Item 1. Business Item 2.
Item 2. Properties Item 3.
Item 3. Legal Proceedings
The Company is one of the defendants in certain litigation brought in July 1984 by the Cheyenne-Arapaho Tribes of Oklahoma in the U.S. District Court for the Western District of Oklahoma, seeking to set aside two communitization agreements with respect to three leases involving tribal lands in which the Company previously owned interests and to have those leases declared expired. In June 1989, the U.S. District Court entered an interim order in favor of the plaintiffs. On appeal, the U.S. Court of Appeals for the Tenth Circuit upheld the decision of the trial court and petitions for rehearing of that decision were denied. Petitions for writs of certiorari filed by the parties with the U.S. Supreme Court have been denied, and the case has been remanded to the trial court for determination of damages.
In 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 these and various other legal actions arising in the normal course of business. After taking into consideration the evaluation of such actions by counsel for the Company, management is of the opinion that outcome of known claims and litigation will not have a material adverse effect on the Company's business or consolidated financial position or results of operations. See Note E of Notes to Consolidated Financial Statements.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during the fourth quarter of fiscal year 1994.
Regulation S-K Item 401(b)
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each executive officer of the Company. Unless otherwise indicated, each has served in the positions set forth for more than five years. Executive officers are elected for a term of one year. There are no family relationships between any of the persons named.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the New York and Pacific Stock Exchanges under the symbol "RB". The following table shows for the periods indicated the high and low sales prices of the Common Stock as reported on the New York Stock Exchange Composite Transactions Tape.
There were approximately 5,990 holders of record of the Company's Common Stock as of February 28, 1995.
The Company has not paid dividends on the Common Stock since the first quarter of 1986 and management does not expect any dividends will be declared or paid in the foreseeable future. The Company's credit facility agreement with ING Bank prohibits the Company from declaring or paying dividends on the Common Stock in any one year in excess of 50% of its cumulative net income subsequent to March 29, 1991, the date of the first drawdown under such financing.
As a result of the Company's recapitalization in 1991, all of the Company's outstanding Non-voting Convertible Class B Common Stock (the "Class B Stock") was converted into Common Stock and at the Company's 1994 Annual Meeting, the stockholders approved a proposal to amend the Company's Charter to delete the Class B Stock in its entirety.
Item 6.
Item 6. Selected Financial Data
READING & BATES CORPORATION AND SUBSIDIARIES
(in thousands except per share amounts)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL CONDITION
Arcade Acquisition
In June 1994, the Company completed a transaction which increased its direct ownership in Drilling and sold its entire ownership in Shipping. The transaction consisted of the Company selling its entire 82.6% ownership in Shipping for approximately $27.8 million, purchasing from Shipping its entire 46.2% ownership in Drilling and equity securities in Dragon Oil for approximately $45.4 million and Shipping repaying a loan of approximately $12.9 million to the Company. This transaction resulted in a net cash outflow of $4.7 million. Also in September 1994, the Company purchased an additional 5.7% of Drilling's outstanding shares pursuant to a mandatory tender offer in Norway required by the Oslo Stock Exchange. As of December 31, 1994, the Company's direct ownership in Drilling was 73.9%. See Note B of Notes to Consolidated Financial Statements.
Purchase of Leased Debt
In the third quarter of 1994, the Company purchased certain notes and interests relating to the lease debt outstanding associated with the operating leases of the drilling units "GEORGE H. GALLOWAY" and "C.E. THORNTON", and the secured contingent obligations associated with the capital lease of the "F.G. McCLINTOCK". Total consideration for the transaction was approximately $36.5 million which consisted of the Company paying cash of approximately $12.2 million and issuing 4,230,235 shares of the Company's Common Stock, par value $.05 per share, totalling approximately $24.3 million at then prevailing stock prices. In October 1994, the Company filed a shelf registration registering such shares (see "Shelf Registration" below). See Note E of Notes to Consolidated Financial Statements.
Sale/Leaseback of the "SONNY VOSS"
In March 1992, the Company entered into a sale/leaseback of the "SONNY VOSS". Proceeds received of $27.7 million resulted in a gain of $6.3 million which was deferred and was being amortized over the lease term. In December 1994, for a fee of $.5 million, the Company negotiated an early release from all of its remaining lease obligations with respect to the "SONNY VOSS". Such lease obligations were scheduled to have expired in September 1995 and the net effect of the early release on the Company's results of operations was a gain of $.5 million recognized as a reduction of operating expenses in the fourth quarter of 1994. See Note E of Notes to Consolidated Financial Statements.
Purchase of Second-Generation Semisubmersible
In September 1994, the Company purchased the second-generation semisubmersible "RIG 41" (ex "BENVRACKIE") with the intent to contribute the drilling unit to a new joint venture with DeepTech International Inc. The objective of the new joint venture company was to acquire and operate semisubmersible drilling units to be converted for use as floating production systems. However, it was subsequently agreed by the Company and DeepTech International Inc. not to establish the new joint venture and the rig currently remains idle for conversion to a floating production system or deployment, after completion of upgrades, as a conventional drilling unit.
Income Tax Refund
In August 1992, the Company received cash of $14.2 million and recognized interest income of $10.6 million and income tax benefits of $1.9 million, net of $1.7 million of income tax benefits that had been previously recognized. The Company's consolidated federal tax returns for the tax years from September 30, 1974 to December 31, 1981 were then examined by the Internal Revenue Service (the "IRS"). The Joint Committee on Taxation approved a settlement agreement between the Company and the IRS for those years which provided the Company with such tax refund. See Note G of Notes to Consolidated Financial Statements.
Public Offerings
In October 1992, the Company completed a public offering (the "1992 Offering") of 8 million shares of its Common Stock (including shares issued pursuant to an underwriter's over-allotment) pursuant to which the Company raised gross proceeds of approximately $40 million in cash (net proceeds of approximately $38.1 million). The proceeds were utilized to repurchase 272,123 shares of Common Stock issued in the settlement of the Company's Supplemental Executive Retirement Plan obligation and 3,102,857 shares of Common Stock issued in a private placement in 1991 and accounted for as Common Stock Subject to Redemption in the Company's financial statements and for general corporate purposes. See Note H of Notes to Consolidated Financial Statements.
In July 1993, the Company effected a public offering (the "1993 Offering") of 2,990,000 shares of $1.625 Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"), pursuant to which the Company raised gross proceeds of approximately $74.7 million in cash (net proceeds of approximately $71.2 million). The proceeds were utilized to repay indebtedness under Facilities F and the then current outstanding balance of Facility C, both under the ING Facility, approximately $11.6 million and $5.5 million, respectively. See "LIQUIDITY AND CAPITAL RESOURCES - ING Facility". The remaining proceeds were used by the Company for working capital and general corporate purposes. The Preferred Stock is convertible at the option of the holder at any time into shares of the Company's Common Stock at a conversion rate of 2.899 shares of Common Stock for each share of Preferred Stock (equivalent to a conversion price of $8.625 per share of Common Stock), subject to adjustment in certain events. Annual dividends are $1.625 per share and are cumulative and are payable quarterly commencing September 30, 1993. The Preferred Stock is redeemable at any time on and after September 30, 1996, at the option of the Company, in whole or in part, at a redemption price of $26.1375 per share, and thereafter at prices decreasing ratably annually to $25.00 per share on and after September 30, 2003, plus accrued and unpaid dividends. The holders of the Preferred Stock do not have any voting rights, except as required by applicable law, and except that, among other things, whenever accrued and unpaid dividends on the Preferred Stock are equal to or exceed the equivalent of six quarterly dividends payable on the Preferred Stock, the holders of the Preferred Stock will be entitled to elect two directors to the Board until the dividend arrearage has been paid in full. The term of office of all directors so elected will terminate immediately upon such payment. The Preferred Stock has a liquidation preference of $25.00 per share, plus accrued and unpaid dividends. The Company has declared and paid all cumulative dividends accrued on the Preferred Stock through December 31, 1994.
Shelf Registration
In October 1994, the Company filed a shelf registration registering the 4,230,235 shares of the Company's Common Stock issued for the purchase of the leased rigs as discussed above. Pursuant to the terms of agreements governing the issuance of such shares and a registration rights agreement among the Company and certain other holders of the Company's Common Stock, as currently in effect, the Company is required to maintain continuously effective shelf registration statements with respect to approximately 26 million shares of its Common Stock (including the 4,230,235 shares referred to above) until the earlier to occur of (i) the sale of such shares by the holders thereof or (ii) August 1, 1996 (in the case of approximately 21.7 million shares) or September 14, 1996 (in the case of the 4,230,235 shares referred to above).
Reverse Stock Split
On October 2, 1992, the Company effected a one-for-five reverse stock split of the Common Stock. All share and per share amounts have been restated. See Note H of Notes to Consolidated Financial Statements.
Miscellaneous
In February 1992, Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") was issued and supersedes substantially all existing income tax pronouncements. The Company adopted SFAS 109 effective January 1, 1993. The cumulative effect of the accounting change at January 1, 1993 was not material to the Company's consolidated results of operations or financial position. See Note A of Notes to Consolidated Financial Statements.
In October 1993, the Company announced that Mr. J. T. Angel, President and Chief Operating Officer, as well as a member of the Board of Directors, resigned from those positions in order to pursue other business interests. In the fourth quarter of 1993, the Company recorded a charge of approximately $1.1 million against earnings related to a severance agreement with Mr. Angel.
Included in the Company's 1992 results of operations is a net loss of approximately $1.2 million on foreign currency transactions. Such loss was primarily due to a settlement by Drilling of unhedged monetary assets, related to an isolated 1992 financing transaction, which was denominated in a currency other than the U.S. dollar.
For a discussion of certain legal proceedings see Part I, Item 3.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Cash provided by operating activities during 1994 amounted to approximately $30.8 million, an increase of $4.3 million from 1993. Cash provided by operating activities during 1993 amounted to approximately $26.5 million, a decrease of $11.1 million from 1992.
Cash used in investing activities was $48.8 million in 1994 compared to $29.4 million in 1993. During 1994, the Company used $10.7 million to purchase additional shares in Drilling and $38.4 million to purchase property and equipment, such as the purchase of certain notes and interests relating to the lease debt outstanding associated with the operating leases of the drilling units "GEORGE H. GALLOWAY" and "C. E. THORNTON" and the secured contingent obligations associated with the capital lease of the drilling unit "F. G. McCLINTOCK", and the purchase of the second-generation semisubmersible drilling unit "RIG 41" (ex "BENVRACKIE"). Since the first quarter of 1992, the Company has consolidated the results of Drilling, which resulted in an increase in cash of $47.3 million (which is subject to restrictions on availability as described below under "Drilling"). Also, in March 1992, the Company entered into a sale/leaseback transaction of the "SONNY VOSS" drilling unit that provided approximately $27.7 million of cash. See "FINANCIAL CONDITION".
Cash used in financing activities was $20 million in 1994 compared to cash provided by financing activities of $30.1 million in 1993. During 1994, the Company made principal payments of $24.6 million, paid Preferred Stock dividends of $4.9 million and received $9.5 million from the ING Facility. During 1993, the Company received $71.2 million of net proceeds from the 1993 Offering, received $11.6 million from the ING Facility and made principal payments of $50.6 million and paid dividends of $2.1 million on the Preferred Stock. During 1992, the Company made principal payments of $34.8 million, repurchased and retired Common Stock Subject to Redemption (issued in a private placement in 1991) using $35.7 million and received $38.1 million net proceeds from the 1992 Offering. See "FINANCIAL CONDITION".
Liquidity of the Company should be considered in light of the significant fluctuations in demand experienced by drilling contractors as rapid changes in oil and gas producers' expectations and budgets occur. These fluctuations can rapidly 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. Despite continued weakness in the offshore drilling business, the Company's management currently expects that its cash flow from operations, in combination with cash on hand and other sources, including short-term loans, debt rescheduling, new debt, new equity, asset disposals and/or by delaying a portion of planned capital or other expenditures, will be sufficient to satisfy the Company's 1995 working capital needs, dividends on Preferred Stock, planned investments, capital expenditures, debt and other payment obligations. In view of the Company's debt repayment schedule for 1995, amounting in the aggregate to $45.1 million (including that of Drilling), the Company expects certain debt rescheduling and/or other financing will likely be required in 1995. Management is constantly evaluating alternatives available to the Company and believes that sufficient flexibility exists to meet any liquidity shortfalls.
At December 31, 1994, approximately $18.3 million of total consolidated cash and cash equivalents of $42.3 million were restricted from the Company's use outside of Drilling's activities.
Capital Expenditures and Deferred Charges
Planned capital expenditures and deferred charges (including mobilization, demobilization and contract preparation costs not recoverable from the Company's customers or claim proceeds from insurance underwriters) for 1995 are expected to aggregate approximately $27.5 million principally for upgrades or replacement of equipment either to fulfill obligations under existing contracts or to improve the marketability of certain of the Company's drilling units and for mobilization of the Company's drilling units between drilling sites. The Company anticipates that such capital expenditures will be funded through cash provided by operations and/or new financing. Certain projects currently being considered by the Company would require, if they materialize, capital expenditures or other cash requirements not included in the above estimate. In addition to planned capital expenditures referred to above, the Company will also continue to review acquisitions of drilling units from time to time and will also consider further investments in floating production equipment. See "Item 1. Business - Business Strategy".
ING Facility
The Company's principal credit facility agreement (the "ING Facility") with ING Bank currently consists of four facilities, "Facility A", "Facility C", "Facility D" and "Facility E". A fifth credit facility ("Facility F") was both created and repaid during 1993. Facility A is in the form of a term loan with an original balance of $30 million. Principal payments which commenced on June 30, 1993 consist of eight equal semiannual installments of $3.75 million with interest payments at a varying rate equal to the 6 month London Interbank Offered Rate ("LIBOR") (7% at December 31, 1994) plus 1.5%. Facilities C, D & E consist of $30 million of working capital financing. Facility C is in the form of an overdraft account, available until August 1, 1995, up to a maximum of $15 million ($12.2 million was utilized as of December 31, 1994). Interest on amounts outstanding under Facility C is paid quarterly at the prime rate of Citibank, N.A. (8.5% as of December 31, 1994) plus 1.25%. Facility D is in the form of a $5 million long-term letter of credit which collateralizes a $15 million note payable relating to the "HARVEY H. WARD" drilling unit. Facility E is in the form of short-term letters of credit aggregating $10 million, which support bid, performance and other bonds needed by the Company in the ordinary course of its business. Facility F con- sisted of a revolving credit facility in an amount not to exceed $15.5 million, for the purchase of shares of Shipping and Drilling. In March 1993, the Company received approximately $11.6 million from Facility F and in July 1993 the Company repaid Facility F from proceeds from the 1993 Offering. In addition, a seperate facility ("Facility B") provided by ING Bank is in the form of a term loan with an original balance of $45 million. Principal payments which commence on June 30, 1993 consist of nine equal semiannual installments of approximately $4.4 million and a final installment of $5.2 million. Interest is payable quarterly at the 3 month LIBOR (6.5% at December 31, 1994) plus 1.9375%. Facility B is the result of ING Bank acquiring, in June 1991, certain interests in two promissory notes issued in connection with the previous sale and leaseback to the Company of the "C.E. THORNTON" and the "GEORGE H. GALLOWAY" drilling units. The present value of the Company's obligations under such operating leases at such date amounted to approximately $45 million. Also, in August 1993, ING Bank agreed to provide a temporary $10 million letter of credit facility, available until June 30, 1997, to cover import duties for drilling equipment in Indonesia. See Notes C, D, E and F of Notes to Consolidated Financial Statements.
Substantially all of the Company's assets that do not serve as collateral for other obligations of the Company collateralize the ING Facility. Also, the Company has pledged to ING Bank all of its shares of Drilling to collateralize the Company's obligations to ING Bank under the ING Facility. The terms of the as currently amended and in effect ING Facility, among other things (i) require the Company to meet certain financial covenants, (ii) prohibit the encumbrance of the Company's assets, (iii) restrict the declaration or payment of dividends by the Company to not more than 50% of cumulative net income from the date of the first drawdown under the ING Facility, (iv) prohibit the Company from engaging in any merger or consolidation or the sale of all or substantially all of its assets or the acquisition of all or substantially all of the assets of any entity, (v) prohibit the Company from incurring indebtedness (with certain exceptions including unsecured debt subordinated to the ING Facility), (vi) prohibit the Company from creating or acquiring new subsidiaries, (vii) prohibit the Company from prepaying indebtedness other than to ING Bank, (viii) prohibit the sale, transfer or assignment of any of the rigs serving as collateral in the ING Facility or any other material asset of the Company or any of the subsidiaries named as borrowers under the ING Facility and (ix) restrict the Company's ability to advance funds to or guarantee obligations. It is also an event of default under the ING Facility if there should occur a material adverse change in the financial or business condition of the Company or certain of its subsidiaries. Thus, the Company has very limited means of securing additional working capital through additional borrowings or credit facilities without the consent of ING Bank. The Company did not meet the fixed charge covenant for 1994 and has received a waiver for such covenant from ING Bank. At the present time the Company anticipates that it will meet all of such covenants or obtain necessary waivers for 1995. The ability of the Company to meet all of its financial covenants under the ING Facility on an ongoing basis or obtain waivers in the future will be subject to economic conditions then prevailing in the offshore drilling industry and the Company's relative performance.
Drilling
As of December 31, 1994, Drilling had a $52.5 million term loan payable to The Chase Manhattan Bank, N.A. as agent for a syndicate of banks (including itself). The adjusted payment terms of this bank obligation currently provide for repayment of principal in 17 semiannual installments which commenced in August 1991. The Company has not guaranteed repayment of such obligation. Drilling has also entered into an interest rate swap agreement, which is combined with the bank credit facility for payment purposes (as set forth below). The swap agreement terminates in August 1996 and the notional principal swapped amount will have been reduced on a semiannual basis to $30.6 million at that time. At December 31, 1994, the notional principal amount of $38.1 million bears interest at 10.69% and the remaining principal amount bears interest at the 6 month LIBOR (7% at December 31, 1994) plus 1.875%. The loan is collateralized by the drilling units "HENRY GOODRICH" and "SONAT ARCADE FRONTIER". The loan agreement requires Drilling to meet certain financial conditions, including maintaining current assets of at least twice the level of current liabilities and liquid assets of at least $10 million, maintaining a ratio of operating cash flow (including actual and projected cash flows) to interest charges of at least 1.75 to 1 and maintaining a ratio of total liabilities to tangible net worth of no more than 1 to 1. Additionally, the loan agreement (i) restricts the payment of dividends by Drilling to not more than 50% of net earnings after tax per year, (ii) prohibits Drilling from making loans, granting credit, giving any guarantee or indemnity to or for the benefit of any other person or assuming any liability with respect to any obligation of any other person, (iii) prohibits Drilling from engaging in any merger or consolidation and (iv) prohibits the encumbrance of Drilling's assets or the sale of such assets other than at fair market value, in each case without the prior written consent of the banks party to the loan agreement holding a majority of the outstanding balance. It is also an event of default if there should occur a material adverse change in the financial or business condition of Drilling. Pursuant to a series of waivers, for the period from May 1, 1992 to May 1, 1993, the bank syndicate waived the requirement that Drilling comply with the actual operating cash flow ratio covenant. For the period from January 1, 1992, to April 30, 1993, the bank syndicate waived the requirement that Drilling comply with the projected operating cash flow ratio covenant. In connection with the most recent waiver, Drilling was required to pay on April 30, 1993 (i) a fee to the bank syndicate of approximately $.1 million and (ii) the last two semiannual installments (totalling $8 million). In addition, the interest rate was increased to LIBOR plus 1.875% for the remainder of the loan. Since May 1, 1993, Drilling has not requested any additional waivers. Drilling expects to meet its repayment obligations under the facility through cash flow generated from operations and current working capital. At December 31, 1994, Drilling held $18.3 million in cash and cash equivalents available to satisfy such obligations, but otherwise subject to the restrictions on use of such cash and cash equivalents set out in such loan agreement. The ability of Drilling to meet all of its financial covenants under its obligations on an ongoing basis or obtain waivers thereof in the future will be subject to economic conditions then prevailing in the offshore drilling industry and Drilling's relative performance. See Note C of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Company reported a net loss for 1994 of $17.1 million ($.39 loss per share after preferred stock dividends of $4.9 million), compared to net income of $4.7 million ($.05 earnings per share after preferred stock dividends of $2.1 million) for 1993 and net income of $3.4 million ($.04 loss per share after $5.3 million of accretion in redemption price of redeemable stocks) for 1992.
Operating revenues are primarily a function of dayrates and utilization. The $14.7 million decrease in 1994 over 1993 is primarily due to the decreased utilization of the jack-up and fourth-generation semisubmersible fleets. The $27.1 million increase in 1993 over 1992 is primarily due to the increased utilization of the semisubmersible and jack-up fleets.
Drilling unit utilization measured in terms of the number of days the units were earning revenues to the total days the units were owned or leased by the Company (the operating method) for the years ended December 31, 1994, 1993 and 1992 is shown below by class:
The utilization trends experienced by the Company are generally consistent with those experienced by the industry.
Average dayrates for the Company's drilling units for the years ended December 31, 1994, 1993 and 1992 are shown below by class (in thousands):
Operating expenses as a percentage of revenues increased by 8.7% in 1994 compared to 1993 due to decreased revenues as well as increased operating costs in Australia and overall equipment maintenance costs.
Included in operating expenses for 1994 is a credit of approximately $3.1 million due to the recognition of the remaining deferred gain on the sale/leaseback of the "SONNY VOSS" as the Company was prematurely released from its lease obligation.
Included in operating expenses for 1993 is a credit of approximately $1.8 million due to the recognition of the deferred gain on the sale/leaseback of the "SONNY VOSS" and a credit of approximately $1.2 million due to the recognition of a gain on the "JACK BATES" casualty caused by Hurricane Andrew in 1992.
Included in operating expenses for 1992 is a credit for approximately $1.4 million due to the recognition of the deferred gain on the sale/leaseback of the "SONNY VOSS" and a credit of approximately $3.8 million due to the recognition of a gain on the "W.D. KENT" crane casualty in 1991.
Operating expenses do not necessarily fluctuate in proportion to changes in operating revenues due to the continuation of personnel on board and equipment maintenance 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. Labor costs have increased in the last three fiscal years primarily due to higher salary levels, inflation and the decline of the U.S. dollar relative to certain foreign currencies of countries where the Company operates. 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 on a basis of number of hours operated in accordance with the Company's preventive maintenance program.
Depreciation and amortization expense decreased $.8 million in 1994 compared to 1993.
Depreciation and amortization expense decreased $3.2 million in 1993 compared to 1992 despite an increase in fleet utilization. The decrease is primarily due to a change in the estimated useful lives of the fourth-generation semisubmersible fleet from an average 16 years to 25 years which resulted in a decrease in depreciation expense of approximately $6.8 million for the year ended December 31, 1993. This change was made to reflect the estimated period during which such assets will remain in service.
General and administrative expenses increased $1 million in 1994 compared to 1993 after adjusting 1993 by $1.1 million of termination benefits that were accrued in 1993. The increase is primarily due to an increase in payroll and related expenses.
General and administrative expenses increased $1.3 million in 1993 compared to 1992 primarily due to $1.1 million of termination benefits that were incurred in 1993.
Despite a decrease in the average principal debt balance outstanding during 1994 compared to 1993, as a result of the repayment of scheduled principal payments on the Company's long-term obligations, interest expense remained constant in 1994 compared to 1993 due to higher interest rates in 1994. Noncash interest expense attributable to amortization of discount and deferrals associated with the Company's 8% Senior Subordinated Convertible Debentures due 1998 and the 8% Convertible Subordinated Debentures due 1995 of Reading & Bates Energy Corporation N.V., a subsidiary of the Company, for the year ended December 31, 1994 was $3.6 million.
Interest expense decreased $2.4 million in 1993 compared to 1992 primarily due to the decrease in the average principal debt balance outstanding during each year as a result of the repayment of scheduled principal payments on the Company's long-term obligations. Noncash interest expense attributable to amortization of discount and deferrals associated with the Company's 8% Senior Subordinated Convertible Debentures due 1998 and the 8% Convertible Subordinated Debentures due 1995 of Reading & Bates Energy Corporation N.V., a subsidiary of the Company, for the year ended December 31, 1993 was $3.1 million.
Interest income increased $1.2 million in 1994 compared to 1993 due to interest earned on the increased average outstanding cash and cash equivalents balance due to proceeds received from the preferred stock offering in July 1993. The decrease in interest income for 1993 compared to 1992 is due to the receipt of $10.6 million in 1992 of interest on a United States federal income tax refund.
For 1994, other, net included the recognition of a $1.2 million loss associated with interests in the exploration and production of oil and gas, a $.8 million expense for the change in the estimate of the reserve for prior workmans compensation claims and a $.7 million loss on the sale of a cash investment due to the decline in the market value.
For 1992, other, net included a $6.8 million curtailment gain as a result of the Company modifying its postretirement benefits. See Note I of Notes to Consolidated Financial Statements.
Income tax expense for 1992 includes a $1.9 million United States federal income tax refund and a deferred income tax benefit of $1.2 million recognized as a result of consolidating Drilling.
Income tax expense was recognized for the years ended December 31, 1994 and 1992 despite losses before income taxes of $13.9 million and $5.3 million, respectively. These expenses resulted from income tax expense incurred with respect to certain foreign operations.
Income from minority interest has decreased from year to year as a result of the Company's increased ownership in Drilling and Drilling incurring smaller losses.
The impact of inflation on the Company's operations for the three years ended December 31, 1994 has not been material.
Item 8.
Item 8. Financial Statements and Supplementary Data
READING & BATES CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Reading & Bates Corporation
We have audited the accompanying consolidated balance sheets of Reading & Bates Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reading & Bates Corporation and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Houston, Texas February 16, 1995
READING & BATES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET December 31, 1994 and 1993 (dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
READING & BATES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET December 31, 1994 and 1993 (in thousands except share amounts)
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)
The accompanying notes are an integral part of the consolidated financial statements.
READING & BATES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
READING & BATES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1994 (in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
READING & BATES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of Reading & Bates Corporation ("Reading & Bates") and its subsidiaries, including its majority-owned subsidiary Arcade Drilling AS ("Drilling") (collectively, the "Company"). As of December 31, 1994, Reading & Bates owned approximately 73.9% of the outstanding stock of Drilling (See Note B). Investments in unconsolidated investees are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash and cash equivalents. At December 31, 1994, $18.3 million of the cash and cash equivalents balance related to Drilling. Such cash and cash equivalents balance is available to Drilling for all purposes subject to certain debt covenants under a credit facility provided by The Chase Manhattan Bank, N.A. ("Chase Manhattan") which require the maintenance of a minimum of $10 million in liquid assets and, under certain circumstances, prohibit Drilling from paying dividends or granting loans (including to the Company).
MATERIALS AND SUPPLIES INVENTORY - Materials and supplies are stated at the lower of average cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at historical cost as adjusted in the Company's quasi-reorganization in 1989. Reading & Bates' drilling units are depreciated under either the units-of-production method or the straight-line method. Drilling's drilling units are depreciated under the straight-line method. Estimated useful lives for drilling equipment range from three to twenty-five years. Gain (loss) on disposal of properties is credited (charged) to income. Effective January 1, 1993, the Company changed its estimate of the useful lives of its fourth-generation semisubmersible fleet from an average of 16 years to 25 years. This change was made to reflect the estimated period during which such assets will remain in service. For the year ended December 31, 1993, the change had the effect of reducing depreciation expense and increasing net income by approximately $6.8 million or $.12 per share.
STOCKHOLDERS' EQUITY - The Company's accumulated deficit at March 31, 1991 was eliminated as a result of the Company's recapitalization in 1991.
INCOME TAXES - Deferred income taxes are recognized for revenues and expenses reported in different years for financial statement purposes and income tax purposes. In February 1992, Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") was issued and supersedes substantially all existing income tax pronouncements. The Company adopted SFAS 109 effective January 1, 1993. The cumulative effect of the accounting change at January 1, 1993 was not material to the Company's consolidated results of operations or financial position.
REVENUE RECOGNITION - Revenues from drilling contracts are recognized as they are earned. Proceeds associated with the early termination of a contract for a drilling unit are recorded as deferred income and recognized as drilling contract revenues over the remaining term of the contract or until such time as the drilling unit begins a new contract. There were no such amounts deferred at December 31, 1994 or 1993. In 1993, the Company secured a contract to convert a semisubmersible drilling unit into a floating production system. Under this contract the Company, for a fixed fee and certain incentives, functions as an agent for its customer and accordingly, disbursements made on behalf of the customer are netted against receipts from the customer in the accompanying financial statements. Disbursements and receipts associated with the contract amounted to approximately $65 million through December 31, 1994.
FOREIGN CURRENCY TRANSACTIONS - The net gains and losses resulting from foreign currency transactions included in determining net income amounted to a net loss of $.6 million in 1994, a net gain of $.1 million in 1993 and a net loss of $1.2 million in 1992. The Company may enter into forward exchange contracts to hedge specific commitments and anticipated transactions. During 1994 and 1993, the Company did not enter into any forward exchange contracts.
EARNINGS (LOSS) PER SHARE - Net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the year. Net income (loss) applicable to common stockholders has been adjusted for dividends on preferred stock and accretion in redemption price of redeemable stocks. The effects of common equivalent shares were antidilutive for all periods presented and, accordingly, no adjustment was made for these common equivalent shares. Common shares and per share amounts for all periods presented have been adjusted to reflect the one-for-five reverse stock split on October 2, 1992. The computation of fully diluted earnings per share is not presented as the results are antidilutive.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances with commercial banks throughout the world. The Company also invests in commercial paper of companies with strong credit ratings, in interest-bearing deposits with major banks and in U.S. government backed securities. These investments generally mature within three months and, therefore, bear minimal risk. However, in 1994 the Company incurred a $.7 million loss on the sale of a cash investment due to the decline in the market value. No losses were incurred during 1993. At December 31, 1994, the Company had investments in interest-bearing deposits with four major banks. At December 31, 1993, the Company had investments in commercial paper of one company, interest-bearing deposits with three major banks and an investment in U.S. government backed securities.
The Company's revenues were generated primarily from its eighteen drilling units. Revenues can be generated from a small number of customers which are primarily major U.S. oil and gas companies or their subsidiaries and foreign government-owned oil and gas companies. The Company performs ongoing credit evaluations of its customers' financial conditions and generally requires no collateral from its customers. The Company's allowance for doubtful accounts was $373,000 at December 31, 1994 and 1993.
INDUSTRY CONDITIONS - Results of operations and financial condition of the Company should be considered in light of the significant fluctuations in demand experienced by drilling contractors as rapid changes in oil and gas producers' expectations, budgets and drilling plans occur. These fluctuations can rapidly impact the Company's results of operations and financial condition as supply and demand factors directly affect utilization and dayrates, which are the primary determinants of cash flow from the Company's operations.
LIQUIDITY - As of December 31, 1994, the Company's total consolidated cash and cash equivalents were $42.3 million. Of this amount, approximately $18.3 million is restricted from the Company's use outside of Drilling. The Company's management currently expects that its cash flow from operations, in combination with cash on hand and other sources, including short-term loans, debt rescheduling, new debt, new equity, asset disposals and/or by delaying a portion of planned capital or other expenditures, will be sufficient to satisfy the Company's 1995 working capital needs, dividends on preferred stock, planned investments, capital expenditures, debt and other payment obligations.
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 (loss) or the overall financial condition of the Company.
(B) INVESTMENT IN ARCADE
ARCADE ACQUISITION - In June 1991, as part of its strategy of emphasizing geographic diversification and "fourth-generation" semisubmersible drilling technology, the Company began acquiring the stock of Arcade Shipping AS ("Shipping") and Drilling, both of which are Norwegian companies (the "Arcade Acquisition"). Beginning with the first quarter of 1992, the Company began to consolidate the accounts of Drilling and Shipping into the consolidated financial statements of the Company. Drilling owns the "HENRY GOODRICH" and the "SONAT ARCADE FRONTIER", two fourth-generation semisubmersible drilling units. Shipping, which the Company sold in June 1994, had two principal lines of operations, the shipping operations which included owning and chartering vessels and the drilling operations which principally consisted of the ownership of approximately 46.2% of the outstanding stock of Drilling. The shipping operations of Shipping had been accounted for as discontinued operations until June 1994, when the Company completed a transaction which consisted of the Company selling its entire 82.6% ownership in Shipping for approximately $27.8 million, purchasing from Shipping its entire 46.2% ownership in Drilling and equity securities in Dragon Oil for approximately $45.4 million and Shipping repaying a loan of approximately $12.9 million to the Company. This transaction resulted in a net cash outflow of $4.7 million.
The Arcade Acquisition has been funded through a margin loan from Carnegie International Limited, a private placement of both preferred and common stocks, the Company's working capital and a revolving credit facility from Internationale Bank N.V. ("ING Bank"). As of December 31, 1994, the Company had acquired approximately 73.9% of the outstanding stock of Drilling, at an accumulated cost of approximately $112.3 million.
Details of business acquisitions as shown on the Consolidated Statement of Cash Flows for the first year of consolidation were as follows (in thousands):
The following unaudited pro forma selected financial data for the three years ended December 31, 1994 show the consolidated data as if the Arcade Acquisition (ownership percentage as of December 31, 1994) and related financing activities had occurred on January 1, 1992, (in thousands except per share amounts):
DISCONTINUED OPERATIONS OF SHIPPING - On June 22, 1994, the Company sold its entire ownership in Shipping (see above). Shipping's operating revenues and net loss from January 1, 1994 to the date of sale were approximately $6.5 million and $2 million, respectively. Shipping's assets held for sale at December 31, 1993, which consisted of vessels, tankers and chartering contracts, were $55.3 million and related liabilities totalled $59.5 million, including $37.1 million of long- term obligations and a $17.3 million reserve for losses on ultimate disposal and operations until disposal. Accordingly, the net position of the shipping operations in the accompanying balance sheet at December 31, 1993 was $4.2 million. Operating revenues and net loss of discontinued operations not included in the Consolidated Statement of Operations for the year ended December 31, 1993 were $14.8 million and $4.6 million, respectively. Operating revenues and net loss of discontinued operations not included in the Consolidated Statement of Operations for the year ended December 31, 1992 were $34.1 million and $3.2 million, respectively.
(C) LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1994 and 1993 consisted of the following (in thousands):
In February 1993, the ING Facility with ING Bank was amended and an additional credit facility was created ("Facility F") to finance a portion of the Arcade Acquisition. Facility F consisted of revolving credit and/or stand-by letters of credit that were to be available to the Company until January 1, 1995, in an amount not to exceed $15.5 million. In March 1993, the Company received approximately $11.6 million from Facility F and in July 1993 the Company repaid Facility F from proceeds from a preferred stock offering (see Note H). No amounts relating to Facility F were outstanding at December 31, 1994.
Aggregate annual maturities of long-term obligations, excluding the unamortized discount on the New and Old Debentures, for the five years ending December 31, 1999 and thereafter are as follows: $45,068,000 (1995); $27,089,000(1996); $24,657,000(1997); $31,606,000(1998); $8,000,000(1999) and $0 (thereafter).
(D) SHORT-TERM OBLIGATIONS
Short-term obligations at December 31, 1994 and 1993 consisted of the following (in thousands):
The Company has a $15 million revolving credit facility in the form of an overdraft account maintained with ING Bank ("Facility C"). A substantial portion of collections on the Company's receivables is paid into the account and is applied automatically against any outstanding balance. Facility C is used primarily for working capital requirements. Overdraft borrowing is available under Facility C (as amended) through August 1, 1995. Facility C bears interest at prime (8.5% at December 31, 1994 and 6% at December 31, 1993) plus 1.25%. The amount of unused revolving credit borrowing available under Facility C at December 31, 1994 was approximately $2.8 million.
(E) COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES - At December 31, 1994, the Company had purchase commitments of $2.2 million for equipment on drilling units.
OPERATING LEASES - The Company has operating leases covering premises and equipment. Net rent expense amounted to $11.2 million (1994), $12.7 million (1993) and $11.5 million (1992). As of December 31, 1994, future minimum rental payments relating to operating leases were $1.9 million (1995), $.9 million (1996), $.8 million (1997), $.7 million (1998), $.7 million (1999) and $0 (thereafter). Certain operating leases contain renewal options and have options to purchase the asset at fair market value at the end of the lease term.
In the third quarter of 1994, the Company purchased certain notes and interests relating to the lease debt outstanding associated with the operating leases of the drilling units "GEORGE H. GALLOWAY" and "C.E. THORNTON", and the secured contingent obligations associated with the capital lease of the "F.G. McCLINTOCK". Total consideration for the transaction was approximately $36.5 million which consisted of cash of approximately $12.2 million and the Company issuing 4,230,235 shares of the Company's Common Stock, par value $.05 per share, totalling approximately $24.3 million at then prevailing stock prices. Since through such purchases, the Company now controls and has effective ownership of the three rigs, it recorded the purchase of the notes and interests as purchases of the rigs. In the fourth quarter of 1994, the Company reclassed the remaining lease obligation (Facility B) from other liabilities to debt obligations (see Notes C and F).
In March 1992, the Company entered into a sale/leaseback of the "SONNY VOSS". Proceeds received of $27.7 million resulted in a gain of $6.3 million which was deferred and was being amortized over the lease term. In December 1994, for a fee of $.5 million, the Company negotiated an early release from all of its remaining lease obligations with respect to the "SONNY VOSS". Such lease obligations were scheduled to have expired in September 1995 and the net effect of the early release on the Company's statement of operations was a gain of $.5 million recognized as a reduction of operating expenses in the fourth quarter of 1994.
LITIGATION - The Company is one of the defendants in certain litigation brought in July 1984 by the Cheyenne- Arapaho Tribes of Oklahoma in the U.S. District Court for the Western District of Oklahoma, seeking to set aside two communitization agreements with respect to three leases involving tribal lands in which the Company previously owned interests and to have those leases declared expired. In June 1989, the U.S. District Court entered an interim order in favor of the plaintiffs. On appeal, the U.S. Court of Appeals for the Tenth Circuit upheld the decision of the trial court and petitions for rehearing of that decision were denied. Petitions for writs of certiorari filed by the parties with the U.S. Supreme Court have been denied, and the case has been remanded to the trial court for determination of damages.
In 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 these and various other legal actions arising in the normal course of business. After taking into consideration the evaluation of such actions by counsel for the Company, management is of the opinion that the outcome of known claims and litigation will not have a material adverse effect on the Company's business or consolidated financial position or results of operations.
EMPLOYMENT CONTRACTS - The Company has committed under employment contracts to provide two key executives with severance benefits totalling approximately $3.2 million which vest in September 2003 or earlier if the executive both reduces his ownership of the Company's common stock below a specified level and resigns. The Company amortizes the cost of the severance benefits over the ten year period from September 1993 to September 2003, unless the executive reduces his stock ownership and resigns prior to September 2003 in which case the unamortized severance cost would be expensed.
LETTERS OF CREDIT - At December 31, 1994, the Company had letters of credit outstanding and unused totalling $13.1 million and $11.9 million, respectively. At December 31, 1993, the Company had letters of credit outstanding and unused totalling $19.2 million and $.7 million, respectively.
(F) ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES
The components of "Accrued liabilities" at December 31, 1994 and 1993 were as follows (in thousands):
The components of "OTHER NONCURRENT LIABILITIES" at December 31, 1994 and 1993 were as follows (in thousands):
(G) INCOME TAXES
The Company's consolidated federal tax returns for the tax years from September 30, 1974 to December 31, 1981 were examined by the Internal Revenue Service (the "IRS"). A settlement agreement between the Company and the IRS for those tax years provided the Company with a tax refund of approximately $3.6 million plus related interest of approximately $10.6 million. The Company received cash of $14.2 million and as a result recognized interest income and income tax benefits of $12.5 million in the third quarter of 1992.
Income tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992 consisted of the following (in thousands):
The domestic and foreign components of income (loss) before income taxes for the years ended December 31, 1994, 1993 and 1992 were as follows (in thousands):
The effective tax rate, as computed on income before income taxes, differs from the statutory U.S. income tax rate for the years ended December 31, 1994, 1993 and 1992 due to the following:
Income taxes of $4,093,000, $4,008,000 and $102,000 were recognized in 1994, 1993 and 1992, respectively, despite losses before income taxes. The expense resulted primarily from income tax expense incurred with respect to certain foreign operations. The Company was limited in utilization of tax benefits from investment tax credits prior to 1986 and operating losses in 1994, 1993 and 1992.
Deferred income taxes result from those transactions which affect financial and taxable income in different years. The nature of these transactions (all of which were long-term) and the income tax effect of each as of December 31, 1994 and 1993 was as follows (in thousands):
Valuation allowance is necessary to reflect the anticipated expiration of net operating loss carryforwards prior to their utilization.
Recapitalizations of the Company in 1989 and 1991 resulted in ownership changes for federal income tax purposes. As a result of these ownership changes, the amount of net operating loss and other tax attribute carryforwards generated prior to the ownership changes which may be utilized to offset federal taxable income is limited by the Internal Revenue Code to approximately $2.7 million annually plus certain built-in gains that existed as of the date of such changes. Net tax operating losses of $36,086,000 arising since the 1991 ownership change are not subject to this limitation. Any tax benefits due to the utilization of carryforwards which were generated prior to the recapitalization in 1991 will be reported as a credit to "Capital in excess of par value".
(H) CAPITAL SHARES
CONVERTIBLE PREFERRED STOCK - In July 1993, the Company effected a public offering of 2,990,000 shares of $1.625 Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"), pursuant to which the Company raised gross proceeds of approximately $74.7 million in cash (net proceeds of approximately $71.2 million). The proceeds were utilized to repay indebtedness under Facilities F and the then current outstanding balance of Facility C, both under the ING Facility, approximately $11.6 million and $5.5 million, respectively. The remaining proceeds were used by the Company for working capital and general corporate purposes. The Preferred Stock is convertible at the option of the holder at any time into shares of the Company's Common Stock at a conversion rate of 2.899 shares of Common Stock for each share of Preferred Stock (equivalent to a conversion price of $8.625 per share of Common Stock), subject to adjustment in certain events. Annual dividends are $1.625 per share and are cumulative and are payable quarterly commencing September 30, 1993. The Preferred Stock is redeemable at any time on and after September 30, 1996, at the option of the Company, in whole or in part, at a redemption price of $26.1375 per share, and thereafter at prices decreasing ratably annually to $25.00 per share on and after September 30, 2003, plus accrued and unpaid dividends. The holders of the Preferred Stock do not have any voting rights, except as required by applicable law and except that, among other things, whenever accrued and unpaid dividends on the Preferred Stock are equal to or exceed the equivalent of six quarterly dividends payable on the Preferred Stock, the holders of the Preferred Stock will be entitled to elect two directors to the Board until the dividend arrearage has been paid in full. The term of office of all directors so elected will terminate immediately upon such payment. The Preferred Stock has a liquidation preference of $25.00 per share, plus accrued and unpaid dividends.
COMMON STOCK - On October 2, 1992, following stockholder approval, the Company effected a one-for-five reverse stock split.
In October 1992, the Company effected a public offering of 8 million shares of Common Stock pursuant to which the Company raised gross proceeds of approximately $40 million in cash (net proceeds of approximately $38.1 million). The proceeds were utilized to repurchase 272,123 shares of Common Stock which had been issued for the settlement of the Company's Supplemental Executive Retirement Plan obligation (the "SERP Shares"), to repurchase 3,102,857 shares of Common Stock which had been issued as a result of the conversion of shares issued in a private placement in 1991 (the "Private Placement Shares") and for general corporate purposes. As of November 6, 1992, all of the 272,123 SERP Shares and all of the 3,102,857 Private Placement Shares had been repurchased by the Company. Supplemental earnings per share for the year ended December 31, 1992 would have been $.06 per share which assumes the public offering and the repurchase of the SERP Shares and the Private Placement Shares, described above, both occurred on January 1, 1992.
In the third quarter of 1994, the Company issued 4,230,235 shares of the Company's Common Stock in association with the purchase of certain notes and interests relating to the lease debt outstanding on the drilling units "GEORGE H. GALLOWAY" and the "C. E. THORNTON", and the secured contingent obligations on the "F. G. McCLINTOCK" (see Note E).
As of December 31, 1994, authorized, unissued shares of Common Stock were reserved for issuance as follows:
Class A (Cumulative Convertible) Capital Stock (the "Class A Stock") has been included with "Capital in excess of par value" due to the insignificance of the $880 outstanding at December 31, 1994 and 1993.
(I) EMPLOYEE BENEFIT PLANS
PENSION PLANS - The Company has three noncontributory pension plans. Substantially all of its employees are covered by one or more of these plans. Plan benefits are primarily based on years of service and average high thirty-six month compensation.
The Reading & Bates Pension Plan (the "Domestic Plan") is qualified under the Employee Retirement Income Security Act (ERISA). It is the Company's policy to fund this plan not less than the minimum required by ERISA. It is the Company's policy to contribute to the Reading & Bates Offshore Pension Plan (the "Offshore Plan") an amount equal to the normal cost plus amounts sufficient to amortize the initial unfunded actuarial liability and subsequent unfunded liability caused by plan or assumption changes over thirty years. The unfunded liability arising from actuarial gains and losses is funded over fifteen years. The Offshore Plan is a nonqualified plan and is not subject to ERISA funding requirements. The Domestic and Offshore Plans invest in cash equivalents, fixed income and equity securities.
The Reading & Bates Retirement Benefit Replacement Plan (the "Replacement Plan") is a self-administered unfunded excess benefit plan. All members of the Domestic Plan or the Reading & Bates Savings Plan are potential participants in the Replacement Plan.
Net Pension costs for the years ended December 31, 1994, 1993 and 1992 included the following components (in thousands):
The funded status of the plans at December 31, 1994 was as follows (in thousands):
The additional minimum liability is shown as a reduction of stockholders' equity.
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 8.5% and 4.5%, respectively. The weighted average expected long-term rate of return on assets was 10.25%.
POSTRETIREMENT BENEFITS - In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. The Company's employees may become eligible for these benefits if they reach normal or early retirement age while working for the Company and if they have accumulated fifteen years of service. Health care costs are paid as they are incurred. Life insurance benefits are provided through an insurance company whose premiums are based on benefits paid during the year.
Effective April 1, 1992, the Company modified its postretirement benefits. The effect of these modifications significantly reduced the Company's postretirement benefit costs and accumulated benefit obligation, and resulted in a $6.8 million curtailment gain recognized in the Company's results of operations (included in Other, net) for the year ended December 31, 1992 primarily due to the change in attribution period. Other modifications include employee cost-sharing through increases in deductibles and out-of-pocket limits and increased service period requirements.
Postretirement benefit costs for the years ended December 31, 1994, 1993 and 1992 included the following (in thousands):
The health care cost trend rates used to measure the expected cost in 1995 for medical, dental and vision benefits were 8%, 5.5% and 5.5%, respectively, each graded down to an ultimate trend rate of 5%, 4.5% and 4.5%, respectively, to be achieved in the year 2021. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 8.5% and 4.5%, respectively. The effect of a one-percentage-point increase in health care cost trend rates for future periods would increase the service cost and interest cost portion of net periodic postretirement benefit cost approximately 18.8%. The accumulated postretirement benefit obligation would increase by approximately 12.8%.
The amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1994 and 1993 was as follows (in thousands):
SAVINGS PLANS - The Company has two savings plans, the Reading & Bates Savings Plan and the Reading & Bates Offshore Savings Plan. Under the plans, an employee may contribute up to 10% of base salary (subject to certain limitations) and the Company may make matching contributions at a rate of up to $1.00 for each dollar contributed by the employee up to 6% of the employee's base salary. Since January 1, 1992, the Company has made matching contributions at a rate of $.50 for each dollar contributed by the employee. Employees may direct the investment of their contributions and the contributions of the Company in various plan options.
Twenty-five percent of the Company's contribution vests after two years of an employee's service with the Company, 50% after three years, 75% after four years and 100% after five years. Compensation costs under the plans amounted to $531,000 in 1994, $502,000 in 1993 and $381,000 in 1992.
CAREER STOCK PLAN - On March 19, 1992, and at the Annual Meeting of Stockholders on May 20, 1992, the Company's Board of Directors and stockholders, respectively, approved the Company's 1992 Long-Term Incentive Plan (the "1992 Plan"). The 1992 Plan provides for grants of stock options, stock appreciation rights, stock awards and cash awards, which may be granted singly, in combination or in tandem. The 1992 Plan is unfunded insofar as the plan provides for awards of cash, Common Stock or rights thereto. An aggregate of 1,000,000 shares of Common Stock is available for awards granted wholly or partly in Common Stock. The Company has granted Restricted Stock Awards under the 1992 Plan totalling 300,000 shares of Common Stock. Such shares awarded are restricted as to transfer until vested pursuant to a schedule whereby 1/24th of the total number of shares is vested per calendar quarter from June 30, 1992 through March 31, 1998 (subject to certain conditions). The market value at the date of grant of the Common Stock granted was recorded as unearned compensation and is amortized to expense over the periods during which the restrictions lapse or shares vest. Unearned compensation is shown as a reduction of stockholders' equity.
STOCK OPTION PLAN - On November 29, 1990, and at a special meeting on March 26, 1991, the Company's Board of Directors and stockholders, respectively, approved the Company's 1990 Stock Option Plan (the "1990 Plan"). The 1990 Plan is intended to provide an incentive that will allow the Company to retain in its employ, persons of the training, experience and ability necessary for the development and financial success of the Company. The 1990 Plan authorized options with respect to 1,966,000 shares of Common Stock to be granted to certain employees of the Company at an adjusted option price of $7.375 per share. On September 25, 1991, options with respect to all 1,966,000 shares were granted. As of December 31, 1994, 33,700 options had been exercised and 1,461,100 shares were vested. Total adjusted compensation under the plan of approximately $1,550,000 represents the excess of market price at the measurement date over the option price multiplied by the number of options granted. This amount is being recognized as expense over the four year vesting period which commenced in March 1991. Compensation recognized under the plan for the three years ending December 31, 1994, 1993 and 1992 totalled approximately $507,000, $507,000 and $117,000, respectively. The plan will terminate on March 29, 2001.
(J) RELATED PARTY TRANSACTIONS
In 1994, as a part of the purchase of certain notes and interests relating to two of the leased drilling units "C.E. THORNTON" and "F.G. McCLINTOCK" (see Note E), the Company paid cash of $93,500 and issued 44,000 shares of Common Stock to BCL Investment Partners, L.P. ("BCL"), a major shareholder of the Company during 1994. Such cash and Common Stock represented payment for BCL's proportionate holdings of such notes and interests and was paid pro rata to all sellers of such notes and interests.
Drilling has a rig management agreement with Sonat Offshore Drilling Inc. ("Sonat Offshore"), a major shareholder of Drilling, for the operation and marketing of both of its drilling units. For each of the years ending December 31, 1994, 1993 and 1992, Drilling paid to Sonat Offshore approximately $2.5 million for such management services. In addition, Drilling has a bareboat charter agreement with Sonat Offshore for one of its drilling units. For the years ended December 31, 1994, 1993, and 1992, Drilling received from Sonat Offshore approximately $13.9 million, $14.7 million, and $3.8 million, respectively, for such bareboat charter. At December 31, 1994 and 1993, Drilling had a net receivable from Sonat Offshore of $4.9 million and $6 million, respectively.
(K) SUBSEQUENT EVENT (unaudited)
On February 28, 1995, the Company announced that it had received an unsolicited merger proposal from Sonat Offshore providing for the acquisition of 100% of the common stock of the Company for a combination of Sonat Offshore common stock and $100 million in cash. As proposed by Sonat Offshore, the Company's shareholders would, at their election, receive either (i) .357 shares of Sonat Offshore common stock or (ii) $7.50 of cash for each share of the Company. To the extent that the election results in an under- or oversubscription as to the $100 million of cash, a proration formula would be utilized. The Company has engaged Morgan Stanley & Co. Incorporated to act as its financial advisor with respect to evaluating the Sonat Offshore proposal. The Company's board of directors is currently evaluating the Sonat Offshore proposal.
(L) MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company, together with its 50% or less owned unconsolidated investees, operates principally in international offshore contract drilling of oil and gas wells. For the year ended December 31, 1994, revenues from one customer of $35.2 million accounted for 21% of the Company's total operating revenues. For the year ended December 31, 1993, revenues from three customers of $39.6 million, $37.7 million and $20.3 million accounted for 22%, 20% and 11%, respectively, of the Company's total operating revenues. For the year ended December 31, 1992, revenues from two customers of $40.9 million and $27.8 million accounted for 26% and 18%, respectively, of the Company's total operating revenues.
Geographic information about the Company's operations for the three years ended December 31, 1994 is as follows (in thousands):
READING & BATES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the two years ended December 31, 1994, are as follows (in thousands except for per share amounts):