incorporated by
reference in its Registration Statements No. 33-44237, No. 33-50828 , No.
33-50565, 33-56029 and 33-62727 its Form 10-Q for the quarter ended June
30, 1996, which includes our report dated July 10, 1996 covering the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered
a part of the registration statement prepared or certified by our firm or
a report prepared or certified by our firm within the meaning of Sections
7 and 11 of the Act.
Arthur Andersen LLP
Houston, Texas
July 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Reading & Bates Corporation for the six months ended
June 30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 44,501
<SECURITIES> 0
<RECEIVABLES> 61,623
<ALLOWANCES> 4,397
<INVENTORY> 11,237
<CURRENT-ASSETS> 115,816
<PP&E> 845,443
<DEPRECIATION> 284,446
<TOTAL-ASSETS> 681,024
<CURRENT-LIABILITIES> 43,025
<BONDS> 0
<COMMON> 3,117
2,983
0
<OTHER-SE> 382,282
<TOTAL-LIABILITY-AND-EQUITY> 681,024
<SALES> 0
<TOTAL-REVENUES> 122,890
<CGS> 0
<TOTAL-COSTS> 56,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 294
<INTEREST-EXPENSE> 6,424
<INCOME-PRETAX> 34,042
<INCOME-TAX> 2,272
<INCOME-CONTINUING> 29,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,307
<EPS-PRIMARY> .43
<EPS-DILUTED> .41
</TABLE>
