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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 JULY 18, 1997: 72,105,779
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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,
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 six month periods ended June 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 six month periods
ended June 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)
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 31,842 $ 59,089
Short-term investments 48,225 -
Accounts receivable:
Trade, net 73,804 57,277
Other 20,709 6,452
Materials and supplies inventory 14,148 13,369
Other current assets 2,935 3,903
---------- ----------
Total current assets 191,663 140,090
---------- ----------
PROPERTY AND EQUIPMENT:
Drilling 958,892 896,609
Other 75,455 57,640
---------- ----------
Total property and equipment 1,034,347 954,249
Accumulated depreciation and amortization (315,933) (296,620)
---------- ----------
Net property and equipment 718,414 657,629
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 52,385 10,471
---------- ----------
TOTAL ASSETS $ 962,462 $ 808,190
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Long-term obligations due within one year $ 19,813 $ 11,500
Accounts payable - trade 22,726 21,961
Accrued liabilities 31,599 21,671
---------- ----------
Total current liabilities 74,138 55,132
LONG-TERM OBLIGATIONS 286,673 207,578
OTHER NONCURRENT LIABILITIES 51,762 52,091
DEFERRED INCOME TAXES 4,663 635
---------- ----------
Total liabilities 417,236 315,436
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 50,536 46,147
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value 3,603 3,594
Capital in excess of par value 392,294 389,907
Retained earnings from March 31, 1991 113,344 71,268
Other (14,551) (18,162)
---------- ----------
Total stockholders' equity 494,690 446,607
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 962,462 $ 808,190
========== ==========
The accompanying notes are an integral part of the consolidated financial
statement.
READING & BATES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1997 1996 1997 1996
-------- -------- --------- ---------
OPERATING REVENUES $ 98,371 $ 61,700 $ 181,802 $ 122,890
-------- -------- --------- ---------
COSTS AND EXPENSES:
Drilling operations 35,339 25,384 70,756 55,576
Development operations 16,968 742 18,065 1,381
Depreciation 10,389 7,740 20,241 15,308
General and administrative 5,714 5,394 11,562 9,984
-------- -------- --------- ---------
Total costs and expenses 68,410 39,260 120,624 82,249
-------- -------- --------- ---------
OPERATING INCOME 29,961 22,440 61,178 40,641
-------- -------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest (4,560) (3,643) (8,089) (6,424)
Interest income 983 484 1,830 983
Other, net (125) (1,062) (417) (1,158)
-------- -------- --------- ---------
Total other income (expense) (3,702) (4,221) (6,676) (6,599)
-------- -------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 26,259 18,219 54,502 34,042
-------- -------- --------- ---------
INCOME TAX EXPENSE:
Current 1,486 1,179 2,978 2,272
Deferred 3,511 - 5,078 -
-------- -------- --------- ---------
Total income tax expense 4,997 1,179 8,056 2,272
-------- -------- --------- ---------
INCOME AFTER INCOME TAX EXPENSE
AND BEFORE MINORITY INTEREST 21,262 17,040 46,446 31,770
MINORITY INTEREST (1,099) (1,205) (4,370) (2,463)
-------- -------- --------- ---------
NET INCOME 20,163 15,835 42,076 29,307
DIVIDENDS ON PREFERRED STOCK - 1,212 - 2,425
-------- -------- --------- ---------
NET INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 20,163 $ 14,623 $ 42,076 $ 26,882
======== ======== ========= =========
PRIMARY NET INCOME PER
COMMON SHARE $ .28 $ .23 $ .58 $ .43
======== ======== ========= =========
FULLY DILUTED NET INCOME
PER COMMON SHARE $ N/A $ .22 $ N/A $ .41
======== ======== ========= =========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING:
Primary 72,060 62,281 72,034 62,124
======== ======== ========= =========
Fully diluted N/A 70,929 N/A 70,771
======== ======== ========= =========
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)
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,076 $ 29,307
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 20,241 15,308
Dry hole and exploration expenses
relating to oil and gas properties 15,544 -
Deferred income taxes 5,078 -
Gain on dispositions of property and equipment (492) (4,681)
Recognition of deferred expenses 2,658 1,836
Deferred compensation 3,786 1,350
Minority interest in income of
consolidated subsidiaries 4,370 2,463
Changes in assets and liabilities:
Accounts receivable, net (29,735) (11,027)
Materials and supplies inventory (194) (1,618)
Deferred charges and other assets (1,233) 53
Accounts payable - trade 765 509
Accrued liabilities 6,649 (1,563)
Accrued interest 3,361 2,503
Deferred mobilization revenue 214 7,042
Income taxes 1,692 (662)
Other, net (1,479) 382
--------- ---------
Net cash provided by operating activities 73,301 41,202
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property and equipment 409 8,785
Purchases of property and equipment:
Drilling and related equipment (66,042) (65,566)
Oil and gas properties (29,515) (10,366)
Exploration expenses relating to
oil and gas properties (2,473) -
Purchase of short-term investments (48,225) -
Increase in investments in and
advances to unconsolidated investees (42,394) (165)
--------- ---------
Net cash used in investing activities (188,240) (67,312)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term obligations - (8,653)
Net proceeds from revolving credit facility 60,000 51,000
Proceeds from long-term obligations 38,000 -
Principal payments on long-term obligations (11,772) (5,000)
Exercise of stock options 1,464 3,180
Dividends paid on preferred stock - (2,425)
Distribution to minority shareholders
of consolidated subsidiary - (3,662)
--------- ---------
Net cash provided by financing activities 87,692 34,440
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,247) 8,330
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,089 36,171
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,842 $ 44,501
========= =========
Supplemental Cash Flow Disclosures:
Interest paid $ 6,486 $ 4,415
Income taxes paid $ 1,958 $ 2,790
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 June 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
$67.4 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 June 30, 1997 and 1996 was $1.1 million and
$.7 million, respectively and for the six months ended June 30, 1997
and 1996 was $2.0 million and $1.2 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. This contract is intended to reduce currency risk from
exchange rate movements. Gains and losses are deferred and accounted
for as part of the underlying transaction. At June 30, 1997, the
Company had an outstanding forward exchange contract to purchase
Danish kroner totaling approximately $3.9 million.
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 60,000
Less cash payments (11,772)
Other 1,180
---------
Debt obligations at June 30, 1997 306,486
Less long-term obligations due within one year (19,813)
---------
Long-term obligations at June 30, 1997 $ 286,673
=========
(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.
C) EXPENSES RELATING TO OIL AND GAS PROPERTIES
For the three and six months ended June 30, 1997, the Company
incurred $13.1 million of dry hole expenses and $2.5 million of
geological and geophysical expenses. 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 currently approximately $230 million plus
capitalized interest. Immediately following the delivery of the
drillship, which is expected to be in the first quarter of 1999, it
has contracts for the initial five years following delivery of the
vessel from the shipyard. 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 a subsidiary of the Company for operations for its own
account 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 June 30, 1997, the Company had advanced
approximately $43.4 million to the joint venture which is expected to
be refinanced by the joint venture. Such amount is included in
"Deferred Charges and Other Assets".
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 approval by the Board of Directors of
both companies and 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 currently 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.
E) SUBSEQUENT EVENT
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 0.59 shares of R&B Falcon Corporation
common stock (which exchange ratio will be adjusted to 1.18 to give
effect to the previously announced Falcon Drilling two-for-one stock-
split) for each share of Reading & Bates common stock. The exchange of
shares for both companies is expected to be tax-free, and the
companies will seek 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.
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, 1997, and the related consolidated statements of operations for
the three and six month periods ended June 30, 1997 and 1996 and the
consolidated statement of cash flows for the six month periods ended June
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
July 14, 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
0.59 shares of R&B Falcon Corporation common stock (which exchange ratio
will be adjusted to 1.18 to give effect to the previously announced Falcon
Drilling two-for-one stock-split) for each share of Reading & Bates common
stock. The exchange of shares for both companies is expected to be
tax-free, and the companies will seek 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 currently approximately
$230 million plus capitalized interest. Immediately following the delivery
of the drillship, which is expected to be in the first quarter of 1999, it
has contracts for the initial five years following delivery of the vessel
from the shipyard. 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 a
subsidiary of the Company for operations for its own account 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 June 30, 1997, the
Company had advanced approximately $43.4 million to the joint venture which
is expected to be refinanced by the joint venture. Such amount is included
in "Deferred Charges and Other Assets".
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 approval by the
Board of Directors of both companies and 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 currently 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.
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, $66.0 million, in the
first six months of 1997 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 offshore units.
Development Operations
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 $11.8 million. The Company is currently evaluating the data
gathered and intends to proceed with additional drilling within the
prospect.
In the first quarter of 1997, the Company entered into an agreement
with a large independent oil company to explore three oil and gas prospects
in the U.S. Gulf of Mexico. One of the prospects is currently being
drilled at an estimated cost to the Company of approximately $5.8 million.
Another prospect which the Company's third-generation semisubmersible "M.
G. HULME, JR." was contracted to drill has been completed and was a dry
hole. See "Material Changes in Results of Operations" below.
The Company continues to consider participation in field development
projects. In this regard, the Company incurred expenditures of $29.5
million in the first six months of 1997 related to investments in oil and
gas properties. Investments in oil and gas properties as of June 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.
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 June 30, 1997, approximately
$47.0 million out of a total of $80.1 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 that date the Company had
$184 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 financings 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
SIX MONTHS ENDED JUNE 30, 1997 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1996
The Company's net income for the six months ended June 30, 1997 was
$42.1 million ($.58 earnings per share) compared with net income of $29.3
million ($.43 earnings per share after preferred stock dividends of $2.4
million) for the same period of 1996. Income from operations for the six
months ended June 30, 1997 was $61.2 million compared to income from
operations of $40.6 million in 1996. The Company's fleet utilization for
the six months ended June 30, 1997 and 1996 was 96% and 92%, respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $58.9 million increase in operating revenues for the six
months ended June 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 43.8%, 58.6%, and 20.8%, respectively, for the six months
ended June 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 six 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. 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 may be deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $15.2 million increase in expenses related to the drilling
operations for the six months ended June 30, 1997 as compared to the same
period in 1996 is primarily due to the addition of the "SEILLEAN" to the
fleet in 1997; 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
Australia, a relatively higher cost area, in 1997 versus Bangladesh and
Thailand in 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 rig maintenance levels on the "PAUL B. LOYD, JR." 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 $16.7 million increase in expenses related to the development
operations for the six months ended June 30, 1997 as compared to the same
period in 1996 is primarily due to expenses related to dry holes
encountered on two oil and gas prospects which were written off in the
second quarter of 1997.
Depreciation expense increased for the six months ended June 30, 1997
as compared to the same period in 1996 primarily due to the addition of the
"SEILLEAN" to the fleet, the June 1996 activation of the "J. W. McLEAN" and
a significant increase in gross property and equipment on the "JIM
CUNNINGHAM" related to major upgrades.
General & administrative expense increased for the six months ended
June 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 six months ended June 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 six months ended June 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 $17.2 million and $9.7 million for
the six months ended June 30, 1997 and 1996, respectively. The minority
interest charge for the six months ended June 30, 1997 was reduced by
approximately $2.0 million due to the allocation of deferred taxes to
Arcade Drilling.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1996
The Company's net income for the three months ended June 30, 1997 was
$20.2 million ($.28 earnings per share) compared with net income of $15.8
million ($.23 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 June 30, 1997 was $30.0 million compared to income from
operations of $22.4 million in 1996. The Company's fleet utilization for
the three months ended June 30, 1997 and 1996 was 98% and 89%,
respectively.
Operating revenues are primarily a function of dayrates and
utilization. The $36.7 million increase in operating revenues for the three
months ended June 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 third-
generation semisubmersible, fourth-generation semisubmersible and jackup
fleets increased 48.1%, 35.6% and 29%, respectively, for the three months
ended June 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 second 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. 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 may be deferred or capitalized as appropriate during periods of
mobilization, contract preparation, major upgrades or conversions.
The $10.0 million increase in expenses related to the drilling
operations for the three months ended June 30, 1997 as compared to the same
period in 1996 is primarily due to the addition of the "SEILLEAN" to the
fleet in 1997; 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
Australia, a relatively higher cost area, in 1997 versus Bangladesh in
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 rig maintenance levels on the "PAUL B. LOYD, JR." in 1997.
These operating expense increases were partially offset by decreases in
operating expenses on the "JACK BATES" due to revised estimates related to
casualty loss accruals 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 $16.2 million increase in expenses related to the development
operations for the three months ended June 30, 1997 as compared to the same
period in 1996 is primarily due to expenses related to dry holes
encountered on two oil and gas prospects which were written off in the
second quarter of 1997.
Depreciation expense increased for the three months ended June 30,
1997 as compared to the same period in 1996 primarily due to the addition
of the "SEILLEAN" to the fleet, the June 1996 activation of the "J. W.
McLEAN" and a significant increase in gross property and equipment on the
"JIM CUNNINGHAM" related to major upgrades.
Interest expense increased for the three months ended June 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 three months ended June 30, 1997
as compared to the same period in 1996 primarily due to an increase in the
Company's pretax income.
The minority interest charge for the three months ended June 30, 1997
was reduced by approximately $2.0 million due to the allocation of deferred
taxes to Arcade Drilling.
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 4. Results of Votes of Security Holders
At the annual meeting of stockholders of Reading & Bates Corporation,
held on May 13, 1997, two Class III 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 60,952,474 and 60,953,070 votes for each of Mr. Chavkin and
Mr. Loyd, respectively, and 1,618,410 and 1,617,814 votes withheld from
each of such nominees, respectively. In addition three proposals were
voted upon: i) a proposal to approve the Company's 1997 Long-Term Incentive
Plan, with 42,768,127 votes for the proposal, 19,629,368 votes against the
proposal and 173,388 abstentions, ii) a proposal to approve the Company's
1996 Director Restricted Stock Award Plan, with 60,090,702 votes for the
proposal, 2,263,570 votes against the proposal and 216,610 abstentions and
iii) a proposal to ratify and approve the appointment of Arthur Andersen
LLP as independent public accountants for the Company for its fiscal year
1997, with 62,248,999 votes for the proposal, 175,557 votes against the
proposal and 146,278 abstentions.
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 seven Current Reports on Form 8-K filed during the three
months ended June 30, 1997. A Current Report on Form 8-K was: filed
April 16, 1997 disclosing the Company's first quarter 1997 earnings;
filed April 21, 1997 disclosing the Company's completion of the
Surveillance Audit "G" of its Quality Management System under the
guidelines of ISO 9001; filed May 2, 1997 disclosing the formation of a
new joint venture with Conoco to construct a second dynamically
positioned drillship; filed May 13, 1997 disclosing the award of stock
options to certain executive officers of the Company in lieu of any cash
bonuses, increases in base salary or restricted stock grants they may
have received for their performance in 1997; filed May 28, 1997
disclosing the completion of drilling operations on an oil and gas
prospect in the U.S. Gulf of Mexico which the Company has a partial
interest. Such prospect was determined to be unsuccessful which resulted
in a write-off in the second quarter of 1997; filed June 18, 1997
disclosing the completion of drilling operations on two oil and gas
prospects in the U.S. Gulf of Mexico which the Company had partial
interests. The first prospect has been temporarily abandoned pending
further drilling in the immediate area and the second prospect was
determined to be unsuccessful which resulted in a write-off in the
second quarter of 1997; and filed June 30, 1997 disclosing that the
Company had entered into a letter of intent with Shell Deepwater
Development Inc. to build a new generation semisubmersible.
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 23, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
PRIMARY NET INCOME PER SHARE:
Weighted average number of
common shares outstanding 72,059,785 62,281,169 72,034,097 62,123,924
========== ========== ========== ==========
Net income $ 20,163 $ 15,835 $ 42,076 $ 29,307
Less dividends paid on $1.625
Convertible Preferred Stock - (1,212) - (2,425)
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding $ 20,163 $ 14,623 $ 42,076 $ 26,882
========== ========== ========== ==========
Primary net income per
common share $ .28 $ .23 $ .58 $ .43
========== ========== ========== ==========
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of
common shares outstanding n/a 62,281,169 n/a 62,123,924
Assume conversion of:
$1.625 Convertible
Preferred Stock n/a 8,647,485 n/a 8,647,485
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted n/a 70,928,654 n/a 70,771,409
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ n/a $ 14,623 $ n/a $ 26,882
Adjustments:
Dividends paid on $1.625
Convertible Preferred Stock n/a 1,212 n/a 2,425
---------- ---------- ---------- ----------
Adjusted net income applicable to
common shares outstanding -
assuming full dilution $ n/a $ 15,835 $ n/a $ 29,307
========== ========== ========== ==========
Fully diluted net income per
common share (considering
only dilutive convertible
securities) $ n/a $ .22 $ n/a $ .41
========== ========== ========== ==========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
FULLY DILUTED NET INCOME PER SHARE:*
Weighted average number of
common shares outstanding 72,059,785 62,281,169 72,034,097 62,123,924
Assume exercise of outstanding
stock options (based on the
treasury stock method) 966,048 1,295,865 990,949 1,230,797
Assume conversion of securities:
$1.625 Convertible Preferred
Stock - 8,647,485 - 8,647,485
8% Senior Subordinated
Convertible Debentures 863,576 823,631 863,576 823,631
---------- ---------- ---------- ----------
Adjusted common shares
outstanding - fully diluted 73,889,409 73,048,150 73,888,622 72,825,837
========== ========== ========== ==========
Adjusted net income applicable
to common shares outstanding $ 20,163 $ 14,623 $ 42,076 $ 26,882
Adjustments:
Interest on 8% Senior
Subordinated Convertible
Debentures 987 901 1,928 1,768
Dividends paid on $1.625
Convertible Preferred Stock - 1,212 - 2,425
---------- ---------- ---------- ----------
Adjusted net income applicable
to common shares outstanding
- assuming full dilution $ 21,150 $ 16,736 $ 44,004 $ 31,075
========== ========== ========== ==========
Net income per common share
- assuming full dilution $ .29 $ .23 $ .60 $ .43
========== ========== ========== ==========
*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 June 30, 1997,
which includes our report dated July 14, 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
July 22, 1997
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This schedule contains summary financial information extracted from the
financial statements of Reading & Bates Corporation for the six months ended
June 30, 1997 and is qualified in its entirety be reference to such financial
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</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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