(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
CAYMAN ISLANDS
(Jurisdiction of incorporation or organization)
TWO LINCOLN CENTRE, SUITE 1100
5420 LBJ FREEWAY
DALLAS, TEXAS 75240-2648
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
------------- ---------------------
Ordinary Shares, par value $0.01 per share New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 114,762,469 Ordinary Shares, par value $0.01 per share
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 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 [ ]
Indicate by check mark which financial statement item the registrant has elected to follow.
TABLE OF CONTENTS
PAGE
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PART I........................................................................... 1
Item 1. Description of Business..................................... 1
Item 2. Description of Property..................................... 18
Item 3. Legal Proceedings........................................... 19
Item 4. Control of Registrant....................................... 19
Item 5. Nature of Trading Market.................................... 20
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders................................................... 20
Item 7. Taxation.................................................... 20
Item 8. Selected Consolidated Financial Data........................ 21
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Item 9A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 34
Item 10. Directors and Officers of Registrant........................ 35
Item 11. Compensation of Directors and Officers...................... 37
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries.............................................. 42
Item 13. Interest of Management in Certain Transactions.............. 42
PART II.......................................................................... 45
Item 14. Description of Securities to Be Registered.................. 45
PART III......................................................................... 45
Item 15. Defaults Upon Senior Securities............................. 45
Item 16. Changes in Securities and Changes in Security for Registered
Securities................................................ 45
PART IV.......................................................................... 46
Item 17. Financial Statements........................................ 46
Item 18. Financial Statements........................................ 46
Item 19. Financial Statements and Exhibits........................... 46
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements containing the words "believes," "anticipates," "expects" and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, financial condition, performance or achievements of the Company (defined below), or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: adverse changes in contract drilling industry conditions, oil and natural gas prices, customer drilling budgets, competition from other drilling contractors, increase in industry fleet capacity, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, refurbishing and fabrication costs for drilling rigs, the availability and replacement costs for rig related equipment, spare parts and supplies, financing costs, changes in operating expenses, attraction and retention of skilled employees, uncertainties arising out of the Company's operations outside the United States, adverse changes in applicable tax laws, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, acts of war, and other factors referenced in this Annual Report on Form 20-F. Certain of these factors are discussed in more detail elsewhere in this Annual Report on Form 20-F, including without limitation "Item 1. Description of Business" and "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such forward-looking statements to reflect future events or developments.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Santa Fe International Corporation (herein referred to individually and, where the context so requires, collectively with its subsidiaries and predecessors as "Santa Fe" or the "Company") is a leading international offshore and land contract driller that was incorporated in its current form under the laws of the Cayman Islands in 1990. As of February 28, 1999, the Company owns and operates a high quality, technologically advanced fleet of 26 marine drilling rigs and 32 land drilling rigs. Santa Fe also provides drilling related services to the petroleum industry worldwide, including third party rig operations, incentive drilling and drilling engineering and project management services. The Company is currently operating in 16 countries throughout the world. The Company's predecessor began U.S. land drilling operations in 1947, commenced international land operations in 1948, expanded into offshore platform drilling in 1956 and initiated mobile offshore rig operations in 1964.
At the core of Santa Fe's drilling rig fleet is its fleet of heavy duty harsh environment jackup rigs (five of the 16 currently in service in the industry), which are capable of operating in water depths of up to 350-400 feet. The Company's current heavy duty harsh environment jackup fleet includes the Galaxy II, which was placed in service on November 9, 1998. Further, the Company has an additional heavy duty harsh environment rig under construction, the Galaxy III, which is expected to be delivered by the shipyard during the third quarter of 1999 and mobilized to its initial work area in the North Sea during the fourth quarter of 1999. Additionally, Santa Fe has three deep water semisubmersible rigs which are capable of operating in water depths of up to 2,000-2,400 feet; eight premium cantilever jackup rigs which are capable of operating in water depths of up to 300-350 feet; nine jackup rigs which are capable of operating in water depths of up to 200-250 feet, seven of which are cantilevered and two of which are specially designed to operate in shallow water; one platform rig; and 32 land rigs, all of which are specially equipped to operate in remote areas. See Note 11 of the Notes to Consolidated Financial Statements for certain financial data pertaining to the Company's business in various regions.
INDUSTRY CONDITIONS
The contract drilling industry is and historically has been highly volatile, competitive and cyclical, with periods of high demand and rig utilization resulting in high rig dayrates followed by periods of low demand, excess rig supply and depressed rig dayrates. The contract drilling business is influenced by many factors beyond the control of the Company, including the current and anticipated prices of oil and natural gas. During 1998, the industry witnessed a substantial decline in oil prices with resulting adverse impact upon rig utilization and rig dayrates.
During industry down cycles, drilling companies compete aggressively for contracts at depressed rates and often are compelled to accept contract terms which are less favorable than those which normally prevail, especially in areas such as liability and indemnity provisions, rate structure, termination and term extension options. Low rig utilization in weak markets causes drilling companies to lay-up or "stack" idle rigs, which often results in termination of employment of all or part of the associated rig crews.
The contract drilling industry currently is in a down cycle resulting in reduced worldwide rig utilization and depressed rig rates. This situation may be exacerbated as newly built rigs enter the market and drilling companies aggressively compete for the limited available opportunities to contract rigs. The extent and duration of the current industry downturn will be influenced by many factors, including future fluctuations in the price of oil and natural gas and the resulting impact upon the drilling budgets of companies engaged in oil and gas exploration and production. See "-- Business Considerations and Risk Factors -- Contract Drilling Industry Volatility and Competition."
BUSINESS STRATEGY
The Company's business strategy is to provide premium quality, cost-effective services to its customers in order to maximize the utilization of its rig fleet at relatively attractive dayrates, with the goal of enhancing shareholder value and establishing long term relationships with its customers. The Company's understanding of its customers' future needs guides strategic decisions regarding investment in equipment, selection of geographic markets and development of Company skills. The following are the principal components of the Company's business strategy:
Modern Rig Fleet
The Company continually invests in its drilling fleet through the acquisition and construction of new rigs and the upgrading, modernization and enhancement of existing rigs to increase drilling productivity and prolong rig life. Santa Fe rigorously evaluates each of its investments based on expected long term return on capital and profitability. Between 1988 and 1993 the Company made significant counter-cyclical investments in six new jackup rigs, including four heavy duty harsh environment jackup rigs and two 300 foot cantilever jackup rigs. The Company also placed the newly constructed Galaxy II heavy duty harsh environment rig in service on November 9, 1998, and has an additional rig of this class, the Galaxy III, currently under construction. The Galaxy III is expected to be delivered by the shipyard during the third quarter of 1999 and mobilized to its initial work area in the North Sea during the fourth quarter of 1999. During the period 1996 through 1998, the Company expanded its land rig fleet through the addition of six specialized, highly mobile rigs and, further, two medium duty 2,000 horsepower and four heavy duty 3,000 horsepower rigs, each of which are equipped with top drives. Also, in late 1998, the Company began assembly of an additional 3,000 horsepower high specification land rig for work in the Middle East in the second quarter of 1999. Over the past several years, the Company's rig fleet upgrade, modernization and enhancement program has included installation of top drive systems, improvements in mud processing and liquid storage capacity, jackup leg extensions, cantilever and skid-off capability. See "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
International Focus
The Company operates outside the U.S., with its entire rig fleet currently deployed in seven major market areas around the world. The Company first operated in each of these markets more than 28 years ago. Santa
Fe believes the operational expertise, international workforce and business relationships it has established through its longstanding presence in its major international markets provide it with a competitive advantage in securing work on attractive terms. The Company favors markets where there is an opportunity to establish a significant presence and benefit from efficiencies associated with market concentration, but also seeks selected opportunities in niche and emerging markets.
The Company believes that international markets generally require more specialized equipment and value added technical expertise than the U.S. market, providing Santa Fe with greater opportunities to secure attractive contracts. Furthermore, the Company believes that international markets for drilling services are somewhat less influenced by volatility in the prices of oil and natural gas than the U.S. market, thus increasing the relative stability of its operations. The Company's international focus enables it to minimize the level of worldwide taxation on its revenues, income and assets through various tax-efficient business structures.
The Company seeks international contracts payable in local currency in amounts equal to the Company's estimated operating costs payable in local currency and in dollars for the balance of the contract. Accordingly, the Company has not historically entered into financial hedging arrangements to manage risks relating to fluctuations in currency exchange rates. However, the Company may enter into such contracts in the future in the event that the Company assumes significant foreign currency risks.
High Quality Multinational Workforce
The Company distinguishes itself with its high quality, well-trained and cost-effective rig crew and supervisory workforce. The breadth and depth of the Company's workforce enable it to efficiently staff its own rigs and profitably provide labor and management services for the operation and maintenance of third party rigs. The Company's rig crew and supervisory personnel are drawn largely from the countries in which the Company has longstanding operations. The quality of Santa Fe's workforce and training program is reflected in its safety performance record, which has consistently exceeded the industry norm over the past decade, as compiled by the International Association of Drilling Contractors.
Specialized Drilling Services
The Company provides drilling services requiring special expertise and technical innovation, such as high pressure, high temperature drilling and jackup rig skid-off drilling. The Company's ability to deliver such services is enhanced by the operational expertise and efficiencies it has developed from its long term presence in selected markets. By taking advantage of innovative contracting opportunities, including incentive contracts, the Company strives to enhance the profitability of its drilling services.
BUSINESS CONSIDERATIONS AND RISK FACTORS
Contract Drilling Industry Volatility and Competition
The contract drilling industry is and historically has been highly volatile, competitive and cyclical, with periods of high demand and rig utilization with resulting high rig dayrates followed by periods of low demand, excess rig supply and depressed rig dayrates. The contract drilling business is influenced by many factors beyond the control of the Company, including the worldwide demand for, and the current and anticipated prices of, oil and natural gas, the level of exploration and production drilling expenditures by oil and gas companies, the ability of the Organization of Petroleum Exporting Countries ("OPEC") to influence production levels and pricing, the level of production of non-OPEC countries, the policies of various governments regarding exploration and development of their oil and natural gas resources and the availability of drilling rigs.
Oil and natural gas prices fluctuate in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors. It is impossible to predict future oil and natural gas price movements with any certainty. Such fluctuations impact drilling budgets of companies engaged in exploration and development of oil and natural gas. Drilling expenditure budget fluctuations have a direct impact upon the demand and dayrates for drilling rigs.
During 1998, oil prices declined substantially resulting in a significant decline in worldwide land and offshore drilling utilization and dayrates. These conditions prevail today and are expected to continue into the foreseeable future as drilling contractors aggressively compete for the declining number of rig contract opportunities which are available.
In the drilling industry, contracts generally are awarded on a competitive bid basis wherein price often is the determining factor in the selection of a drilling contractor. A customer selecting a rig may consider other factors such as a contractor's safety record, productivity and specialized skills and capabilities and condition of equipment. During industry down cycles, drilling companies compete aggressively for contracts and often are compelled to accept contract terms which are less favorable than those which normally prevail, especially in areas such as liability and indemnity provisions, rate structure, termination and term extension options. The Company believes that competition for drilling contracts will continue to be intense for the foreseeable future.
Additional rig construction, movement or reactivation could further depress rig dayrates and adversely affect utilization of the Company's rigs. In addition, labor availability and cost and vendor prices and delivery fluctuate in response to overall drilling industry conditions.
Operational Risks, Insurance and Indemnification
Oil and natural gas drilling operations are subject to many risks, including blowouts, cratering, oil or natural gas well fires, explosions, oil spills and other disasters, each of which could result in substantial losses to the Company due to injury or loss of life and damage to or destruction of rigs, oil and natural gas wells, reservoirs, production facilities or other properties. In addition, the Company's offshore and marine equipment is subject to hazards peculiar to marine operations, such as sinking, capsizing, grounding, collision and damage from heavy weather or hurricanes. Loss of or serious damage to certain of the Company's equipment, even if adequately covered by insurance, might materially reduce the Company's revenues and operating profit for an extended period of time.
The Company evaluates its exposure to certain risks when participating in any project and, to the extent permitted by market conditions, contracts with its customers or joint venture partners to provide the Company with indemnification or other protection against certain risks, including those not generally covered by insurance and losses in excess of applicable insurance limits. There can be no assurance that the Company can obtain effective indemnification in its contracts, that the level of indemnification that can be obtained will be meaningful, that such indemnification agreements will be enforceable or that the customer will be financially able to comply with its indemnity obligations. See "-- Risks, Insurance and Indemnification" for a discussion of the Company's insurance coverage.
Governmental Regulation
Many aspects of the Company's operations are affected periodically by political developments and by both domestic and foreign governmental regulations, including those relating to the construction, equipment and operation of drilling rigs, drilling practices and methods and levels of taxation, as well as additional hazards and uncertainties, such as the risk of expropriation, foreign exchange restrictions, fluctuations in currency exchange rates, foreign and domestic monetary, economic and trade policies, and environmental regulation. The energy service industry is dependent on demand for its services from the oil and gas industry and, accordingly, is affected by changing taxes, price controls and other laws relating to the energy business generally. Governments may, from time to time, suspend or curtail drilling operations or leasing activities when such operations are considered to be detrimental to the environment or to jeopardize public safety. Many jurisdictions have at various times imposed limitations on the production of oil and natural gas by restricting the rate of flow for oil and natural gas wells below their natural capacity. There can be no assurance that present or future regulation will not adversely affect the operations of the Company.
As of February 28, 1999, all of the Company's rigs were engaged in
operations or activities outside the United States and its territorial waters.
The Company's worldwide operations are also subject to a variety of laws and
regulations designed to improve safety in the businesses in which the Company
operates. International conventions, including Safety of Life at Sea (SOLAS),
the Convention For Prevention of Oil
Pollution by Ships at Sea (MARPOL) and the Code for Construction of Mobile Offshore Drilling Units (MODU CODE), generally are applicable to the Company's offshore operations. The Company's operations in the U.K. sector of the North Sea are also subject to strict regulatory requirements, including the Mineral Workings Act (MWA) 1971 and the Health and Safety at Work Act (HASAWA) 1974. Historically, the Company has made significant capital expenditures and incurred additional expenses to ensure that its marine rigs comply with applicable local and international health and safety regulations. Future efforts by the Company to comply with these regulations and standards may increase the Company's costs and may affect the demand for the Company's services by influencing energy prices or limiting the areas in which drilling may be performed.
Taxation Risks
As a Cayman Islands company primarily doing business outside the U.S., the Company is taxed at rates substantially lower than if it were engaged in a U.S. trade or business. Although almost all of its operations are outside the U.S., the Company has an office in Texas from which a number of senior management personnel generally oversee, supervise and control the policies of the Company. The Company reports only income attributable to the functions performed in the U.S. as income effectively connected with a U.S. business. If income earned from its worldwide operations were deemed by the Internal Revenue Service to be effectively connected with a U.S. business, the Company could be subjected to U.S. income tax on such effectively connected income, and its operating results could be materially adversely affected. The Company's international focus enables it to reduce the level of worldwide taxation on its revenues, income and assets through various tax-efficient business structures. The Company could suffer substantial additional tax expense in the event any of its existing business structures were successfully challenged or in the event of an adverse change in the treaties, laws, rules or regulations (or the interpretation thereof) upon which the Company has relied in relation to its business strategies and structures. See "Item 7. Taxation," "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 of the Notes to Consolidated Financial Statements. In addition, demand for services in the drilling industry is dependent on the oil and gas exploration industry and accordingly is affected by changes in tax and other laws relating to the energy business generally.
Environmental and Regulatory Risks
The Company's worldwide operations are subject to numerous environmental laws and regulations that relate directly or indirectly to its operations, including certain regulations controlling the discharge of materials into the environment, requiring removal and clean-up under certain circumstances, or otherwise relating to the protection of the environment. For example, the Company may be liable for damages and costs incurred in connection with oil spills for which it is held responsible. Laws and regulations protecting the environment have become increasingly stringent in recent years and may in certain circumstances impose "strict liability" and render a company liable for environmental damage without regard to negligence or fault on the part of such company. Such laws and regulations may expose the Company to liability for the conduct of or conditions caused by others, or for acts of the Company that were in compliance with all applicable laws at the time such acts were performed. The Company believes its operations are in compliance in all material respects with all such laws and regulations. The application of these requirements or the adoption of new requirements could have a material adverse effect on the Company. See "-- Governmental Regulation" for a discussion of the Company's regulatory operating requirements.
Governments may, from time to time, suspend or curtail drilling operations or leasing activities when such operations are considered to be detrimental to the environment or to jeopardize public safety. Many jurisdictions have at various times imposed limitations on the production of oil and natural gas by restricting the rate of flow for oil and natural gas wells below their natural capacity. There can be no assurance that present or future regulation will not adversely affect the operations of the Company.
The Company may be required to make significant capital expenditures in the
future to comply with laws and regulations that become applicable to the Company
and such compliance could materially adversely affect the earnings or
competitive position of the Company. It is possible that such regulations may in
the future add
significantly to the cost of operating drilling equipment or may significantly limit drilling activity. See "-- Governmental Regulation" and "Item 3. Legal Proceedings."
Contract Termination and Performance Risks
The Company's contracts with its customers often are cancelable upon specified notice at the option of the customer, and some, but not all, contracts provide for the customer to pay a specified early termination payment in the event of such cancellation. Such termination payments may not be sufficient to fully compensate the Company for the loss of the contract. Early termination of a contract may result in a rig being idle for an extended period of time. Contracts customarily provide for either automatic termination or termination at the option of the customer in the event of total loss of the drilling rig or if drilling operations are suspended for extended periods of time by reason of force majeure or excessive rig downtime for repairs, or upon other specified conditions. In periods of rapid market downturn, the Company's customers may not honor the terms of existing contracts and may terminate contracts or prevail upon the Company to renegotiate contract rates and terms to conform with depressed market conditions, reducing the Company's rig utilization and revenues.
The Company selectively engages in drilling services pursuant to turnkey drilling contracts under which the Company agrees to drill a well for a customer to a specified depth, and to provide the associated services and well consumables for a fixed price. Generally, the Company is not entitled to payment unless the well is successfully drilled to the specified depth, and profitability of the contract depends upon an ability to keep expenses within the estimates used by the Company in determining the contract price. Drilling a well under a turnkey contract therefore typically requires a cash commitment by the Company in excess of that required under a conventional dayrate contract and exposes the Company to risks of potential financial losses. These losses could be substantially greater than those that would ordinarily exist under a conventional dayrate contract and may include losses resulting from delays in drilling progress or loss of a well or portion thereof. Although the Company carefully evaluates the associated risks, the financial results of a turnkey contract depend upon the performance of the drilling unit, drilling conditions and other factors, some of which are beyond the control of the Company. Additionally, the Company undertakes certain risks when entering into footage and other incentive contracts, alliances and drilling project management contracts where a portion of the remuneration is dependent upon achieving specified performance goals. A failure to meet the performance criteria may result in lower revenue to the Company and, in certain circumstances, also may cause the Company to incur a monetary penalty, often in the form of reduced or suspended remuneration. See "-- Contracts."
Dependence on Workforce
The Company's high quality, well-trained and cost-effective rig crew and supervisory workforce contribute significantly to its ability to deliver premium quality services. If the Company were unable to retain its current workforce or to hire comparable personnel, it could have a material adverse effect on the success of the Company. The Company does not maintain key-person insurance for any of its senior management personnel.
Uncertainties and Risks of Non-U.S. Operations
Operations outside the U.S. account for substantially all of the Company's consolidated revenues. The Company's non-U.S. operations are subject to certain political, economic and other uncertainties not generally encountered in the U.S., including hazards incident to war and civil disturbances (or other hazards that may limit or disrupt markets) and the general hazards associated with the assertion of national sovereignty over certain areas in which operations are conducted. These risks are mitigated by the Company's ability to relocate its rigs. The Company's operations outside the U.S. are also subject to foreign customs and business practices, to changes in political conditions, such as confiscatory taxation, unreasonable regulation, unrealistic pricing or royalty terms, export sales restrictions, embargoes and expropriation or nationalization with or without compensation, to the additional risks of fluctuating currency values and hard currency shortages, to the possibility of realizing economic currency exchange losses when transactions are completed in currencies other
than dollars and to the Company's ability to freely repatriate its earnings under existing exchange control laws. Additionally, export restrictions or trade sanctions imposed by the U.S. Government under the Export Administration Act, the Trading With the Enemy Act or similar legislation or regulation may impede the Company's ability, or the ability of its customers, to operate or continue to operate in certain countries. No prediction can be made as to what governmental regulations may be enacted in the future that could adversely affect the international drilling industry.
Control by Holdings and Potential Conflicts of Interest
As of February 28, 1999, SFIC Holdings (Cayman), Inc. ("Holdings"), a
wholly owned subsidiary of Kuwait Petroleum Corporation ("KPC"), beneficially
owned approximately 64.9% of the outstanding ordinary shares, par value $0.01
per share, of the Company ("Ordinary Shares"). KPC is wholly owned by the
Government of Kuwait. Accordingly, KPC through Holdings is able to effectively
control the election of the Board of Directors of the Company and effectively
control the outcome of the vote on certain matters submitted to a vote of the
Company's shareholders. The Company, Holdings and KPC have entered into
agreements with respect to the approval by Holdings of certain future corporate
actions by the Company, the management and allocation of certain liabilities
relating to former non-drilling activities of the Company, registration rights
for the Ordinary Shares owned by Holdings, and various other matters. See "Item
10. Directors and Officers of the Registrant" and "Item 13. Interest of
Management in Certain Transactions."
DRILLING RIG FLEET AND DRILLING RELATED SERVICES
Marine Rigs
A marine rig consists of a suite of drilling equipment mounted on a hull or offshore platform. The drilling equipment generally is comprised of a derrick or mast, hoisting equipment, a rotary system, well control equipment, systems for storing, treating and pumping drilling fluids, and a power plant. The specifications of this drilling equipment will determine the drilling capabilities of the rig. Offshore rigs also generally include living quarters, cranes, heliports, and storage areas for drill pipe and drill collars and other materials. The design of the rig and its hull determines the marine areas in which it can operate. The Company's marine fleet consists of 22 jackup rigs, three semisubmersible rigs, and one platform rig. The Company's marine rigs are documented as vessels and are registered outside the U.S. During the fourth quarter of 1998, the Company's inland lake barge that formerly operated in Venezuela was retired from service. For financial reporting purposes, the Company's inland barge rig and platform rig have historically been combined under the heading "Other Marine Rigs." Effective January 1, 1999, the Company will classify the remaining platform rig as company-owned equipment within the Drilling Related Services segment.
Jackup Rigs. The Company classifies its jackup rigs in three categories:
heavy duty harsh environment rigs, 300-350 foot premium cantilever rigs, and
200-250 foot rigs. A jackup is a mobile rig that jacks down its legs to stand on
the sea floor with its hull elevated above the water surface during drilling
operations. For transportation between locations, the legs are raised and the
hull is floated. The legs are raised and lowered by multiple jacking units
attached to the legs. The water depth limit for each rig is a function of
several factors, including leg length, sea floor conditions and the anticipated
wind, wave and current severity. Jackup rigs can be used to drill exploration
wells or to drill multiple production wells at the same location. Several
features are important for this latter capability. A cantilever, on which is
mounted the derrick, drill floor and substructure, enables the rig to drill
alongside and over an adjacent platform or subsea template and to drill multiple
wells at the same location without repositioning the rig. Twenty of the
Company's 22 jackup rigs are cantilevered and five of them also have skid-off
capability which enables the drilling system to be skidded onto a production
platform for development drilling while the rig serves in a tender-assist mode.
All of the Company's jackup rigs are equipped with top-drives. A top-drive
enables the rig to drill long, highly deviated wells both more efficiently and
more safely than conventional rotary equipment.
The Company owns one of the world's largest fleets of heavy duty harsh environment jackup rigs (five of the 16 currently in service in the industry). Two of these rigs, the Galaxy I and the Galaxy II, are Universe class rig designs capable of operating in water depths of up to 400 feet. The Galaxy I is currently operating
year-round in the harsh environment of the central North Sea in water depths of up to 360 feet, while the Galaxy II was placed in service offshore Nova Scotia on November 9, 1998. The Company is currently constructing an additional rig of this class, the Galaxy III, which is expected to be delivered by the shipyard during the third quarter of 1999 and mobilized to its initial work area in the North Sea during the fourth quarter of 1999. The Galaxy III is contracted to work in the U.K. sector of the North Sea for an initial term of three years. The Company's three other heavy duty harsh environment jackup rigs, the Monarch, Monitor and Magellan, are Monarch class rig designs capable of operating in water depths of up to 350 feet and are currently operating year-round in the central North Sea in water depths of up to 310 feet.
Two of the Company's 300-350 foot cantilever jackup rigs are capable of operating in water depths up to 350 feet and six are capable of operating in water depths of up to 300 feet. Seven of the Company's 200-250 foot jackup rigs are capable of operating in water depths of up to 250 feet, one in water depths of up to 230 feet and one in water depths of up to 200 feet. Two of these rigs are specially designed with eight-foot drafts to permit them to work in shallow water depths and are equipped with large cranes which enable them to perform certain construction activities as well as drilling work.
Jackup rigs often compete with semisubmersible rigs in water depths ranging from 200 to 360 feet, especially in the North Sea. Within this water depth range in the North Sea, the industry's general preference is to utilize heavy duty harsh environment jackup rigs for a number of reasons, including cost effectiveness resulting from operating efficiencies, greater hull stability and more accessible well control equipment when compared to semisubmersible rigs.
Semisubmersible Rigs. The Company's three semisubmersible rigs are designed to work in deeper water than jackup rigs. These semisubmersible rigs operate afloat and include the machinery, quarters and drilling equipment on a deck structure which is supported by the buoyancy of two submerged barge-shaped hulls. The Company's semisubmersible rigs are moved between drill sites by pumping saltwater ballast out of the hulls until the rig is raised to its transit draft. Once the rig is positioned on location by tugs, saltwater ballast is pumped into the hulls until the water level is approximately midway between hulls and upper deck structure. The Company's semisubmersible rigs are maintained on station by an eight point mooring system. Two of the Company's semisubmersible rigs use combination wire rope/chain anchor lines which allow the rigs to operate in deeper water than would be the case if the anchor lines were all wire rope. The third rig uses all wire anchor lines. The mooring systems on the Company's semisubmersible rigs are often preferred for production drilling to minimize the risk of damaging existing pipelines on the seabed.
All of the Company's semisubmersible rigs are deep water rigs equipped with top drives. The Company's semisubmersible rig in Equatorial Guinea, the Aleutian Key, is capable of operating in water depths of up to 2,300 feet of water. The Company's semisubmersible rigs in the North Sea (Rig 135 and Rig 140) are capable of operating in water depths of up to 2,400 feet and, with only minor structural modifications, can be upgraded to operate in water depths of up to 3,000 feet.
Other Marine Rig. The Company currently owns and operates one platform rig in the North Sea that consists of a number of self-contained drilling equipment packages which, when assembled on a customer's offshore production platform, make a complete drilling rig. During the fourth quarter of 1998, the Company's lake barge in Venezuela was retired from service. Effective January 1, 1999, the Company classified its platform rig as a component of Drilling Related Services.
More detailed information concerning the Company's marine fleet, as of February 28, 1999, is set forth in the table below:
MAXIMUM MAXIMUM
SERVICE DATE/ WATER DRILLING BLOWOUT
YEAR-OF-LATEST DEPTH DEPTH PREVENTER
TYPE AND NAME ENHANCEMENT(1) RIG DESIGN ATTRIBUTES(2) (FT) (FT) (PSI)
------------- -------------- ---------- ------------- ------- -------- ---------
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
Galaxy III................... 1999 F&G Universe IC; SO: ATDS: SCR 400 30,000 15,000
(Scheduled)
Galaxy II.................... 1998 F&G Universe IC; SO; ATDS; SCR 400 30,000 15,000
Magellan..................... 1992/1993 F&G Monarch IC; SO; ATDS; SCR 350 30,000 15,000
Galaxy I..................... 1991 F&G Universe IC; SO; ATDS; SCR 400 30,000 15,000
Monitor...................... 1989 F&G Monarch IC; ATDS; SCR 350 30,000 15,000
Monarch...................... 1988/1996 F&G Monarch IC; ATDS: SCR 350 30,000 10,000
SEMISUBMERSIBLE RIGS
Rig 135...................... 1983/1989 F&G L-907 PA; ATDS; 3G; SCR 2,400 25,000 15,000
Rig 140...................... 1983/1998 F&G L-907 PA; ATDS: 3G; SCR 2,400 25,000 15,000
Aleutian Key................. 1976/1995 F&G 9500 ATDS: 2G; SCR 2,300 25,000 10,000
300-350 FOOT CANTILEVER JACKUP RIGS
Compact Driller.............. 1993 MLT 116C IC; TDS; SCR 300 25,000 10,000
Parameswara.................. 1993 BMC 300IC IC; SO; TDS; SCR 300 25,000 10,000
Key Hawaii................... 1983 MODEC JC-300 IC; ATDS: SCR 300 25,000 10,000
Key Singapore................ 1982/1994 MLT 116C IC; TDS; SCR 350 25,000 10,000
Rig 136...................... 1982 F&G 780 Mod. II IC; TDS; SCR 300 20,000 10,000
Key Manhattan................ 1980/1996 MLT 116C IC; TDS; SCR 350 25,000 10,000
Galveston Key(3)............. 1978/1988 MLT 84/116C IC; TDS; SCR 300 25,000 10,000
Key Gibraltar................ 1976/1996 MLT 84/116C IC; SO; TDS; SCR 300 25,000 10,000
200-250 FOOT JACKUP RIGS
Rig 134(3)................... 1982 F&G L-780 IC; TDS; SCR 250 20,000 10,000
Rig 141...................... 1982 MLT 82SDC IC; TDS; SCR 250 20,000 10,000
Rig 124...................... 1980 Mitsui 200C-45 IC; TDS; SCR 250 20,000 10,000
Key Bermuda.................. 1980 Mitsui IS; SD; TDS; SCR 200 20,000 10,000
Rig 127...................... 1981,1995 F&G L-780 IC; TDS; SCR 250 20,000 10,000
Rig 105...................... 1975 MLT 52C IC; TDS; SCR 250 20,000 5,000
Key Victoria................. 1974/1996 MLT 80 IS; SD; TDS; DC/DC 250 20,000 10,000
Rig 103...................... 1974/1994 MLT 52C IC; TDS; SCR 250 20,000 10,000
Britannia.................... 1968/1987 Breit & Garcia IC; TDS; SCR 230 20,000 10,000
OTHER MARINE RIG
PLATFORM RIG
Rig 82....................... 1968/1995 National 1320 UE TDS; DC/DC N/A 20,000 5,000
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(1) Indicates year rigs were placed in service by the Company and corresponds to the year built, except the Parameswara, Monarch and Compact Driller, which were built in 1983, 1986 and 1992, respectively. The second date, if given, is the most recent year in which the rig underwent a major upgrade in capacity and/or a refurbishment which extended its useful working life. In some cases, such upgrade or refurbishment took place over an extended period; in those instances, the year given is the year in which the work was completed.
(2) Attributes are abbreviated as follows: "ATDS" means an advanced top drive system (Varco TDS 4 and above); "DC/DC" means a power transmission system in which DC electricity is generated by diesel engines and supplied directly to DC motors driving the principal components of drilling equipment (mud pumps, drawworks, and rotary table); "IC" means independent leg cantilever; "IS" means independent leg slot rig; "PA" means propulsion assist; "SCR" means a highly efficient power transmission system which rectifies AC power to DC power using a silicon controlled rectifier; "SD" means shallow draft; "SO" means skid-off capability; "TDS" means top drive drilling system; "2G" means 2nd generation semisubmersible; and "3G" means 3rd generation semisubmersible.
(3) The Galveston Key and Rig 134 are owned by P.T. Santa Fe Supraco Indonesia, a limited liability company of which the Company is a 95% shareholder.
As of December 31, 1998, the average age of the Company's marine fleet, measured from the date first placed in service by the Company, was 16.4 years. The average age for heavy duty harsh environment jackup rigs, semisubmersible rigs, 300-350 foot cantilever jackup rigs, 200 to 250 foot jackup rigs and other marine rig was 6.7 years, 17.5 years, 15.1 years, 20.9 years and 30.8 years, respectively.
Land Rigs
The Company had its origins as a U.S. land drilling contractor and was a pioneer in international land rig operations, especially in the Middle East and Latin America. Although the Company has emphasized the development of its marine fleet, it has maintained a substantial presence in selected international land rig markets and has continuously upgraded, modernized and enhanced its land rigs. Since the beginning of 1996, the Company has selectively expanded its land rig fleet. During the period 1996 through 1998, the Company expanded its land rig fleet through the addition of six specialized, highly mobile rigs and, further, two medium duty 2,000 horsepower and four heavy duty 3,000 horsepower rigs, each of which are equipped with top drives. Also, in late 1998, the Company began assembly of an additional 3,000 horsepower high specification land rig for work in the Middle East in the second quarter of 1999.
Many of the Company's land rigs are designed for use in remote desert environments and generally include all necessary facilities to support living and working in harsh and remote environments, including accommodation camps and inventories of repair parts and materials. Each of the rigs is designed for efficient disassembly, transport and reassembly. Eleven of the newer rigs are specially designed as wheel-mounted units that can be moved quickly between well locations. The Company's land rig operations in Egypt, Kuwait, the Kuwait-Saudi Arabia Partitioned Neutral Zone and Qatar are supported by an extensive fleet of specialized rig transport equipment, comprised primarily of heavy duty trucks equipped for desert service. Additionally, these operations are supported by a fleet of heavy equipment, such as bulldozers, cranes and forklifts which prepare access roads and drill site locations and facilitate the assembly and tear down of the Company's land rigs.
The Company historically has concentrated its land rig operations in the Middle East, South America and North Africa. The Company has a longstanding operational history in these areas, having operated in each of them for over 28 years. As of December 31, 1998, the Company was operating 31 land rigs in Kuwait, Venezuela, Egypt, Oman, Qatar, the Kuwait-Saudi Arabia Partitioned Neutral Zone and Saudi Arabia. As of December 31, 1998, the average age of the Company's land rig fleet, measured from the date first placed in service by the Company, was 10.4 years.
Information concerning the Company's fleet of land drilling rigs as of February 28, 1999 is set forth in the table below:
MAXIMUM
DRILLING BLOWOUT
DEPTH PREVENTER
NAME RIG TYPE HORSEPOWER (FT.) (PSI) POWER(1)
---- -------- ---------- -------- --------- --------
COMPANY OWNED LAND RIGS
Rig 144............ EMSCO C3 3,000 30,000 10,000 DC/DC
Rig 155............ Oilwell E-3000 3,000 30,000 15,000 SCR
Rig 173............ Gardner Denver 3000 3,000 30,000 10,000 SCR
Rig 174............ EMSCO C3 3,000 30,000 10,000 SCR
Rig 176............ Ideco 3000E 3,000 30,000 10,000 SCR
Rig 177............ Oilwell E-3000 3,000 30,000 10,000 SCR
Rig 180(3)......... National 1625 3,000 30,000 15,000 SCR
Rig 94............. National 110 UE 2,000 20,000 10,000 DC/DC
Rig 97............. Oilwell E-2000 2,000 20,000 10,000 SCR
Rig 104............ National 1320 UE 2,000 20,000 10,000 DC/DC
Rig 110............ Oilwell E-2000 2,000 20,000 5,000 DC/DC
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MAXIMUM
DRILLING BLOWOUT
DEPTH PREVENTER
NAME RIG TYPE HORSEPOWER (FT.) (PSI) POWER(1)
---- -------- ---------- -------- --------- --------
Rig 115............ National 1320 UE 2,000 20,000 10,000 DC/DC
Rig 119............ Oilwell E-2000 2,000 20,000 10,000 DC/DC
Rig 158............ Oilwell E-2000 2,000 25,000 10,000 SCR
Rig 178............ National 1320 2,000 20,000 5,000 SCR
Rig 179............ National 1320 2,000 20,000 5,000 SCR
Rig 157............ Ideco 1700 UE 1,700 17,000 5,000 SCR
Rig 92............. National 110 UE 1,500 16,000 5,000 DC/DC
Rig 102............ National 110 UE 1,500 16,000 5,000 DC/DC
Rig 147............ National 110 UE 1,500 16,000 5,000 DC/DC
Rig 170............ National 110 UE 1,500 16,000 5,000 SCR
Rig 169............ National 110 UE 1,500 16,000 5,000 SCR
Rig 160............ Dreco 1250 E 1,250 12,000 5,000 SCR
Rig 161............ Dreco 1250 E 1,250 12,000 5,000 SCR
Rig 150............ National 80 UE 1,000 12,000 5,000 SCR
Rig 151............ National 80 UE 1,000 12,000 5,000 SCR
Rig 166............ Wilson 75 900 7,000 5,000 Mech
Rig 167............ Wilson 75 900 7,000 5,000 Mech
Rig 146............ Kremco 750 750 10,000 5,000 SCR
Rig 159............ Cooper 750 750 8,000 5,000 Mech
Rig 171............ Oilwell 660-E 750 10,000 5,000 SCR
Rig 172............ Oilwell 660-E 750 10,000 5,000 SCR
Rig 143............ Ideco H37 ED 420 6,500 3,000 Mech
JOINT VENTURE OWNED LAND RIGS(2)
Rig 89............. National 110 UE 1,500 16,000 10,000 DC/DC
QDC 3.............. Cooper 650 650 8,000 3,000 Mech
Rig 131............ Portadril 330 1,000 None Mech
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(1) For purposes of this table, "DC/DC" refers to a power transmission system in which DC electricity is generated by diesel engines and supplied directly to DC motors driving the principal components of drilling equipment (mud pumps, drawworks, and rotary table); "Mech" is a power transmission system in which power to the principal components of drilling equipment (mud pumps, drawworks and rotary table) is supplied by direct mechanical linkage; and "SCR" means a highly efficient power transmission system which rectifies AC power to DC power using a silicon controlled rectifier.
(2) For purposes of this table, joint ventures refer only to joint ventures which the Company accounts for on the equity method. The rigs listed are owned by Qatar Drilling Company W.L.L., of which the Company is a 49% shareholder.
(3) Under assembly.
Rig Fleet Utilization
At the direction of its Board of Directors, the Company implemented a change from a June 30 fiscal year end to a December 31 fiscal year end effective January 1, 1998.
The following table sets forth certain information for the Company's rig fleet during the calendar years ended December 31, 1998 and 1997, six months ended December 31, 1997 and 1996 and each of fiscal 1997 and 1996. Results for the calendar year ended December 31, 1997 and the six months ended December 31, 1996 are presented for comparative purposes.
AVERAGE FOR THE AVERAGE FOR THE AVERAGE FOR THE
CALENDAR YEAR SIX MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ---------------- ---------------
1998 1997 1997 1996 1997 1996
------ ------ ------ ------ ------ -----
HEAVY DUTY HARSH ENVIRONMENT JACKUP RIGS
Total rigs(1)............................... 4.1 4.0 4.0 4.0 4.0 4.0
Rigs under contract......................... 4.1 4.0 4.0 4.0 4.0 3.9
Utilization rate(2)......................... 98.3% 99.0% 99.2% 100.0% 99.5% 97.5%
SEMISUBMERSIBLE RIGS
Total rigs.................................. 3.0 3.0 3.0 3.0 3.0 3.0
Rigs under contract......................... 2.7 2.9 2.8 3.0 3.0 2.3
Utilization rate(2)......................... 91.1% 97.2% 94.4% 100.0% 100.0% 75.3%
300-350 FOOT CANTILEVER JACKUP RIGS(3)
Total rigs.................................. 8.0 8.0 8.0 7.0 7.5 7.0
Rigs under contract......................... 7.6 7.8 7.8 6.5 7.2 6.7
Utilization rate(2)......................... 94.7% 97.2% 97.0% 93.5% 95.5% 95.7%
200-250 FOOT JACKUP RIGS(3)
Total rigs.................................. 9.0 9.0 9.0 10.0 9.5 10.0
Rigs under contract......................... 8.0 8.9 9.0 8.6 8.8 8.8
Utilization rate(2)......................... 88.4% 99.3% 100.0% 86.4% 92.1% 88.4%
OTHER MARINE RIGS(4)
Total rigs.................................. 1.8 2.0 2.0 2.0 2.0 2.0
Rigs under contract......................... 1.8 2.0 2.0 1.9 1.9 1.4
Utilization rate(2)......................... 100.0% 100.0% 100.0% 93.5% 96.7% 69.3%
LAND RIGS
Total rigs.................................. 29.2 25.9 27.5 23.3 23.8 21.5
Rigs under contract......................... 25.9 23.5 25.4 21.4 21.5 20.5
Utilization rate(2)......................... 88.8% 90.8% 92.3% 92.1% 90.6% 95.3%
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(1) There are 16 heavy duty harsh environment jackup rigs currently in service in the industry: Galaxy I, Galaxy II, Maersk Endurer, Maersk Gallant, Maersk Giant, Maersk Guardian, Magellan, Monarch, Monitor, Rowan-Gorilla II, Rowan-Gorilla III, Rowan-Gorilla IV, Rowan-Gorilla V, Transocean Nordic, West Epsilon and Ensco 100.
(2) "Utilization" means the percentage of the number of days a drilling rig is earning a normal daily margin under a customer contract compared to the total number of days within a specified period.
(3) For the fiscal year ended June 30, 1996, "200-250 foot jackup rigs" means the Company's nine jackup rigs capable of operating in water depths of up to 200-250 feet and the Key Gibraltar. During the fiscal year ended June 30, 1997, the Key Gibraltar was converted to a cantilever rig and extensively upgraded and was reclassified as a 300-350 foot cantilever jackup rig effective January 1, 1997.
(4) During the fourth quarter of calendar 1998, the Company's lake barge rig, the Rey del Lago, was retired from service. Effective January 1, 1999, the Company will classify its platform rig as a component of Drilling Related Services.
Drilling Related Services
The Company is a leading provider of drilling related services to the petroleum industry worldwide, including third party rig operations, incentive drilling, and drilling engineering and project management. These
activities complement the Company's contract drilling business by enabling the Company to provide an expanded suite of services, thus responding to customer requirements, and to enhance the utilization and financial performance of its rig fleet. The Company is able to provide these services with its existing workforce and infrastructure without investing significant additional capital.
Third Party Rig Operations. The Company's third party rig operations historically have been concentrated in the North Sea and Venezuela, areas where the Company also maintains substantial contract drilling operations. This enables the Company to meet the needs of its customers and to make more efficient use of its workforce and infrastructure. In September 1996, the Company expanded its third party rig operations into the emerging market of the Caspian Sea when it commenced operation and management of the semisubmersible rig, Dada Gorgud. A second semisubmersible, the Istiglal (formerly known as the Shelf 5) initiated operations in December 1998. As of December 31, 1998, the Company operated and maintained 13 platform, land and offshore rigs for third parties.
The following table lists the location of third party rigs in which the Company was participating as of February 28, 1999.
TYPE AND NAME RIG TYPE CUSTOMER(1) LOCATION
------------- -------- ----------- --------
PLATFORM RIGS
Andrew.................................. EMSCO BP Amoco U.K. North Sea
Beatrice................................ National 1320 Talisman U.K. North Sea
Buchan.................................. EMSCO C3 Talisman U.K. North Sea
Clyde................................... Oilwell E-3000 Talisman U.K. North Sea
Fulmar.................................. National 1320 UE Shell U.K. North Sea
Kittiwake............................... National E-2000 VDB Shell U.K. North Sea
Magnus.................................. National 1625 BP Amoco U.K. North Sea
Miller.................................. EMSCO C3 BP Amoco U.K. North Sea
Nelson.................................. EMSCO CE2 Enterprise U.K. North Sea
Tiffany................................. EMSCO C2 Agip U.K. North Sea
LAND RIGS
CV15.................................... EMSCO 2000 Corpoven Venezuela
SEMISUBMERSIBLE RIGS
Dada Gorgud(2).......................... F&G Pacesetter AIOC Azerbaijan
Istiglal(2)............................. F&G Pacesetter BP Amoco Azerbaijan
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(1) Generic designation including affiliates, joint ventures and consortia.
"AIOC" means Azerbaijan International Operating Company.
(2) Rig is operated by Caspian Drilling Company Limited of which the Company is a 45% shareholder. See "-- Joint Venture, Agency and Sponsorship Relationships and Other Investments" for a further discussion of Caspian Drilling Company Limited.
Incentive Drilling Services and Alliances. The Company selectively pursues incentive drilling contracts and innovative contracting opportunities. In doing so, the Company seeks markets which enable it to enhance its profitability by undertaking work that rewards superior performance and drilling productivity. Types of incentive contracts include:
Turnkey. The Company generally provides all services, drill bits, casings, well consumables and logistical support to drill a well to a specified depth for a fixed price.
Footage. The Company receives a predetermined lump sum per foot drilled in a well or a specified portion thereof.
Well Target Time. The contract provides that the drilling of a specified well (or portion thereof) is subject to an agreed target time. If the well is drilled ahead of schedule, then a bonus is paid in accordance with a specified formula. If the well is drilled behind schedule, a penalty may be imposed.
Lump Sum or Bonus Arrangement. This arrangement provides for the Company to perform a specific task either for a lump sum payment or for a day rate with a bonus payable for time saved.
Alliances. An agreement under which the Company works in conjunction with the customer and selected parties, such as service companies, fabricators, designers and engineers, to provide and coordinate their resources, facilities and expertise to maximize efficiency on a specified drilling project. Alliances often involve common goals and targets, with an incentive for execution of a project in an efficient manner as measured against specific time and economic goals. The Company has participated in alliances involving execution of specified drilling programs as well as an alliance involving various aspects of engineering, design and procurement of platform rig equipment for a specific development drilling project.
Drilling Engineering and Drilling Project Management. The Company's drilling engineers and other engineering personnel provide drilling management services for its own operations and on a contract basis for customer projects. Additionally, the Company provides drilling rig project management, including rig design, engineering, procurement and commissioning activities as well as management of all phases of offshore rig new construction or upgrade projects.
COMPETITION
The contract drilling industry is characterized by intense competition. Competition is usually restricted to a particular region, although drilling rigs are mobile and can be moved from one region to another in response to changes in demand. While price is the most important competitive determinant in the drilling industry, the availability and location of suitable equipment, the design and technical capability of drilling rigs, and the reputation and experience of the drilling contractor may also play a significant role in obtaining a contract and may, in certain cases, warrant a contractor receiving greater compensation than a competitor. Other competitive factors include the ability to provide specialized services, such as well drilling engineering, the technical and financial flexibility to perform turnkey and other incentive contracts, and the contractor's reputation and safety record. The Company believes that it competes favorably with respect to all of these factors.
CONTRACTS
Drilling contracts are most often awarded through competitive bidding; however, some contracts are a result of direct negotiations between the drilling contractor and the customer. In many cases, the specifications of the bid contain certain requirements not met by any of the Company's available rigs. As a result, if the Company is awarded the contract, the Company may incur considerable expense to upgrade and outfit a rig in the specified manner.
The Company operates each of its rigs under a contract either to drill a specified well or number of wells or for a stated period of time, which generally is automatically extended to include the period required to complete the well in progress on the scheduled contract expiration date. Contracts often are cancelable upon specified notice at the option of the customer, and some, but not all, contracts provide for the customer to pay a specified early termination payment in the event of such cancellation. The contracts customarily provide for either automatic termination or termination at the option of the customer in the event of total loss of the drilling rig or if drilling operations are suspended for extended periods by reason of force majeure or excessive rig downtime for repairs. The contracts also contain provisions addressing automatic termination or termination at the option of the customer in certain circumstances and may be dishonored or subject to renegotiation in depressed market conditions. See "-- Business Considerations and Risk Factors, Contract Termination and Performance Risks."
Many of the Company's contracts provide for compensation on a dayrate basis, under which the Company receives a fixed amount per day that the rig is operating under contract. Under a dayrate contract, the Company provides the drilling rig and personnel to operate the rig and to conduct the drilling operations. Operating expenses, such as crew wages and incidental supplies, with respect to the contracted rig are paid by
the Company. Many of the Company's dayrate contracts also contain incentive terms which provide for additional remuneration if specified performance goals are met and sometimes provide for penalties in the form of reduced or suspended compensation if the specified goals are not achieved. The Company also provides turnkey, footage and other services on an incentive contract basis. See "-- Drilling Rig Fleet and Drilling Related Services -- Incentive Drilling Services and Alliances" above.
The Company's contracts generally provide for payment in dollars except for amounts required to meet local expenses. The rate of compensation specified in each contract depends on the type of equipment required, its availability and location, the location and nature of the operation to be performed, the duration of the work, market conditions and other variables. The contracts may provide for no dayrate, a reduced dayrate or lump sum payment when the rig is being transported to the first and from the last drill site. Generally, a reduced dayrate or no payment is applicable when operations are suspended because of force majeure or extended mechanical breakdown. Reduced dayrates often also apply while a rig is on standby awaiting a customer's directions or customer-furnished materials or services or while moving between well locations under the same contract. When drilling rigs are being relocated a substantial distance, the Company attempts to obtain either a lump sum payment or a dayrate plus transport costs as compensation for mobilization and demobilization expenses and the rig time incurred during the period of transit. In a depressed market, such compensation is difficult to obtain and the Company may incur the full costs of transportation and/or rig time during rig relocations.
Contracts commonly contain renewal or extension provisions exercisable at the option of the customer which address extension for a number of wells or specified period of time. These options may provide that the compensation for the extension period must be agreed upon before commencement of the extension or the parties may have negotiated the extension period compensation at the time of the initial contract. The Company prefers either to negotiate provisions which require mutual agreement upon compensation for the option term (to obtain then-prevailing market rates) or establish a means of increasing compensation for the option term to reflect cost escalation and anticipated market conditions. During industry down cycles, drilling companies compete aggressively for contracts and often are compelled to accept contract terms which are less favorable than those which normally prevail, especially in areas such as liability and indemnity provisions, rate structure, termination and term extension options. In periods of rapid market downturn, the Company's customers may not honor the terms of existing contracts and may terminate contracts or prevail upon the Company to renegotiate contract rates and terms to conform with depressed market conditions.
Contract information concerning the Company's marine and land drilling fleet, as of December 31, 1998, is set forth in the table below:
CURRENT
CONTRACT
TYPE AND NAME LOCATION CUSTOMER(1) EXPIRATION(2)
------------- -------- ----------- -------------
HEAVY DUTY HARSH ENVIRONMENT
JACKUP RIGS
Galaxy III..................... (Under construction) BP Amoco 4th Qtr 02
Galaxy II...................... Canada Mobil Nov 03
Magellan....................... U.K. North Sea Elf Jul 00(3)
Galaxy I....................... U.K. North Sea Elf Mar 01
Monitor........................ U.K. North Sea BP Amoco Nov 99
Monarch........................ U.K. North Sea BP Amoco Mar 00(3)
SEMISUBMERSIBLE RIGS
Rig 135........................ U.K. North Sea BG Mar 00
Rig 140........................ U.K. North Sea Phillips Jan 99(4)
Aleutian Key................... Equatorial Guinea Mobil Aug 99(3)
300-350 FOOT CANTILEVER JACKUP
RIGS
Compact Driller................ Thailand Thaipo Jun 99(3)
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CURRENT
CONTRACT
TYPE AND NAME LOCATION CUSTOMER(1) EXPIRATION(2)
------------- -------- ----------- -------------
Parameswara.................... Vietnam Petronas Carigali Jul 99(3)
Key Hawaii..................... Egypt Agiba Feb 99(3)
Key Singapore.................. Egypt Deminex Feb 99
Rig 136........................ Egypt Petrobel Feb 99
Key Manhattan.................. Eritrea Anadarko Mar 99
Galveston Key.................. Indonesia Unocal Jan 99
Key Gibraltar.................. Malaysia Shell Apr 99
200-250 FOOT JACKUP RIGS
Rig 134........................ Indonesia Maxus Jan 99
Rig 141........................ Egypt Idle
Rig 124........................ Egypt Idle (5)
Key Bermuda.................... Nigeria Chevron Oct 00
Rig 127........................ Sharja Shipyard (6)
Rig 105........................ Egypt Petrobel Jan 99
Key Victoria................... Venezuela Idle
Rig 103........................ Qatar QGPC Jul 99
Britannia...................... U.K. North Sea Shell Jun 01
OTHER MARINE RIG PLATFORM RIG
Rig 82......................... U.K. North Sea Shell Evergreen
COMPANY OWNED LAND RIGS
Rig 92......................... Egypt Khalda Oct 99
Rig 94......................... Egypt HBS Feb 99(3)
Rig 104........................ Egypt Eshpetco Mar 99
Rig 143........................ Egypt Petrobel Sep 99
Rig 147........................ Egypt Tullow Jan 99
Rig 170........................ Egypt Idle
Rig 146........................ Kuwait KOC Mar 01
Rig 155........................ Kuwait KOC Mar 01
Rig 158........................ Kuwait KOC Mar 01
Rig 160........................ Kuwait KOC Mar 01
Rig 161........................ Kuwait KOC Mar 01
Rig 169........................ Kuwait Mobilizing (7)
Rig 172........................ Kuwait KOC Jun 00
Rig 102........................ Kuwait-Saudi PNZ SAT Aug 99
Rig 171........................ Kuwait-Saudi PNZ SAT Aug 99
Rig 173........................ Saudi Arabia Aramco May 00
Rig 174........................ Saudi Arabia Aramco May 00
Rig 144........................ Oman Idle
Rig 150........................ Oman PDO Oct 01
Rig 151........................ Oman PDO Apr 99(3)
Rig 159........................ Oman PDO Jan 99
Rig 157........................ Qatar Idle
Rig 97......................... Venezuela Perez Companc Oct 99
Rig 110........................ Venezuela PDVSA Jan 99
Rig 115........................ Venezuela PDVSA Mar 99
Rig 119........................ Venezuela Idle
Rig 166........................ Venezuela Mobil Sep 99
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CURRENT
CONTRACT
TYPE AND NAME LOCATION CUSTOMER(1) EXPIRATION(2)
------------- -------- ----------- -------------
Rig 167........................ Venezuela Idle
Rig 176........................ Venezuela Mobilizing (8)
Rig 177........................ Venezuela Arco Oct 00
Rig 178........................ Venezuela Mobil Jul 00
Rig 179........................ Venezuela Mobil Sep 99
Rig 180........................ (Under assembly) KOC Apr 02
JOINT VENTURE OWNED LAND RIGS
Rig 89......................... Qatar QGPC May 99(3)
QDC 3.......................... Qatar Idle
Rig 131........................ Qatar QGPC May 99
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(1) Generic designation including affiliates, joint ventures and consortia.
"QGPC" means Qatar General Petroleum Company; "KOC" means Kuwait Oil
Company; "SAT" means Saudi Arabia Texaco; "PDO" means Petroleum Development
Oman; "PDVSA" means Petroleos de Venezuela; "PNZ" means Kuwait -- Saudi
Arabian Partitioned Neutral Zone.
(2) Indicates date of scheduled expiration of current contract term, or, if the contract is for a fixed number of wells, date of estimated completion of those wells at December 31, 1998. Many contracts are subject to early termination.
(3) Contract is subject to customer term extension options(s).
(4) Rig 140 next to Shell UK for 3 years.
(5) Rig 124 next to Bapetco for 1 firm well plus 1 option well.
(6) Rig 127 contracted to Oxy Qatar at December 31; subsequently cancelled.
(7) Rig 169 next to KOC Kuwait for 3 years.
(8) Rig 176 next to Arco Venezuela for 2 years from January 1, 1999.
CUSTOMERS
The Company's customers consist primarily of major international, state owned and large independent oil companies and their affiliates. Several major international oil companies have recently consolidated, and the Company is currently unable to predict the impact, if any, of such consolidation on its business. During the calendar year ended December 31, 1998, Royal Dutch/Shell Group of Companies and its affiliates, joint ventures and consortia and Elf Aquitaine accounted for 13.2% and 10.5% of the Company's consolidated revenues, respectively. See Note 11 of the Notes to Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1998, the Company had approximately 5,800 full time employees from more than 45 nations, over 95% of whom work outside the United States. Approximately two-thirds of the Company's employees are citizens of countries outside North America and Europe. Approximately 565 and 110 of the Company's employees in Venezuela and Nigeria, respectively, are represented by labor unions. In response to the recent market downturn, the Company's workforce had been reduced to approximately 5,500 full time employees at February 28, 1999.
JOINT VENTURE, AGENCY AND SPONSORSHIP RELATIONSHIPS AND OTHER INVESTMENTS
In some areas of the world, local custom and practice or governmental requirements are such as to necessitate the formation of joint ventures with local participation. The Company is an active participant in several joint venture drilling companies, principally in Azerbaijan, Indonesia, Malaysia, Nigeria, Oman, Qatar and Saudi Arabia. The Istiglal commenced operations in the Caspian Sea in December 1998. The Istiglal and
the Dada Gorgud are being operated under long term bareboat charters through the joint venture Caspian Drilling Company Limited, of which the Company owns 45%.
The Company participates in a joint venture which operates a petroleum supply base in Indonesia. The Indonesian supply base, 42% owned by the Company, is located at Merak Point on West Java. It provides open and covered storage and bulk chemical trans-shipment facilities. The Company has managed this supply base for over 25 years. The land lease for the supply base, scheduled to expire in 2000, is subject to a pending renewal application and there is no assurance that the lease will be renewed on terms acceptable to the Company. The Company also has a passive minority investment in a Libyan drilling company which is accounted for on the cost basis.
Local law or custom in some areas of the world also effectively mandates establishment of a relationship with a local agent or sponsor. When necessary in these areas, the Company enters into agency or sponsorship agreements.
RISKS, INSURANCE AND INDEMNIFICATION
The Company emphasizes ongoing safety and training programs and has installed significant safety equipment, all designed to promote a safe working environment. Nevertheless, the operations of the Company are subject to the many hazards inherent in the drilling business.
While the Company maintains broad insurance coverage, such insurance generally does not cover all types of losses (e.g., loss of charter hire/dayrate revenue, war, internal disturbances, expropriation, nationalization or business interruption). Losses and liabilities arising from uninsured or underinsured events would reduce revenues and increase costs to the Company. In addition, pollution and similar environmental risks generally are not fully insurable. As a consequence, the existing insurance may not be sufficient to protect the Company from all of its operational risks or against liability from all consequences of well disasters, maritime casualties or damage to the environment. It is also not sufficient to protect the Company for the full market or replacement value of assets that are rendered actual or constructive total losses. The Company may be liable for oil spills, costs of controlling a wild well, well loss or damage and similar matters if not indemnified by its customers or insured. When appropriate, the Company may separately insure well-related risks (well loss or damage, wild well control and pollution).
The Company believes its policy with regard to the purchase of insurance coverage is consistent with industry practice with regard to the types, amounts and limits of insurance maintained. The Company has and will, from time to time, review its coverage levels and adjust them commensurate with industry conditions and perceived rig values. Further, no assurances can be given that the desired insurance coverages will continue to be available at rates considered reasonable or that certain types of coverage will be available at any cost.
In the event insurance is determined to be inadequate or unavailable, the Company evaluates its exposure to uninsurable risks before participating in any projects. To the extent permitted by market conditions, the Company contracts with its customers to provide the Company with indemnification or other protection against risks not generally covered by insurance and against losses in excess of applicable insurance limits. The Company generally has been able to obtain contractual indemnification from its customers which protects and indemnifies the Company to some degree from liability arising out of damages to customer property and injuries to certain personnel, reservoir, pollution and environmental damages and wild well control. However, there can be no assurance that the Company can obtain such indemnification in all of its contracts.
ITEM 2. DESCRIPTION OF PROPERTY.
See "Item 1. Description of Business -- Drilling Rig Fleet and Drilling Related Services" for a description of the Company's principal assets. The Company leases and, in some cases, owns various operating and administrative facilities, generally consisting of office, maintenance and storage space, around the world.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings incidental to its business. In the opinion of the management of the Company, based upon information presently available, the ultimate resolution of these legal proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.
The Company has been named as a Potentially Responsible Party ("PRP") in connection with a Superfund site located adjacent to the city of Whittier, California in Santa Fe Springs and maintained by Waste Disposal, Inc. ("WDI"). On August 18, 1994 the U.S. Environmental Protection Agency (the "EPA") issued an Administrative Order for Remedial Design ("ORD") against eight PRPs, not including the Company, alleging that they are responsible for costs associated with the cleanup of the WDI site and requesting that these parties consent to undertake certain specific investigative and remedial measures with respect to the site. On March 31, 1997 the ORD was amended to modify the scope of remedial work to be performed at the site and to add thirteen additional parties, including the Company. On April 29, 1997 the Company advised the EPA of its intention to comply with the ORD. In an effort to minimize costs associated with its involvement in the site, the Company has entered into a Participation Agreement with the other named PRPs, by which the PRPs will provide monetary credit to certain PRPs for previously incurred costs, cooperate in common response to any claims arising out of the ORD, and allocate among themselves costs associated with their involvement with the site. The PRP's have agreed to an allocation arrangement, which, subject to resolution of pending appeals by certain PRP's, will result in the Company assuming responsibility for approximately 7.7% of costs related to site remediation. Under the allocation arrangement, this amount is reduced by recoveries from other parties, including landowners, non-participating PRP's and any contributions from the Environmental Protection Agency under its orphan share program. Ultimate liability will be dependent upon the results of continuing testing, evaluation and agreement between the EPA and the PRP's concerning the most cost effective and appropriate remediation of the site.
Based on information presently available, the Company does not believe that any liability imposed in connection with the WDI site will have a material adverse effect on the Company's financial condition or ongoing results or operations given the nature and extent of its involvement at the site and available resources.
ITEM 4. CONTROL OF REGISTRANT.
(a) As of February 28, 1999, Holdings, a wholly-owned subsidiary of KPC, beneficially owned approximately 64.9% of the outstanding Ordinary Shares. KPC is wholly-owned by the Government of Kuwait.
So long as Holdings owns a majority of the outstanding Ordinary Shares, KPC through Holdings will be able to elect the Board of Directors of the Company and effectively control the outcome of the vote on certain matters submitted to a vote of the Company's shareholders. It is anticipated that Mr. Nader Hamad Sultan, a Director of the Company who also serves as Chairman and a member of the Board of Holdings, will be authorized by the Holdings Board to cast votes for Holdings' Ordinary Shares of the Company at the Company's 1999 Annual General Meeting of Shareholders, in person or by proxy. So long as KPC remains a significant indirect shareholder of the Company, it intends to oversee its investment in the Company, including exercise of its and Holdings' rights under the Intercompany Agreement and the Company's Articles. See "Item 13. Interest of Management in Certain Transactions."
(b) The following table is furnished as of February 28, 1999 to indicate beneficial ownership of the Company's Ordinary Shares by (i) each person who is known by the Company to be a beneficial owner of more than 5% of the Company's Ordinary Shares and (ii) all executive officers and Directors of the Company as a group. The information in the following table was provided by such persons.
TITLE OF CLASS IDENTITY OF PERSON OR GROUP AMOUNT OWNED PERCENT OF CLASS
-------------- --------------------------- ------------ ----------------
Ordinary Shares................ SFIC Holdings (Cayman), Inc. 74,500,000 64.9%
Ordinary Shares................ Directors and Executive 182,840(1) 0.2%
Officers as a group (17
persons)
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(1) Does not include 67,100 restricted shares or 788,025 options that are not exercisable within 60 days. Includes 13,945 shares held in the Company's Investment Savings and Profit Sharing Plan and 250 shares held by a spouse in a custodial account for the benefit of a minor child. Does not include 800 shares held of record by the spouse of Mr. Ferdinand A. Berger, a Director of the Company. Mr. Berger disclaims beneficial ownership of such 800 shares. Does not include 74,500,000 shares over which Mr. Nader Hamad Sultan has the authority to cast votes on behalf of Holdings at the Company's 1999 Annual General Meeting of Shareholders. Mr. Sultan disclaims beneficial ownership of such 74,500,000 shares.
ITEM 5. NATURE OF TRADING MARKET.
There is no non-U.S. trading market for the Ordinary Shares of the Company.
Within the United States, effective June 10, 1997 the Company's Ordinary Shares commenced trading on The New York Stock Exchange ("NYSE") under the symbol "SDC."
The following table sets forth the high and low sales price per Ordinary Share for each quarterly fiscal period since trading of the Ordinary Shares on the NYSE commenced.
HIGH LOW
------ ------
FISCAL YEAR ENDED JUNE 30, 1997:
Fourth Quarter (commencing June 10, 1997)................. $34.63 $31.00
TRANSITION PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997:
First Quarter............................................. $48.75 $33.50
Second Quarter............................................ $57.00 $35.00
CALENDAR YEAR 1998
First Quarter............................................. $41.50 $29.75
Second Quarter............................................ $42.94 $28.44
Third Quarter............................................. $31.44 $12.25
Fourth Quarter............................................ $21.19 $11.19
CALENDAR YEAR 1999
First Quarter (through February 28, 1999)................. $17.50 $13.00
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Based upon records maintained by its transfer agent, as of February 28, 1999, there were approximately 309 shareholders of record in the United States and 230 shareholders of record outside of the United States holding approximately 40,335,290 and 74,618,208 Ordinary Shares, respectively. These numbers include persons or entities holding shares as nominees for beneficial owners.
On March 5, 1999, the Company's Board of Directors declared a quarterly dividend of $0.0325 per Ordinary Share payable on April 15, 1999 to holders of record at the close of business March 31, 1999. The Company's current dividend policy contemplates the payment of quarterly dividends of $0.0325 per Ordinary Share.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
The Company is not subject to any governmental laws, decrees or regulations in the Cayman Islands which restrict the export or import of capital, including any foreign exchange controls, or which affect the remittance of dividends, interest or other payments to non-resident holders of the Company's Ordinary Shares.
Additionally, neither the laws of the Cayman Islands nor the Company's charter impose any limitations on the right of non-resident foreign owners to hold or vote the Ordinary Shares of the Company.
ITEM 7. TAXATION.
At the present time there is no Cayman Islands income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by a Cayman Islands company or its shareholders.
The Company has obtained an assurance from the Cayman Islands Government under the Tax Concessions Law (Revised) that, in the event that any legislation is enacted in the Cayman Islands imposing tax computed on profits or income, or computed on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax shall not until February 13, 2010 be applicable to the Company or to any of its operations or to the shares, debentures or other obligations of the Company. Therefore, under present law there will be no Cayman Islands tax consequences with respect to distributions in respect to the Ordinary Shares. The United States does not have a tax treaty with the Cayman Islands. See "Item 1. Description of Business -- Business Considerations and Risk Factors -- Taxation Risks."
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
At the direction of its Board of Directors, the Company implemented a change from a June 30 fiscal year end to a December 31 fiscal year end effective January 1, 1998.
The following table sets forth selected consolidated financial data for the Company as of and for the calendar years ended December 31, 1998 and 1997, the six months ended December 31, 1997 and 1996 and for each of the four fiscal years in the period ended June 30, 1997, which has been derived from audited financial statements of the Company. Audited financial statements for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the two years in the period ended June 30, 1997 and 1996 are included elsewhere in this Annual Report on Form 20-F. The information set forth below should be read in conjunction with "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto.
CALENDAR YEAR ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------- --------------------- ---------------------------------------------
1998 1997(1) 1997 1996(1) 1997 1996 1995 1994
---------- ---------- ---------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenues.............. $ 811,346 $ 688,957 $ 375,185 $264,791 $ 578,563 $ 470,882 $466,262 $391,752
Operating costs................. 414,022 373,833 195,678 161,510 339,665 308,513 320,317 271,951
---------- ---------- ---------- -------- ---------- ---------- -------- --------
Operating margin................ 397,324 315,124 179,507 103,281 238,898 162,369 145,945 119,801
Other operating costs and
expenses:
Depreciation and
amortization(2)............. 55,807 46,197 24,876 22,039 43,360 77,128 86,916 87,460
General and administrative.... 22,161 20,149 10,781 7,563 16,931 17,168 16,225 14,676
Gain on sale of assets........ (5,988) (626) (374) (789) (1,041) (754) (1,355) (2,176)
---------- ---------- ---------- -------- ---------- ---------- -------- --------
Operating income (loss)......... 325,344 249,404 144,224 74,468 179,648 68,827 44,159 19,841
Other income (expense), net..... 1,320 2,868 804 4,529 6,593 9,016 5,094 (1,336)
---------- ---------- ---------- -------- ---------- ---------- -------- --------
Income before provision for
taxes on income............... 326,664 252,272 145,028 78,997 186,241 77,843 49,253 18,505
Provision for taxes on income... 39,520 27,486 16,500 10,339 21,325 15,867 4,955 8,007
---------- ---------- ---------- -------- ---------- ---------- -------- --------
Net income...................... $ 287,144 $ 224,786 $ 128,528 $ 68,658 $ 164,916 $ 61,976 $ 44,298 $ 10,498
========== ========== ========== ======== ========== ========== ======== ========
Net income per ordinary
share(3):
Basic......................... $ 2.51 $ 1.96 $ 1.12 $ 1.44
Diluted....................... $ 2.50 $ 1.96 $ 1.12 $ 1.44
Pro forma net income per
ordinary share(2):
Basic......................... $ 0.60 $ 0.54
Diluted....................... $ 0.60 $ 0.54
Cash dividends per ordinary
share(4)...................... $ 0.13 $ 0.065 $ 0.065 $ -- $ -- $ --
========== ========== ========== ======== ========== ==========
OTHER FINANCIAL DATA:
Capital expenditures............ $ 277,400 $ 229,192 $ 127,133 $ 44,537 $ 146,596 $ 64,810 $ 36,443 $ 44,527
Cash flows provided by (used
in):
Operating activities.......... 343,221 297,794 164,669 74,053 207,178 113,118 131,685 82,326
Investing activities.......... (272,475) (235,648) (131,428) (38,977) (143,197) 5,012 (14,643) (17,781)
Financing activities.......... (14,885) (66,785) (3,721) (3,829) (66,893) (108,391) (98,373) (69,756)
EBITDA(5)....................... 381,151 295,601 169,100 96,507 223,008 145,955 131,075 107,301
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CALENDAR YEAR ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------- --------------------- ---------------------------------------------
1998 1997(1) 1997 1996(1) 1997 1996 1995 1994
---------- ---------- ---------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital................. $ 170,776 $ 122,700 $ 122,700 $172,627 $ 125,730 $ 124,333 $ 89,033 $ 73,466
Property and equipment, net..... 1,049,201 801,970 801,970 610,216 691,300 587,420 599,680 652,202
Total assets.................... 1,453,736 1,161,453 1,161,453 948,232 1,000,446 884,998 924,983 938,206
Total debt(6)................... -- -- -- -- -- -- 58,364 84,254
Shareholders' equity............ 1,227,224 953,017 953,017 797,921 831,115 733,092 728,089 755,253
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(1) Calendar 1997 results were derived from audited financial information found elsewhere in this Annual Report on Form 20-F and are provided for comparative purposes, as are results for the six months ended December 31, 1996.
(2) During 1996, the Company's management undertook engineering and economic studies to evaluate the economic useful lives of its drilling rigs. The study results indicated that the estimated useful lives should be extended by 12 years from 18 to 30 years for marine rigs and by four years from 12 to 16 years for land rigs. The Company's Board of Directors approved application of the change in estimated useful lives effective July 1, 1996 which reduced depreciation expense, and increased net income, by approximately $34.5 million for the fiscal year ended June 30, 1997. See Note 3 of the Notes to Consolidated Financial Statements.
(3) The basic income per Ordinary Share data for the calendar years ended December 31, 1998 and 1997, the six months ended December 31, 1997 and the fiscal year ended June 30, 1997 is calculated based on weighted average shares outstanding for the periods of 114,500,000. The dilutive impact of Ordinary Share equivalents related to stock awards and options outstanding under the Company's share award plans was not significant for the periods presented, increasing the weighted average shares outstanding used in the computation for the calendar year ended December 31, 1998, the calendar year and six months ended December 31, 1997 and the fiscal year ended June 30, 1997 to 114,812,000, 114,608,000 and 114,502,000, respectively. The pro forma net income per Ordinary Share data for the six months ended December 31, 1996 and the fiscal year ended June 30, 1996 is calculated as though 114,500,000 shares issued were outstanding. See Note 2 of the Notes to Consolidated Financial Statements.
(4) Prior to becoming a public company, the Company made certain distributions to its sole shareholder.
(5) EBITDA (Operating Income before depreciation) is a supplemental financial measure used by the Company in evaluating its business and should be read in conjunction with all the information in the Consolidated Financial Statements and notes thereto included elsewhere herein. The Company believes that EBITDA is a measure commonly used by analysts, investors and others interested in the contract drilling industry. Accordingly, this information has been disclosed herein to permit a more complete analysis of the Company's operating performance. The difference between cash flows provided by operating activities and EBITDA relates to interest, taxes, depreciation and changes in operating assets and liabilities. EBITDA should not be considered as an alternative to net income or cash flow from operating activities or as an indication of the Company's performance or as a measure of liquidity. The Company's definition of EBITDA may not be comparable with similarly titled measures disclosed by other companies.
(6) Total debt related to rigs held under leveraged capitalized lease obligations. During 1996 and 1994 the Company acquired the equity owner's interest in such rigs and extinguished the related obligations during 1996 and 1995.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto, included elsewhere in this Annual Report on Form 20-F.
RESULTS OF OPERATIONS
General
Overview. The Company is subject to many risks which could impair liquidity and operating results because of decreased revenues, increased expenses or both. The contract drilling industry is a highly competitive and cyclical industry which is influenced by customer drilling budgets and expenditures and oil and natural gas pricing, consumption and demand. The industry has and may encounter periods of rapid downturn which result in substantially reduced dayrates and low utilization. A further reduction in industry utilization could idle more of the Company's drilling rigs, in which event the Company must bear idle rig expenses without any offsetting revenue. Should the industry engage in a more extensive rig building program, the resulting increase in rig supply could cause a further deterioration of the market for the Company's rigs. Any of these events could have a materially adverse effect on the Company's revenues, gross margins and net income and the Company's liquidity in future periods.
The Company's contract drilling revenues vary based upon demand, which affects the number of days the rig fleet is utilized and the dayrates received. Revenue can also increase or decrease as a result of the acquisition or disposal of rigs. In order to improve utilization, realize higher dayrates or retain market share, the Company may mobilize its rigs from one market to another. During periods of mobilization, however, revenues generally are adversely affected. As a response to changes in demand and dayrate conditions, the Company may withdraw a rig from the market by "stacking" it in an idle mode or may reactivate a rig which was previously stacked, which may decrease or increase revenues, respectively. See "Item 1. Description of Business -- Industry Conditions." See "-- Liquidity and Capital Resources -- Industry Risks" for a description of certain factors that may affect the Company's results of operations in the future.
Operating revenues. Santa Fe derives its revenues from dayrates under drilling contracts and the provision of drilling related services. A drilling contract may provide both dayrate and drilling related service revenues. Changes in or renewals of contracts may alter the composition of the Company's revenues. Revenues from dayrate drilling contracts are recognized as work is performed. When mobilization or rig enhancement is required for a contract, the Company may receive a lump-sum payment to offset all or a portion of the cost. When an offshore rig is mobilized from one market to another under contract, mobilization revenues less costs incurred are recognized over the term of the related drilling contract. If a rig is moved without a contract, all costs incurred are immediately charged against income. Payments received for rig enhancements are recognized as revenues over the term of the related drilling contract. In addition to the impact of dayrates, which increase and decrease with demand, revenues from contract drilling may fluctuate from quarter to quarter due to the timing of contract completions, mobilizations, scheduled maintenance, and the weather.
The Company also earns revenue by providing drilling related services to the petroleum industry worldwide, including third party rig operations, incentive drilling, drilling engineering and project management. Revenues from third party rig operations and drilling engineering services are recognized as the services are performed. Revenues from incentive drilling are derived from performance based contracts, including turnkey and footage contracts, in which the Company has negotiated the opportunity to earn incremental revenue by meeting or exceeding certain preset job performance criteria. Incremental revenues from incentive drilling contracts are recognized as terms and conditions of each contract are fulfilled. The Company uses the percentage of completion method to account for project management contracts. Revenues from drilling services fluctuate from quarter to quarter as a result of the amount of services being performed during the quarter and the timing of achievement of performance objectives under incentive based and project management contracts.
In reviewing the Company's results of operations, it should be noted that current industry conditions are considerably less positive than those reflected in recent results. During 1998, oil prices declined substantially resulting in a significant decrease in the worldwide demand for drilling services. The Company has recently witnessed significant industry declines in offshore drilling rig and land rig utilization and dayrates. The impact on the Company through December 31, 1998 was relatively minor; however, the Company is currently experiencing similar declines and expects 1999 rig utilization and dayrates to be considerably lower than those experienced in 1998. Other revenues, including those associated with mobilization, incentive programs, drilling related services and project management, are expected to be adversely impacted as well.
Operating costs. Operating costs are not affected by changes in dayrates, nor are they necessarily significantly affected by fluctuations in utilization. For instance, if a rig is idle for a short period of time, the Company realizes few decreases in operating expenses since the rig typically is maintained in a ready-to-operate state with a full crew. However, if a rig were expected to be idle for more than a brief period of time, the Company may reduce the size of the rig's crew and take steps to maintain the rig in an idle "stacked" mode, which lowers expenses and partially offsets the negative impact on operating income associated with loss of revenues. Operating costs also may be impacted by the Company's ability to successfully hire and train sufficient numbers of employees to operate the Company's drilling equipment. The Company recognizes as an operating cost repair and maintenance activities, such as painting, inspections and routine overhauls that maintain rather than upgrade the rigs. These expenses include the purchase of parts and materials from third parties, the prices of which vary from period to period and are, in part, impacted by influences outside the control of the Company. While the Company has experienced significant increases in the cost of rig related equipment and spare parts due to manufacturer/supplier price increases over the past few years, prices have recently stabilized or declined. The Company's financial results could be negatively affected in the future by these or similar cost increases.
Current drilling industry conditions have resulted in a significant decline in demand for drilling rigs which, in turn, has resulted in an increase in the number of idle rigs. The Company presently has a number of rigs idle and expects to experience overall lower fleet utilization. The previously mentioned expected lower revenues combined with lower rig utilization has caused the Company to take certain actions such as reduce personnel employment as rigs become idle, defer certain non-essential operating expenses, reduce land based support personnel, defer compensation actions and apply other similar cost conservation measures. The Company will continue to evaluate market conditions and make further adjustments as appropriate.
Operating income. In addition to operating revenues and costs, operating income is also affected by the level of general and administrative expense, depreciation and amortization expense and any gains or losses from the sale or retirement of assets. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Increased depreciation expense subsequent to a capital upgrade decreases operating income.
Provision for taxes on income. The Company is not subject to income taxes in the Cayman Islands. The Company's provision for taxes on income for the calendar years ended December 31, 1998 and 1997, the six months ended December 31, 1997 and 1996 and the fiscal years ended June 30, 1997 and 1996 was $39.5 million, $27.5 million, $16.5 million, $10.3 million, $21.3 million and $15.9 million, respectively. The Company's effective tax rate for the calendar years ended December 31, 1998 and 1997, the six months ended December 31, 1997 and 1996 and the fiscal years ended June 30, 1997 and 1996 was 12.1%, 10.9%, 11.4%, 13.1%, 11.5% and 20.4%, respectively. The effective tax rate varies from period to period because each country in which the Company operates has its own tax system and because the amounts earned in, and subject to tax by, each jurisdiction change from period to period. Since 1996, the Company's consolidated pre-tax income has increased while the effective tax rate has remained relatively constant within a low range because a substantial portion of the Company's pre-tax income is either not subject to taxation or is subject to taxation at rates lower than the Company's average worldwide rates. See Note 5 of Notes to Consolidated Financial Statements.
The following table presents data relating to the Company's operating revenues, operating costs, operating income, utilization and average dayrates by equipment type and for drilling services.
CALENDAR YEAR ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------- ------------------ ------------------
1998 1997(1) 1997 1996(1) 1997 1996
-------- -------- -------- ------- -------- -------
(IN THOUSANDS)
OPERATING REVENUES
Heavy duty harsh environment jackup
rigs............................... $148,997 $135,931 $ 71,813 $55,623 $119,741 $92,939
Semisubmersible rigs................. 114,952 87,787 49,483 26,447 64,751 37,510
300-350 foot cantilever jackup
rigs(2)............................ 150,602 121,854 66,867 38,786 93,773 65,308
200-250 foot jackup rigs(2).......... 143,164 122,817 69,272 42,651 97,141 73,716
Other marine rigs(3)................. 11,836 11,984 5,669 5,639 11,009 4,666
-------- -------- -------- ------- -------- -------
Total marine rigs.......... 569,551 480,373 263,104 169,146 386,415 274,139
-------- -------- -------- ------- -------- -------
Land rigs............................ 147,880 125,527 71,626 49,257 103,158 91,859
Drilling related services............ 92,746 81,472 39,596 45,028 86,904 101,581
Other................................ 1,169 1,585 859 1,360 2,086 3,303
-------- -------- -------- ------- -------- -------
Total operating revenues... 811,346 688,957 375,185 264,791 578,563 470,882
-------- -------- -------- ------- -------- -------
OPERATING COSTS(4)
Heavy duty harsh environment jackup
rigs............................... 49,549 47,091 25,224 23,351 45,218 40,528
Semisubmersible rigs................. 63,712 41,694 22,767 18,042 36,969 30,979
300-350 foot cantilever jackup
rigs(2)............................ 58,373 59,645 30,125 19,380 48,900 39,130
200-250 foot jackup rigs(2).......... 66,982 59,260 31,491 31,182 59,552 53,947
Other marine rigs(3)................. 8,659 8,477 4,219 3,151 6,808 3,252
-------- -------- -------- ------- -------- -------
Total marine rigs.......... 247,275 216,167 113,826 95,106 197,447 167,836
-------- -------- -------- ------- -------- -------
Land rigs............................ 97,966 86,547 48,345 35,485 73,687 63,689
Drilling related services............ 65,665 61,641 30,537 30,305 61,408 75,775
Other................................ 3,116 9,478 2,970 614 7,123 1,213
-------- -------- -------- ------- -------- -------
Total operating costs...... 414,022 373,833 195,678 161,510 339,665 308,513
-------- -------- -------- ------- -------- -------
OPERATING MARGIN........... 397,324 315,124 179,507 103,281 238,898 162,369
-------- -------- -------- ------- -------- -------
Depreciation and amortization........ (55,807) (46,197) (24,876) (22,039) (43,360) (77,128)
General and administrative........... (22,161) (20,149) (10,781) (7,563) (16,931) (17,168)
Gain on sale of assets............... 5,988 626 374 789 1,041 754
-------- -------- -------- ------- -------- -------
OPERATING INCOME........... $325,344 $249,404 $144,224 $74,468 $179,648 $68,827
======== ======== ======== ======= ======== =======
OPERATING INCOME AS A PERCENTAGE OF
REVENUES........................... 40.1% 36.2% 38.4% 28.1% 31.1% 14.6%
======== ======== ======== ======= ======== =======
AVERAGE RIG FLEET UTILIZATION
Heavy duty harsh environment jackup
rigs............................... 98.3% 99.0% 99.2% 100.0% 99.5% 97.5%
Semisubmersible rigs................. 91.1 97.2 94.4 100.0 100.0 75.3
300-350 foot cantilever jackup
rigs(2)............................ 94.7 97.2 97.0 93.5 95.5 95.7
200-250 foot jackup rigs(2).......... 88.4 99.3 100.0 86.4 92.1 88.4
Other marine rigs.................... 100.0 100.0 100.0 93.5 96.7 69.3
Total marine rigs.......... 93.0 98.4 98.3 92.5 95.5 88.8
Land rigs............................ 88.8 90.8 92.3 92.1 90.6 95.3
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CALENDAR YEAR ENDED SIX MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------- ------------------ ------------------
1998 1997(1) 1997 1996(1) 1997 1996
-------- -------- -------- ------- -------- -------
AVERAGE DAYRATES
Heavy duty harsh environment jackup
rigs............................... $100,132 $ 94,005 $ 98,374 $75,575 $ 82,466 $65,129
Semisubmersible rigs................. 115,298 82,507 94,977 47,911 59,133 45,357
300-350 foot cantilever jackup
rigs(2)............................ 54,487 42,952 46,826 32,214 35,887 26,645
200-250 foot jackup rigs(2).......... 49,299 37,662 41,831 26,825 30,404 22,773
Other marine rigs.................... 18,237 16,416 15,405 16,392 15,593 9,203
Total marine rigs.......... 64,707 51,443 55,944 38,216 42,646 32,446
Land rigs............................ 15,642 14,611 15,331 12,486 13,118 12,264
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(1) Calendar 1997 results were derived from audited financial information found elsewhere in this Annual Report on Form 20-F and are provided for comparative purposes, as are results for the six months ended December 31, 1996.
(2) For the fiscal years ended June 30, 1996 and 1995, "200-250 jackup rigs" means the Company's nine jackup rigs capable of operating in water depths of up to 200-250 feet and the Key Gibraltar. During the fiscal year ended June 30, 1997, the Key Gibraltar was converted to a cantilever rig and extensively upgraded and was reclassified as a 300-350 foot cantilever jackup rig effective January 1, 1997.
(3) During the fourth quarter of calendar 1998, the Company's lake barge rig, the Rey del Lago, was retired from service. Effective January 1, 1999, the Company will classify its platform rig as a component of Drilling Related Services.
(4) Exclusive of depreciation which is presented separately below.
CALENDAR YEARS ENDED DECEMBER 31, 1998 AND 1997
Operating revenues. Total operating revenues increased $122.4 million (17.8%). Revenues from the Company's heavy duty harsh environment jackup rig fleet increased $13.1 million (9.6%). Average dayrates increased 6.5% ($8.4 million), the new rig Galaxy II began operations on November 9, 1998 ($6.0 million) and the Galaxy I worked an additional eight days ($0.8 million). Partially offsetting these increases, the Magellan was idle while completing certification inspections and preparing for a new contract ($2.1 million). Operating revenues for the Company's three semisubmersibles increased $27.2 million (30.9%), mainly due to a 39.7% increase in average dayrates ($30.5 million) and 31 days increased Rig 135 utilization in the North Sea ($3.0 million). These increases were partially offset by 98 days lower utilization of Rig 140 ($6.3 million) as it was relocated from the Gulf of Mexico to the North Sea, undergoing a planned shipyard maintenance and capital upgrade program prior to the commencement of its new contract. Revenues from 300-350 foot cantilever jackups increased $28.7 million (23.6%) primarily because of a 26.9% increase in average dayrates ($33.7 million), partially offset by lower utilization ($5.0 million), mainly for the Paramesawa and Compact Driller as they were mobilized from Australia and Gabon to Malaysia and Thailand, respectively. Revenues from 200-250 foot jackup rigs increased $20.3 million (16.6%), mainly due to a 30.9% increase in average dayrates ($33.3 million), partially offset by 357 days lower utilization ($12.9 million), primarily on Rig 134 in Indonesia, Rig 127 in Qatar, the Key Victoria in Venezuela and Rig 141 in Oman. Revenues from land rigs increased by $22.4 million (17.8%). Four new rigs, three in South America and one in North Africa, operated in the calendar year ended December 31, 1998 as compared with the same period of 1997, increasing revenues by $10.7 million. Higher utilization of four rigs that were placed in service in the Middle East during 1997 contributed higher revenues of $14.5 million. Revenues from the remaining land rigs decreased $2.8 million due to 475 days decreased utilization ($6.5 million) partially offset by increased average dayrates ($3.7 million). Revenues from drilling related services increased $11.3 million (13.8%) primarily because of a $14.0 million increase in revenues from incentive contracts, partially offset by a $2.7 million decrease in third party rig operations revenues. Incentive drilling revenues increased because of an increase in the number of contracts containing incentive based provisions, primarily in the North Sea. Third party operations revenues decreased mainly due to the August 1997 implementation of a joint venture company that operates a third
party semisubmersible in the Caspian Sea. Prior to that date, the rig was operated solely by the Company. Decreased well engineering services in the North Sea were partially offset by increased activity in the Middle East.
Operating costs. Total operating costs increased $40.2 million (10.8%). Operating costs for the heavy duty harsh environment jackup rigs increased $2.5 million (5.2%), primarily due to increased costs associated with a new contract for the Magellan and the startup of the Galaxy II in November, 1998. Semisubmersible rig operating costs increased $22.0 million (52.8%) primarily due to the relocation of Rig 140 from the Gulf of Mexico and costs incurred for its planned shipyard maintenance program prior to commencing new work in the North Sea. Operating costs for 200-250 foot jackup rigs increased $7.7 million (13.0%) mainly due to increased costs associated with a new contract for the Key Victoria in South America, increased costs associated with maintenance and support on the Key Bermuda in Nigeria and increased maintenance costs for Rig 127 in Qatar. Operating costs associated with land rigs increased $11.4 million (13.2%) primarily due to the staged deployment of eight additional rigs during the calendar years ended December 31, 1998 and 1997. In 1998, three rigs were deployed in South America and one in North Africa, increasing operating costs by $7.5 million. Increased utilization of rigs deployed in 1997, two to Saudi Arabia and two to the Kuwait-Saudi Partitioned Neutral Zone, resulted in increased expense of $7.2 million. The remaining decrease of $3.3 million in land rig operating costs stemmed mainly from decreased utilization. Operating costs from drilling related services increased $4.0 million (6.5%). Incentive drilling expense increased $7.5 million mainly due to an increase in the number of contracts containing incentive based provisions in the North Sea. Third party rig operations expenses decreased $3.5 million mainly due to the August 1997 implementation of a joint venture company that operates a third party semisubmersible in the Caspian Sea and decreased well engineering services in the North Sea, partially offset by increased activity in the Middle East. The $6.4 million (67.1%) decrease in other operating costs was primarily due to reduced provision for inventory obsolescence.
General and administrative. General and administrative expense increased $2.0 million (10.0%) primarily due to increased costs associated with becoming a public company in June 1997 ($1.0 million), increased employee benefit plan costs ($0.5 million) and increased costs associated with higher staff levels ($0.5 million).
Depreciation and amortization. Depreciation and amortization expense increased $9.6 million (20.8%) for the calendar year ended December 31, 1998 as compared with the same period in the prior year. Depreciation of eight new land rigs placed in service during 1998 and 1997 and the Galaxy II resulted in increased expense of $3.9 million and $1.1 million, respectively, with the remainder of the increase due to depreciation of general capital additions to all other rigs and equipment.
Gain on sale of assets. Gain on sale of assets increased $5.4 million for the calendar year ended December 31, 1998 as compared with the same period in the prior year. On July 10, 1998, Rig 162, one of the Company's land rigs operating in Saudi Arabia, was severely damaged following a blowout and subsequent fire. As provided for in the drilling contract, the customer elected to cancel the remaining term of the contract and the Company determined that the rig would not be rebuilt. An unrepaired partial loss settlement was negotiated with the Company's insurance carriers under which total proceeds of $13.8 million were received, resulting in recognition of a $4.8 million gain during the fourth calendar quarter of 1998. The remaining increase of $0.6 million resulted from increased sales and dispositions of miscellaneous equipment.
Other income (expense), net. This category experienced a $1.5 million decrease for the calendar year ended December 31, 1998. Foreign exchange losses increased $1.7 million, primarily resulting from unfavorable movements of the dollar in relation to the Indonesian rupiah and the Venezuelan bolivar. Other charges increased $0.9 million, primarily due to increased provision for contingencies. Investment income increased by $1.1 million, primarily due to higher invested balances.
Provision for taxes on income. The provision for taxes on income increased $12.0 million (43.8%) primarily due to increased earnings in North Africa, South America, Southeast Asia and the U.K., leading to an increase in the Company's effective tax rate to 12.1% from 10.9% for the same period in 1997.
Net income. Net income for the calendar year ended December 31, 1998 increased $62.3 million (27.7%) to $287.1 million as compared to $224.8 million for the same period in the prior year. This increase resulted primarily from the increase of $122.4 million in the Company's operating revenues and $5.4 million increased gain on sales of assets, partially offset by increased operating expense of $40.2 million, increased general and administrative expense of $2.0 million, $9.6 million higher depreciation expense, lower other income (expense), net of $1.5 million and an increased provision for income taxes of $12.0 million.
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
Operating revenues. Total operating revenues increased $110.4 million (41.7%) principally because of increased revenues from heavy duty harsh environment jackups, semisubmersibles, 300-350 foot cantilever jackups, 200-250 foot jackups and land rigs, partly offset by reduced revenue from drilling related services. Revenues from the Company's heavy duty harsh environment jackup rig fleet, which operated entirely in the North Sea for both six month periods, increased $16.2 million (29.1%) principally because of a 30.2% increase in average dayrates. Operating revenues for the Company's three semisubmersibles increased $23.0 million (87.1%) because of a 98.2% increase in average dayrates, which increased revenues $24.8 million, partially offset by a 5.6% decrease in utilization stemming from 31 days idle time for Rig 135 in the North Sea between contracts, which contributed decreased revenues of $1.8 million. The semisubmersible rigs were continuously located in the North Sea, Gulf of Mexico and West Africa during the six months ended December 31, 1997 and 1996. Revenues from 300-350 foot cantilever jackups increased $28.1 million (72.4%). Nine million dollars of additional revenue were attributable to the Key Gibraltar which was fully utilized during the 1997 reporting period. During the comparable 1996 reporting period, the rig was idle in the shipyard undergoing modernization and addition of a cantilever. Substantially all of the remaining $17.8 million revenue increase was attributable to increased dayrates. Revenues from 200-250 foot jackup rigs increased $26.6 million (62.4%). The increase was primarily attributable to a 55.9% increase in average dayrates providing $25.0 million in increased revenues. A 13.6% increase in 200-250 foot jackup rigs utilization contributed increased revenues of $1.6 million. Revenues from land rigs increased by $22.4 million (45.4%). Four new rigs operated in the Middle East in the six months ended December 31, 1997 as compared with the same period of 1996, increasing revenues by $13.1 million. The remaining increase of $9.3 million was primarily attributable to a 16.4% increase in dayrates earned by rigs in service during both periods. Revenues from drilling related services decreased by $5.4 million (12.1%) primarily because of a $4.7 million (100.0%) decrease in project management revenues and a $1.7 million (6.9%) decrease in third party rig operations revenues, partially offset by a $1.0 million (6.9%) increase in revenues from incentive drilling contracts. Revenues from drilling project management services decreased primarily due to the completion of a platform rig construction project in the North Sea. Third party rig operations revenues decreased mainly due to the inception of a rig sharing agreement in Azerbaijan for a third party semisubmersible rig, which was operated solely by the Company during the six months ended December 31, 1996, partially offset by increased activity in South America. Incentive drilling revenues increased because of an increase in the number of contracts containing incentive based provisions, primarily in the North Sea.
Operating costs. Total operating costs increased $37.4 million (22.1%) due
principally to increased costs related to the operations of the Company's marine
fleet and land rigs. The increases in operating costs related to the Company's
heavy duty harsh environment jackup rigs ($1.9 million or 8.0%) resulted
primarily from increased costs of preparing the Magellan and the Galaxy I for
new contracts in the North Sea. Semisubmersibles operating costs increased $4.7
million (26.2%) primarily due to increased mobilization cost associated with Rig
135's new contract in the North Sea and increased repair and maintenance costs
for both Rig 140, operating in the Gulf of Mexico, and Rig 135. Increased costs
of $10.7 million (55.4%) for the 300-350 foot cantilever jackup rigs were
primarily due to increased costs associated with operation of the Key Gibraltar
in Malaysia following its extensive upgrade and reclassification to the 300-350
foot cantilever class of rigs and the Parameswara's and Compact Driller's
deployment to and operations in Australia and West Africa, respectively.
Increased operating costs of $1.1 million (33.9%) for other marine rigs stemmed
mainly from increased costs for the lake barge working in South America
associated with a new collective bargaining agreement which was implemented in
the six months ended December 31, 1997. Operating costs associated with land
rigs increased $12.9 million (36.2%), primarily due to the deployment of four
additional rigs in the Middle East
($8.1 million), increased utilization of rigs in service during both periods ($1.9 million) and increased costs for rigs working in South America. During the quarter ended December 31, 1997, the Company experienced increased pressure on operating costs in the form of competition for skilled employees resulting in increased salary and wages and significantly increased prices and delivery delays for vendor equipment and materials.
General and administrative. General and administrative expense increased $3.2 million (42.5%) primarily due to increased awards under the Company's performance based management incentive compensation programs ($1.1 million), a 6% increase in staff levels ($0.6 million) and increased outside Director, investor relations, legal and other costs associated with becoming a public company in June 1997.
Depreciation and amortization. Depreciation and amortization expense increased $2.8 million (12.9%) for the six months ended December 31, 1997 as compared with the same period in the prior year. Depreciation of four land rigs placed in service during 1997 yielded increased expense of $2.0 million, with the remainder of the increase due to depreciation of capital additions to other rigs and equipment, primarily major upgrades to the Key Gibraltar ($0.9 million).
Other income (expense), net. Total other income (expense), net decreased $3.7 million for the six months ended December 31, 1997. Investment income decreased $1.2 million during the six months ended December 31, 1997 due to the sale of marketable securities, the proceeds of which were invested in capital and other programs. Foreign exchange gains decreased $2.2 million for the six months ended December 31, 1997 primarily resulting from unfavorable movements of the dollar in relation to the pound sterling. Costs related to services provided under the provisions of the Intercompany Agreement was $0.3 million for the six months ended December 31, 1997. See "Item 13. Interest of Management in Certain Transactions -- Related Party Agreements."
Provision for taxes on income. The provision for taxes on income increased by $6.2 million, primarily due to significantly increased earnings in the U.K., Egypt, West Africa and the U.S. For the six months ended December 31, 1997, the Company's effective tax rate decreased to 11.4% from 13.1% for the six months ended December 31, 1996 primarily because a substantial portion of the Company's pre-tax income was either not subject to taxation or was subject to taxation at rates lower than the Company's average worldwide rates. See Note 5 of Notes to Consolidated Financial Statements.
Net income. Net income for the six months ended December 31, 1997 increased $59.8 million (87.2%) to $128.5 million as compared to $68.7 million for the same period in the prior year. This increase resulted primarily from the increase of $110.4 million in the Company's operating revenues, partially offset by increased operating expense of $37.4 million, increased general and administrative expense of $3.2 million, $2.8 million higher depreciation expense, lower other income (expense), net of $3.7 million and an increased provision for income taxes of $6.2 million.
YEARS ENDED JUNE 30, 1997 AND 1996
Operating revenues. Total operating revenues increased $107.7 million
(22.9%) principally because of increased revenues from heavy duty harsh
environment jackups, semisubmersibles, 300-350 foot cantilever jackups, 200-250
foot jackups, other marine, and land rigs, partly offset by reduced revenue from
drilling related services. Revenues from the Company's heavy duty harsh
environment jackup rig fleet increased $26.8 million (28.8%) principally because
of continued high demand (99.5% utilization) for high quality jackup equipment
in the North Sea and a 26.6% increase in average dayrates. All of the Company's
heavy duty harsh environment jackup rigs were located in the North Sea during
fiscal year 1997. Operating revenues for the Company's three semisubmersibles
increased $27.2 million (72.6%) because of a 30.4% increase in average dayrates,
which increased revenues $15.1 million, and a 32.8% increase in utilization
contributing increased revenues of $12.1 million. The rigs were continuously
located in the North Sea, Gulf of Mexico and West Africa during fiscal year
1997. Revenues from 300-350 foot cantilever jackups increased $28.5 million
(43.6%) because of a 32.2% increase in average dayrates, excluding the Key
Gibraltar, which provided $21.2 million in increased revenues. The remaining
$7.3 million incremental revenue was primarily due to the reclassification of
the Key Gibraltar from other marine rigs in January 1997 following extensive
upgrade. Revenues from 200-250 foot jackup rigs increased $23.4 million (31.8%)
primarily due to a 33.5% increase in
average dayrates. Revenues from other marine rigs increased $6.4 million due to a 69.4% increase in average dayrates, which was primarily attributable to the North Sea platform rig working in operating mode approximately seven months more in 1997 than 1996 and increased dayrates on the lake barge working in Venezuela on a new contract, along with a 39.5% increase in utilization. Revenues from land rigs increased by $11.3 million (12.3%). Three new rigs were deployed in 1997, two for work in the Middle East and one in South America, increasing revenues by $1.9 million. The remaining increase of $9.4 million was primarily due to a 6.7% increase in dayrates earned by rigs in service at June 30, 1996. Revenues from drilling related services decreased by $14.7 million (14.4%) primarily because of a $23.6 million (83.2%) decrease in project management revenues and a $7.9 million (21.9%) decrease in incentive drilling contract revenues, partially offset by a $16.8 million (45.1%) increase in revenues from third party rig operations. Revenues from drilling project management services decreased with the completion of a contract awarded in late 1995 pursuant to which the Company extensively upgraded a third party semisubmersible in the Caspian Sea offshore Azerbaijan and the completion of a platform rig construction project in the North Sea. Incentive drilling revenues decreased because of a reduction in the number of contracts containing incentive based provisions primarily in the North Sea. Revenues from third party rig operations increased primarily due to the operation of a third party semisubmersible in the Caspian Sea offshore Azerbaijan and increased activity in the North Sea.
Operating costs. Total operating costs increased $31.2 million (10.1%) due principally to increased costs related to the operations of the Company's marine fleet and land rigs, partially offset by lower expenses for drilling related services. The increases in operating costs related to the Company's heavy duty harsh environment jackup rigs ($4.7 million or 11.6%) resulted primarily from increased costs of preparing the Monarch and the Monitor for new contracts in the North Sea. Semisubmersibles operating costs increased $6.0 million (19.3%) primarily due to an increase in the utilization of the Aleutian Key in West Africa in excess of 100% compared with 1996 and higher Aleutian Key maintenance costs. Increased costs of $9.8 million (25.0%) for the 300-350 foot cantilever jackup rigs were primarily due to increased costs associated with the Parameswara's and Compact Driller's deployment to and operations in Australia and West Africa, respectively, and operation of the Key Gibraltar in Malaysia following its extensive upgrade and reclassification to the 300-350 foot cantilever class of rigs. The $5.6 million (10.4%) increase in costs associated with 200-250 foot jackup rigs was primarily a result of extensive maintenance and upgrades undertaken on the Key Gibraltar ($7.3 million) while it was being converted to a cantilever rig, partially offset by reduced costs on rigs working in the Middle East. The increase of $3.6 million (109.3%) in other marine rig costs was primarily attributable to a 39.5% increase in utilization and increased days in operating, rather than idle, mode for the North Sea platform rig. Operating costs associated with land rigs increased $10.0 million (15.7%), primarily due to the deployment of three new rigs, two in the Middle East and one in South America, full year operations of two rigs deployed in 1996 and increased costs for rigs working in South America. The decrease of $14.4 million (19.0%) in operating costs associated with drilling related services resulted from lower project management services expense of $19.3 million (100.0%) and reduced incentive drilling expense of $2.8 million (10.6%), partially offset by increased costs from third party rig operations of $7.7 million (25.0%). The reduction in project management services expense was due to the completion of a contract to construct a third party platform drilling rig for use in the North Sea during the first quarter of fiscal year 1997 and from completion in September 1996 of the extensive upgrade of a third party semisubmersible for use in the Caspian Sea offshore Azerbaijan. Third party rig operations costs increased due to the commencement of a contract to operate the same third party semisubmersible in the Caspian Sea for approximately one year.
General and administrative. General and administrative expense was effectively flat showing a modest decrease of $0.2 million (1.4%) from the previous year.
Depreciation and amortization. Depreciation and amortization expense decreased $33.8 million (43.8%) for the year ended June 30, 1997 as compared with the same period in the prior year. During 1996, the Company's management undertook engineering and economic studies to evaluate the economic useful lives of its drilling rigs. The study results indicated that the estimated useful lives should be extended from 18 to
30 years for marine rigs and from 12 to 16 years for land rigs. The change in accounting estimate was applied effective July 1, 1996, with the consequence of reduced depreciation expense and increased operating income of approximately $34.5 million for fiscal year 1997. See Note 3 of the Notes to Consolidated Financial Statements.
Other income (expense), net. Total other income (expense), net decreased $2.4 million for the year ended June 30, 1997. Investment income, net of interest expense, decreased $4.0 million during the year ended June 30, 1997 due to the sale of marketable securities during 1996, the proceeds of which were used to acquire a rig previously operated under capital lease obligation. Foreign exchange gains increased $2.7 million for the year ended June 30, 1997 primarily resulting from favorable movements of the dollar in relation to the pound sterling. The annual costs related to services provided under the provisions of the Intercompany Agreement was $1.1 million for the year ended June 30, 1997. See "Item 13. Interest of Management in Certain Transactions -- Related Party Agreements."
Provision for taxes on income. The provision for taxes on income increased by $5.4 million, primarily due to significantly increased earnings in the U.K., Egypt, Venezuela and West Africa, partially offset by a reduction in the provision for taxes in the U.S. The Company's effective tax rate decreased to 11.5% from 20.4% for the fiscal year ended June 30, 1996 primarily because a substantial portion of the Company's pre-tax income was either not subject to taxation or was subject to taxation at rates lower than the Company's average worldwide rates. See Note 5 of Notes to Consolidated Financial Statements.
Net income. Net income for the year ended June 30, 1997 increased $102.9 million (166.0%) to $164.9 million as compared to $62.0 million for the same period in the prior year. This increase resulted primarily from the increase of $107.7 million in the Company's operating revenues, $33.8 million lower depreciation expense and higher other income (expense), net of $1.6 million, partially offset by increased operating expense of $31.2 million, an increased provision for income taxes of $5.4 million and lower net investment income and interest expense of $4.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $343.2 million and $297.8 million for the calendar years ended December 31, 1998 and 1997, respectively. The increase in cash flows from operations was primarily attributable to increased net income adjusted for non-cash charges, partially offset by increased working capital requirements. Investing activities used cash of $272.5 million and $235.7 million for the calendar years ended December 31, 1998 and 1997, respectively. The increased usage in investing activities of $36.8 million was primarily due to $48.2 million increased capital spending, partially offset by $13.8 million increased proceeds from the insurance settlement associated with the loss of Rig 162. Capital expenditures totaled $277.4 million and $229.2 million for the calendar years ended December 31, 1998 and 1997, respectively, principally related to rig expansion, upgrades and modernization. For the calendar year periods, capital expenditures on the heavy duty harsh environment jackup rig Galaxy III and new land rig and related expenditures increased $89.5 million and $28.0 million, respectively, while spending on the Galaxy II decreased $56.6 million. Construction of the Galaxy II is now complete and the rig was mobilized to its initial work location offshore Nova Scotia, Canada and began work under its five year contract on November 9, 1998. Cash used in financing activities was $14.9 million for the calendar year ended December 31, 1998 and consisted solely of dividends paid. For the calendar year ended December 31, 1997, the total cash used in financing activities was $66.8 million and consisted of $59.4 million cash distributions to Holdings pursuant to the initial public offering of Ordinary Shares and $7.4 million dividends paid subsequent to the initial public offering.
The Company has budgeted approximately $167 million for capital expenditures during the year ending December 31, 1999. Capital spending to meet contractual obligations for customers and for rig upgrade, modernization and enhancement projects is budgeted to require approximately $64 million and represent numerous individual transactions spread over the course of the year. Progress payments on the Galaxy III heavy duty harsh environment jackup rig presently under construction are estimated to require approximately $60 million with initial mobilization expected to require an additional $8 million. The Company believes it has
minimal exposure to significant cost increases in completing the Galaxy III construction during the second half of 1999 as the construction contract with the shipyard is a fixed price agreement, and the Company has to date been, and expects through the completion of this construction project to be, successful in purchasing the Company provided drilling equipment at price and delivery terms within the Company's initial project estimates. The Company currently has one high specification 3,000 horsepower land rig under assembly for work in the Middle East that is expected to require approximately $10 million to complete for initial work in the second quarter of 1999. In addition, the Company identified $25 million intended for use in either constructing or acquiring new rig(s) as indicated based upon market conditions. It is expected that the entire 1999 capital program will be funded from internally generated funds. Future capital spending, particularly rig fleet additions, is subject to the Company's prospects for securing appropriate drilling contract opportunities and the availability of suitable rigs, rig components, construction facilities and supplies.
As noted throughout this Annual Report on Form 20-F, drilling industry activity has declined sharply in recent months. This decline and other factors have caused the Company to initiate a program whereby 1999 capital spending requirements will be continuously reviewed with the objective of reducing commitments to only those needed to meet essential rig maintenance requirements, certain capital upgrades, client contract requirements and potential counter-cyclical rig acquisitions.
From time to time, the Company reviews opportunities for rig acquisition, construction or upgrade. Once a capital project is undertaken by the Company, factors outside the Company's control, such as changes in market demand, may alter the project economics and the Company may be unable to fully recoup the cost of such expenditures through future drilling contracts. Should current plans for rig acquisition, construction or upgrade not be completed, the Company will not have those rigs available to compete in its markets.
On March 5, 1999, the Company's Board of Directors declared a quarterly dividend of $0.0325 per Ordinary Share payable on April 15, 1999 to holders of record at the close of business March 31, 1999. The Company's current dividend policy contemplates payment of future quarterly dividends of $0.0325 per Ordinary Share.
The Company's principal source of funds has been cash flow from operations. The Company believes available cash resources and cash flows from operations will be sufficient to meet its capital requirements during 1999.
The Company currently has a $35 million uncommitted credit facility for advances and letter of credit with a major bank, $1.4 million of which is subject to standby letters of credit at December 31, 1998.
CURRENCY RISK AND INFLATION
The Company conducts material business operations in foreign currency environments, including the U.K., Venezuela, Indonesia and Egypt. The Company generally attempts to minimize its currency exchange risk by seeking international contracts payable in local currency in amounts equal to the Company's estimated operating costs payable in local currency and in dollars for the balance of the contract. Because of this strategy, the Company has minimized its net asset or liability positions denominated in local currencies and has not experienced significant gains or losses associated with changes in currency exchange rates. Accordingly, the Company has not historically entered into financial hedging arrangements to manage risks relating to fluctuations in currency exchange rates. However, the Company may enter into such contracts in the future in the event that the Company assumes significant foreign currency risks.
Although inflation has not had a significant impact on the Company's results of operations during the past several years, labor availability and cost and vendor prices and delivery fluctuate in response to overall drilling industry conditions.
CREDIT RISK
The Company's customers consist primarily of major international, state owned and large independent oil companies and their affiliates. The Company has not incurred any charges for credit losses during the last five
years. There is no assurance that in the future such charges will not occur. Such charges may adversely affect the Company's profitability.
OTHER
Operational risks and hazards may result in extensive damage to or total loss of drilling rigs, with associated personal injuries and loss of life, pollution, well loss, well control expenses and/or wreck removal or other requirements. Such losses, liabilities or obligations may be uninsured or underinsured. In the event of a major incident or incidents resulting from operational risks and hazards, the Company will sustain a loss of revenue by reason of the rig loss or damage and may be subject to extraordinary expenses in respect of uninsured or underinsured losses, liabilities or obligations.
The Company's worldwide operations are subject to numerous environmental laws and regulations that relate directly or indirectly to its operations, including certain regulations controlling the discharge of materials into the environment, requiring removal and clean-up under certain circumstances, or otherwise relating to the protection of the environment. Laws and regulations protecting the environment have become increasingly stringent in recent years and may in certain circumstances impose "strict liability" and render a company liable for environmental damage without regard to negligence or fault on the part of such company. Such laws and regulations may expose the Company to liability for the conduct of or conditions caused by others, or for acts of the Company that were in compliance with all applicable laws at the time such acts were performed. See "Item 1. Description of Business -- Business Considerations and Risk Factors -- Environmental and Regulatory Risks."
The Company's liquidity also may be adversely impacted by reason of war, political turmoil, revolution, insurrection or similar events which could, inter alia, result in damage to or loss of the Company's rigs, either physically or by reason of nationalization, expropriation or deprivation of use, or could impair the concessionary rights of the Company's customers, thus jeopardizing the Company's drilling contracts. The Company does not normally insure against these risks, and such events could result in an actual or constructive loss of substantial assets and the associated loss of revenues and/or receivables.
IMPACT OF YEAR 2000
The Company has actively been pursuing solutions to the Millennium Date Change Problem ("Y2K") for approximately two years with initial activities concentrating on Information Technology ("IT") issues. A Company-wide initiative was launched in January 1998 with the formation of the Y2K Office responsible for coordinating the Y2K efforts and reporting directly to the Company's Chief Executive Officer. A Company policy was issued in April 1998 stating a goal of 'business as usual' and further specifying that the Company intended to be prepared for Y2K by July 1999 with the responsibility for the preparation allocated to operating and administrative management. Guidance as to minimum requirements included development of a 'Quality Plan' document that organized local initiatives complete with milestones and reporting requirements, definitions of conformity and operational significance and an outline of a basic program of awareness, inventory, impact analysis, mitigation, implementation and testing.
A Company-wide awareness campaign was initiated, with all operational centers visited. At these meetings, Y2K policy and guidance was presented, and the responsibilities of local management were discussed. Eighteen centers are now working towards the solutions of their Y2K issues with the support of the Y2K Office in Dallas, Texas.
Due to the diverse geographic location and nature of the Company business activities ranging from the operation of drilling rigs through the procurement and supply of materials, the potential Y2K problems are being considered in three categories: IT; Field Equipment; and Third Party Relationships. To these three categories, a common set of analyses is applied in order to evaluate the potential for the disruption of business. Evaluation of operational significance of all potentially Y2K sensitive functions or components is critical to subsequent mitigation and remedial action.
IT issues include remediation of corporate supported software including materials management, accounting and payroll systems and the upgrade of non-compliant hardware and communication systems. Major software applications have been modified and are presently in the testing phase. The remaining applications are due to be tested in the first quarter of 1999. Final deployment of IT solutions is scheduled to be ongoing through July 1999. Analysis of hardware (primarily computer) compliance is scheduled for completion in the first quarter of 1999, with 90% of this effort complete at February 1, 1999. All hardware will be deployed by July 1999.
As to field equipment issues, a considerable amount of electrical equipment is used on drilling rigs for control, monitoring and data acquisition. This equipment contains imbedded microprocessors and is potentially Y2K sensitive. A comprehensive inventory of all such equipment has been compiled and assessed as to potential risk and appropriate remedial action. Analysis to date has shown that many items of equipment are Y2K compliant. Verification of operation of critical items is now taking place and includes independent validation. Known non-compliant equipment is in the process of being upgraded or replaced with implementation and testing targeted for completion in April 1999.
In the area of third party relationships, the Company's business relies heavily on the supply of goods and services from outside suppliers and failure of any provider as a result of Y2K issues could cause serious business disruption. In order to minimize potential disruption, all suppliers of goods and services are being surveyed and critical suppliers are being audited to determine their preparedness for Y2K. As of February 28, 1999, this effort was 70% complete. Where doubt exists, alternative sources are being secured if available. Contingency plans are being developed to accommodate such failure.
In the event that Y2K compliance is not timely met in certain critical areas, operating and administrative management are in the process of developing and testing contingency plans covering a wide range of issues that could adversely impact business. These include failure of systems that effect safety and the environment, supply of equipment and materials and provision of utilities, particularly in third world countries. All major contingency plans are targeted for completion in April 1999. It must, however, be clearly recognized that contingency planning will continue to the millennium rollover date as circumstances dictate.
Costs for the Company-wide Y2K initiative are estimated at $5.1 million. Expenditures for the calendar year ended December 31, 1998 amounted to approximately $1.4 million, with an estimated $3.7 million to be spent in 1999. Since full verification of Y2K compliance of field equipment is not yet complete, unforeseen expenses that must be incurred to insure Y2K success may be encountered. Y2K remediation costs are charged to operations on a current basis as incurred.
The Company has determined that its insurance does not cover costs incurred to remedy Y2K related problems. The Company's insurance may provide reimbursement for physical loss or damage to the Company's insured property which results from a Y2K related incident.
Company management believes that an effective program is in place to resolve the Y2K issue in a timely manner. Since it is not possible to anticipate all eventualities, particularly where third world countries are concerned, circumstances which impact or interrupt normal business operations could occur. The resulting cost, potential liability and loss of revenue under such circumstances is not subject to quantification and has not been included in estimates as detailed herein.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The Board of Directors of the Company currently has nine members. The Company's Articles of Association (the "Articles") divide the Board of Directors into three classes having staggered terms of three years each, with Classes II, III and I having initial terms expiring at the annual general meeting of shareholders in 1999, 2000 and 2001, respectively. The Articles also require the number of Directors to be not less than nine nor more than 15 and provide that the Board is to determine, from time to time, the number of Directors to be on the Board. Officers are elected by the Board of Directors for one year terms of office expiring at the next Annual General Meeting of Shareholders. Information with respect to the current Directors and executive officers of the Company is set forth below.
DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of the Directors and executive officers of the Company as of February 28, 1999.
NAME AGE POSITION
---- --- --------
Gordon M. Anderson........................ 66 Chairman of the Board and Class I Director
C. Stedman Garber, Jr..................... 55 President, Chief Executive Officer and
Class III Director
Richard N. Haass.......................... 47 Class I Director
Khaled R. Al-Haroon....................... 49 Class I Director
Ferdinand Anton Berger.................... 60 Class II Director
Stephen J. Solarz......................... 58 Class II Director
Nader Hamad Sultan........................ 50 Class II Director
Sami Fahed Al-Rushaid..................... 44 Class III Director
Robert E. Wycoff.......................... 68 Class III Director
Donald G. Barber.......................... 64 Senior Vice President and Chief Financial
Officer
Gordon W. McCullough...................... 64 Senior Vice President, Drilling Operations
Roger B. Hunt............................. 49 Senior Vice President, Commercial Manager
Ali Awad.................................. 58 Vice President and Area Manager
James A. Blue............................. 53 Vice President and Regional Manager
Seals M. McCarty.......................... 52 Vice President and Controller
Cary A. Moomjian, Jr...................... 51 Vice President, General Counsel and
Secretary
Tom L. Seeliger........................... 55 Vice President and Area Manager
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Gordon M. Anderson has served as a Director of the Company since 1969. Mr. Anderson was appointed President and Chief Executive Officer in 1991 and became Chairman of the Board of Directors in 1993. Mr. Anderson has worked with the Company since June 1954. Following several international assignments, he was appointed President of Santa Fe Drilling Company in 1972. Mr. Anderson retired as Chief Executive Officer in December 1997 and currently serves as a non-employee Director and Chairman of the Board. Mr. Anderson also serves as a Trustee of the American University in Cairo.
C. Stedman Garber, Jr. has served as a Director of the Company since 1989. Mr. Garber was employed by Getty Oil Company between 1977 and 1984. Mr. Garber joined the Company in 1984 as Vice President of Planning and Acquisition and in 1989 was appointed President of Santa Fe Minerals, Inc., a former subsidiary of the Company. Mr. Garber was named Executive Vice President and Chief Operating Officer of the Company in 1991, was appointed President and Chief Operating Officer in December 1995 and was appointed Chief Executive Officer effective January 1, 1998. Mr. Garber also serves as a Director of the American Petroleum Institute.
Richard N. Haass has served as a Director of the Company since November 1998. Dr. Haass is Director of Foreign Policy Studies at the Brookings Institution. A widely quoted expert on contemporary American foreign policy, Dr. Haass also consults for NBC News, is a frequent contributor to foreign affairs journals and major newspapers and is an author of several books. Dr. Haass has extensive government experience and
served as Special Assistant to President George Bush and Senior Director on the staff of the National Security Council. He was awarded the Presidential Citizens Medal for his contribution to the development of U.S. policy during Operations Desert Shield and Desert Storm, has held various posts in the Departments of State and Defense, and was a legislative aide in the U.S. Senate.
Khaled R. Al-Haroon has served as a Director of the Company since November 1998. Mr. Al-Haroon serves on the Board of Kuwait Petroleum Corporation and as Managing Director of International Operations. He also serves as the Chairman-Oils Sector Loss Assessment Committee and is the Deputy Chairman of Kuwait Petroleum Corporation's Higher Tender Committee. His career began in 1974 with the International Marketing Group of the Kuwait National Petroleum Company. Since 1980, Mr. Al-Haroon has held various management positions at Kuwait Petroleum Corporation. Mr. Al-Haroon also serves as a Director of Holdings.
Ferdinand A. Berger has served as a Director of the Company since September 1997. Mr. Berger retired from the Shell Group of Companies at the end of 1996, having served in various management positions in South America, the Middle East and Europe since 1965. He was appointed Senior Vice President of Shell International Trading Company in 1987 and served as a Director of Shell International Petroleum Company Limited, with responsibility for overall Shell Group activities in the Middle East, Africa and South Asia from 1992 until his retirement. He is also a Director of Xpronet Inc., a privately owned oil and gas exploration and production company.
Stephen J. Solarz has served as a Director of the Company since November 1998. Mr. Solarz is President of Solarz Associates, an international consulting firm. He also is a Director of the George Washington University Foreign Policy Forum, Vice Chairman of the International Crisis Group, and a Senior Counselor at APCO Associates. Mr. Solarz serves on the Board of several corporations including Samsonite, IRI International and the First Philippine Fund, and is a Director of the National Endowment for Democracy, the International Rescue Committee, the National Democratic Institute and the Balkan Action Council Steering Committee. Mr. Solarz has served in public office for twenty-four years, both in the New York Assembly and in the U.S. House of Representatives. As a Congressman, Mr. Solarz served on various committees, including the House Foreign Affairs Committee where he chaired the Subcommittee on Africa and the Subcommittee on Asian and Pacific Affairs. He was appointed by President Clinton as Chairman of the Board of the Central Asian-American Enterprise Fund, served as President Clinton's special envoy to Cambodia and co-chaired the National Democratic Institute's election observer delegation.
Nader Hamad Sultan has served as a Director of the Company since January 1995. Since 1993, he has served as Deputy Chairman and Managing Director, Planning and International Operations, of KPC and was appointed Chief Executive Officer of KPC in 1998. Mr. Sultan also serves as a Director of KPC and Holdings.
Sami Fahed Al-Rushaid has served as a Director of the Company since September 1997. Mr. Al-Rushaid joined the Kuwait National Petroleum Company ("KNPC"), a subsidiary of KPC, in 1978. He held various positions in the KNPC Corporate Planning Department until 1995, when he assumed his current position as KNPC's Executive Assistant Managing Director of Planning and Finance. Mr. Al-Rushaid also serves as a Director of Holdings.
Robert E. Wycoff has served as a Director of the Company since September 1997. Mr. Wycoff retired from the Atlantic Richfield Company ("ARCO") in 1993, having served with ARCO since 1953. After holding various engineering and management positions, he was named Vice President and Resident Manager of ARCO's Alaska Region in 1973. Mr. Wycoff served as a Director, President and Chief Operations Officer of ARCO from 1986 until his retirement. He is also a Director of MagneTek, Inc., a publicly traded company engaged in electronic equipment and controls.
Donald G. Barber joined the Company in 1985 as Senior Vice President of Santa Fe Minerals, Inc., a former subsidiary of the Company, and has served as Senior Vice President and Chief Financial Officer of the Company since December 1986. Mr. Barber previously served as Chief Financial Officer of Aminoil, Inc. and in senior financial positions with Exxon U.S.A.
Gordon W. McCullough joined the Company in 1962. He has worked in progressively more senior management positions, primarily internationally, including assignments in the United Kingdom, Holland, Norway, Nigeria, Brazil, Libya and Angola. In 1982, Mr. McCullough was appointed Managing Director of the Company's North Sea operations. In January 1994, Mr. McCullough was named the Company's Senior Vice President, Drilling Operations.
Roger B. Hunt joined the Company in 1970. During the period 1977 through 1982, he was assigned to Venezuela as Assistant Zone Manager. In 1983, he was named Vice President and Manager of International Sales and in 1988 was assigned regional operations responsibilities as Vice President and Regional Manager for Asia, Australia, Venezuela, Azerbaijan, West Africa and the Gulf of Mexico. He assumed his current responsibilities as Senior Vice President, Commercial Manager, during September 1997.
Ali Awad joined the Company in 1974 following a distinguished career with major oil companies operating locally in Egypt. He has held several managerial positions in Egypt, including Zone Manager from 1979 to 1993. In 1993, he was promoted to his current position of Vice President and Area Manager responsible for all offshore and land operations in Egypt as well as other operations in the Mediterranean area.
James A. Blue joined the Company in 1965. He initially served in various assignments in England, Egypt, Libya, Scotland and Venezuela. He was named Vice President and Regional Operations Manager in 1989. In 1997, he assumed his current position of Vice President and Regional Manager with responsibility for operations in Azerbaijan, the Gulf of Mexico, Venezuela and West Africa.
Seals M. McCarty joined the Company in 1985 concurrently with the purchase of Keydril Company from Gulf/Chevron. He had served as Vice President of Finance for Keydril since 1982. Mr. McCarty has held various financial positions with the Company including his present position as Vice President and Controller.
Cary A. Moomjian, Jr. joined the Company in 1976. After two years as Corporate Marine Counsel, Mr. Moomjian served as Santa Fe Drilling Company's Senior Counsel and then Vice President, General Counsel. In 1983, Mr. Moomjian was named Vice President, Contracts for Santa Fe Drilling Company. In January 1994, Mr. Moomjian was named Vice President, General Counsel and Secretary.
Tom L. Seeliger joined the Company in 1965. He has worked in progressively more senior management positions, primarily internationally, including assignments in Nigeria, the North Sea, Libya, Argentina, Trinidad, Venezuela and London. In 1993, Mr. Seeliger assumed his current position as Vice President and Area Manager for North Sea operations.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
COMPENSATION OF DIRECTORS AND OFFICERS
For the calendar year ended December 31, 1998, the aggregate remuneration paid by the Company (which includes salary and other cash payments under the Company's benefit plans and policies) to all Directors and executive officers of the Company as a group (21 persons, including three former Directors and a deceased executive officer) for services in all capacities was $9,811,481.
The Company and Gordon M. Anderson, a Director of the Company, entered into a Consulting Agreement dated December 10, 1997 pursuant to which Mr. Anderson receives certain compensation. See "Item 13. Interest of Management in Certain Transactions -- Consulting Agreement."
DIRECTOR FEES AND STOCK OPTIONS
Effective July 1, 1997, the Board adopted a policy whereby each non-employee Director is paid an annual retainer fee of $20,000 plus meeting fees of $2,000 for each Board and committee meeting (other than telephonic meetings) attended by that Director. Each non-employee Director also is paid a meeting fee of $500 for any Board or committee telephonic meeting of one hour or longer and an additional $1,000 for each Board meeting such Director attends outside his or her country of residence. Each non-employee Director who serves as a committee chairman receives an additional meeting fee of $1,000. The Company also reimburses its Directors for travel, lodging and related expenses they may incur attending Board and committee meetings.
The Company has also adopted a stock option plan for non-employee Directors. See "-- Long Term Incentive Plans -- 1997 Non-Employee Director Stock Option Plan." Effective January 1, 1999, non-employee Directors are permitted to defer receipt of cash compensation for Director service pursuant to a Deferred Compensation Plan adopted by the Company in December 1998.
INVESTMENT SAVINGS AND PROFIT SHARING (401(k)) PLAN
The Company maintains an Investment Savings and Profit Sharing Plan, a defined contribution 401(k) plan that allows dollar payroll employees to make both pre-tax and after-tax employee contributions. The Company matches these employee contributions up to a maximum of 5% of a participant's base salary subject to the limitations of eligible salary. Employees are vested in all contributions made. Additionally, although it has not done so since 1984 and does not currently expect to do so in the future, the Company has the option to make additional employer contributions any year out of profits.
ANNUAL INCENTIVE COMPENSATION PLAN
The Company also maintains an Annual Incentive Compensation Plan ("AIP"). The AIP provides for payment of additional compensation to participating employees, including executive officers, based on individual contributions and overall performance of the Company and its key operating business units during the fiscal year. The AIP is administered by the Compensation Committee. Employees of the Company and its subsidiaries eligible for awards under the AIP are executive officers, officers and other key management personnel of the Company and its subsidiaries, whose performance, in the judgment of the Compensation Committee, can have a significant effect on the success of the Company. During the term of the AIP, an aggregate of 286,250 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares under the AIP.
In general, the Compensation Committee will establish a target incentive award for each participant based on performance measures (and performance scales for the measures) and individual objectives. The maximum target incentive award shall not exceed 100% of the participant's base salary in effect at the beginning of the plan year. The current performance measures are (i) cash flow from operations and (ii) return on average capital employed as compared to certain peer group companies set forth in the AIP. In general, except for "covered employees," as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") (relating to deduction limits for compensation over $1 million), the Compensation Committee has discretion to vary these measures and the relative weight to assign to the various objectives. With respect to covered employees, the individual objectives must be capable of determination by a third party and all of the objectives must be established during the first 90 days of the plan year.
In the event of a Change in Control (as defined below), (i) if the various objectives have not yet been determined during the plan year, then the objectives and participants shall generally be based on the same rules as set forth in the preceding plan year and (ii) in general, participants are eligible for full unprorated target incentives for that year.
PENSION PLANS
The Company maintains a tax-qualified pension plan for employees of the Company and participating subsidiaries who are residing in or are citizens of the United States and who have completed one year of service, and a "mirror" non-qualified pension plan for selected non-U.S. management and other employees of the Company and participating subsidiaries which provides substantially similar benefits (hereafter referred to collectively as the "Pension Plans"). In addition, the Company maintains two non-qualified pension plans that provide certain additional pension benefits.
The Pension Plans provide for monthly retirement benefits upon normal retirement at age 62 based on the number of credited years of service and the average of the highest 60 months of salary covered by the Pension Plans. The Pension Plans permit retirement as early as age 55 with reduced benefits. The Equity Restoration Plan restores to Pension Plan participants any benefits otherwise lost as a result of the benefit limitations contained in Section 415 of the Code and limitations contained in Section 401(a)(17) of the Code on the
amount of compensation includable in determining benefits provided by tax-qualified trusts. The Company's Supplemental Executive Retirement Plan ("SERP") provides additional benefits for a select group of management employees as a means to attract and retain employees of exceptional ability who are critical to the Company's success.
For employees who participate only in the Pension Plans and the Company's Equity Restoration Plan, the annual retirement income benefit is equal to 1.525% of the participant's average annual base salary in the highest 60 consecutive months during the final 10 years of service multiplied by years of credited service, plus 0.475% of this same base salary amount less the participant's Social Security Covered Compensation (as defined), multiplied by years of credited service not exceeding 35 years. For employees who also participate in the SERP, the benefit so calculated will not be less than 60% of the participant's average annual salary and bonus in the highest consecutive 36 months during the final five years of service, reduced ratably for service under 15 years.
LONG TERM INCENTIVE PLANS
Performance Unit Plan
On June 28, 1995, the Company adopted the Santa Fe International Corporation Performance Unit Plan ("Performance Unit Plan") to provide incentive via performance share units to foster and promote the long-term financial success of the Company and materially increase the value of the equity interests of the shareholder.
Each unit awarded under the Performance Unit Plan represents the right to receive an amount in cash on the date of payout, the amount of which depends upon the Company's targeted three-year total cash flow from operations and a return on fixed assets (three-year average of the annual cash flow from operations divided by fixed assets) compared to a comparative group of peer companies. The minimum (threshold) is $20 per unit, which is payable if the Company's cash flow from operations equals 80% of targeted cash flow from operations and the Company's return on fixed assets equals the 40th percentile of its peer companies. If the results are less than threshold for any of the two performance criteria, no awards are earned. The target amount of $100 per unit is payable if the Company meets targeted total cash flow from operations and return on fixed assets equals the 60th percentile of its peer companies. The maximum amount of $300 per unit is payable if the Company's cash flow from operations equals or exceeds 150% of targeted cash flow from operations and return on fixed assets equals or exceeds the 90th percentile of peer companies. As of December 31, 1998, there were 14 participants in the Performance Unit Plan.
The last awards under the Performance Unit Plan were granted in December 1996. No further awards will be made under the Performance Unit Plan. The Performance Unit Plan will remain in existence until the last performance cycle has elapsed and payouts, if any, have been made to participants. It is expected that the Performance Unit Plan will terminate shortly after the results have been finalized for the third plan year ending June 30, 1999. In the event of a Change in Control (as defined below) the performance share units granted would become fully vested.
1997 Long Term Incentive Plan
The Company has adopted the 1997 Long Term Incentive Plan (the "LTIP"), which is designed to retain key executives and other selected employees by rewarding them for making major contributions to the success of the Company and to provide participants with a proprietary interest in the growth and performance of the Company.
Employees of the Company eligible for awards under the LTIP are executive officers, other officers and key management personnel selected by the Compensation Committee (including employees who are Directors), and whose performance, in the judgment of the Compensation Committee, can have a significant effect on the success of the Company. As of December 31, 1998, there were 427 persons who participated in the LTIP. Awards under the LTIP may consist of the grant of stock options, share appreciation rights, restricted and/or performance-based share awards and/or restricted and/or performance-based cash awards,
granted singly, in combination or in tandem. The exercise price for stock options shall not be less than 85% of the fair market value of the stock on the date of the option grant (100% in the case of incentive stock options). The Compensation Committee can also award supplemental payments up to the amount necessary to pay the federal income tax payable with respect to exercise of non-qualified stock options, share appreciation rights, restricted shares and performance units. If approved by the Compensation Committee, the Company may also make loans to participants to purchase shares pursuant to the exercise of an award. During the term of the LTIP, an aggregate of 5,725,000 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares under the LTIP. No participant may receive during a fiscal year incentive awards covering an aggregate of more than 150,000 Ordinary Shares.
The Compensation Committee is responsible for administration and interpretation of the LTIP. When a participant's employment with the Company is terminated, any unexercised, deferred or unpaid awards will be treated as provided in the specific agreement evidencing the award. If a participant terminates for "good reason" (as defined in the LTIP) within two years after a Change in Control (as defined below), all outstanding stock options shall become vested and immediately exercisable and will remain exercisable until the earlier of the expiration of their term or the first anniversary of the termination of employment, all shares of restricted stock will immediately cease to be forfeitable and all conditions relating to realization of any other stock-based or non-stock award will immediately terminate. In addition, upon a Change in Control (as defined below), the Company will have the right to cash out all incentive awards (and all non-vested awards will vest) based on their fair market value; for this purpose, their market value will be the average fair market value per share on each of the five trading days immediately following a Change in Control or the highest price per share, if any, offered in connection with a Change in Control, whichever is higher. This cash out is automatic if the stock of the surviving entity in a Change in Control is not publicly traded.
As of February 28, 1999, an aggregate of 810,325 options to purchase the Company's Ordinary Shares (net of canceled or expired options) had been granted under the LTIP to all Directors and executive officers as a group (17 persons). Such options were granted at exercise prices ranging from $12.25 to $45.00 per Ordinary Share and expire ten years from date of grant or earlier. In addition, the Company has granted restricted share awards for an aggregate of 107,600 Ordinary Shares to all Directors and executive officers as a group (17 persons).
1997 Non-Employee Director Stock Option Plan
The 1997 Non-Employee Director Stock Option Plan (the "Director Plan") has been adopted by the Company. The Director Plan is designed to attract and retain the services of experienced and knowledgeable non-employee Directors and to provide non-employee Directors with a proprietary interest in the growth and performance of the Company. Awards under the Director Plan consist of a grant of stock options. The purchase price for the shares as to which the option is exercised will be payable in full upon exercise, in cash or, if permitted by the Compensation Committee, by tender of Ordinary Shares, valued at "fair market value." During the term of the Director Plan, an aggregate of 286,250 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares. No option will be granted under the Director Plan after 10 years following consummation of the Company's initial public offering of Ordinary Shares in June 1997 (the "Offering"). The Compensation Committee is responsible for administration and interpretation of the Director Plan.
As of February 28, 1999, an aggregate of 58,000 options to purchase the
Company's Ordinary Shares (net of canceled or expired options) had been granted
under the Director Plan to eight non-employee Directors who participated in the
Director Plan. Such options were granted at exercise prices ranging from $12.25
to $45.50 per Ordinary Share. Any new non-employee Director will be granted a
one-time award of a right to purchase 10,000 Ordinary Shares (increased from
4,000 by amendment of the Director Plan in March 1999) upon their election to
the Board at the fair market stock price/value on the date of their election.
Each non-employee Director who continues in office immediately following the
Annual General Meeting of Shareholders in any year (commencing in 1998) will
automatically be granted an option to acquire 5,000 shares of Ordinary Shares
(increased from 2,000 by amendment of the Director Plan in March 1999). The
Board may increase the number of options granted, provided that a non-employee
Director cannot receive
more than 22,000 options (increased from 10,000 by amendment of the Director Plan in December 1998) in any year. The price of shares that may be purchased upon exercise of an option is the fair market value of the Ordinary Shares on the date of the grant. Options granted pursuant to the Director Plan are exercisable in installments of 33 1/3% upon each anniversary of the date of grant. The term of each option is for a period not exceeding 10 years from the date of grant.
In the event of a Change in Control of the Company (as defined below), all outstanding stock options will become vested and immediately exercisable and will remain exercisable until the earlier of the expiration of their term or the first anniversary of the Change in Control. In addition, the Company may cash out options upon a Change in Control; these provisions are substantially the same as set forth in the LTIP.
1997 Employee Share Purchase Plan
The Company has adopted the 1997 Employee Share Purchase Plan (the "Share Purchase Plan"), which is designed to furnish eligible employees of the Company and designated subsidiaries of the Company an incentive to advance the best interests of the Company by providing a formal program whereby they may voluntarily purchase Ordinary Shares of the Company at a favorable price and upon favorable terms. Generally speaking, all covered employees of a participating company who are scheduled to work an average of at least 20 hours per week are eligible to participate in the Plan.
Once a year, participants in the Share Purchase Plan are granted options to purchase Ordinary Shares with a fair market value equal to the lesser of 10% of the participant's eligible compensation (as defined in the Share Purchase Plan) and the amount specified in Section 423(b) of the Code (currently $25,000). The exercise price of the options is 85% of the fair market value of the Ordinary Shares on the date of grant or the date of exercise, whichever is less. Options granted under the Share Purchase Plan are exercisable on the date one year after the date of grant. Generally speaking, participants pay option exercise prices through payroll deductions. An aggregate of 572,500 Ordinary Shares are available for grants of options under the Share Purchase Plan. The Share Purchase Plan, which became effective January 1, 1998, is administered by the Compensation Committee.
1997 Employee Severance Protection Plan
The Company maintains the 1997 Employee Severance Protection Plan (the "Severance Protection Plan") to retain the services of its employees in the event of an unsolicited takeover of the Company or in the event of a threat of a Change in Control of the Company. The Severance Protection Plan is intended to ensure the continued dedication and efforts of the Company's employees in such events without undue concern for their personal financial and employment security. The Severance Protection Plan covers all full-time U.S.-based payroll employees as defined therein. Severance is only payable in the event of a termination of employment by the Company other than for "cause" or voluntary termination by the Employee for "good reason," each as defined in the Severance Protection Plan, within a specified period following a Change in Control. A participant will also receive severance if the employee is terminated by the Company without "cause" or for "good reason" at the request or direction of the third party involved in the Change in Control or otherwise in connection with or in anticipation of a Change in Control.
DEFINITION OF CHANGE IN CONTROL
A "Change in Control" for all of the Company's benefit plans described above is generally deemed to occur (a) if any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's shareholders of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of the period; or (c) upon
consummation of a merger, consolidation or similar event, if the equity holders of the Company prior to the transaction have beneficial ownership of less than 50% of the combined voting power of the surviving entity; (d) upon any sale, disposition or similar transaction of 50% or more of the assets or earning power of the Company or business operations which generate a majority of the consolidated revenues; or (e) upon a liquidation of the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
See "Item 11. Compensation of Directors and Officers."
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
This section describes certain transactions among KPC, Holdings and the Company that occurred prior to the Company's Offering and certain arrangements that will be in effect after the Offering. Because the Company is controlled by KPC, these transactions and arrangements were not the result of arms-length negotiations. See Note 12 of the Notes to Consolidated Financial Statements.
CONTRACT DRILLING SERVICES
The Company provides contract drilling and associated services in Kuwait to the Kuwait Oil Company K.S.C. ("KOC"), a subsidiary of KPC, and also provides contract drilling services to a partially owned affiliate of the Kuwait Oil Company in the Kuwait-Saudi Arabia Partitioned Neutral Zone. Such services are performed pursuant to drilling contracts which contain terms and conditions and rates of compensation which materially approximate those which are customarily included in the Company's arms-length contracts of a similar nature. In connection therewith, KOC provides the Company rent-free use of certain land and maintenance facilities and has committed to continue providing same, subject to availability of the maintenance facilities, through the current February 2001 term of the drilling contracts. In relation to its drilling business in Kuwait, the Company has an agency agreement with a subsidiary of KPC which obligates the Company to pay an agency fee based upon a percentage of revenues. The Company believes the terms of this agreement are more favorable than those which could be obtained with an unrelated third party in an arms-length negotiation, but the value of such terms is currently immaterial to the Company's results of operations.
The Company earned revenues from KPC affiliated companies in the ordinary course of business of $44.8 million for the calendar year ended December 31, 1998. The Company paid agency fees to a subsidiary of KPC of $0.6 million during the calendar year ended December 31, 1998. The Company had accounts receivable from KPC affiliated companies of $6.1 million at December 31, 1998.
RELATED PARTY AGREEMENTS
The following summary description of the agreements among the Company, Holdings and KPC and of the Articles is qualified in its entirety by reference to the forms of Intercompany Agreement and Management Services Agreement and the Articles filed as exhibits to this Annual Report on Form 20-F.
Intercompany Agreement
In connection with the Offering, the Company, Holdings and KPC have entered into an Intercompany Agreement (the "Intercompany Agreement"), certain provisions of which are summarized below. As used herein, "KPC Affiliated Group" means KPC and its affiliates, including Holdings, other than the Company and its subsidiaries.
Indemnification. As of December 31, 1998, the consolidated financial statements of Holdings contained liabilities to third parties, including tax liabilities, aggregating approximately $61 million incurred by certain subsidiaries which conducted the Company's former non-drilling operations and services (the "Non-Drilling Subsidiaries") on or before March 31, 1997. Holdings maintains cash and cash equivalents (the "Liability Payment Fund") which will be used to satisfy those liabilities remaining after such date. The Company,
Holdings and KPC have agreed in the Intercompany Agreement that all amounts paid to claimants to satisfy those liabilities, whether by settlement, judgment or award (including claimants' attorneys' fees), will be paid by Holdings from the Liability Payment Fund. The Company will pay all internal and external costs and fees (including the Company's and Holdings' attorneys' fees) associated with management and resolution of those liabilities, and believes such costs and fees will not be material. If any amount remains in the Liability Payment Fund at March 31, 2002, Holdings will pay the Company the first $10 million of such amount and 50% of any amount in excess of $10 million. Thereafter, or if the resolution of those liabilities earlier exhausts the Liability Payment Fund, Holdings will have no further responsibility for those liabilities, and the Company will be responsible for all costs, fees and amounts paid to resolve those liabilities and will indemnify the KPC Affiliated Group in respect of such costs and fees and those liabilities. The Company believes that the Liability Payment Fund is adequate to provide for such costs and fees and those liabilities. Accordingly, the Company believes that the indemnification costs, if any, will not be material and no additional reserves have been established by the Company in respect of such costs and fees and those liabilities or the Company's obligation under the Intercompany Agreement relating to such costs and fees and those liabilities. See "-- Management Services Agreement."
The Intercompany Agreement also provides that, except as may be provided in
a separate agreement, the Company will indemnify the KPC Affiliated Group
against losses based on, or taxes arising from, the following: (i) the ownership
of the assets or the operation of the business of the Company or its
subsidiaries, (ii) any other activities of the Company or its subsidiaries,
(iii) any guaranty or similar agreement by the KPC Affiliated Group provided to
any person with respect to any obligation of the Company or its subsidiaries,
and (iv) certain other matters. In addition, the Company has agreed to indemnify
the KPC Affiliated Group against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
relating to misstatements in or omissions from the Registration Statement filed
in respect of the Offering and any other registration statement or report that
the Company files under the Securities Act. Holdings has also agreed to
indemnify the Company and its subsidiaries against losses based on the ownership
or operation of the assets or properties or the operation or conduct of the
business of Holdings and its subsidiaries on or after March 31, 1997.
Consent of Holdings to Certain Events. The Intercompany Agreement provides
that until members of the KPC Affiliated Group cease to own the lesser of at
least 25% of the outstanding Ordinary Shares or 25% of the Company's outstanding
voting shares, the prior consent of Holdings generally will be required for: (i)
any disposition by the Company of assets involving consideration in excess of
$50 million; (ii) any issuance by the Company or any subsidiary of the Company
of any equity securities; (iii) the incurrence of any indebtedness or guaranty
in a consolidated amount in excess of $250 million at any time outstanding; and
(iv) a change in corporate domicile of the Company or any of its subsidiaries.
Analogous provisions are contained in the Articles. Under this arrangement,
consents may be requested from time to time. In the event Holdings does not
respond within 30 days after receipt of written notice from the Company
requesting consent to a proposed action, then the consent will be deemed to have
been given by Holdings to the Company.
Registration Rights. The Company has granted to the KPC Affiliated Group certain demand and "piggyback" registration rights with respect to equity securities owned by it. Pursuant to the demand registration rights, the KPC Affiliated Group may, at any time, request the Company to register under the Securities Act any or all Ordinary Shares held by the KPC Affiliated Group whenever it wishes to sell Ordinary Shares in a transaction it reasonably expects will yield gross proceeds of at least $250 million. The Company has agreed to use its best efforts to effect any demand registrations requested by the KPC Affiliated Group and has also agreed to register under the Securities Act a certain amount of Ordinary Shares held by the KPC Affiliated Group when the Company initiates certain other registrations of equity securities of the Company on its own behalf or on behalf of any shareholder of the Company. Such registration rights are transferable by the KPC Affiliated Group. The Company has agreed to pay all costs and expenses in connection with each such registration, except underwriting discounts and commissions applicable to the equity securities sold by the KPC Affiliated Group and its transferees. The Intercompany Agreement also contains specified restrictions on the ability of the KPC Affiliated Group to exercise its demand and piggyback registration rights and also contains customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification granted by parties thereunder in connection with the registration of Ordinary Shares on behalf of the KPC Affiliated Group under the Securities Act and otherwise.
Other Provisions. Until the end of the first fiscal year of KPC in which the KPC Affiliated Group owns the lesser of at least 25% of the outstanding Ordinary Shares or 25% of the Company's outstanding voting shares, the Company has agreed to furnish extensive financial information to Holdings, including certain information before it becomes publicly available. So long as the KPC Affiliated Group owns at least 10% of the outstanding Ordinary Shares or 10% of the Company's outstanding voting shares, the Company has agreed to discuss its affairs, finances and accounts with Holdings and to permit Holdings to inspect its properties, corporate books, and financial and other records.
Management Services Agreement
The Company has also entered into a Management Services Agreement with Holdings (the "Management Services Agreement") for the purpose of providing asset (primarily real estate) management services, general and administrative services and liability management and resolution services to Holdings, the Non- Drilling Subsidiaries and inactive subsidiaries of Holdings. The Management Services Agreement authorizes the Company to resolve the liabilities of the Non-Drilling Subsidiaries described under "Intercompany Agreement" using the Liability Payment Fund. Although Holdings retains the right to reduce or expand the scope of services to be performed by the Company pursuant to the Management Services Agreement, the Company's liability management and resolution services may not be reduced or terminated. The Management Services Agreement also provides for payment of an initial asset management fee to the Company of $173,000 per year as well as reimbursement of out-of-pocket costs in respect of asset management services, and stipulates that the fees are subject to negotiation on an annual basis and upon any reduction in or expansion of the scope of services provided by the Company. The Company will pay all internal and external costs and fees (including the Company's and Holdings' attorneys' fees) associated with the Company's liability management and resolution services and all internal and external costs and fees associated with the provision of general and administrative services pursuant to the Management Services Agreement. The Company believes such costs and fees will not be material.
Charter Provisions Relating to Corporate Opportunities and Interested Directors
The Company's Board of Directors currently includes persons who are also Directors or officers of Holdings or KPC. As a consequence, Directors of the Company who are also Directors or officers of KPC or Holdings charged with granting or withholding consent for certain of the Company's actions may be faced with conflicts of interest. In addition, potential conflicts of interest exist or could arise in the future for such Directors with respect to a number of areas, including the Company's contract drilling activities in Kuwait and its other business relationships with KPC subsidiaries.
In order to address certain potential conflicts of interest between the Company and the KPC Affiliated Group, the Articles contain provisions regulating and defining the conduct of certain affairs of the Company as they may involve the KPC Affiliated Group and their Directors and officers, and the powers, rights, duties and liabilities of the Company and its officers, Directors and shareholders in connection therewith. In general, these provisions recognize that the Company and the KPC Affiliated Group may engage in the same line of business and have an interest in the same areas of corporate opportunities and that the Company and the KPC Affiliated Group will continue to have certain contractual and business relations with each other (including service of Directors and officers of the KPC Affiliated Group as Directors of the Company).
The Articles provide that the KPC Affiliated Group shall have no duty to refrain from (i) engaging in the same line of business as the Company, (ii) doing business with any customer of the Company or (iii) employing any employee of the Company. The Articles also provide that the KPC Affiliated Group is not under any duty to present any corporate opportunity to the Company which may be a corporate opportunity for both the KPC Affiliated Group and the Company.
When corporate opportunities are offered to persons who are Directors or officers of the Company and the KPC Affiliated Group, the Articles provide that such Directors or officers of the Company shall not be liable to the Company or its shareholders by reason of the fact that such members of the KPC Affiliated Group pursue such corporate opportunities for themselves or do not present such corporate opportunities to the Company, except in the case of wilful default or fraud of such Directors or officers, if such Directors or officers act in a manner consistent with a policy that provides for allocation based principally on the capacities in which the individual Director or officer is offered the opportunity.
The Articles also provide that no arrangement between the Company and the KPC Affiliated Group or another related party shall be voidable, and no liability shall be imposed, solely because a member of the KPC Affiliated Group is a party thereto, or solely because any Directors or officers who are related parties are present at, participate in or vote with respect to, the authorization of the arrangement, except in the case of wilful default or fraud on the part of the Directors or officers, if the material facts as to the arrangement are disclosed to the Company's Board of Directors or the holders of the Ordinary Shares who approve the arrangement.
The affirmative vote of a two-thirds majority of the shares entitled to vote thereon and voting at a meeting of shareholders is required to amend the Articles, including the provisions concerning corporate opportunity and interested Directors described above and the provisions requiring the consent of Holdings to certain actions described in "-- Intercompany Agreement -- Consent of Holdings to Certain Events." Accordingly, so long as the KPC Affiliated Group controls more than one third of such voting power, it can prevent any such amendment.
CONSULTING AGREEMENT
On December 10, 1997, Gordon M. Anderson, a Director of the Company, and the Company entered into a Consulting Agreement pursuant to which Mr. Anderson shall serve as an independent consultant to the Company with respect to matters relating to or affecting the operations of the Company. The term of the Consulting Agreement was one year, terminating on January 1, 1999. Pursuant to the Consulting Agreement, the Company has compensated Mr. Anderson by issuing to Mr. Anderson 4,000 restricted Ordinary Shares under the Company's LTIP. In addition, on the 25th month anniversary from the date of the grant of restricted Ordinary Shares, the Company will further compensate Mr. Anderson under the Consulting Agreement by paying Mr. Anderson cash in an amount equal to the federal income tax payable with respect to the vesting of the 4,000 Ordinary Shares and the federal income tax payable with respect to the cash payment to Mr. Anderson. The Consulting Agreement also provides that Mr. Anderson will be entitled to the standard Directors' cash and noncash compensation that all other non-employee Directors are entitled to receive. Mr. Anderson has fulfilled his obligations under the Consulting Agreement, which was not renewed for 1999.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES.
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
See Item 19(a).
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See Index to Consolidated Financial Statements on page F-1.
(b) Exhibits
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
**3.1 -- Amended and Restated Memorandum of Association of the
Registrant.
**3.2 -- Amended and Restated Articles of Association of the
Registrant.
*4 -- Specimen of Ordinary Shares Certificate.
**10.1 -- Registrant's Investment Savings and Profit Sharing Plan.
**10.2 -- Registrant's Pension Plan (U.S. employees).
**10.3 -- Registrant's Special Pension Plan (non-U.S. employees).
**10.4 -- Registrant's Equity Restoration Plan.
*10.5 -- Registrant's Supplemental Executive Retirement Plan.
*10.6 -- Registrant's Performance Unit Plan.
***10.7 -- Registrant's Annual Incentive Compensation Plan.
***10.8 -- Registrant's 1997 Long Term Incentive Plan.
***10.9 -- Registrant's 1997 Non-Employee Director Stock Option
Plan.
***10.10 -- Registrant's 1997 Employee Share Purchase Plan.
*10.11 -- Registrant's Employee Severance Protection Plan.
*10.12 -- Registrant's Directors and Officers Indemnity Agreement.
*10.13 -- Intercompany Agreement by and among Kuwait Petroleum
Corporation, SFIC Holdings (Cayman), Inc. and the
Registrant, dated June 9, 1997.
*10.14 -- Management Services Agreement by and between SFIC
Holdings (Cayman), Inc. and the Registrant, dated June 9,
1997.
**10.15 -- Agency Agreement between Kuwait Santa Fe Braun for
Engineering and Petroleum Enterprises( K.S.B.) Company
K.S.C. and the Registrant, dated April 1, 1992.
**10.16 -- Contract for the Construction and Sale of a Jackup
Drilling Unit by and between Far East Levingston
Shipbuilding Ltd. and the Registrant, dated as of
December 16, 1996.
**10.17 -- Drilling Contract by and between Mobil Oil Canada
Properties and Santa Fe Drilling Company (Canada)
Limited, dated as of December 16, 1996.
*10.18 -- Share Purchase Agreement between SFIC Holdings (Cayman)
Inc. and the Registrant, dated as of June 9, 1997.
*10.19 -- Contract for the Construction and Sale of Jackup Drilling
Unit Galaxy III by and between Keppel FELS Limited and
the Registrant, dated as of September 17, 1997.
|
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
*10.20 -- Letter of Interim Agreement for Provision of Jackup
Drilling Unit by and between Amoco (U.K.) Exploration
Company and the Registrant, dated as of September 3,
1997.
****10.21 -- Consulting Agreement dated December 10, 1997 between
Registrant and Gordon M. Anderson.
****10.22 -- AMOCO (U.K.) Exploration Company Form of Contract Ref:
AD3300 for The Provision of the Jack-Up Drilling Unit
Santa Fe "Galaxy III" for Drilling Operations on the
U.K.C.S. with Santa Fe Drilling Company (North Sea)
Limited, dated September 3, 1997 (with Appendix 5 only).
+10.23 -- Registrant's Non-Employee Director Deferred Compensation
Plan.
+10.24 -- Amendment to Registrant's 1997 Non-Employee Director
Stock Option Plan.
+10.25 -- Amendment to Registrant's 1997 Long-Term Incentive
Compensation Plan.
+10.26 -- Amendment to Registrant's Supplemental Executive
Retirement Plan.
+10.27 -- Amendment to Registrant's Supplemental Executive
Retirement Plan.
+10.28 -- Amendment to Registrant's 1997 Non-Employee Director
Stock Option Plan.
+21 -- List of Subsidiaries.
+23.1 -- Consent of Ernst & Young LLP, independent auditors
|
* Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended June 30, 1997.
** Incorporated by reference to the Company's Registration Statement on Form F-1 (No. 333-6912) filed May 14, 1997.
*** Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-7070) filed June 13, 1997.
**** Incorporated by reference to the Company's Report on Form 6-K filed March 3, 1998.
+ Filed herewith.
SANTA FE INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-1
Consolidated Statements of Operations for the calendar year
ended December 31, 1998, the six months ended December 31,
1997 and the fiscal years ended June 30, 1997 and 1996.... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Shareholders' Equity for the
calendar year ended December 31, 1998, the six months
ended December 31, 1997 and the fiscal years ended June
30, 1997 and 1996......................................... F-4
Consolidated Statements of Cash Flows for the calendar year
ended December 31, 1998, the six months ended December 31,
1997 and the fiscal years ended June 30, 1997 and 1996.... F-5
Notes to the Consolidated Financial Statements.............. F-6
|
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Santa Fe International Corporation
We have audited the accompanying consolidated balance sheets of Santa Fe International Corporation and subsidiary companies (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996. 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 Santa Fe International Corporation and subsidiary companies at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, in conformity with generally accepted accounting principles in the United States.
ERNST & YOUNG LLP
Dallas, Texas
January 27, 1999
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CALENDAR YEAR SIX MONTHS
ENDED ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1998 1997 1997 1996
------------- ------------ ------------ ------------
Operating revenues (Notes 11 and 12)..... $ 811,346 $ 375,185 $ 578,563 $ 470,882
Operating costs.......................... 414,022 195,678 339,665 308,513
------------ ------------ ------------ ------------
Operating margin............... 397,324 179,507 238,898 162,369
Other operating costs and expenses:
Depreciation and amortization (Note
3).................................. 55,807 24,876 43,360 77,128
General and administrative............. 22,161 10,781 16,931 17,168
Gain on sale of assets................. (5,988) (374) (1,041) (754)
------------ ------------ ------------ ------------
Operating income......................... 325,344 144,224 179,648 68,827
Other income (expense):
Investment income...................... 5,583 1,364 5,702 10,071
Interest expense....................... -- -- -- (386)
Other, net............................. (4,263) (560) 891 (669)
------------ ------------ ------------ ------------
Income before provision for taxes on
income................................. 326,664 145,028 186,241 77,843
Provision for taxes on income (Note 5)... 39,520 16,500 21,325 15,867
------------ ------------ ------------ ------------
Net income............................... $ 287,144 $ 128,528 $ 164,916 $ 61,976
============ ============ ============ ============
Net income per Ordinary Share:
Basic.................................. $ 2.51 $ 1.12 $ 1.44
============ ============ ============
Diluted................................ $ 2.50 $ 1.12 $ 1.44
============ ============ ============
Pro forma net income per Ordinary Share:
Basic and diluted...................... $ 0.54
============
Weighted average ordinary and ordinary
equivalent shares used in Ordinary
Share computations:
Basic.................................. 114,500,249 114,500,000 114,500,000 114,500,000
============ ============ ============ ============
Diluted................................ 114,812,234 114,608,000 114,502,000 114,500,000
============ ============ ============ ============
|
See notes to consolidated financial statements.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 124,314 $ 68,453
Marketable securities..................................... -- 8,093
Accounts receivable (Note 12)............................. 161,728 149,268
Inventories............................................... 51,481 51,182
Prepaid expenses and other current assets................. 14,913 17,459
---------- ----------
Total current assets.............................. 352,436 294,455
---------- ----------
Property and equipment, at cost (Note 3).................... 2,030,756 1,737,285
Less accumulated depreciation and amortization............ (981,555) (935,315)
---------- ----------
Property and equipment, net............................... 1,049,201 801,970
Prepaid deposits............................................ -- 14,861
Other noncurrent assets (Notes 5 and 7)..................... 52,099 50,167
---------- ----------
Total assets...................................... $1,453,736 $1,161,453
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 74,603 $ 92,014
Accrued liabilities (Note 4).............................. 107,057 79,741
---------- ----------
Total current liabilities......................... 181,660 171,755
Other noncurrent liabilities (Note 6)....................... 44,852 36,681
---------- ----------
Total liabilities................................. 226,512 208,436
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 1 and 8):
Ordinary Shares par value $.01; 600,000,000 shares
authorized, 114,762,469 and 114,746,550 shares issued
and outstanding at December 31, 1998 and 1997,
respectively........................................... 1,148 1,147
Additional paid-in capital................................ 667,816 665,869
Retained earnings......................................... 558,260 286,001
---------- ----------
Total shareholders' equity........................ 1,227,224 953,017
---------- ----------
Total liabilities and shareholders' equity........ $1,453,736 $1,161,453
========== ==========
|
See notes to consolidated financial statements.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS, IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ORDINARY SHARES ADDITIONAL SHAREHOLDERS' OTHER TOTAL
----------------------- PAID-IN RETAINED NET COMPREHENSIVE SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS INVESTMENT INCOME EQUITY
----------- --------- ---------- -------- ------------- ------------- -------------
BALANCE AT JUNE 30, 1995........ -- $ -- $ -- $ -- $ 721,143 $ 6,946 $ 728,089
Distributions to parent....... -- -- -- -- (50,027) -- (50,027)
Net income.................... -- -- -- -- 61,976 -- 61,976
Other comprehensive income:
Unrealized gains on
available-for-sale
securities.................. -- -- -- -- -- (6,946) (6,946)
----------- ------ ---------- -------- --------- ------- ----------
Comprehensive income.......... -- -- -- -- 61,976 (6,946) 55,030
Reclassification of
shareholder's net investment
(Note 1).................... 84,500,000 845 732,247 -- (733,092) -- --
----------- ------ ---------- -------- --------- ------- ----------
BALANCE AT JUNE 30, 1996........ 84,500,000 845 732,247 -- -- -- 733,092
Ordinary Shares issued for
cash, net (Note 1).......... 40,000,000 400 1,080,320 -- -- -- 1,080,720
Purchase of Ordinary Shares
from Holdings (Note 1)...... (10,000,000) (100) (272,080) -- -- -- (272,180)
Distributions to parent....... -- -- (875,433) -- -- -- (875,433)
Net income.................... -- -- -- 164,916 -- -- 164,916
----------- ------ ---------- -------- --------- ------- ----------
BALANCE AT JUNE 30, 1997........ 114,500,000 1,145 665,054 164,916 -- -- 831,115
Ordinary Shares issued
pursuant to employee benefit
plans, net of forfeitures... 246,550 2 815 -- -- -- 817
Dividends..................... -- -- -- (7,443) -- -- (7,443)
Net Income.................... -- -- -- 128,528 -- -- 128,528
----------- ------ ---------- -------- --------- ------- ----------
BALANCE AT DECEMBER 31, 1997.... 114,746,550 1,147 665,869 286,001 -- -- 953,017
Ordinary Shares issued
pursuant to employee benefit
plans, net of forfeitures... 15,919 1 1,947 -- -- -- 1,948
Dividends..................... -- -- -- (14,885) -- -- (14,885)
Net Income.................... -- -- -- 287,144 -- -- 287,144
----------- ------ ---------- -------- --------- ------- ----------
BALANCE AT DECEMBER 31, 1998.... 114,762,469 $1,148 $ 667,816 $558,260 $ -- $ -- $1,227,224
=========== ====== ========== ======== ========= ======= ==========
|
See notes to consolidated financial statements.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS, IN THOUSANDS)
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1998 1997 1997 1996
------------ ------------ ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 287,144 $ 128,528 $ 164,916 $ 61,976
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 55,807 24,876 43,360 77,128
Gain on sale of assets.............................. (5,988) (374) (1,041) (754)
Accretion of interest income and gains on sales of
marketable securities............................. (127) (508) (4,643) (9,866)
Deferred provision (benefit) for taxes on income.... (785) 2,545 2,381 4,452
Changes in operating assets and liabilities:
Accounts receivable................................. (12,460) (15,638) (3,592) (27,066)
Inventories......................................... (299) (4,727) (3,766) (5,274)
Prepaid expenses and other current assets........... 2,546 (3,691) (685) 1,440
Accounts payable.................................... (17,411) 30,359 (4,457) 23,204
Accrued liabilities................................. 27,316 4,825 15,906 (9,704)
Other, net............................................ 7,478 (1,526) (1,201) (2,418)
--------- --------- ---------- ---------
Net cash provided by operating activities...... 343,221 164,669 207,178 113,118
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (277,400) (127,133) (146,596) (64,810)
Advance payments for drilling rigs.................... (18,532) (23,111) -- --
Proceeds from sales of property and equipment......... 1,406 608 1,191 1,490
Maturities of marketable securities................... 8,220 44,050 44,986 --
Sales of marketable securities........................ -- -- -- 91,881
Purchases of marketable securities.................... -- (25,842) (42,778) (23,549)
Proceeds from insurance settlement.................... 13,831 -- -- --
--------- --------- ---------- ---------
Net cash provided by (used for) investing
activities................................... (272,475) (131,428) (143,197) 5,012
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Ordinary Shares, net.......................... -- -- 1,080,720 --
Purchase of Ordinary Shares from Holdings............. -- -- (272,180) --
Distributions to parent, net.......................... -- -- (875,433) (50,027)
Dividends paid........................................ (14,885) (3,721) -- --
Repayments of capital lease obligations............... -- -- -- (58,364)
--------- --------- ---------- ---------
Net cash used for financing activities......... (14,885) (3,721) (66,893) (108,391)
--------- --------- ---------- ---------
Net change in cash and cash equivalents............... 55,861 29,520 (2,912) 9,739
Cash and cash equivalents at beginning of period...... 68,453 38,933 41,845 32,106
--------- --------- ---------- ---------
Cash and cash equivalents at end of period............ $ 124,314 $ 68,453 $ 38,933 $ 41,845
========= ========= ========== =========
Supplemental disclosures of cash flows information:
Interest paid....................................... $ -- $ -- $ -- $ 1,947
========= ========= ========== =========
Income taxes paid................................... $ 28,005 $ 7,587 $ 11,819 $ 9,440
========= ========= ========== =========
|
See notes to consolidated financial statements.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Santa Fe International Corporation (the "Company"), a Cayman Islands corporation, is a majority-owned subsidiary of SFIC Holdings (Cayman), Inc. ("Holdings"), which in turn is a wholly-owned subsidiary of Kuwait Petroleum Corporation ("KPC"). KPC is wholly owned by the Government of Kuwait. In a series of transactions during the four years ended December 31, 1996, Holdings and its subsidiaries were reorganized in a manner which resulted in the Company owning all of the drilling assets and the direct and indirect subsidiaries of Holdings and KPC engaged in providing contract drilling and drilling related services (the "Reorganization"). The actions taken in connection with the Reorganization have been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. For financial reporting purposes the historical equity accounts of the Company, its subsidiaries and its predecessors for dates prior to June 30, 1996 (the date at which the Reorganization was substantially complete) have been combined into a single disclosure caption entitled "Shareholder's Net Investment."
On May 27, 1997, the Company was recapitalized, resulting in the Company's 900,000 authorized ordinary shares, par value $1.00 per share, with 1,003 ordinary shares issued and outstanding, being recapitalized into 600,000,000 authorized ordinary shares, par value $0.01 per share ("Ordinary Shares"), with 84,500,000 Ordinary Shares issued and outstanding. The accompanying consolidated financial statements have been adjusted to reflect this recapitalization retroactively.
On June 9 and 13, 1997, respectively, the Company commenced and completed an initial public offering (the "Offering") of Ordinary Shares. Upon the issuance of 40,000,000 Ordinary Shares in the Offering and consummation of the purchase described below of Ordinary Shares from Holdings, the Company had 114,500,000 Ordinary Shares outstanding. Immediately following the Offering, Holdings held 65.1% of the outstanding Ordinary Shares of the Company. The Offering price was $28.50 per share, resulting in net proceeds of approximately $1,088,720,000 after deducting underwriting discounts and commissions. The Company also incurred approximately $8 million of expenses in connection with the Offering which has been charged to additional paid-in-capital. Upon receipt of proceeds from the sale of the first 30,000,000 Ordinary Shares sold in the Offering, the Company paid a cash dividend to Holdings in an amount equal to those proceeds. All of the proceeds the Company received from the sale in the Offering of Ordinary Shares in excess of that amount were used to purchase a like number of Ordinary Shares from Holdings.
Holders of Ordinary Shares are entitled to participate in the payment of dividends in proportion to their holdings. Under Cayman Island law, the Company may pay dividends or make other distributions to its shareholders, in such amounts as the Board of Directors deems appropriate, from the profits of the Company or out of the Company's share premium account (equivalent to additional paid-in capital) if the Company thereafter has the ability to pay its debts as they come due. Cash dividends, if any, will be declared and paid in U.S. dollars. At December 31, 1998, the Company had declared dividends which had not been paid amounting to $3,722,000.
At the direction of the Board of Directors, the Company has implemented a change from a June 30 fiscal year end to a December 31 fiscal year end effective January 1, 1998.
The accompanying consolidated financial statements are presented in U.S. dollars and in accordance with U.S. generally accepted accounting principles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The Company consolidates all of its majority-owned subsidiaries. The Company also consolidates joint ventures over which the Company exercises control through the joint venture agreement or related operating
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
and financing agreements. The Company accounts for its interest in other joint ventures using the equity method. All material intercompany accounts and transactions are eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid short-term investments that are readily convertible into cash and which at the date of purchase were so near their maturity that they expose the Company to an insignificant risk from changes in interest rates. Cash equivalents are carried at cost plus accrued interest, which approximates fair value. The interest method is used to account for any premium or discount on cash equivalents. The Company's policy is to place its temporary cash investments with high credit quality financial institutions and by policy limit the amount of credit exposure to any one financial institution.
The Company's marketable securities and long-term investments are classified as available-for-sale securities. Unrealized holding gains and losses on securities available-for-sale are recorded as a component of shareholder's equity, net of tax effect. The fair values for marketable securities are based on quoted market prices. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The Company does not believe that it is exposed to any significant risks on its investments.
At December 31, 1997, marketable securities consisted only of Eurodollar debt securities.
Investment income included realized gains on sales of marketable securities of $3,863,000 for the fiscal year ended June 30, 1996.
Inventories
Inventories consist primarily of materials and supplies which are used in operations and are stated at the lower of cost (determined principally by the average cost or specific identification method) or estimated net realizable value.
Concentrations of Credit Risk
The Company's customers consist primarily of major international, state owned and large independent oil companies and their affiliates. The Company provides allowances for potential credit losses when necessary. The Company did not incur any charges for credit losses during the periods presented.
Property and Equipment
Property and equipment is carried at cost. Maintenance and repairs are charged to expense currently while major replacements and upgrades are capitalized. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation and amortization are removed from the respective accounts and any gains or losses are included in the results of operations. Property and equipment is depreciated on the straight-
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
line method, after allowing for salvage values, over the remaining estimated useful lives from the date the asset is placed into service.
The Company reviews its long-term assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In 1996, the Company adopted Statement of Financial Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used be reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell. The Company has made no adjustments for impairment.
Operating Revenues and Costs
The majority of the Company's drilling contracts are performed on a dayrate basis, with revenues and expenses recognized as work is performed. The Company also operates under incentive-based contracts, such as turnkey drilling and footage contracts, under the terms of which the Company may earn additional revenues by exceeding preset conditions of job performance. The Company recognizes incremental revenues from these incentive-based contracts when such conditions of the contract have been achieved. Under certain incentive-based contracts, the Company may incur penalties or reduced remuneration if preset conditions are not achieved. The Company recognizes the effect of such penalties or reduced remuneration, which historically has been immaterial, as an adjustment to incentive revenues when the amount reasonably can be estimated.
In connection with drilling contracts, the Company may receive lump sum fees for the mobilization of equipment and personnel or for capital improvements to rigs. In connection with mobilization reimbursements, the net of mobilization fees received and expenses incurred is recognized over the term of the drilling contract. Costs of relocating drilling units without contracts are expensed as incurred. Demobilization fees received are reflected in income, net of any related expense. Capital upgrade fees received from the client are deferred and recognized as revenue over the period of the drilling contract. The actual cost incurred for the capital upgrade is capitalized and depreciated over the estimated useful life of the asset.
The Company also earns revenue by providing drilling related services. Revenues from third party rig operations, drilling engineering and integrated well services are recognized as the services are performed. Revenues from drilling project management contracts are recognized using the percentage of completion method based on the ratio of costs incurred to total estimated contract costs. Provisions for losses are recorded for contracts in progress when losses are anticipated.
Income Taxes
The Company is not subject to income taxes in the Cayman Islands. The current provision for taxes on income consists primarily of income taxes based on the tax laws and rates of the countries in which operations were conducted during the periods presented. Certain of the Company's operations were included in consolidated income tax returns of affiliates during the periods presented. Under tax sharing agreements, the Company provides for income taxes payable to such affiliates as if it filed separate income tax returns.
The Company computes its provision for deferred income taxes using the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the future tax benefits to the extent, based on available evidence, it is more likely than not they will be realized.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
Foreign Currency Translation
The functional currency of the primary economic environments in which the Company operates is the U.S. dollar. Gains and losses resulting from the remeasurement of local currencies into U.S. dollars are included in the consolidated results of operations of the current period. The Company periodically reviews the operations of its entities to ensure the functional currency of each entity is the currency of the primary economic environment in which it operates.
Share Options and Awards
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its employee share options. Under APB 25, if the exercise price of an employee's share option equals or exceeds the market price of the underlying share on the date of grant, no compensation expense is recognized.
Net Income Per Ordinary Share
The basic and diluted net income per Ordinary Share data for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and for the fiscal year ended June 30, 1997 is calculated based on the weighted average shares outstanding for the periods. The pro forma net income per Ordinary Share data for the fiscal year ended June 30, 1996 is calculated as though the 114,500,000 shares issued in connection with the recapitalization and the Offering were outstanding for the period then ended. At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share". Accordingly, the financial statements have been restated as applicable. The effect of the adoption of this statement was not material.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal year ended June 30, 1997, the Company realized no such transactions other than those reported as net income. For the fiscal year ended June 30, 1996, an unrealized holding gain was recorded in comprehensive income.
Segment Reporting and Related Information
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 superceded the Financial Accounting Standards Board Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes standards for the way in which companies report information about operating segments and establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of segment information.
Pension and Other Postretirement Benefits
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 revised employers' disclosures about pension and other postretirement benefit plans through standardization and suggested combined formats for presentation of pension and other postretirement benefits.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
Derivative Instruments and Hedging Activities
Effective December 31, 1998, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain of those imbedded in other contracts, and for hedging activities by requiring that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. At December 31, 1998 and 1997, the Company had no material derivative instruments or hedging activities that would require disclosure or measurement under SFAS No. 133.
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
DECEMBER 31,
ESTIMATED -----------------------
USEFUL LIVES 1998 1997
------------- ---------- ----------
Drilling rigs and equipment.................... 3 to 30 years $1,764,359 $1,493,888
Buildings, facilities, and camps............... 4 to 10 years 52,094 48,763
Transportation equipment....................... 3 to 5 years 18,421 14,107
Land........................................... 316 204
Construction in progress....................... 195,566 180,323
---------- ----------
$2,030,756 $1,737,285
========== ==========
|
Following several years of strengthened demand for drilling rigs and improving market conditions, during 1996 the Company's management undertook engineering and economic studies to evaluate the economic useful lives of its drilling rigs. Such studies included evaluation of current and future new rig building costs, technological enhancements, rig maintenance and repair costs, and market demand factors. The study results indicated that, given the current condition of the rigs, the lack of new entrants into the market, and overall market improvements at that time, the estimated useful lives should be extended by 12 years from 18 to 30 years for marine rigs and by four years from 12 to 16 years for land rigs. The Company's Board of Directors approved application of the change in useful lives effective July 1, 1996, which reduced depreciation and amortization expense and increased net income, by approximately $34.5 million for the fiscal year ended June 30, 1997. The reduction in depreciation and amortization expense did not result in an increase in the provision for taxes on income. See Note 5.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
------------------
1998 1997
-------- -------
Compensation and benefits................................... $ 29,182 $26,604
Deferred revenue............................................ 14,409 3,840
Income taxes (Note 5)....................................... 54,323 41,364
Accrued insurance........................................... 1,656 2,263
Other....................................................... 7,487 5,670
-------- -------
$107,057 $79,741
======== =======
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
5. INCOME TAXES
The Company is not subject to income taxes in the Cayman Islands. All of the Company's income before provision for taxes on income and the related provision for taxes on income relates to operations in jurisdictions other than the Cayman Islands. The relationship between income before provision for taxes on income and the provision for taxes on income varies from period to period because each jurisdiction in which the Company operates has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowability of deductions, credits and other benefits) and because the amounts earned in, and subject to tax by, each jurisdiction changes from period to period. The reconciliation of income taxes computed at the applicable statutory rates of the jurisdictions in which the Company's operations are located and the provision for taxes on income is as follows (in thousands):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Provision for taxes on income at the
applicable statutory rates of the
jurisdictions in which the Company's
operations are located.................. $108,708 $ 52,704 $ 65,459 $ 26,487
Effect of income taxed at rates other than
the statutory rates of jurisdictions in
which the Company's operations are
located................................. (66,336) (31,538) (40,024) (10,790)
Benefit of additional tax depreciation.... (10,114) (8,411) (8,050) --
Taxes on income resulting from
indexation.............................. 720 436 2,193 --
Benefit of net operating loss
carryforwards........................... (2,827) (298) (13) (505)
Net operating losses not recognized....... 8,743 3,607 1,760 675
Other..................................... 626 -- -- --
-------- -------- -------- --------
Provision for taxes on income............. $ 39,520 $ 16,500 $ 21,325 $ 15,867
======== ======== ======== ========
|
The components of the provision for taxes on income are as follows (in thousands):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Current provision......................... $ 40,305 $ 13,955 $ 18,944 $ 11,415
Deferred provision (benefit).............. (785) 2,545 2,381 4,452
-------- -------- -------- --------
Provision for taxes on income............. $ 39,520 $ 16,500 $ 21,325 $ 15,867
======== ======== ======== ========
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The Company's net deferred tax liabilities and assets consist of the following (in thousands):
DECEMBER 31,
------------------
1998 1997
-------- -------
Deferred tax liabilities:
Property and equipment.................................... $ (8,739) $(4,838)
Other..................................................... 2,216 (714)
-------- -------
(6,523) (5,552)
Net operating loss carryforwards:
Australia................................................. 4,016 3,602
Venezuela................................................. 3,902 1,041
Oman...................................................... 1,741 196
Qatar..................................................... 2,448 --
Indonesia................................................. 420 4,648
Tunisia................................................... 3,305 1,188
Ireland................................................... 81 --
U.S....................................................... 2,031 584
U.S. credit carryover..................................... 240 --
-------- -------
Total deferred income tax assets.................. 18,184 11,259
Valuation allowance......................................... (12,852) (6,935)
-------- -------
5,332 4,324
-------- -------
Net deferred income tax liabilities......................... $ (1,191) $(1,228)
======== =======
|
The Company's net operating loss carryforwards include tax effected losses of $13,847,000 that expire between 1999 and 2013. The remaining $4,097,000 of net operating losses do not expire.
The Company's income tax returns are subject to review and examination in the various jurisdictions in which the Company operates. At December 31, 1998 and 1997, accrued income taxes include $24,613,000 and $24,798,000, respectively, representing estimated liabilities which will result from final settlements of such reviews and examinations. The Company believes that all income tax issues which have been or may be raised as a result of such reviews and examinations will be resolved with no additional material impact on the Company's financial position or results of operations.
6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following (in thousands):
DECEMBER 31,
-----------------
1998 1997
------- -------
Pension benefits (Note 7)................................... $10,214 $ 7,281
Postretirement health and insurance benefits (Note 7)....... 14,054 14,882
Deferred Taxes.............................................. 1,191 1,228
Other....................................................... 19,393 13,290
------- -------
$44,852 $36,681
======= =======
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
7. EMPLOYEE BENEFIT PLANS
The Company sponsors several qualified and non-qualified benefit plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets at December 31, 1998 and 1997 (in thousands):
PENSION BENEFITS OTHER BENEFITS
------------------ -------------------
1998 1997 1998 1997
-------- ------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period... $ 88,631 $78,968 $ 8,855 $ 9,083
Service cost................................ 5,137 2,216 65 29
Interest cost............................... 6,967 3,012 621 324
Plan participants' contributions............ 958 384 354 173
Actuarial (gains) losses.................... 5,667 5,272 468 (212)
Benefits paid............................... (2,903) (1,221) (1,355) (542)
Settlements................................. (3,241) -- -- --
-------- ------- -------- --------
Benefit obligation at end of period......... 101,216 88,631 9,008 8,855
======== ======= ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
period.................................... 94,942 83,602 -- --
Actual return on plan assets................ 13,723 10,892 -- --
Company contributions....................... 6,260 1,285 1,001 369
Plan participants' contributions............ 958 384 354 173
Benefits paid............................... (2,903) (1,221) (1,355) (542)
Settlements................................. (3,241) -- -- --
-------- ------- -------- --------
Fair value of plan assets at end of
period.................................... 109,739 94,942 -- --
======== ======= ======== ========
FUNDED STATUS
Funded status of the plan (underfunded)..... 8,523 6,311 (9,008) (8,855)
Unrecognized net actuarial loss............. (9,894) (6,715) (4,990) (5,966)
Unrecognized prior service cost............. 1,655 (125) (56) (61)
Unrecognized net transition liability....... (290) (273) -- --
-------- ------- -------- --------
Aggregate accrued benefit cost.............. $ (6) $ (802) $(14,054) $(14,882)
======== ======= ======== ========
|
The following table provides the amounts recognized in the statement of financial position as of December 31, 1998 and 1997 (in thousands):
PENSION BENEFITS OTHER BENEFITS
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
Prepaid benefit cost......................... $ 8,929 $ 8,969 $ -- $ --
Accrued benefit liability.................... (8,935) (9,771) (14,054) (14,882)
Additional minimum liability................. (1,279) (676) -- --
Intangible asset............................. 1,279 676 -- --
------- ------- -------- --------
Net amount recognized.............. $ (6) $ (802) $(14,054) $(14,882)
======= ======= ======== ========
|
Certain of the Company's nonqualified supplemental retirement plans had accumulated benefit obligations in excess of plan assets. These plans' accumulated and projected benefit obligations were $10,214,000 and $14,198,000 at December 31, 1998 and $9,088,000 and $12,050,000 at December 31, 1997,
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
respectively. There are no plan assets in these plans due to their nature. All of the Company's plans for postretirement benefits other than pensions also have no plan assets. The aggregate benefit obligation for these plans is $14,054,000 at December 31, 1998 and $14,882,000 at December 31, 1997.
The following table provides the components of net periodic benefit costs for the plans for the periods presented (in thousands):
PENSION BENEFITS OTHER BENEFITS
----------------------------------------------- -----------------------------------------------
CALENDAR SIX MONTHS FISCAL YEAR ENDED CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30, YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------- DECEMBER 31, DECEMBER 31, -----------------
1998 1997 1997 1996 1998 1997 1997 1996
------------ ------------ ------- ------- ------------ ------------ ------- -------
Service cost............ $ 5,127 $ 2,202 $ 4,012 $ 3,670 $ 65 $ 29 $ 53 $ 57
Interest cost........... 6,957 3,004 5,674 5,180 621 324 691 738
Expected return on plan
assets................ (7,856) (3,287) (5,646) (4,598) -- -- -- --
Amortization of
transition
obligation............ 19 9 20 21 -- -- -- --
Amortization of prior
service cost.......... 26 (171) 113 111 (5) (3) (6) --
Amortization of net
(gain) loss........... 204 101 (79) (7) (508) (300) (576) (595)
Settlement charge....... 971 -- -- -- -- -- -- --
------- ------- ------- ------- ----- ----- ----- -----
Net periodic
benefit
cost........ $ 5,448 $ 1,858 $ 4,094 $ 4,377 $ 173 $ 50 $ 162 $ 200
======= ======= ======= ======= ===== ===== ===== =====
|
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market value of assets are amortized over the remaining service period of active participants.
The assumptions used in the measurement of the Company's benefit obligation are shown in the following table:
PENSION BENEFITS OTHER BENEFITS
--------------------------------------------------------- ---------------------------
CALENDAR SIX MONTHS CALENDAR SIX MONTHS
YEAR ENDED ENDED FISCAL YEAR ENDED JUNE 30, YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, --------------------------- DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
WEIGHTED-AVERAGE
ASSUMPTIONS
Discount rate.......... 7.0%-9.0% 8.0%-9.0% 8.0%-9.0% 8.0%-9.0% 7.0% 8.0%
Increase in future
compensation
levels............... 4.5%-7.0% 4.5%-7.0% 4.5%-7.0% 4.5%-7.0% N/A N/A
Expected long-term rate
of return on
assets............... 8.0%-9.0% 8.0%-9.0% 8.0%-9.0% 8.0%-9.0% N/A N/A
OTHER BENEFITS
---------------
FISCAL YEAR
ENDED JUNE 30,
---------------
1997 1996
------ ------
WEIGHTED-AVERAGE
ASSUMPTIONS
Discount rate.......... 8.0% 8.0%
Increase in future
compensation
levels............... N/A N/A
Expected long-term rate
of return on
assets............... N/A N/A
|
The Company provides postretirement medical and life insurance benefits to all its employees who are U.S. citizens and certain non-U.S. citizens. The Company's policy is to fund the cost of these benefits as claims are incurred. The Company allocates benefit costs to affiliates based on the ratio of active employees of affiliates to total employees.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits is 8% for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, respectively. This rate is assumed to decrease to 7% in 2000, then to 6% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, as of and for the calendar year ended December 31, 1998, increasing or decreasing the assumed health care cost trend rates by one percentage point each year would change the accumulated postretirement benefit obligation by approximately $474,000 and $450,000, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit by approximately $33,000 and $32,000, respectively.
Annual Incentive Compensation Plan
The Company also maintains an Annual Incentive Compensation Plan ("AIP"). The AIP provides for payment of additional compensation to participating employees, including executive officers, based on individual contributions and performance measures of the Company as defined in the plan. During the term of the AIP, an aggregate amount of 286,250 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares under the AIP. Amounts charged to expense related to awards under the Annual Incentive Compensation Plan aggregated $2,100,000, $1,070,000, $2,350,000 and $2,600,000 for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, respectively.
Performance Unit Plan
The Company's Performance Unit Plan provides incentives to certain members of management through performance share units to foster and promote the long-term financial success of the Company. The performance share units vest, and the related compensation expense is accrued, over a three year performance period based on performance measures of the Company as defined in the plan. Amounts charged to expense related to awards under the Performance Unit Plan aggregated $2,090,000, $1,738,000, $3,370,000 and $1,587,000 for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, respectively. The last awards under the Performance Unit Plan were granted in December 1996, and no further awards will be made under the Plan.
Investment Savings and Profit Sharing Plan
The Company maintains the Investment Savings and Profit Sharing Plan, a defined contribution 401(k) plan that allows dollar payroll employees to make both pre-tax and after-tax employee contributions. The Company matches these employee contributions up to a maximum of 5% of a participant's base salary subject to the limitations of eligible salary. Employees are vested in all contributions made. Additionally, although it has not done so since 1984 and currently does not expect to do so in the future, the Company may also make additional employer contributions any year out of profits. Matching contributions totaled $1,756,000, $843,000, $1,556,000 and $1,529,000 for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, respectively.
1997 Employee Severance Protection Plan
The Company maintains the 1997 Employee Severance Protection Plan (the "Severance Protection Plan") to retain the services of its employees in the event of an unsolicited takeover of the Company or in the event of a threat of a Change of Control, as defined, of the Company. The Severance Protection Plan is intended to ensure the continued dedication and efforts of the Company's employees in such events without undue concern for their personal financial and employment security. The Severance Protection Plan covers all
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
full-time U.S.-based payroll employees. Severance is only payable in the event of a termination of employment by the Company other than for "cause" or voluntary termination by the Employee for "good reason", each as defined in the Severance Protection Plan, within a specific period following a Change in Control. A participant will also receive severance if the employee is terminated by the Company without "cause" or for "good reason" at the request or direction of the third party involved in the Change in Control or otherwise in connection with or in anticipation of a Change in Control.
8. SHARE AWARDS AND OPTIONS
1997 Long-term Incentive Plan
The Company has adopted the 1997 Long Term Incentive Plan (the "LTIP"), which is designed to retain key executives and other selected employees by rewarding them for making major contributions to the success of the Company and to provide participants with a proprietary interest in the growth and performance of the Company.
Employees of the Company eligible for awards under the LTIP are executive officers, other officers and key management personnel selected by the Compensation Committee (including employees who are Directors), and whose performance, in the judgment of the Compensation Committee, can have a significant effect on the success of the Company. Awards under the LTIP may consist of the grant of stock options, share appreciation rights, restricted and/or performance-based share awards and/or restricted and/or performance- based cash awards, granted singly, in combination or in tandem. The exercise price for stock options shall not be less than 85% of the fair market value of the stock on the date of the option grant (100% in the case of incentive stock options). The Compensation Committee can also award supplemental payments up to the amount necessary to pay the federal income tax payable with respect to exercise of non-qualified stock options, share appreciation rights, restricted shares and performance units. If approved by the Compensation Committee, the Company may also make loans to participants to purchase shares pursuant to the exercise of an award. During the term of the LTIP, an aggregate of 5,725,000 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares under the LTIP. No participant may receive during a fiscal year incentive awards covering an aggregate of more than 150,000 Ordinary Shares.
An aggregate of 2,318,000 options to purchase the Company's Ordinary Shares (net of cancelled or expired options) had been granted under the LTIP at prices ranging between $12.25 to $45.00 per Ordinary Share. In addition, the Company had granted restricted share awards for an aggregate of 262,469 Ordinary Shares (net of forfeited shares) under the LTIP. The options will vest over periods ranging from two to four years and expire seven to ten years from the date of grant. The restricted share awards will vest over periods ranging from two to five years from the date of grant.
1997 Employee Share Purchase Plan
The Company has also adopted the 1997 Employee Share Purchase Plan (the "Share Purchase Plan"), which is designed to furnish eligible employees of the Company and designated subsidiaries of the Company an incentive to advance the best interests of the Company by providing a formal program whereby they may voluntarily purchase Ordinary Shares of the Company at a favorable price and upon favorable terms. Generally speaking, all covered employees of a participating company who are scheduled to work an average of at least 20 hours per week are eligible to participate in the Share Purchase Plan.
Once a year, participants in the Share Purchase Plan will be granted options to purchase Ordinary Shares with a fair market value equal to the lesser of 10% of the participant's eligible compensation (as defined in the Share Purchase Plan) and the amount specified in Section 423(b) of the Code (currently $25,000). The exercise price of the options is 85% of the fair market value of the Ordinary Shares on the date of grant or the
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
date of exercise, whichever is less. Options granted under the Share Purchase Plan are exercisable on the date one year after the date of grant. Generally speaking, participants pay option exercise prices through payroll deductions. An aggregate of 572,500 Ordinary Shares are available for grants of options under the Share Purchase Plan. The Share Purchase Plan, which became effective January 1, 1998, is administered by the Compensation Committee. An aggregate of 191,029 Ordinary Shares were issued in January 1999 to participating employees for the year ended December 31, 1998 at an exercise price of $10.9969 per Ordinary Share.
1997 Non-Employee Director Stock Option Plan
The Company has also adopted the 1997 Non-Employee Director Stock Option Plan (the "Director Plan"). The Director Plan is designed to attract and retain the services of experienced and knowledgeable non-employee Directors and to provide non-employee Directors with a proprietary interest in the growth and performance of the Company. Awards under the Director Plan consist of a grant of stock options. The purchase price for the shares as to which the option is exercised will be payable in full upon exercise, in cash or, if permitted by the Compensation Committee, by tender of Ordinary Shares, valued at "fair market value." During the term of the Director Plan, an aggregate of 286,250 Ordinary Shares will be available for awards granted wholly or partly in Ordinary Shares. No option will be granted under the Director Plan after 10 years following consummation of the Offering. The Compensation Committee is responsible for administration and interpretation of the Director Plan.
An aggregate of 58,000 options to purchase the Company's Ordinary Shares (net of cancelled or expired options) had been granted under the Director Plan to eight non-employee Directors who participated in the Director Plan. Such options were granted at exercise prices ranging from $12.25 to $45.50 per Ordinary Share. Any new non-employee Director will be granted a one-time award of a right to purchase 10,000 Ordinary Shares (anticipated to be increased from 4,000 by amendment of the Director Plan in March 1999). Each non-employee Director who continues in office immediately following the Annual General Meeting of Shareholders in any year (commencing in 1998) will automatically be granted an option to purchase 5,000 shares of Ordinary Shares (anticipated to be increased from 2,000 by amendment of the Director Plan in March 1999). The Board may increase the number of options granted, provided that a non-employee Director cannot receive more than 22,000 options (increased from 10,000 by amendment of the Director Plan in December 1998) in any year. The price of shares that may be purchased upon exercise of an option is the fair market value of the Ordinary Shares on the date of the grant. Options granted pursuant to the Director Plan are exercisable in installments of 33 1/3% upon each anniversary of the date of grant. The term of each option is for a period not exceeding 10 years from the date of grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for its plans. Compensation cost charged against income in connection with stock plans totaled $1,947,000 and $815,000 for the calendar year ended December 31, 1998 and the six months ended December 31, 1997, respectively. The difference between the quoted market price as of the date of the grant and the purchase price of shares is being charged to operations over the vesting period. No compensation cost has been recognized for stock options because the exercise prices of the options equal the market prices of the underlying stock on the date of the grants.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The following is a summary of all of the Company's share option activity, and related information for the above plans for the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal year ended June 30, 1997:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding at June 30, 1997.............................. 291,850 $28.50
Granted................................................. 658,550 $45.01
Cancelled............................................... (7,800) $41.19
--------- ------
Outstanding at December 31, 1997.......................... 942,600 $39.93
Granted................................................. 1,483,125 $12.55
Cancelled............................................... (49,725) $39.18
--------- ------
Outstanding at December 31, 1998.......................... 2,376,000 $22.85
========= ======
|
There were 29,708 options exercisable at December 31, 1998 and none exercisable at December 31, 1997.
The following table summarizes information about options outstanding at December 31, 1998:
OPTIONS OUTSTANDING
---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE CONTRACTUAL LIFE (YEARS) NUMBER OF SHARES
-------------- -------------------------- ----------------
$28.50........................................ 8.44 274,425
$45.50........................................ 8.69 12,000
$45.00........................................ 8.94 612,450
$39.75........................................ 9.35 10,000
$12.25........................................ 9.95 1,467,125
---------
Total............................... 9.22 2,376,000
=========
|
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", ("SFAS 123") requires the disclosure of pro forma net income and net income per Ordinary Share information computed as if the Company had accounted for its employee share options under the fair value method set forth in SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
CALENDAR SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Expected life (in years).................................... 3.74 3.74
Risk-free interest rate..................................... 5.0% 6.0%
Volatility.................................................. 0.55 0.40
Dividend yield.............................................. 0.46% 0.46%
|
The weighted average estimated fair value of options granted during the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal year ended June 30, 1997 was $5.65, $16.31 and $10.38, respectively. The fair value of these options was estimated based on an expected life of one year from the vesting date. For purposes of pro forma disclosures, the estimated fair value of stock based compensation plans and other options is amortized to expense over the vesting period. The Company's
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
pro forma net income and net income per Ordinary Share is as follows (in thousands except per share amounts):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------
1998 1997 1997 1996
------------ ------------ -------- -------
Net income
As reported.............................. $287,144 $128,528 $164,916 $61,976
Pro forma................................ $281,658 $127,916 $164,842 $61,976
Basic net income per Ordinary Share
As reported.............................. $ 2.51 $ 1.12 $ 1.44 $ 0.54
Pro forma................................ $ 2.46 $ 1.11 $ 1.44 $ 0.54
Diluted net income per Ordinary Share
As reported.............................. $ 2.50 $ 1.12 $ 1.44 $ 0.54
Pro forma................................ $ 2.45 $ 1.11 $ 1.44 $ 0.54
|
The effects of applying SFAS 123 for providing pro forma disclosures during the initial phase-in period may not be representative of the effects on reported net income for future years.
The Black-Scholes option valuation was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's employee share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee share options.
9. NET INCOME PER ORDINARY SHARE
The following table sets forth the computation of basic and diluted net income per ordinary share (in thousands except share and per share amounts):
CALENDAR YEAR SIX MONTHS
ENDED ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1998 1997 1997 1996
------------- ------------ ------------ ------------
Numerator:
Net income.................... $ 287,144 $ 128,528 $ 164,916 $ 61,976
Numerator for basic and
diluted net income per
Ordinary Share -- income
available to common
shareholders............... $ 287,144 $ 128,528 $ 164,916 $ 61,976
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
CALENDAR YEAR SIX MONTHS
ENDED ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------------
1998 1997 1997 1996
------------- ------------ ------------ ------------
Denominator:
Denominator for basic net
income per Ordinary
Share -- weighted-average
shares..................... 114,500,249 114,500,000 114,500,000 114,500,000
Effect of dilutive securities
Employee stock options..... 311,985 108,000 2,000 --
------------ ------------ ------------ ------------
Dilutive potential common
shares........................ 311,985 108,000 2,000 --
Denominator for diluted net
income per Ordinary
Share -- adjusted
weighted-average shares and
assumed conversions........ 114,812,234 114,608,000 114,502,000 114,500,000
============ ============ ============ ============
Basic net income per Ordinary
Share......................... $ 2.51 $ 1.12 $ 1.44 $ 0.54
Diluted net income per Ordinary
Share......................... $ 2.50 $ 1.12 $ 1.44 $ 0.54
|
For additional disclosures regarding the employee stock options, see Note 8.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various lawsuits, claims and related matters. In the opinion of management, the ultimate resolution of such matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
In January 1997, the Company entered into a contract for the construction of the Galaxy II, a heavy duty harsh environment jackup drilling rig. The rig was delivered timely from the shipyard on August 24, 1998 at a total cost of approximately $156 million excluding initial mobilization. The Galaxy II was transported from Singapore to Nova Scotia during the period August 26 to October 27 and, following completion of import formalities, was moved to its first drilling location where final commissioning activity was completed. The rig began work under a five year drilling contract on November 9, 1998.
In September 1997, the Company entered into a contract for the construction of the Galaxy III, a heavy duty harsh environment jackup drilling rig. The cost of the rig, excluding initial mobilization is expected to be approximately $175 million. The rig is expected be delivered by the shipyard during the third quarter of 1999 and mobilized to its initial work area in the North Sea during the fourth quarter of 1999. The Company has entered into a three year drilling contract with a customer to operate the rig in the U.K. sector of the North Sea.
On July 10, 1998, Rig 162, one of the Company's land rigs operating in Saudi Arabia, was severely damaged following a blowout and subsequent fire. There were no personnel injuries. As provided for in the drilling contract, the customer elected to cancel the remaining term of the contract and the Company determined that the rig would not be rebuilt. An unrepaired partial loss settlement of $13.8 million was negotiated with the Company's insurance carriers. All proceeds from this settlement had been received at December 31, 1998. The Company recognized a gain of $4.8 million in connection with this loss.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
The Company has an uncommitted credit facility with a major bank which provides for advances and letters of credit up to a maximum of $35,000,000, denominated in U.S. dollars. This credit facility expires on July 1, 1999. At the Company's election, advances under this credit facility bear interest at the higher of (a) 0.50% per annum above the latest Federal Funds Rate and (b) the bank's publicly announced Reference Rate, or at the LIBOR rate plus 0.25%. The fee for letters of credit is 0.375% per annum. At December 31, 1998, $1,365,000 of the credit facility was used for standby letters of credit.
11. SEGMENT INFORMATION AND RELATED DISCLOSURES
The Company has seven reportable segments, defined as different equipment classifications, or by contract terms in the case of drilling related services, as follows: heavy duty harsh environment jackup rigs, semisubmersible rigs, 300 to 350 foot cantilever jackup rigs, 200 to 250 foot jackup rigs, other marine rigs, land rigs and drilling related services. The Company's heavy duty harsh environment jackup rig fleet consists of five rigs capable of operating in water depths of 350-400 feet. The Company currently has one additional heavy duty harsh environment jackup rig under construction (Note 10). The semisubmersible segment is comprised of three rigs capable of operating in water depths of 2,000-2,400 feet. Eight rigs capable of operating in water depths of 300-350 feet make up the 300 to 350 foot cantilever jackup rig segment. The 200 to 250 foot jackup rig segment consists of nine rigs capable of operating in water depths of 200-250 feet, seven of which are cantilevered and two of which are specially designed to operate in shallow water. Other marine rigs consist of one platform rig and one lake barge that was disposed of in the fourth quarter of 1998. The land rig segment includes 31 rigs, all of which are specially designed to operate in remote areas. Through its drilling related services segment, the Company provides third party rig operations, incentive drilling and drilling engineering and project management services.
The Company evaluates performance and allocates resources based upon the operating margin (operating revenues less operating expenses) generated by the segment. The accounting policies of the segments are the same as those described in the summary of significant policies (Note 2). There are no intersegment sales and transfers due to the nature of the business of the segments.
Santa Fe's reportable segments are managed separately due to the distinct capabilities of each of the underlying equipment classifications or the particular contract requirements in the case of drilling related services. The following table sets forth the operating margin for each of the reportable segments and reconciles total operating revenues and operating expenses (in thousands):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Operating revenues
Heavy duty harsh environment jackup rigs........ $148,997 $ 71,813 $119,741 $ 92,939
Semisubmersibles................................ 114,952 49,483 64,751 37,510
300-350 foot cantilever jackup rigs............. 150,602 66,867 93,773 65,308
200-250 foot jackup rigs........................ 143,164 69,272 97,141 73,716
Other marine rigs............................... 11,836 5,669 11,009 4,666
-------- -------- -------- --------
Total marine rigs....................... 569,551 263,104 386,415 274,139
Land rigs....................................... 147,880 71,626 103,158 91,859
Drilling related services....................... 92,746 39,596 86,904 101,581
Other........................................... 1,169 859 2,086 3,303
-------- -------- -------- --------
Total operating revenues................ 811,346 375,185 578,563 470,882
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Operating costs
Heavy duty harsh environment jackup rigs........ 49,549 25,224 45,218 40,528
Semisubmersibles................................ 63,712 22,767 36,969 30,979
300-350 foot cantilever jackup rigs............. 58,373 30,125 48,900 39,130
200-250 foot jackup rigs........................ 66,982 31,491 59,552 53,947
Other marine rigs............................... 8,659 4,219 6,808 3,252
-------- -------- -------- --------
Total marine rigs....................... 247,275 113,826 197,447 167,836
Land rigs....................................... 97,966 48,345 73,687 63,689
Drilling related services....................... 65,665 30,537 61,408 75,775
Other........................................... 3,116 2,970 7,123 1,213
-------- -------- -------- --------
Total operating costs................... 414,022 195,678 339,665 308,513
Operating margin
Heavy duty harsh environment jackup rigs........ 99,448 46,589 74,523 52,411
Semisubmersibles................................ 51,240 26,716 27,782 6,531
300-350 foot cantilever jackup rigs............. 92,229 36,742 44,873 26,178
200-250 foot jackup rigs........................ 76,182 37,781 37,589 19,769
Other marine rigs............................... 3,177 1,450 4,201 1,414
-------- -------- -------- --------
Total marine rigs....................... 322,276 149,278 188,968 106,303
Land rigs....................................... 49,914 23,281 29,471 28,170
Drilling related services....................... 27,081 9,059 25,496 25,806
Other........................................... (1,947) (2,111) (5,037) 2,090
-------- -------- -------- --------
Total operating margin.................. $397,324 $179,507 $238,898 $162,369
======== ======== ======== ========
|
The following table reconciles operating margin for each of the reportable segments to consolidated income before provision for taxes on income and presents capital spending for each reportable segment (in thousands):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Operating margin............................. $397,324 $179,507 $238,898 $162,369
-------- -------- -------- --------
Depreciation/(gain) loss on sale of assets
Heavy duty harsh environment jackup rigs... 12,423 5,367 11,361 19,051
Semisubmersibles........................... 4,975 1,904 3,869 9,092
300-350 foot cantilever jackup rigs........ 9,836 4,874 8,678 17,009
200-250 foot jackup rigs................... 9,011 4,004 6,588 13,619
Other marine rigs.......................... 231 104 164 127
-------- -------- -------- --------
Total marine rigs.................. 36,476 16,253 30,660 58,898
Land rigs.................................. 10,387 7,194 10,280 13,924
Drilling related services.................. 1,102 150 269 1,017
Other...................................... 1,854 905 1,110 2,535
-------- -------- -------- --------
Total depreciation/(gain) loss on
sale of assets................... 49,819 24,502 42,319 76,374
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Unallocated amount:
General and administrative................. 22,161 10,781 16,931 17,168
-------- -------- -------- --------
Operating income................... 325,344 144,224 179,648 68,827
-------- -------- -------- --------
Other income (expense)..................... 1,320 804 6,593 9,016
-------- -------- -------- --------
Income before provision for taxes on
income..................................... $326,664 $145,028 $186,241 $ 77,843
======== ======== ======== ========
Capital spending by segment
Heavy duty harsh environment jackup rigs... $145,411 $ 83,502 $ 27,972 $ 7,153
Semisubmersibles........................... 14,329 5,003 6,805 13,995
300-350 foot cantilever jackup rigs........ 5,223 5,085 29,632 8,919
200-250 foot jackup rigs................... 19,615 6,121 12,145 10,221
Other marine rigs.......................... 293 -- 158 77
-------- -------- -------- --------
Total marine rigs.................. 184,871 99,711 76,712 40,365
Land rigs.................................. 88,906 29,526 47,560 13,924
Drilling related services.................. 79 -- 82 368
Other...................................... 3,544 (2,104) 22,242 10,153
-------- -------- -------- --------
Total capital spending by
segment.......................... $277,400 $127,133 $146,596 $ 64,810
======== ======== ======== ========
|
Segment assets for each of the reportable segments is defined as the net book value of the property and equipment for each classification. The following table presents assets for each of the Company's reportable segments and reconciles such segment assets to total consolidated assets (in thousands):
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
Property and equipment, net
Heavy duty harsh environment jackup rigs.................. $ 538,207 $ 372,154
Semisubmersibles.......................................... 65,745 56,481
300-350 foot cantilever jackup rigs....................... 147,041 152,276
200-250 foot jackup rigs.................................. 75,069 64,404
Other marine rigs......................................... 340 333
---------- ----------
Total marine rigs................................. 826,402 645,648
Land rigs................................................. 200,216 131,531
Drilling related services................................. 3,103 65
Other..................................................... 19,480 24,726
---------- ----------
Total property and equipment, net................. 1,049,201 801,970
---------- ----------
Unallocated amounts:
Total current assets...................................... 352,436 294,455
Prepaid deposits.......................................... -- 14,861
Other noncurrent assets................................... 52,099 50,167
========== ==========
Total assets...................................... $1,453,736 $1,161,453
========== ==========
|
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
All of the Company's operations are located outside of the Cayman Islands. The following table summarizes, by geographical area, the identifiable assets of the Company (in thousands):
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
North Sea................................................... $ 401,243 $ 359,411
North Africa................................................ 121,717 136,760
West Africa................................................. 38,902 66,830
Southeast Asia and Pacific.................................. 131,234 62,876
Middle East and Azerbaijan.................................. 163,704 153,095
South America............................................... 110,597 42,471
North America............................................... 201,525 108,011
Corporate assets(1)......................................... 284,814 231,999
---------- ----------
Total assets...................................... $1,453,736 $1,161,453
========== ==========
|
(1) Consists primarily of cash equivalents, marketable securities, construction in progress, and other corporate assets.
The following table summarizes, by geographical area, operating revenues (in thousands):
CALENDAR SIX MONTHS FISCAL YEAR ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1997 1996
------------ ------------ -------- --------
Operating revenues
North Sea................................. $308,802 $135,201 $219,466 $196,784
North Africa.............................. 142,468 62,191 107,979 98,423
West Africa............................... 71,480 35,476 48,263 16,520
Southeast Asia and Pacific................ 84,760 36,131 49,585 37,347
Middle East and Azerbaijan................ 132,003 66,160 93,988 89,786
South America............................. 58,366 24,446 43,098 20,647
North America............................. 13,467 15,580 16,184 11,375
-------- -------- -------- --------
Total operating revenues........ $811,346 $375,185 $578,563 $470,882
======== ======== ======== ========
|
The Company's operations in the North Sea are presently all conducted within the U.K. sector of the North Sea. The Company's operations in North Africa consist principally of operations in Egypt. The Company's operations in the Middle East include significant operations in Kuwait. See Note 12.
A substantial portion of the Company's assets are mobile. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the earnings generated by such assets during the periods. General corporate assets are principally cash and cash equivalents and other nonoperating assets.
The Company's operations are geographically dispersed and are therefore subject to certain political and other uncertainties not encountered in domestic operations, including risks of war, expropriation of equipment, renegotiation or modification of existing contracts, taxation policies, and the general hazards associated with foreign sovereignty over certain areas in which operations are conducted.
Operational risks and hazards may result in extensive damage to or total loss of drilling rigs, with associated personal injuries and loss of life, pollution, well loss, well control expenses and/or wreck removal or other requirements. Such losses, liabilities or obligations may be uninsured or underinsured. In the event of a major incident or incidents resulting from operational risks and hazards, the Company will sustain a loss of
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
revenue by reason of the rig loss or damage and may be subject to significant additional expenses in respect of uninsured or underinsured losses, liabilities or obligations.
The following table summarizes revenues from major customers of the Company as a percentage of total operating revenues for the period indicated.
CALENDAR SIX MONTHS FISCAL YEAR
YEAR ENDED ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------
1998 1997 1997 1996
------------ ------------ ----- -----
Shell......................................... 13.2% 13.9% 9.3% 18.3%
Elf Aquitaine................................. 10.5% 5.5% 1.9% 0.0%
BP Amoco...................................... 9.9% 9.7% 19.2% 15.2%
Mobil Oil Company............................. 7.4% 4.7% 4.0% 1.5%
AGIP.......................................... 5.7% 6.4% 7.0% 9.5%
Kuwait Oil Company (Note 12).................. 5.5% 4.6% 4.4% 7.6%
Phillips Petroleum Company.................... 4.4% 0.0% 3.9% 10.3%
Petroleo Y Gas................................ 3.8% 4.0% 5.3% 3.5%
Texaco........................................ 2.7% 5.3% 6.4% 2.2%
British Gas................................... 0.5% 7.5% 7.6% 6.0%
|
12. TRANSACTIONS WITH AFFILIATES
The Company provides contract drilling services in Kuwait to the Kuwait Oil Company, K.S.C. ("KOC"), a subsidiary of KPC, and also provides contract drilling services to a partially owned affiliate of KOC in the Kuwait-Saudi Arabian Partitioned Neutral Zone. Such services are performed pursuant to drilling contracts which contain terms and conditions and rates of compensation which materially approximate those which are customarily included in arm's-length contracts of a similar nature. In connection therewith, KOC provides the Company rent free use of certain land and maintenance facilities and has committed to continue providing same, subject to availability of the maintenance facilities, through the current February 2001 term of the drilling contracts. In relation to its drilling business in Kuwait, the Company has an agency agreement with a subsidiary of KPC which obligates the Company to pay an agency fee based on a percentage of revenues. The Company believes the terms of this agreement are more favorable than those which could be obtained with an unrelated third party in an arm's-length negotiation, but the value of such terms is currently immaterial to the Company's results of operations.
The Company earned revenues from KPC affiliated companies in the ordinary course of business of $44,800,000, $17,315,000, $25,268,000 and $35,925,000 for the calendar year ended December 31, 1998, the six months ended December 31, 1997, and the fiscal years ended June 30, 1997 and 1996, respectively. The Company paid agency fees to a subsidiary of KPC of $563,028, $175,038, $259,827 and $356,851 during the calendar year ended December 31, 1998, the six months ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996, respectively. The Company had accounts receivable from KPC affiliated companies of $6,072,000 and $5,597,000 at December 31, 1998 and 1997, respectively.
In connection with the Reorganization, the Company made distributions to Holdings during the three years ended June 30, 1997 comprised principally of certain subsidiaries which conducted the Company's former non-drilling operations and services (the "Non-Drilling Subsidiaries") and certain additional non-drilling assets, including real estate, cash and cash equivalents.
The Company, Holdings and KPC entered into an Intercompany Agreement before the consummation of the Offering (the "Intercompany Agreement"), certain provisions of which are summarized below. As used
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
herein, "KPC Affiliated Group" means KPC and its affiliates, including Holdings, other than the Company and its subsidiaries.
As of December 31, 1998, the consolidated financial statements of Holdings contained liabilities to third parties, including tax liabilities, aggregating approximately $61 million incurred by the Non-Drilling Subsidiaries on or before March 31, 1997. As of December 31, 1998, Holdings maintained cash and cash equivalents (the "Liability Payment Fund") sufficient to satisfy those liabilities remaining after such date. The Company, Holdings and KPC have agreed in the Intercompany Agreement that all amounts paid to claimants to satisfy those liabilities, whether by settlement, judgment or award (including claimants' attorneys' fees), will be paid by Holdings from the Liability Payment Fund. The Company will pay all internal and external costs and fees (including the Company's and Holdings' attorneys' fees) associated with management and resolution of those liabilities, and believes such costs and fees will not be material. If any amount remains in the Liability Payment Fund at March 31, 2002, Holdings will pay the Company the first $10 million of such amount and 50% of any amount in excess of $10 million. Thereafter, or if the resolution of those liabilities earlier exhausts the Liability Payment Fund, Holdings will have no further responsibility for those liabilities, and the Company will be responsible for all costs, fees and amounts paid to resolve those liabilities and will indemnify the KPC Affiliated Group in respect of such costs and fees and those liabilities. The Company believes that the Liability Payment Fund is adequate to provide for such costs and fees and those liabilities. Accordingly, the Company believes that the indemnification costs, if any, will not be material and no additional reserves have been established by the Company in respect of such costs and fees and those liabilities or the Company's obligation under the Intercompany Agreement relating to such costs and fees and those liabilities.
The Intercompany Agreement also provides that, except as may be provided in
a separate agreement, the Company will indemnify the KPC Affiliated Group
against losses based on, or taxes arising from, the following: (i) the ownership
of the assets or the operation of the business of the Company or its
subsidiaries, (ii) any other activities of the Company or its subsidiaries,
(iii) any guaranty or similar agreement by the KPC Affiliated Group provided to
any person with respect to any obligation of the Company or its subsidiaries,
and (iv) certain other matters. In addition, the Company has agreed to indemnify
the KPC Affiliated Group against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended ("the Securities Act"),
relating to misstatements in or omissions from any registration statement or
report that the Company files under the Securities Act. Holdings has also agreed
to indemnify the Company and its subsidiaries against losses based on the
ownership or operation of the assets or properties or the operation or conduct
of the business of Holdings and its subsidiaries on or after March 31, 1997.
The Company also entered into a Management Services Agreement with Holdings (the "Management Services Agreement"), for the purpose of providing asset (primarily real estate) management services, general and administrative services and liability management and resolution services to Holdings, the Non-Drilling Subsidiaries and inactive subsidiaries of Holdings. The Management Services Agreement authorizes the Company to resolve the liabilities of the Non-Drilling Subsidiaries under the Intercompany Agreement using the Liability Payment Fund. Although Holdings retains the right to reduce or expand the scope of services to be performed by the Company pursuant to the Management Services Agreement, the Company's liability management and resolution service may not be reduced or terminated. The Management Services Agreement also provides for payment of an initial asset management fee to the Company of $173,000 per year as well as reimbursement of out-of-pocket costs in respect of asset management services, and stipulates that the fees are subject to negotiation on an annual basis and upon any reduction in or expansion of the scope of services provided by the Company. The Company will pay all internal and external costs and fees (including the Company's and Holdings' attorneys' fees) associated with the Company's liability management and resolution services and all internal and external costs and fees associated with the provision of general and administrative
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
services pursuant to the Management Services Agreement. The Company believes such costs and fees will not be material.
13. QUARTERLY RESULTS (UNAUDITED)
Shown below are selected unaudited quarterly data (in thousands), except per share data:
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ----------- ------------ -----------
CALENDAR YEAR ENDED DECEMBER 31, 1998
Operating revenues.......................... $196,281 $202,646 $201,085 $211,334
======== ======== ======== ========
Operating income............................ $ 78,103 $ 72,596 $ 81,565 $ 93,080
======== ======== ======== ========
Net income.................................. $ 67,759 $ 63,980 $ 72,734 $ 82,671
======== ======== ======== ========
Basic net income per Ordinary Share......... $ 0.59 $ 0.56 $ 0.64 $ 0.72
======== ======== ======== ========
Diluted net income per Ordinary Share....... $ 0.59 $ 0.56 $ 0.64 $ 0.72
======== ======== ======== ========
|
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- ------------ -----------
SIX MONTHS ENDED DECEMBER 31, 1997
Operating revenues.......................... $176,787 $198,398
======== ========
Operating income............................ $ 67,058 $ 77,166
======== ========
Net income.................................. $ 59,322 $ 69,206
======== ========
Basic and diluted net income per Ordinary
Share..................................... $ 0.52 $ 0.60
======== ========
FISCAL YEAR ENDED JUNE 30, 1997
Operating revenues.......................... $126,080 $138,711 $149,253 $164,519
======== ======== ======== ========
Operating income............................ $ 34,782 $ 39,686 $ 47,134 $ 58,046
======== ======== ======== ========
Net income.................................. $ 30,994 $ 37,664 $ 42,923 $ 53,335
======== ======== ======== ========
Basic and diluted net income per Ordinary
Share..................................... $ 0.27 $ 0.33 $ 0.37 $ 0.47
======== ======== ======== ========
FISCAL YEAR ENDED JUNE 30, 1996
Operating revenues.......................... $111,255 $114,529 $118,417 $126,681
======== ======== ======== ========
Operating income............................ $ 9,489 $ 15,925 $ 21,722 $ 21,691
======== ======== ======== ========
Net income.................................. $ 9,012 $ 14,067 $ 17,393 $ 21,504
======== ======== ======== ========
Pro forma basic and diluted net income per
Ordinary Share............................ $ 0.08 $ 0.12 $ 0.15 $ 0.19
======== ======== ======== ========
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
SANTA FE INTERNATIONAL
CORPORATION
By: /s/ D.G. BARBER
----------------------------------
D.G. Barber, Senior Vice President
and Chief Financial Officer
Date: March 29, 1999
|
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
**3.1 -- Amended and Restated Memorandum of Association of the
Registrant.
**3.2 -- Amended and Restated Articles of Association of the
Registrant.
*4 -- Specimen of Ordinary Shares Certificate.
**10.1 -- Registrant's Investment Savings and Profit Sharing Plan.
**10.2 -- Registrant's Pension Plan (U.S. employees).
**10.3 -- Registrant's Special Pension Plan (non-U.S. employees).
**10.4 -- Registrant's Equity Restoration Plan.
*10.5 -- Registrant's Supplemental Executive Retirement Plan.
*10.6 -- Registrant's Performance Unit Plan.
***10.7 -- Registrant's Annual Incentive Compensation Plan.
***10.8 -- Registrant's 1997 Long Term Incentive Plan.
***10.9 -- Registrant's 1997 Non-Employee Director Stock Option
Plan.
***10.10 -- Registrant's 1997 Employee Share Purchase Plan.
*10.11 -- Registrant's Employee Severance Protection Plan.
*10.12 -- Registrant's Directors and Officers Indemnity Agreement.
*10.13 -- Intercompany Agreement by and among Kuwait Petroleum
Corporation, SFIC Holdings (Cayman), Inc. and the
Registrant, dated June 9, 1997.
*10.14 -- Management Services Agreement by and between SFIC
Holdings (Cayman), Inc. and the Registrant, dated June 9,
1997.
**10.15 -- Agency Agreement between Kuwait Santa Fe Braun for
Engineering and Petroleum Enterprises( K.S.B.) Company
K.S.C. and the Registrant, dated April 1, 1992.
**10.16 -- Contract for the Construction and Sale of a Jackup
Drilling Unit by and between Far East Levingston
Shipbuilding Ltd. and the Registrant, dated as of
December 16, 1996.
**10.17 -- Drilling Contract by and between Mobil Oil Canada
Properties and Santa Fe Drilling Company (Canada)
Limited, dated as of December 16, 1996.
*10.18 -- Share Purchase Agreement between SFIC Holdings (Cayman)
Inc. and the Registrant, dated as of June 9, 1997.
*10.19 -- Contract for the Construction and Sale of Jackup Drilling
Unit Galaxy III by and between Keppel FELS Limited and
the Registrant, dated as of September 17, 1997.
*10.20 -- Letter of Interim Agreement for Provision of Jackup
Drilling Unit by and between Amoco (U.K.) Exploration
Company and the Registrant, dated as of September 3,
1997.
****10.21 -- Consulting Agreement dated December 10, 1997 between
Registrant and Gordon M. Anderson.
****10.22 -- AMOCO (U.K.) Exploration Company Form of Contract Ref:
AD3300 for The Provision of the Jack-Up Drilling Unit
Santa Fe "Galaxy III" for Drilling Operations on the
U.K.C.S. with Santa Fe Drilling Company (North Sea)
Limited, dated September 3, 1997 (with Appendix 5 only).
+10.23 -- Registrant's Non-Employee Director Deferred Compensation
Plan.
+10.24 -- Amendment to Registrant's 1997 Non-Employee Director
Stock Option Plan.
+10.25 -- Amendment to Registrant's 1997 Long-Term Incentive
Compensation Plan.
+10.26 -- Amendment to Registrant's Supplemental Executive
Retirement Plan.
+10.27 -- Amendment to Registrant's Supplemental Executive
Retirement Plan.
|
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
+10.28 --Amendment to Registrant's 1997 Non-Employee Director Stock
Option Plan
+21 -- List of Subsidiaries.
+23.1 -- Consent of Ernst & Young LLP, independent auditors
|
* Incorporated by reference to the Company's Annual Report on Form 20-F for the fiscal year ended June 30, 1997.
** Incorporated by reference to the Company's Registration Statement on Form F-1 (No. 333-6912) filed May 14, 1997.
*** Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-7070) filed June 13, 1997.
**** Incorporated by reference to the Company's Report on Form 6-K filed March 3, 1998.
+ Filed herewith.
Exhibit 10.23
SANTA FE INTERNATIONAL CORPORATION
NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN
The Santa Fe International Corporation Non-Employee Director Deferred Compensation Plan is hereby established effective December 8, 1998 as follows:
ARTICLE 1 - INTRODUCTION
1.1 PURPOSE OF PLAN
Santa Fe International Corporation (hereafter "Santa Fe" or the "Company") has adopted the Plan set forth herein to attract and retain qualified Directors and to provide incentives to these Directors through the ability to defer their receipt of fees for service as a Director of the Company.
ARTICLE 2 - DEFINITIONS
Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:
2.1 ACCOUNT means, for each Participant, the account established for his or her benefit under Section 5.1.
2.2 ADOPTION AGREEMENT means the Merrill Lynch Special Nonqualified Deferred Compensation Plan Adoption Agreement signed by the Company to establish the Plan and containing all the options selected by the Company, as the same may be amended from time to time.
2.3 BOARD means the Board of Directors of the Company.
2.4 CHANGE OF CONTROL means a change in control of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act as such Schedule, Regulation and Act were in effect on the date of adoption of this Plan by the Board, assuming that such Schedule, Regulation and Act applied to the Company, provided that such a change in control shall be deemed to have occurred at such time as:
(i) any "person" (as that term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) (other than an Excluded Person (as defined below)) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities representing 20% or more of the combined voting power for election of members of the Board of the then outstanding voting securities of the Company or any successor of the Company, excluding any person whose beneficial ownership of securities of the Company or any successor is obtained in a merger or consolidation not included in paragraph (iii) below;
(ii) during any period of two (2) consecutive years or less, individuals who at the beginning of such period constituted the Board of the Company cease, for any reason, to constitute at least a majority of the Board, unless the appointment, election or nomination for election of each new member of the Board (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) was approved by a vote of at least two-thirds of the members of the Board then still in office who were members of the Board at the beginning of the period or whose appointment, election or nomination was so approved since the beginning of such period;
(iii) there is consummated any merger, consolidation or similar transaction to which the Company or any Subsidiary is a party as a result of which the persons who were equityholders of the Company immediately prior to the effective date of the merger or consolidation shall have beneficial ownership of less than 50% of the combined voting power for election of members of the Board (or equivalent) of the surviving entity or its parent following the effective date of such merger or consolidation;
(iv) any sale or other disposition (or similar transaction) (in a single transaction or series of related transactions) of (x) 50% or more of the assets or earnings power of the Company or (y) business operations which generated a majority of the consolidated revenues (determined on the basis of the Company's four most recently completed fiscal quarters for which reports have been completed) of the Company and its subsidiaries immediately prior thereto, other than a sale, other disposition or similar transaction to an Excluded Person or to an entity of which equityholders of the Company beneficially own at least 50% of the combined voting power;
(v) any liquidation of the Company.
For purposes of this Section 2.4, the term "Excluded Person" shall mean and include (i) Kuwait Petroleum Corporation and its affiliates, (ii) any corporation beneficially owned by shareholders of the Company in substantially the same proportion as their ownership of shares of the Company and (iii) the Company and any subsidiary of the Company.
2.5 COMPANY means Santa Fe International Corporation.
2.6 COMPENSATION has the meaning elected by the Company in the Adoption Agreement.
2.7 DIRECTOR shall mean any director of the Company who is not an employee of the Company at the time of deferral of income under this Plan.
2.6 EFFECTIVE DATE means the date chosen in the Adoption Agreement as of which the Plan first becomes effective.
2.7 ELECTION FORM means the participation election form as approved and prescribed by the Plan Administrator.
2.8 ELECTIVE DEFERRAL means the portion of Fees that is deferred by a Participant under Section 4.1.
2.9 ELIGIBLE DIRECTOR means, each non-employee Director of the Company who is performing services as a Director of the Company and who is eligible to receive Fees for such services.
2.10 FEES means the cash compensation payable to a Director by reason of service on the Board either (i) as a retainer (without regard to attendance at meetings) or (ii) on a per meeting basis.
2.11 INSOLVENT means either (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
2.12 PARTICIPANT means any individual who participates in the Plan in accordance with Article 3.
2.13 PLAN means the Santa Fe International Corporation Non-Employee Director Deferred Compensation Plan as amended from time to time and the Adoption Agreement and all amendments thereto.
2.14 PLAN ADMINISTRATOR means the person, persons or entity-designated by the Company in the Adoption Agreement to administer the Plan and to serve as the agent for "Company" with respect to the Trust as contemplated by the agreement establishing the Trust. If no such person or entity is so serving at any time, the Compensation Committee of the Board of Directors of the Company shall be the Plan Administrator.
2.15 PLAN YEAR means the calendar year commencing January 1 and ending December 31.
2.16 TRUST means the trust established by the Company that identifies the Plan as a plan with respect to which assets are to be held by the Trustee.
2.17 TRUSTEE means the trustee or trustees under the Trust.
ARTICLE 3 - PARTICIPATION
3.1 COMMENCEMENT OF PARTICIPATION
Any Eligible Director who elects to defer part of his or her Fees in accordance with Section 4.1 shall become a Participant in the Plan as of the date such deferrals commence in accordance with Section 4.1.
3.2 CONTINUED PARTICIPATION A
Participant in the Plan shall continue to be a Participant so long as any amount remains credited to his or her Account.
ARTICLE 4 - ELECTIVE DEFERRALS
4.1 ELECTIVE DEFERRALS
An individual who is an Eligible Director on the Effective Date may, by completing an Election Form and filing it with the Plan Administrator within 30 days following the Effective Date, elect to defer a percentage or dollar amount of one or more payments of Fees, on such terms as the Plan Administrator may permit, which are payable to the Participant after the date on which the individual files the Election Form. Any individual who becomes an Eligible Director after the Effective Date may, by completing an Election Form and filing it with the Plan Administrator within 30 days following the date on which the Plan Administrator gives such individual written notice that the individual is an Eligible Director, elect to defer a percentage or dollar amount of one or more payments of Fees, on such terms as the Plan Administrator may permit, which are payable to the Participant after the date on which the individual files the Election Form. Any Eligible Director who has not otherwise initially elected to defer Fees in accordance with this paragraph 4.1 may elect to defer a percentage or dollar amount of one or more payments of Fees, on such terms as the Plan Administrator may permit, commencing with Fees paid in the next succeeding Plan Year, by completing an Election Form prior to the first day of such succeeding Plan Year. A Participant's Fees shall be reduced in accordance with the Participant's election hereunder and amounts deferred hereunder shall be paid by the Company to the Trust as soon as administratively feasible and credited to the Participant's Account as of the date the amounts are received by the Trustee.
An election to defer a percentage or dollar amount of Fees for any Plan Year shall apply for subsequent Plan Years unless changed or revoked. A Participant may change or revoke his or her deferral election as of the first day of any Plan Year by giving written notice to the Plan Administrator before such first day (or any such earlier date as the Plan Administrator may prescribe).
ARTICLE 5 - ACCOUNTS
5.1 ACCOUNTS
The Plan Administrator shall establish an Account for each Participant reflecting Elective Deferrals made for the Participant's benefit together with any adjustments for income, gain or loss and any payments from the Account. The Plan Administrator may cause the Trustee to maintain and invest separate assets accounts corresponding to each Participant's Account. The Plan Administrator shall establish sub-accounts for each Participant that has more than one election in effect under Section 6.1 and such other sub-accounts as are necessary for the proper administration of the Plan. As of the last business day of each calendar quarter, the Plan Administrator shall provide the Participant with a statement of his or her Account reflecting the income, gains and losses (realized and unrealized), amounts of deferrals, and distributions of such Account since the prior statement.
5.2 INVESTMENTS
The assets of the Trust shall be invested in such investments as the Trustee shall determine. The Trustee may (but is not required to) consider the Company's or a Participant's investment preferences when investing the assets attributable to a Participant's Account.
5.3 CLAIMS OF GENERAL CREDITORS. All Fees and any other compensation deferred and any amounts credited to any Accounts or sub accounts established under this Plan shall remain a part of the general assets of the Company. Accordingly, any compensation deferred under this plan is subject to the claims of the Company's general creditors.
ARTICLE 6 - PAYMENTS
6.1 ELECTION AS TO TIME AND FORM OF PAYMENT
A Participant shall elect (on the Election Form used to elect to defer Fees under Section 4.1) the date at which the Elective Deferrals will commence to be paid to the Participant. The Participant shall also elect thereon for payments to be paid in either:
a. a single lump-sum payment; or
b. annual installments over a period elected by the Participant, not to exceed ten (10) years, with the amount of each installment to equal the balance of his or her Account immediately prior to the installment divided by the number of installments remaining to be paid.
Each such election will be effective for the Plan Year for which it is made and succeeding Plan Years, unless changed by the Participant. Any change will be effective only for Elective Deferrals that are (at the time of the subsequent change of payment election) scheduled to commence to be paid at least 24 months following the date on which the Election Form containing the change is filed with the Plan Administrator. Except as provided in Sections 6.2, 6.3, or 6.4, payment of a Participant's Account shall be made in accordance with the Participant's elections under this Section 6.1.
6.2 CHANGE OF CONTROL
As soon as possible following a Change of Control of the Company, each Participant shall be paid his or her entire Account balance in a single lump sum.
6.3 DEATH
If a Participant dies prior to the complete distribution of his or her Account, the balance of the Account shall be paid as soon as practicable to the Participant's designated beneficiary or beneficiaries, in accordance with the payment election in effect under Section 6.1 on the date of the Participant's death. Alternatively, the Participant may elect that the balance of the Account be paid to the Participant's beneficiary or beneficiaries.
Any designation of beneficiary and form of payment to such beneficiary shall be made by the Participant on an Election Form filed with the Plan Administrator and may be changed by the Participant at any time by filing another Election Form containing the revised instructions. If no beneficiary is designated or no designated beneficiary survives the Participant, payment shall be made to the Participant's surviving spouse, or, if none, to his or her issue per stirpes, in a single payment. If no spouse or issue survives the Participant, payment shall be made in a single lump sum to the Participant's estate.
6.4 UNFORESEEN EMERGENCY
If a Participant (which shall include for purposes of this Section 6.4, a beneficiary) suffers an unforeseen emergency, as defined herein, the Plan Administrator, in its sole discretion, may pay to the Participant only that portion, if any, of his or her Account that the Plan Administrator determines is necessary to satisfy the emergency need, including any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution. A Participant requesting an emergency payment shall apply for the payment in writing in a form approved by the Plan Administrator may require. For purposes of this paragraph, "unforeseen emergency" means an immediate and heavy financial need resulting from any of the following:
a. expenses that are not covered by insurance and which the Participant or his or her spouse or dependent has incurred as a result of, or is required to incur in order to receive, medical care;
b. the need to prevent eviction of a Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence; or
c. any other circumstance that is determined by the Plan Administrator in its sole discretion to constitute an unforeseen emergency that is not covered by insurance and which cannot reasonably be relieved by the liquidation of the Participant's assets.
6.5 TAXES
All federal, state or local taxes that the Plan Administrator determines are required to be withheld from any payments made pursuant to this Article 6 shall be withheld.
ARTICLE 7 - PLAN ADMINISTRATOR
7.1 PLAN ADMINISTRATION AND INTERPRETATION
The Plan Administrator shall oversee the administration of the Plan. The Plan Administrator shall have complete control and authority to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan. The Plan Administrator shall have complete discretion to interpret the Plan and to decide all matters under the Plan. Such interpretation and decision shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously. Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on information furnished by a Participant, a beneficiary, the Company or the Trustee.
7.2 POWERS, DUTIES, PROCEDURES, ETC.
The Plan Administrator shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, may delegate such powers and duties, may receive such reimbursements and compensation, and shall follow such claims and appeal procedures with respect to the Plan as it may establish.
7.3 INFORMATION
To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of Participants, their service, retirement, death, termination of service, and such other pertinent facts as the Plan Administrator may require.
7.4 INDEMNIFICATION OF PLAN ADMINISTRATOR
The Company agrees to indemnify and to defend to the fullest extent permitted by law any officer(s) or employee(s) who serve as Plan Administrator (including any such individual who formerly served as Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Company) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.
ARTICLE 8 - AMENDMENT AND TERMINATION
8.1 AMENDMENTS
The Company shall have the right to amend the Plan from time to time, subject to
Section 8.3, by an instrument in writing that has been executed on the Company's
behalf by its duly authorized officer.
8.2 TERMINATION OF PLAN
This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Eligible Director (or any other person) or a consideration for, or an inducement or condition of service for, the performance of the services by an Eligible Director (or other person). The Company reserves the right to terminate the Plan at any time, subject to Section 8.3, by an instrument in writing that has been executed on the Company's behalf by its duly authorized officer. Upon termination, the Company may (a) elect to continue to maintain the Trust to pay benefits hereunder as they become due as if the Plan had not terminated or (b) direct the Trustee to pay promptly to Participants (or their beneficiaries) the balance of their Accounts.
8.3 EXISTING RIGHTS
No amendment or termination of the Plan shall adversely affect the rights of any Participant with respect to amounts that have been credited to his or her Account prior to the date of such amendment or termination.
ARTICLE 9 - MISCELLANEOUS
9.1 NO FUNDING
The Plan constitutes a mere promise by the Company to make payments in accordance with the terms of the Plan and Participants and beneficiaries shall have the status of general unsecured creditors of the Company. Nothing in the Plan will be construed to give any Director or any other person rights to any specific assets of the Company or of any other person. In all events, it is the intent of the Company that the Plan be treated as unfunded for tax purposes.
9.2 NON-ASSIGNABILITY
None of the benefits, payments, proceeds or claims of any Participant or beneficiary shall be subject to any claim of any creditor of any Participant or beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or beneficiary, nor shall any Participant or beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments or proceeds that he or she may expect to receive, contingently or otherwise, under the Plan.
9.3 LIMITATION OF PARTICIPANTS' RIGHTS
Nothing contained in the Plan shall constitute or be evidence of any agreement or understanding, expressed or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation.
9.4 PARTICIPANTS BOUND
Any action with respect to the Plan taken by the Plan Administrator or the Company or the Trustee or any action authorized by or taken at the direction of the Plan Administrator, the Company or the Trustee shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan.
9.5 RECEIPT AND RELEASE
Any payment to any Participant or beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Company, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may require such Participant or beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant or beneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid
receipt and release, the Plan Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Plan Administrator, the Company or the Trustee to follow the application of such funds.
9.6 GOVERNING LAW
The Plan shall be construed, administered, and governed in all respects under and by the laws of the state in which the Company maintains its primary place of business. If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective.
9.7 HEADINGS AND SUBHEADINGS
Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof.
9.8 SEVERABILITY The invalidity and unenforceability of any particular provision of this Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provisions were omitted herefrom.
By: /s/ Cary A. Moomjian
------------------------------------------------
SANTA FE INTERNATIONAL CORPORATION
|
Exhibit 10.24
AMENDMENT TO
SANTA FE INTERNATIONAL CORPORATION
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, Santa Fe International Corporation ("SFIC") has established a Non-Employee Director Stock Option Plan (hereafter "Plan") for the benefit of non-employee Directors of SFIC and
WHEREAS, pursuant to Section 4.7 of the plan, the Board of Directors may at any time or from time to time amend the Plan, provided such amendment does not adversely affect the vested rights of any participant in the Plan; and
WHEREAS, the Board of Directors has determined that it is appropriate at this time to amend the Plan in a manner not inconsistent with the terms of the Plan,
NOW THEREFORE, effective this 8th day of December 1998, the Santa Fe International Corporation Non-Employee Director Stock Option Plan is amended as follows:
1. The current Section 1.6 Maximum Individual Grants is DELETED and the following Substituted therefore:
"1.6 Maximum Individual Grants Subject to adjustment under Section 3.5, no Grantee may receive, during any fiscal year of the Company, Options covering an aggregate of more than twenty two thousand (22,000) Shares of Common Stock..
Dated: December 8, 1998
SANTA FE INTERNATIONAL CORPORATION
By: /s/ CARY A. MOOMJIAN
--------------------------------------------
Santa Fe International Corporation
|
Exhibit 10.25
AMENDMENT TO
SANTA FE INTERNATIONAL CORPORATION
1997 LONG-TERM INCENTIVE COMPENSATION PLAN
The Santa Fe International Corporation 1997 Long-Term Incentive Plan, which was adopted effective June 1, 1997, is hereby amended effective November 17, 1998 as follows:
1. The current Section 1.3 Administration is hereby AMENDED by ADDING to the end of the section the following sentence:
"Notwithstanding the foregoing, the Committee may delegate to any agent such duties or powers, both ministerial and discretionary with respect to the interpretation or administration of the Plan as it deems appropriate, except that the Committee shall retain exclusive authority to determine both the grant of awards under the Plan and the terms and conditions of such awards, and excepting further that any dispute arising from any such interpretation or administration shall be determined by the Committee in its sole and absolute discretion."
Dated: November 17, 1998
By: /s/ JOE BOYD
--------------------------------------------
Santa Fe International Corporation
|
Exhibit 10.26
AMENDMENT TO
SANTA FE INTERNATIONAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS Santa Fe International Corporation has established a Supplemental Executive Retirement Plan (hereafter "SERP") for the benefit of selected Executive employees of SFIC and
WHEREAS, pursuant to Section 2.2 of the SERP, the Compensation Committee of the Board of Directors may at any time or from time to time amend the SERP provided such amendment does not materially increase plan costs nor substantially modify the eligibility, vesting or benefit provisions of the plan, and
WHEREAS the Compensation Committee has determined that it is appropriate at this time to amend the SERP in a manner not inconsistent with the terms of the Plan,
NOW THEREFORE, effective this 17th day of November 1998 the Santa Fe International Corporation Supplemental Executive Retirement Plan is amended as follows:
1. A new item (bb) is added at the end of the current Section 1.2 Definitions to read as follows:
(bb) SPECIAL PENSION PLAN means the Special Pension Plan for Selected Employees of the Santa Fe International Corporations, as amended from time to time.
2. A new item (cc) is added at the end of the current Section 1.2 Definitions to read as follows:
(cc) SPECIAL PENSION PLAN BENEFIT means the sum of (i) the amount of straight life annual retirement benefit payable to a Participant in the Special Pension Plan at his or her Early, Normal or Late Retirement; plus (ii) the amount of annual retirement benefit attributable to the Participant as his or her Adjusted Special Profit Sharing Amount under the Special Pension Plan.
3. The current Section 3.1 is Amended as follows:
The subsection called "Class A Participants" is DELETED in its entirety and the following SUBSTITUTED therefore:
"Class A Participants
(a) Four (4) percent of Average Total Cash Earnings for each year of Service to a maximum of fifteen (15) years.
Less
(b) The sum of
(i) the Qualified Plan Benefit;
(ii) the Equity Restoration Plan Benefit;
(iii) any other retirement benefit provided from a non-qualified Company sponsored pension plan which replaces benefits otherwise reduced under Sections 401(a) or 415 of the Code; and
(iv) the Special Pension Plan Benefit."
Dated: November 17, 1998
SANTA FE INTERNATIONAL CORPORATION
By: /s/ JOE BOYD
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Santa Fe International Corporation
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EXHIBIT 10.27
AMENDMENT TO
SANTA FE INTERNATIONAL CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS Santa Fe International Corporation has established a Supplemental Executive Retirement Plan (hereafter "SERP") for the benefit of selected Executive employees of SFIC and
WHEREAS, pursuant to Section 2.1 of the SERP, the Compensation Committee of the Board of Directors may at any time or from time to time determine if any employee shall become a Participant in the Plan and
WHEREAS the Compensation Committee has determined that it is appropriate for Roger B. Hunt to become a Participant in the Plan, effective November 17, 1998.
NOW THEREFORE, effective this the 17th day of November 1998 the Santa Fe International Corporation Supplemental Executive Retirement Plan is amended as follows:
Appendix A is hereby modified to ADD to the list of Class A Participants the following Participant:
Roger B. Hunt
Dated: November 17, 1998
SANTA FE INTERNATIONAL CORPORATION
By: /s/ JOE BOYD
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Santa Fe International Corporation
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EXHIBIT 10.28
AMENDMENT TO
SANTA FE INTERNATIONAL CORPORATION
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, Santa Fe International Corporation ("SFIC") has established a Non-Employee Director Stock Option Plan (hereafter "Plan") for the benefit of non-employee Directors of SFIC and
WHEREAS, pursuant to Section 4.7 of the plan, the Board of Directors may at any time or from time to time amend the Plan, provided such amendment does not adversely affect the vested rights of any participant in the Plan; and
WHEREAS, the Board of Directors has determined that it is appropriate at this time to amend the Plan in a manner not inconsistent with the terms of the Plan,
NOW THEREFORE, effective this 23rd day of March 1999, the Santa Fe International Corporation Non-Employee Director Stock Option Plan is amended as follows:
1. The current Section 2.1 Grant Of Options is DELETED and the following Substituted therefore:
"2.1 Grant Of Options. The Committee is authorized to grant Options to Grantees in accordance with the terms and conditions required pursuant to this Plan and with such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. Current and future non-employee Directors of the Company and any of its subsidiaries that have not previously received any stock options from the Company shall be granted a one-time award of a right to purchase 10,000 shares (or such higher amount determined by the Board) of Common Stock at the fair market value at the date of approval of the Plan or their election to the Board. Subsequently each Director shall receive an Option of 5,000 shares (or such higher amount determined by the Board) of Common Stock on an annual basis.
Dated: March 23, 1999
SANTA FE INTERNATIONAL CORPORATION
By: /s/ Cary A. Moomjian
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Santa Fe International Corporation
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EXHIBIT 21
(UPDATED AS OF 2/28/99)
SUBSIDIARIES OF SANTA FE INTERNATIONAL CORPORATION
Arab Drilling & Workover Company
Caspian Drilling Company Limited
Desert Rig Operations, Inc.
Fortress Energy Services LLC
Key International Drilling Company Limited
Logistics Forwarding Company, Inc.
Merak Petroleum Base
Nigerian Santa Fe Joint Venture
Offshore Drilling Services Company AS
Oilfield Services, Inc.
P.T. Santa Fe-Pomeroy Indonesia
P.T. Santa Fe Supraco Indonesia
Platform Capital N.V.
Platform Financial N.V.
Qatar Drilling Company (W.L.L.)
SAFEMAL Drilling Sdn. Bhd.
Santa Fe AG
Santa Fe Communications, Inc.
Santa Fe Construction Co.
Santa Fe Drilling (N.A.) N.V.
Santa Fe Drilling (Nigeria) Limited
Santa Fe Drilling Company (Canada) Limited
Santa Fe Drilling Company (North Sea) Limited
Santa Fe Drilling Company (Overseas) Limited
Santa Fe Drilling Company (U.K.) Limited
Santa Fe Drilling Operations, Inc.
Santa Fe Drilling Venezuela, C.A.
Santa Fe Finance Ireland
Santa Fe Holding Company (North Sea) Limited
Santa Fe International Services, Inc.
Santa Fe Nederland B.V.
Santa Fe Operations (Nigeria) Limited
Santa Fe Services Netherlands B.V.
Santa Fe Techserv (North Sea) Limited
Saudi Drilling Company Limited
Sphere Supply, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-7070) of Santa Fe International Corporation of our report dated January 27, 1999, with respect to the consolidated financial statements of Santa Fe International Corporation included in this Annual Report (Form 20-F) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Dallas, Texas
March 29, 1999