=============================================================================
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 September 30, 1997
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 Identification No.)
of incorporation or organization)
901 Threadneedle, Suite 200, Houston, Texas 77079
(Address of principal executive offices)(Zip Code)
(281) 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 OCTOBER 17, 1997: 72,210,483
Exhibit Index
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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 nine month periods ended September
30, 1997 and 1996, 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 nine month periods ended September 30, 1997
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 nine month periods
ended September 30, 1997 are not necessarily indicative of results of
operations which will be realized for the year ending December 31, 1997. The
financial statements should be read in conjunction with the Company's Form
10-K for the year ended December 31, 1996.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 31,631 $ 59,089
Short-term investments 35,425 -
Accounts receivable:
Trade, net 77,935 57,277
Other 16,753 6,452
Materials and supplies inventory 16,182 13,369
Other current assets 3,327 3,903
----------- -----------
Total current assets 181,253 140,090
----------- -----------
PROPERTY AND EQUIPMENT:
Drilling 1,059,771 896,609
Other 60,119 57,640
----------- -----------
Total property and equipment 1,119,890 954,249
Accumulated depreciation and amortization (324,980) (296,620)
----------- -----------
Net property and equipment 794,910 657,629
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS 58,520 10,471
----------- -----------
TOTAL ASSETS $ 1,034,683 $ 808,190
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Long-term obligations due within one year $ 13,499 $ 11,500
Accounts payable - trade 18,284 21,961
Accrued liabilities 32,428 21,671
----------- -----------
Total current liabilities 64,211 55,132
LONG-TERM OBLIGATIONS 360,088 207,578
OTHER NONCURRENT LIABILITIES 52,735 52,726
----------- -----------
Total liabilities 477,034 315,436
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 53,035 46,147
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value 3,608 3,594
Capital in excess of par value 393,794 389,907
Retained earnings from March 31, 1991 119,721 71,268
Other (12,509) (18,162)
----------- -----------
Total stockholders' equity 504,614 446,607
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,034,683 $ 808,190
=========== ===========
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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ----------
OPERATING REVENUES $ 109,558 $ 76,413 $ 291,360 $ 199,303
--------- --------- --------- ---------
COSTS AND EXPENSES:
Drilling operations 38,974 33,199 109,730 88,772
Development operations 42,668 681 60,733 2,065
Depreciation 10,906 8,684 31,147 23,992
General and administrative 5,698 5,411 17,260 15,395
--------- --------- --------- ---------
Total costs and expenses 98,246 47,975 218,870 130,224
--------- --------- --------- ---------
OPERATING INCOME 11,312 28,438 72,490 69,079
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (5,612) (3,362) (13,701) (9,786)
Interest income 1,132 551 2,962 1,534
Other, net (650) (706) (1,067) (1,864)
--------- --------- --------- ---------
Total other income (expense) (5,130) (3,517) (11,806) (10,116)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 6,182 24,921 60,684 58,963
--------- --------- --------- ---------
INCOME TAX EXPENSE (BENEFIT):
Current 3,063 570 6,041 2,842
Deferred (5,739) 527 (661) 527
--------- --------- --------- ---------
Total income tax expense
(benefit) (2,676) 1,097 5,380 3,369
--------- --------- --------- ---------
INCOME AFTER INCOME TAX EXPENSE
AND BEFORE MINORITY INTEREST 8,858 23,824 55,304 55,594
MINORITY INTEREST (2,481) (1,179) (6,851) (3,642)
--------- --------- --------- ---------
NET INCOME 6,377 22,645 48,453 51,952
DIVIDENDS ON PREFERRED STOCK - 1,206 - 3,631
--------- --------- --------- ---------
NET INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 6,377 $ 21,439 $ 48,453 $ 48,321
========= ========= ========= =========
PRIMARY NET INCOME PER
COMMON SHARE $ .09 $ .34 $ .67 $ .78
========= ========= ========= =========
FULLY DILUTED NET INCOME
PER COMMON SHARE $ N/A $ .32 $ N/A $ .74
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Primary 72,124 62,686 72,064 62,313
========= ========= ========= =========
Fully diluted N/A 71,058 N/A 70,679
========= ========= ========= =========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 48,453 $ 51,952
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 31,147 23,992
Dry hole and exploration expenses
relating to oil and gas properties 56,612 -
Deferred income taxes (661) 527
Gain on dispositions of property
and equipment (1,940) (5,585)
Recognition of deferred expenses 3,588 2,655
Deferred compensation 5,767 2,012
Minority interest in income of
consolidated subsidiaries 6,851 3,642
Changes in assets and liabilities:
Accounts receivable, net (29,910) (21,891)
Materials and supplies inventory (2,228) (2,364)
Deferred charges and other assets (5,679) (4,477)
Accounts payable - trade (3,677) 1,972
Accrued liabilities 3,179 500
Accrued interest 6,462 3,558
Deferred mobilization revenue 4,675 5,995
Income taxes 3,192 (810)
Other, net (2,245) 520
---------- ----------
Net cash provided by operating activities 123,586 62,198
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment 1,794 8,973
Purchases of property and equipment:
Drilling and related equipment (169,470) (120,808)
Oil and gas properties (53,113) (13,075)
Exploration expenses relating to oil
and gas properties (4,310) -
Purchase of short-term investments (35,425) -
Increase in investments in and advances
to unconsolidated investees (45,405) (516)
--------- ----------
Net cash used in investing activities (305,928) (125,426)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term obligations - (12,000)
Net proceeds from revolving credit facility 157,000 91,000
Proceeds from long-term obligations 38,000 -
Principal payments on long-term obligations (42,337) (12,500)
Exercise of stock options 2,221 4,352
Dividends paid on preferred stock - (3,631)
Distribution to minority shareholders
of consolidated subsidiary - (5,119)
---------- ----------
Net cash provided by financing activities 154,884 62,102
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,458) (1,126)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,089 36,171
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,631 $ 35,045
========== ==========
Supplemental Cash Flow Disclosures:
Interest paid $ 9,811 $ 7,400
Income taxes paid $ 3,079 $ 3,523
Noncash investing activities:
Purchase of property and equipment in
exchange for debt $ - $ 2,139
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
SHORT-TERM INVESTMENTS - Short-term investments consist of
interest-bearing deposits with a commercial bank with a maturity
greater than three months but less than one year from the date of the
investment.
PROPERTY AND EQUIPMENT - As of September 30, 1997, none of the
Company's oil and gas properties had entered the production stage and
the accumulated cost related to such properties was approximately
$51.9 million which is included in Property and Equipment, Other.
Depending on prices and reserve developments the Company could
experience a future impairment charge.
OIL AND GAS ACCOUNTING - The successful efforts method of
accounting is used for oil and gas exploration and production
activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs,
including geological and geophysical costs and costs of carrying and
retaining unproved properties, are charged to expense as incurred.
The costs of drilling exploratory wells are capitalized pending
determination of whether each well has discovered proved reserves. If
proved reserves are not discovered, such drilling costs are charged to
expense. Costs incurred to drill and equip development wells,
including unsuccessful development wells, are capitalized.
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 months ended September 30, 1997 and 1996 was $1.1
million and $.8 million, respectively and for the nine months ended
September 30, 1997 and 1996 was $3.1 million and $2.0 million,
respectively, and is shown net of interest expense in the Consolidated
Statement of Operations.
FOREIGN CURRENCY TRANSACTIONS - In the third quarter of 1996
the Company entered into a short-term foreign exchange forward
contract to hedge a firm commitment relating to the purchase of
equipment and in the third quarter of 1997 this contract was
completed. This contract was intended to reduce currency risk from
exchange rate movements. Insignificant gains and losses were
deferred and accounted for as part of the underlying transaction. At
September 30, 1997, the Company did not have any outstanding forward
exchange contracts.
RECLASSIFICATION - Certain prior period amounts in the
consolidated financial statements have been reclassified for
comparative purposes. Such reclassifications had no effect on the net
income or the overall financial condition of the Company.
B) LONG-TERM OBLIGATIONS
(in thousands)
--------------
Debt obligations at December 31, 1996 $ 219,078
Proceeds from NIC (1) 38,000
Net proceeds from revolving credit facility 157,000
Less cash payments (2) (42,337)
Other 1,846
---------
Debt obligations at September 30, 1997 373,587
Less long-term obligations due within one year (13,499)
---------
Long-term obligations at September 30, 1997 $ 360,088
=========
(1) In December 1996, a wholly owned subsidiary of the Company
entered into a five year $38 million loan agreement with Nissho Iwai
Europe PLC ("NIC"). In April 1997, the loan agreement was finalized
and the Company received the funds. The loan is collateralized by a
vessel mortgage on the "SEILLEAN" without recourse to the Company and
bears interest at the London Interbank Offered Rate plus 2%.
Principal repayments are monthly based on the greater of the excess
cash flow of the "SEILLEAN" or the outstanding principal balance
divided by the remaining period of the loan. In addition, NIC has the
option to purchase up to 10% of the ownership in the "SEILLEAN", any
time prior to three years after April 25, 1997, the date the Company
received the funds from NIC, at a minimum price of $4.2 million.
(2) In the third quarter of 1997, the bank obligation between
Arcade Drilling AS, a majority-owned subsidiary of the Company, and
Chase Manhattan was repaid by Arcade Drilling AS in full from cash on
hand.
C) EXPENSES RELATING TO OIL AND GAS PROPERTIES
For the three and nine months ended September 30, 1997, the
Company incurred $39.2 million and $52.6 million of dry hole expenses,
respectively, and $1.8 million and $4.3 million of geological
expenses, respectively. Such expenses are included in "Development
operations" in the Consolidated Statement of Operations.
D) COMMITMENTS
DRILLSHIP PROJECT II - In the second quarter of 1997, the Company
and an affiliate of Conoco, Inc. formed a 60/40 joint venture (60%
Reading & Bates, 40% Conoco) to build and operate a second dynamically
positioned drillship capable of drilling at water depths up to 10,000
feet. The drillship is essentially identical to the previously
announced drillship project and Samsung Heavy Industries of Korea has
also been awarded the contract to construct the vessel. The estimated
cost of the drillship is approximately $233 million plus capitalized
interest. Immediately following the delivery of the vessel from the
shipyard, which is expected to be in the first quarter of 1999, the
vessel is contracted for five years. During the initial five years,
the vessel will be contracted to an affiliate of Conoco Inc. for
operations in the U. S. Gulf of Mexico and foreign areas for an
aggregate of 2.5 years and to the Company for operations for its own
account or the account of a subsidiary and for operations in which the
Company may have an interest in the U.S. Gulf of Mexico and foreign
areas for the remaining 2.5 years. The Company's portion of the
project is expected to be funded through working capital and project
financing of the joint venture which is expected to be provided by a
third party on a limited recourse basis. As of September 30, 1997,
the Company had advanced approximately $46.4 million to the joint
venture which is expected to be reimbursed after financing is obtained
by the joint venture. Such amount is included in "Deferred Charges
and Other Assets".
DRILLSHIP PROJECT III - In the third quarter of 1997, the Company
announced plans to build and operate a third dynamically positioned
drillship that will be 100% owned by the Company. The drillship is
essentially identical to the two previously announced drillship
projects and Samsung Heavy Industries of Korea has also been awarded
the contract to construct the vessel. The estimated cost of the
drillship is approximately $235 million plus capitalized interest
which is expected to be funded through non-recourse project financing.
Immediately following the delivery of the drillship, which is expected
to be in the third quarter of 1999, the drillship is committed for a
minimum of 2.5 years over a five year period with Statoil. Statoil has
an option, exercisable by January 1998, to increase its commitment
from the 2.5 year minimum up to the total five year period. As of
September 30, 1997, the Company had spent approximately $37.2 million
which is included in "Property and Equipment: Drilling".
NEW BUILD SEMI "RBS-6" - In the second quarter of 1997, the
Company entered into a letter of intent with Shell Deepwater
Development Inc. ("Shell") to build a new generation ultra deepwater
moored semi-submersible, the "RBS-6", under a five year contract. The
letter of intent is subject to the execution of a mutually agreeable
drilling contract. The "RBS-6" builds on concepts similar to the con-
struction of the "JACK BATES" and was designed by the Company's
engineering department in conjunction with the engineering subsidiary
of Ishikawajima-Harima Heavy Industries Co., Ltd. The "RBS-6" will be
capable of drilling at water depths up to 8,000 feet and during the
initial contract period, the unit will operate in the U.S. Gulf of
Mexico. The estimated cost of the unit is approximately $235 million
plus capitalized interest and other non-hardware costs and delivery of
the unit is scheduled for the first quarter of 2000. This estimate is
subject to change as discussions with the shipyard progress. The
drilling contract is being structured to facilitate non-recourse
financing by the Company by using the five year contract with Shell as
the primary financing collateral.
LETTERS OF CREDIT - In the third quarter of 1997, Christiania
Bank waived the Company's requirement to comply with the coverage
ratio covenant related to its letter of credit facility.
E) BUSINESS COMBINATION
On July 10, 1997, the Company and Falcon Drilling Company Inc.
("Falcon Drilling") announced that they had agreed to combine their
companies into a new company -- R&B Falcon Corporation. Under the
terms of the definitive agreement, which has been unanimously approved
by the Boards of Directors of both companies, Falcon Drilling
shareholders will receive 1 share of R&B Falcon Corporation common
stock for each share of Falcon Drilling common stock. Reading & Bates
shareholders will receive 1.18 shares of R&B Falcon Corporation common
stock for each share of Reading & Bates common stock. The exchange of
shares for both companies is expected to be tax-free, and the
companies are seeking pooling of interests accounting treatment. The
transaction, which is subject to regulatory and shareholder approvals,
is expected to close in the fourth quarter of 1997.
F) EMPLOYEE BENEFIT PLAN
STOCK OPTION PLAN - Reading & Bates Corporation has approved, in
principal, the adoption by Reading & Bates Development Co.
("Development"), a wholly owned subsidiary of the Company, of a stock
option plan to provide an incentive that will allow Development
to retain in its employ, persons of the training, experience and
ability necessary for the development and financial success of
Development. The plan would authorize options with respect to 15% of
the outstanding common stock of Development to be granted to certain
employees of Development and the Company. If after three years from
the date of grant Development has not obtained a separate financial
identity, the option holders have the right under certain conditions
to require the Company to make a publicly registered offering of
Development's stock. However in lieu of such offering, the Company
would be able to require the option holders to exercise their options
under certain conditions and secure the option to buy such holders'
shares after six months at the market value on that date.
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 September
30, 1997, and the related consolidated statements of operations for the three
and nine month periods ended September 30, 1997 and 1996 and the consolidated
statement of cash flows for the nine month periods ended September 30, 1997
and 1996. 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
October 15, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MATERIAL CHANGES IN FINANCIAL CONDITION
Business Combination
The Company has had a long standing policy of willingness 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 and has engaged in such
discussions on several occasions in the past. As a result of such
discussions with Falcon Drilling Company, Inc. ("Falcon Drilling"), on July
10, 1997, the Company and Falcon Drilling announced that they had agreed to
combine their companies into a new company -- R&B Falcon Corporation. Under
the terms of the definitive agreement, which has been unanimously approved
by the Boards of Directors of both companies, Falcon Drilling shareholders
will receive 1 share of R&B Falcon Corporation common stock for each share
of Falcon Drilling common stock. Reading & Bates shareholders will receive
1.18 shares of R&B Falcon Corporation common stock for each share of Reading
& Bates common stock. The exchange of shares for both companies is expected
to be tax-free, and the companies are seeking pooling of interests
accounting treatment. The transaction, which is subject to regulatory and
shareholder approvals, is expected to close in the fourth quarter of 1997.
Drillship Project II
In the second quarter of 1997, the Company and an affiliate of Conoco,
Inc. formed a 60/40 joint venture (60% Reading & Bates, 40% Conoco) to build
and operate a second dynamically positioned drillship capable of drilling at
water depths up to 10,000 feet. The drillship is essentially identical to
the previously announced drillship project and Samsung Heavy Industries of
Korea has also been awarded the contract to construct the vessel. The
estimated cost of the drillship is approximately $233 million plus
capitalized interest. Immediately following the delivery of the vessel from
the shipyard, which is expected to be in the first quarter of 1999, the
vessel is contracted for five years. During the initial five years, the
vessel will be contracted to an affiliate of Conoco Inc. for operations in
the U. S. Gulf of Mexico and foreign areas for an aggregate of 2.5 years and
to the Company for operations for its own account or the account of a
subsidiary and for operations in which the Company may have an interest in
the U.S. Gulf of Mexico and foreign areas for the remaining 2.5 years. The
Company's portion of the project is expected to be funded through working
capital and project financing of the joint venture which is expected to be
provided by a third party on a limited recourse basis. As of September 30,
1997, the Company had advanced approximately $46.4 million to the joint
venture which is expected to be reimbursed after financing is obtained by
the joint venture. Such amount is included in "Deferred Charges and Other
Assets".
Drillship Project III
In the third quarter of 1997, the Company announced plans to build and
operate a third dynamically positioned drillship that will be 100% owned by
the Company. The drillship is essentially identical to the two previously
announced drillship projects and Samsung Heavy Industries of Korea has also
been awarded the contract to construct the vessel. The estimated cost of the
drillship is approximately $235 million plus capitalized interest which is
expected to be funded through non-recourse project financing. Immediately
following the delivery of the drillship, which is expected to be in the
third quarter of 1999, the drillship is committed for a minimum of 2.5 years
over a five year period with Statoil. Statoil has an option, exercisable by
January 1998, to increase its commitment from the 2.5 year minimum up to the
total five year period. As of September 30, 1997, the Company had spent
approximately $37.2 million which is included in "Property and Equipment:
Drilling".
New Build Semi "RBS-6"
In the second quarter of 1997, the Company entered into a letter of
intent with Shell Deepwater Development Inc. ("Shell") to build a new
generation ultra deepwater moored semisubmersible, the "RBS-6", under a five
year contract. The letter of intent is subject to the execution of a
mutually agreeable drilling contract. The "RBS-6" builds on concepts similar
to the construction of the "JACK BATES" and was designed by the Company's
engineering department in conjunction with the engineering subsidiary of
Ishikawajima-Harima Heavy Industries Co., Ltd. The "RBS-6" will be capable
of drilling at water depths up to 8,000 feet and during the initial contract
period, the unit will operate in the U.S. Gulf of Mexico. The estimated
cost of the unit is approximately $235 million plus capitalized interest and
other non-hardware costs and delivery of the unit is scheduled for the first
quarter of 2000. This estimate is subject to change as discussions with the
shipyard progress. The drilling contract is being structured to facilitate
non-recourse financing by the Company by using the five year contract with
Shell as the primary financing collateral.
Purchase of Semisubmersible
In the third quarter of 1997, the Company purchased the semisubmersible
accommodation unit "RIG 82" (ex "ALLEGHENY") for approximately $34.2
million. "RIG 82" was originally built as a drilling unit, but was
converted to an accommodation vessel in 1978. Prior to commencing any
upgrade, the unit will be marketed to operators for conversion back to a
full drilling mode to operate in various worldwide locations with varying
water depth and upgrade specifications.
Drilling Operations
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, $169.5 million, in the
first nine months of 1997 primarily related to the purchase of the
"ALLEGHENY" (see above), the advance for Drillship Project III (see above)
and significant capital upgrades to the fleet to fulfill obligations under
existing contracts or to improve the marketability of certain of the
Company's offshore units.
Development Operations
In October 1995, the Company purchased an approximate 20% working
interest in the Green Canyon 254 Allegheny oil and gas development project
in the U.S. Gulf of Mexico from Enserch who was the operator at that time.
Mobil Exploration & Producing Inc., an affiliate of Mobil Corporation, had a
40% working interest in the project and Enserch had retained the remaining
40% working interest. In the third quarter of 1997, the Company acquired an
additional 20% working interest in the Allegheny field and British-Borneo
Petroleum, Inc., the new operator, acquired the remaining 60% working
interest in the field. As of September 30, 1997, the Company had accumulated
costs related to its ownership in such project of approximately $40 million
which are included in Property and Equipment, Other.
In July 1996, the Company entered into an agreement with Shell
Offshore Inc. to drill an appraisal well at the Company's expense in Shell's
East Boomvang prospect in the U.S. Gulf of Mexico with terms that if the
results were positive the Company would earn a working interest. The
estimated cost to drill the appraisal well, which was drilled in the first
quarter of 1997 and was suspended as a potential producer, was approximately
$12 million. In February 1997, Shell Offshore Inc. waived its election to
remain a working interest owner in the East Boomvang, North Boomvang and
East Bequia prospects ("Boomvang"), but retained an overriding royalty
interest in the three prospects. In July 1997, the Company entered into an
agreement with Norcen Explorer, Inc. ("Norcen") whereby an appraisal well on
the North Boomvang prospect would be drilled primarily at Norcen's expense
(up to an agreed upon cap) in exchange for a working interest in Boomvang.
In August 1997, drilling commenced on the North Boomvang prospect and the
well is expected to be completed in the fourth quarter of 1997.
The Company continues to consider participation in field development
projects. In this regard, the Company incurred expenditures of $53.1 million
in the first nine months of 1997 related to investments in oil and gas
properties. See "Material Changes in Results of Operations" below.
Investments in oil and gas properties as of September 30, 1997 are not
material to total assets. However, depending on prices, reserve developments
and decisions regarding economic feasibility of field developments, the
Company could experience a future impairment charge. In the third quarter of
1997, the Company wrote off or provided for two oil and gas prospects which
were not completed in the third quarter and are expected to incur additional
expenses in the fourth quarter of 1997. Such fourth quarter expenses for
these prospects are currently estimated to be $6.4 million.
Liquidity
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 and budgets 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 September 30, 1997, approximately
$36.0 million out of a total of $67.1 million of total consolidated cash,
cash equivalents and short-term investments are restricted from the
Company's use outside of Arcade Drilling AS, a majority owned subsidiary of
the Company. In addition, on July 3, 1997, the Company's revolving credit
facility was increased to $400 million and as of September 30, 1997, the
Company had $77 million available under the facility. The Company's
management currently expects that its cash flow from operations, in
combination with cash on hand, funds available under its existing credit
facility, and other new financing will be sufficient to satisfy the
Company's short-term and long-term working capital needs, planned
investments, capital expenditures, debt, lease and other payment
obligations.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1996
The Company's net income for the nine months ended September 30, 1997
was $ 48.5 million ($.67 earnings per share) compared with net income of
$52.0 million ($.78 earnings per share after preferred stock dividends of
$3.6 million) for the same period of 1996. Income from operations for the
nine months ended September 30, 1997 was $72.5 million compared to income
from operations of $69.1 million in 1996. The Company's fleet utilization
for the nine months ended September 30, 1997 and 1996 was 95% and 91%,
respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $92.1 million increase in operating revenues for the nine
months ended September 30, 1997 over the same period in 1996 is due to
increased dayrates for the semisubmersible fleet and increased dayrates and
utilization of the jackup fleet. Average dayrates for the Company's fourth-
generation semisubmersible, third-generation semisubmersible and jackup
fleets increased 44.0%, 49.0%, and 28.4%, respectively, for the nine months
ended September 30,1997 as compared to the same period in 1996, which
accounted for the largest part of the increase in operating revenues. Also,
the addition of the "SEILLEAN", a floating production storage and shuttle
vessel, to the fleet and the June 1996 activation of the "J. W. McLEAN", a
second-generation semisubmersible, contributed to the increased operating
revenues in the first nine months of 1997. These operating revenue
increases were partially offset by decreases in operating revenues relating
to the "M.G. HULME, JR." due to the unit drilling on oil and gas prospects
in which Reading & Bates Development Co., a wholly owned subsidiary of the
Company, holds an ownership interest.
Operating expenses related to the drilling operations do not
necessarily fluctuate in proportion to changes in operating revenues. 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. Also, 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. Operating expenses for a drilling unit
may be deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $21.0 million increase in expenses related to the drilling
operations for the nine months ended September 30, 1997 as compared to the
same period in 1996 is primarily due to the addition of the "SEILLEAN" to
the fleet in September 1996; the recognition of a $3.5 million gain on the
sale of the "D. K. McINTOSH" in 1996; the "RON TAPPMEYER" due to operations
in a relatively higher cost area in 1997 versus 1996; the "J. W. McLEAN"
being placed in service in June 1996 which increased operating expenses and
decreased capitalized expenses in 1997 and due to higher labor and rig
maintenance levels on the "PAUL B. LOYD, JR." and the "GEORGE H. GALLOWAY"
in 1997. These operating expense increases were partially offset by
decreases in operating expenses due to the capitalization of expenses
related to the "M. G. HULME, JR." due to the unit drilling on oil and gas
prospects in which Reading & Bates Development Co., a wholly owned
subsidiary of the Company, holds an ownership interest.
The $58.7 million increase in expenses related to the development
operations for the nine months ended September 30, 1997 as compared to the
same period in 1996 is primarily due to expenses related to dry holes
encountered on oil and gas prospects which were written off in the second
and third quarters of 1997.
Depreciation expense increased for the nine months ended September 30,
1997 as compared to the same period in 1996 primarily due to the addition of
the "SEILLEAN" to the fleet in September 1996, the June 1996 activation of
the "J. W. McLEAN" and a significant increase in gross property and
equipment primarily on the "JIM CUNNINGHAM" and the "M. G. HULME, JR."
related to major upgrades.
General & administrative expense increased for the nine months ended
September 30, 1997 as compared to the same period in 1996 primarily due to
increases in payroll and related expenses associated with increased staffing
and employee incentive plans.
Interest expense increased for the nine months ended September 30,
1997 as compared to the same period in 1996 primarily due to an increased
average principal balance outstanding, partially offset by increased
capitalized interest related to oil and gas development costs.
Income tax expense increased for the nine months ended September 30,
1997 as compared to the same period in 1996 primarily due to an increase in
the Company's pretax income.
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 $27.1 million and $14.3 million for
the nine months ended September 30, 1997 and 1996, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1996
The Company's net income for the three months ended September 30, 1997
was $6.4 million ($.09 earnings per share) compared with net income of $22.6
million ($.34 earnings per share after preferred stock dividends of $1.2
million) for the same period of 1996. Income from operations for the three
months ended September 30, 1997 was $11.3 million compared to income from
operations of $28.4 million in 1996. The Company's fleet utilization for
the three months ended September 30, 1997 and 1996 was 94% and 91%,
respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $33.1 million increase in operating revenues for the three
months ended September 30, 1997 over the same period in 1996 is due to
increased utilization and dayrates for the jackup fleet and increased
dayrates for the semisubmersible fleet. Average dayrates for the Company's
fourth-generation semisubmersible, third-generation semisubmersible, other
semisubmersible and jackup fleets increased 44.6%, 29.8%, 34.1% and 43.8%,
respectively, for the three months ended September 30,1997 as compared to
the same period in 1996, which accounted for the largest part of the
increase in operating revenues. Also, the addition of the "SEILLEAN", a
floating production storage and shuttle vessel, to the fleet in September
1996 contributed to the increased operating revenues in the third quarter of
1997. These operating revenue increases were partially offset by decreases
in operating revenues relating to the "M.G. HULME, JR." due to the unit
drilling on oil and gas prospects in which Reading & Bates Development Co.,
a wholly owned subsidiary of the Company, holds an ownership interest.
Operating expenses related to the drilling operations do not
necessarily fluctuate in proportion to changes in operating revenues. 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. Also, 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. Operating expenses for a drilling unit
may be deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $5.8 million increase in expenses related to the drilling
operations for the three months ended September 30, 1997 as compared to the
same period in 1996 is primarily due to the addition of the "SEILLEAN" to
the fleet in September 1996; the "RON TAPPMEYER" due to operations in
Australia in 1997 versus being on AFE for the majority of the third quarter
of 1996; the "C. E. THORNTON" due to contract termination payments in 1997
and the "G.H. GALLOWAY" primarily due to higher rig maintenance expense in
1997. These operating expense increases were partially offset by decreases
in operating expenses on the "HENRY GOODRICH" due to the October 1996
expiration of the management contract previously held by Transocean Offshore
Inc. (as successor to Sonat Offshore) and due to the capitalization of
expenses related to the "M. G. HULME, JR." due to the unit drilling on oil
and gas prospects in which Reading & Bates Development Co., a wholly owned
subsidiary of the Company, holds an ownership interest.
The $42.0 million increase in expenses related to the development
operations for the three months ended September 30, 1997 as compared to the
same period in 1996 is primarily due to expenses related to dry holes
encountered on oil and gas prospects which were written off in the third
quarter of 1997.
Depreciation expense increased for the three months ended September
30, 1997 as compared to the same period in 1996 primarily due to the
addition of the "SEILLEAN" to the fleet in September 1996 and significant
increases in gross property and equipment primarily on the "JIM CUNNINGHAM",
the "M.G. HULME, JR." and the "JACK BATES" related to major upgrades.
Interest expense increased for the three months ended September 30,
1997 as compared to the same period in 1996 primarily due to an increased
average principal balance outstanding, partially offset by increased
capitalized interest related to oil and gas development costs.
Income tax expense decreased for the three months ended September 30,
1997 as compared to the same period in 1996 primarily due to losses
associated with the development 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 $9.9 million and $4.6 million for the
three months ended September 30, 1997 and 1996, respectively.
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 - 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.
The Company is involved in 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 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 6(a). Exhibits
Exhibit 11 - Computation of Net Income 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 nine Current Reports on Form 8-K filed during the three
months ended September 30, 1997. A Current Report on Form 8-K was: filed
July 2, 1997 disclosing the Company's award from Premier Oil of a one year
contract for the "HARVEY H. WARD"; filed July 11, 1997 disclosing the
announcement of the Company and Falcon Drilling Company, Inc. agreeing to
combine their companies into a new company called R&B Falcon Corporation;
filed July 15, 1997 disclosing the Company's second quarter 1997 earnings;
filed August 6, 1997 disclosing the completion of drilling operations on
four unsuccessful exploratory wells in the U.S. Gulf of Mexico which the
Company had partial interests and resulted in a write-off in the third
quarter of 1997; filed August 22, 1997 disclosing the Company's "W. D. KENT"
lost its derrick equipment set as a result of a blowout and fire; filed
August 27, 1997 disclosing that the Company has entered into a letter of
intent to acquire an additional 20% working interest in the Allegheny Field
in the U.S. Gulf of Mexico in Green Canyon Blocks 253, 254, 297 and 298;
filed September 11, 1997 disclosing that the Company will construct a third
dynamically positioned drillship; filed September 12, 1997 disclosing that
the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and rules promulgated thereunder had expired and
that the Company and Falcon Drilling Company, Inc. anticipate the merger
will be completed in the fourth quarter of 1997; and filed September 26,
1997 disclosing the Company's award of a one year contract for the "ROGER W.
MOWELL".
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: October 27, 1997 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 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 PER COMMON SHARE, PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
PRIMARY NET INCOME PER SHARE:
Weighted average number of
common shares outstanding 72,124,127 62,686,024 72,064,437 62,312,556
========== ========== ========== ==========
Net income $ 6,377 $ 22,645 $ 48,453 $ 51,952
Less dividends paid on $1.625
Convertible Preferred Stock - (1,206) - (3,631)
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding $ 6,377 $ 21,439 $ 48,453 $ 48,321
========== ========== ========== ==========
Primary net income
per common share $ .09 $ .34 $ .67 $ .78
========== ========== ========== ==========
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number
of common shares outstanding n/a 62,686,024 n/a 62,312,556
Assume conversion of:
$1.625 Convertible
Preferred Stock n/a 8,372,482 n/a 8,366,454
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted n/a 71,058,506 n/a 70,679,010
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ n/a $ 21,439 $ n/a $ 48,321
Adjustments:
Dividends paid on $1.625
Convertible Preferred Stock n/a 1,206 n/a 3,631
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ n/a $ 22,645 $ n/a $ 51,952
========== ========== ========== ==========
Fully diluted net income per
common share (considering
only dilutive convertible
securities) $ n/a $ .32 $ n/a $ .74
========== ========== ========== ==========
READING & BATES CORPORATION
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE, PRIMARY AND FULLY DILUTED
(in thousands except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
FULLY DILUTED NET INCOME PER SHARE:*
Weighted average number of
common shares outstanding 72,124,127 62,686,024 72,064,437 62,312,556
Assume exercise of outstanding
stock options (based on the
treasury stock method) 1,377,582 1,253,686 1,119,827 1,238,426
Assume conversion of securities:
$1.625 Convertible Preferred Stock - 8,372,482 - 8,366,454
8% Senior Subordinated Convertible
Debentures 823,410 823,631 823,410 823,631
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted 74,325,119 73,135,823 74,007,674 72,741,067
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ 6,377 $ 21,439 $ 48,453 $ 48,321
Adjustments:
Interest on 8% Senior Sub-
ordinated Convertible Debentures 1,036 945 2,965 2,714
Dividends paid on $1.625
Convertible Preferred Stock - 1,206 - 3,631
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 7,413 $ 23,590 $ 51,418 $ 54,666
=========== ========== ========== ==========
Net income per common share
- assuming full dilution $ .10 $ .32 $ .69 $ .75
=========== ========== ========== ==========
*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, No. 33-56029, No. 33-61465, No. 33-61471, No. 33-62727, No. 333-
31315 and No. 333-31317 its Form 10-Q for the quarter ended September 30,
1997, which includes our report dated October 15, 1997 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
October 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Reading & Bates Corporation for the nine months
ended September 30, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 67,056
<SECURITIES> 0
<RECEIVABLES> 96,459
<ALLOWANCES> 1,771
<INVENTORY> 16,182
<CURRENT-ASSETS> 181,253
<PP&E> 1,119,891
<DEPRECIATION> 324,980
<TOTAL-ASSETS> 1,034,685
<CURRENT-LIABILITIES> 64,211
<BONDS> 0
0
0
<COMMON> 3,608
<OTHER-SE> 501,008
<TOTAL-LIABILITY-AND-EQUITY> 1,034,685
<SALES> 0
<TOTAL-REVENUES> 291,360
<CGS> 0
<TOTAL-COSTS> 218,870
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<INTEREST-EXPENSE> 13,701
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<INCOME-TAX> 5,381
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