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FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer Pursuant to Rule 13a-16 or 15f-16
of the Securities Exchange Act of 1934
For the month of September, 1999
SANTA FE INTERNATIONAL CORPORATION
(Translation of Registrant's name into English)
Two Lincoln Centre, Suite 1100, 5420 LBJ Freeway, Dallas, Texas 75240-2648
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.]
Form 20-F [ X ] Form 40-F [ ]
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934]
Yes [ ] No [ X ]
[If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with rule 12g3-2(b): 82 - ________.]
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Note: The following disclosure has been prepared to conform to the disclosure
called for in Quarterly Reports on Form 10-Q filed with the U. S. Securities and
Exchange Commission.
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO FORM 6-K
QUARTER ENDED SEPTEMBER 30, 1999
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Page No.
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COVER PAGE 1
DOCUMENT TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations and Retained Earnings
for the Three Months ended September 30, 1999 and 1998 and the
Nine Months ended September 30, 1999 and 1998 3
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1999 and 1998 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION 16
SIGNATURES 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(U.S. dollars, in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Operating revenues $ 143,599 $ 201,085 $ 489,117 $ 600,012
Operating costs 86,523 101,068 268,162 311,511
------------- ------------- ------------- -------------
Operating margin 57,076 100,017 220,955 288,501
Other operating costs and expenses:
Depreciation and amortization 17,653 13,267 53,121 39,914
General and administrative 4,351 5,426 14,870 17,019
Gain on sale of assets 10 (241) (371) (696)
------------- ------------- ------------- -------------
Operating income 35,062 81,565 153,335 232,264
Other income (expense):
Investment income 3,142 1,188 6,957 3,992
Other, net (261) 161 (1,199) (3,960)
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Income before provision for taxes on income 37,943 82,914 159,093 232,296
Provision for taxes on income (Note 4) 6,109 10,180 25,614 27,823
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Net income 31,834 72,734 133,479 204,473
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Retained earnings as of the beginning of the period 652,448 410,297 558,260 286,001
Dividends declared ($0.0325 per share per quarter) (3,730) (3,721) (11,187) (11,164)
------------- ------------- ------------- -------------
Retained earnings as of the end of the period $ 680,552 $ 479,310 $ 680,552 $ 479,310
============= ============= ============= =============
Income per Ordinary Share:
Basic and Diluted $ 0.28 $ 0.64 $ 1.16 $ 1.79
============= ============= ============= =============
Weighted average ordinary and ordinary
equivalent shares used in Income per
Ordinary Share computations:
Basic 114,733,469 114,500,300 114,732,897 114,500,221
============= ============= ============= =============
Effect of dilutive employee stock options 875,527 10,729 725,894 114,982
------------- ------------- ------------- -------------
Diluted 115,608,996 114,511,029 115,458,791 114,615,203
============= ============= ============= =============
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars, in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 109,846 $ 124,314
Marketable securities 108,934 --
Accounts receivable 123,460 161,728
Inventories 42,155 51,481
Prepaid expenses and other current assets 11,797 14,913
------------------ ------------------
Total current assets 396,192 352,436
------------------ ------------------
Property and equipment, at cost 2,112,055 2,030,756
Less accumulated depreciation and amortization (1,033,228) (981,555)
------------------ ------------------
Property and equipment, net 1,078,827 1,049,201
Other noncurrent assets 56,242 52,099
------------------ ------------------
Total assets $ 1,531,261 $ 1,453,736
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,281 $ 74,603
Accrued liabilities 103,417 107,057
------------------ ------------------
Total current liabilities 138,698 181,660
Other noncurrent liabilities 39,566 44,852
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Total liabilities 178,264 226,512
Commitments and contingencies (Note 3)
Shareholders' equity:
Ordinary shares par value $.01; 600,000,000 shares authorized,
114,960,648 and 114,762,469 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 1,150 1,148
Additional paid-in capital 671,295 667,816
Retained earnings 680,552 558,260
------------------ ------------------
Total shareholders' equity 1,352,997 1,227,224
------------------ ------------------
Total liabilities and shareholders' equity $ 1,531,261 $ 1,453,736
================== ==================
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
Nine Months ended September 30,
------------------------------
1999 1998
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<S> <C> <C>
Operating activities:
Net income $ 133,479 $ 204,473
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 53,121 39,914
Gain on sale of assets (371) (696)
Accretion of interest income and gains on sales (1,934) (127)
of marketable securities
Deferred income tax provision (benefit) (42) (76)
Changes in operating assets and liabilities:
Accounts receivable 38,268 (2,934)
Inventories 9,326 (3,001)
Prepaid expenses and other current assets 1,067 (4,942)
Accounts payable (39,322) (9,294)
Accrued liabilities (7,253) 15,035
Other, net (2,952) 7,054
------------ ------------
Net cash provided by operating activities 183,387 245,406
Investing activities:
Capital expenditures (82,296) (204,713)
Advance payments for drilling rigs -- (18,532)
Proceeds from sales of property and equipment 519 851
Maturities of marketable securities 45,261 8,220
Purchases of marketable securities (152,261) --
Proceeds from insurance settlement -- 6,515
------------ ------------
Net cash used for investing activities (188,777) (207,659)
Financing activities:
Dividends paid (11,179) (11,164)
Issuance of shares under the Employee Share Purchase Plan 2,101 --
------------ ------------
Net cash used for financing activities (9,078) (11,164)
------------ ------------
Net change in cash and cash equivalents (14,468) 26,583
Cash and cash equivalents at beginning of period 124,314 68,453
------------ ------------
Cash and cash equivalents at end of period $ 109,846 $ 95,036
============ ============
Supplemental disclosures of cash flows information:
Income taxes paid $ 26,284 $ 19,634
============ ============
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SANTA FE INTERNATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 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.
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 September 30, 1999, the Company had declared dividends that had not
been paid amounting to $3,730,000.
The accompanying consolidated financial statements are presented in
U.S. dollars and in accordance with U.S. generally accepted accounting
principles. The preparation of interim financial statements requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. While management has based its
assumptions and estimates on facts and circumstances currently known, actual
amounts may differ from such estimates.
The condensed consolidated financial statements included herein have
been prepared without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and notes normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods. Such adjustments are considered to be of a normal recurring
nature unless otherwise identified. Results of operations for the three month
and nine month periods ended September 30, 1999 are not necessarily indicative
of the results of operations that will be realized for the year ending December
31, 1999. These financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 20-F for the year ended December 31, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 are classified as
available-for-sale securities. Unrealized holding gains and losses on
available-for-sale securities are included as a component of other
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comprehensive income in shareholders' equity, net of the 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 September 30, 1999, marketable securities consisted primarily of
Eurodollar debt securities and commercial paper. Cost approximates market value.
Income Per Ordinary Share
The basic and diluted income per Ordinary Share data for the three
months and nine months ended September 30, 1999 and 1998, respectively, is
calculated based on the weighted average shares outstanding for the periods.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which established
standards for reporting and display of comprehensive income and its components.
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 three month and nine month periods ended September 30,
1999 and 1998, respectively, the Company realized no such transactions other
than those reported as net income.
NOTE 3 - 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.
On September 20, 1999, the Company took delivery of the Galaxy III, a
new heavy duty harsh environment jackup rig, the construction of which was
contracted in September 1997. The Galaxy III departed the shipyard in late
September for transit to the U.K. sector of the North Sea where it will commence
work on a three year drilling contract in early December 1999. The final cost of
the rig, excluding initial mobilization costs, totaled approximately $179
million, which was approximately 3% over the original budget.
NOTE 4 - 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 varies from period
to period. The provisions for taxes on income for the three month and nine month
periods ended September 30, 1999 and 1998, respectively, were recognized based
upon the expected annualized relationship.
NOTE 5 - SEGMENT INFORMATION
At December 31, 1998, the Company adopted Statement of Financial
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information". At that time, the Company identified 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. Historically, the Company's platform rig and inland lake barge
were combined and reported as "other marine rigs". During the fourth quarter of
1998, the
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Company's inland lake barge was retired from service, and, effective January 1,
1999, the Company has reclassified the remaining platform rig to its drilling
related services segment.
The Company evaluates performance and allocates resources based upon
the operating margin (operating revenues less operating expenses) generated by
the segment. For further details of operating margin by segment, see "Item 2. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations." There are no intersegment sales and transfers due to the nature of
the business of the segments. The following table sets forth operating revenue
and segment income for each of the reportable segments and reconciles total
segment income to consolidated income before provision for taxes on income.
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 45,470 $ 38,027 $ 137,264 $ 108,643
Semisubmersible rigs 23,518 29,561 77,105 76,844
300-350 foot cantilever jackup rigs 14,163 40,843 70,393 111,545
200-250 foot jackup rigs 11,897 33,955 47,058 115,316
Other marine rigs -- 3,238 -- 9,924
------------ ------------ ------------ ------------
Total marine rigs 95,048 145,624 331,820 422,272
Land rigs 35,705 35,127 106,803 110,046
Drilling related services 12,626 20,101 49,557 66,702
Other 663 233 1,380 992
------------ ------------ ------------ ------------
Total operating revenues $ 144,042 $ 201,085 $ 489,560 $ 600,012
============ ============ ============ ============
SEGMENT INCOME
Heavy duty harsh environment jackup rigs $ 25,103 $ 22,314 $ 78,542 $ 64,046
Semisubmersible rigs 11,274 10,476 39,413 21,245
300-350 foot cantilever jackup rigs 179 24,382 25,148 62,610
200-250 foot jackup rigs (2,173) 14,194 3,661 59,345
Other marine rigs -- 1,073 -- 2,667
------------ ------------ ------------ ------------
Total marine rigs 34,383 72,439 146,764 209,913
Land rigs 5,689 8,248 18,968 26,561
Drilling related services 3,396 6,627 13,382 17,227
Other (4,055) (323) (10,909) (4,418)
------------ ------------ ------------ ------------
Total segment income 39,413 86,991 168,205 249,283
------------ ------------ ------------ ------------
Unallocated amount:
General and administrative 4,351 5,426 14,870 17,019
------------ ------------ ------------ ------------
Operating income 35,062 81,565 153,335 232,264
------------ ------------ ------------ ------------
Other income (expense) 2,881 1,349 5,758 32
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR TAXES ON INCOME $ 37,943 $ 82,914 $ 159,093 $ 232,296
============ ============ ============ ============
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements regarding future performance and results and the other
statements that are not historical facts contained in this report are
forward-looking statements. Statements made in this document that state the
Company's or management's intentions, hopes, plans, estimates, beliefs,
expectations, anticipations or predictions of the future and words of similar
import are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. Such
statements involve risks and uncertainties including, but not limited to, the
risks involved in dealing with other parties, including the risk that other
parties' commitments to the Company and its subsidiaries could be breached,
changes in the markets for oil and natural gas and for drilling rigs and the
risks of doing business in changing markets, the success of the Company in
implementing its Year 2000 compliance plan and changing costs and other factors
discussed herein and in the Company's other Securities and Exchange Commission
filings. Should one or more risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated.
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 low 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 and client oil company
capital programs. Beginning in 1998 and continuing into 1999, several oil and
gas companies completed or announced consolidation transactions that have
resulted or are likely to result in further adjustments to their exploration and
development activity.
Beginning in 1998 and continuing into 1999, 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. Current drilling industry
conditions have resulted in a significant decline in demand for drilling rigs
which, in turn, has resulted in decreased rig utilization and an increase in the
number of idle rigs. As a result, for the nine months ended September 30, 1999,
the Company has realized sequential declines in rig utilization and generally
lower average rig dayrates, the combination of which has led to decreased
operating revenues and net income.
The Company presently has a number of rigs idle and expects to continue
to experience low fleet utilization and dayrates throughout the remainder of
1999 and into 2000. The Company has taken certain actions to minimize its
consequent decline in operating margin, such as reducing personnel employment as
rigs become idle, deferring certain non-essential operating expenses, reducing
land based support personnel, deferring compensation actions and applying other
cost reduction measures. The Company will continue to evaluate rig employment
conditions and make further adjustments as appropriate. Although the price of
crude oil has increased since March 1999, the potential impact of this oil price
increase on the Company's results of operations, both as to amount and timing,
cannot yet be accurately predicted. The Company believes, however, that higher
oil prices for an extended period of time may result in its customers expanding
their exploration and production budgets, which in turn may result in increased
demand for drilling rigs.
The following table presents data relating to the Company's operating
revenues, operating costs, operating margin, operating income, utilization and
average dayrates by segment.
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<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
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(in thousands except as indicated)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 45,470 $ 38,027 $ 137,264 $ 108,643
Semisubmersible rigs 23,518 29,561 77,105 76,844
300-350 foot cantilever jackup rigs 14,163 40,843 70,393 111,545
200-250 foot jackup rigs 11,897 33,955 47,058 115,316
Other marine rigs (2) -- 3,238 -- 9,924
------------ ------------ ------------ ------------
Total marine rigs 95,048 145,624 331,820 422,272
Land rigs 35,705 35,127 106,803 110,046
Drilling related services (2) 12,626 20,101 49,557 66,702
Other 220 233 937 992
------------ ------------ ------------ ------------
Total operating revenues 143,599 201,085 489,117 600,012
------------ ------------ ------------ ------------
OPERATING COSTS(1)
Heavy duty harsh environment jackup rigs 16,042 12,951 45,225 36,272
Semisubmersible rigs 10,918 17,789 32,935 51,951
300-350 foot cantilever jackup rigs 11,294 13,945 37,229 41,622
200-250 foot jackup rigs 11,659 17,593 36,340 49,409
Other marine rigs (2) -- 2,086 -- 7,075
------------ ------------ ------------ ------------
Total marine rigs 49,913 64,364 151,729 186,329
Land rigs 23,954 23,592 70,648 72,280
Drilling related services (2) 9,007 13,025 35,484 48,875
Other 3,649 87 10,301 4,027
------------ ------------ ------------ ------------
Total operating costs 86,523 101,068 268,162 311,511
------------ ------------ ------------ ------------
OPERATING MARGIN 57,076 100,017 220,955 288,501
------------ ------------ ------------ ------------
Depreciation and amortization 17,653 13,267 53,121 39,914
General and administrative 4,351 5,426 14,870 17,019
Loss (gain) on sale of assets 10 (241) (371) (696)
------------ ------------ ------------ ------------
OPERATING INCOME $ 35,062 $ 81,565 $ 153,335 $ 232,264
============ ============ ============ ============
OPERATING INCOME AS A PERCENTAGE OF REVENUES 24.4% 40.6% 31.3% 38.7%
============ ============ ============ ============
RIG FLEET UTILIZATION (IN PERCENTAGES)
Heavy duty harsh environment jackup rigs 92.0% 100.0% 97.3% 97.7%
Semisubmersible rigs 85.1% 86.6% 95.0% 88.0%
300-350 foot cantilever jackup rigs 70.7% 97.6% 78.6% 92.9%
200-250 foot jackup rigs 44.9% 86.2% 48.3% 95.0%
Total marine rigs (2) 67.4% 92.9% 73.4% 94.3%
Land rigs 66.8% 89.5% 68.3% 89.9%
AVERAGE DAYRATES (IN WHOLE DOLLARS)
Heavy duty harsh environment jackup rigs $ 107,494 $ 103,334 $ 103,361 $ 101,821
Semisubmersible rigs 100,077 123,686 99,107 106,580
300-350 foot cantilever jackup rigs 27,237 56,884 41,022 55,002
200-250 foot jackup rigs 31,981 47,556 39,644 49,428
Total marine rigs (2) 61,321 65,508 66,245 63,073
Land rigs 17,615 14,828 17,706 15,634
</TABLE>
- ----------------------
(1) Exclusive of depreciation which is presented separately below.
(2) During the fourth quarter of 1998, the Company's inland lake barge was
retired from service, and its remaining marine platform rig has been
reclassified as a component of Drilling Related Services effective
January 1, 1999.
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QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
OPERATING REVENUES. Total operating revenues decreased $57.5 million
(28.6%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $7.4 million (19.6%) primarily due to the impact of Galaxy II
operations which began on November 9, 1998 ($13.3 million), partially offset by
lower utilization of the Monitor ($3.5 million) and lower average dayrates ($2.4
million). Operating revenues for the Company's three semisubmersibles decreased
$6.0 million (20.4%) mainly due to a 19.1% decrease in average dayrates.
Revenues from 300-350 foot cantilever jackups decreased $26.7 million (65.3%)
primarily because of a 52.1% decrease in average dayrates ($16.8 million) and
decreased utilization of rigs in Egypt, Indonesia, Malaysia and Vietnam ($10.8
million), partially offset by increased utilization of the Compact Driller in
Thailand ($0.9 million). Revenues from 200-250 foot jackup rigs decreased $22.1
million (65.0%), mainly due to lower utilization ($15.8 million) of rigs in
Egypt, Qatar and Venezuela and a 32.8% decrease in average dayrates ($6.3
million). During the fourth quarter of 1998, the inland lake barge Rey del Lago
was retired from service and the Company's remaining platform rig in the North
Sea, Rig 82, was reclassified as a component of drilling related services.
Accordingly, no revenues were earned in the other marine rig category for the
quarter ended September 30, 1999 compared to $3.2 million for the same period of
1998. Revenues from drilling related services decreased $7.5 million (37.2%),
primarily due to decreased third party rig operations of $7.8 million, partially
offset by $0.6 million in revenues from the Company's platform rig that was
transferred from other marine rigs effective January 1, 1999. Third party rig
operations revenues decreased mainly due to lower activity in the North Sea,
Venezuela and Azerbaijan.
OPERATING COSTS. Total operating costs decreased $14.6 million (14.4%).
Operating expenses from heavy duty harsh environment jackup rigs increased $3.1
million (23.9%) primarily due to the impact of Galaxy II operations.
Semisubmersible rig operating costs decreased $6.9 million (38.6%) primarily due
to non-recurring Rig 140 upgrade expense incurred in 1998. Operating costs for
the 300-350 foot cantilever jackups rigs and the 200-250 foot jackup rigs
decreased $2.7 million (19.0%) and $5.9 million (33.7%), respectively, primarily
due to lower utilization. The retirement of the Company's lake barge and the
reclassification of its platform rig to drilling related services led to a
decrease in other marine operating expenses of $2.1 million. Operating expenses
from drilling related services decreased $4.0 million (30.8%) primarily due to a
$4.5 million decrease in expenses from third party operations, partially offset
by $0.5 million from the Company's reclassified platform rig. Other operating
expenses increased $3.6 million, primarily due to increased provision for
inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $1.1 million (19.8%) primarily due to decreased costs associated with
reduced staff and lower employee benefit costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.4 million (33.1%) for the quarter ended September 30, 1999 as
compared with the same period in the prior year. Depreciation of three land rigs
that were in service during the quarter ended September 30, 1999, but not in the
prior year same period, yielded increased expense of $2.5 million. Addition of
the new Galaxy II increased depreciation expense by $1.6 million. The remainder
of the increase was due to depreciation of general capital additions to all
other rigs and equipment.
OTHER INCOME (EXPENSE), NET. Other income increased $1.5 million for
the quarter ended September 30, 1999, mainly due to $2.0 million increased
investment income, primarily due to higher invested balances, partially offset
by $0.7 million increased foreign exchange losses resulting from unfavorable
exchange rate fluctuations, mainly in Indonesia and Venezuela.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
decreased $4.1 million (40.0%) for the quarter ended September 30, 1999, as
compared with the same quarter of 1998, primarily due to lower reportable
earnings in Egypt and the North Sea. This situation was partially offset by the
initiation of Galaxy II operations in Canada and Rig 135 operations in Trinidad.
The Company's annualized effective tax rate increased to 16.1% in 1999 from
12.3% in 1998 due to changes in the mix of reportable earnings generated within
the various taxing jurisdictions in which the Company operates.
NET INCOME. Net income for the quarter ended September 30, 1999
decreased $40.9 million (56.2%) to $31.8 million as compared to $72.7 million
for the same period in the prior year. This decrease resulted primarily from
$57.5 million decreased operating revenues and increased depreciation
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and amortization expense of $4.4 million, partially offset by decreased
operating expense of $14.6 million, $1.5 million higher other income (expense),
net, decreased general and administrative expense of $1.1 million and $4.1
million decreased provision for income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
OPERATING REVENUES. Total operating revenues decreased $110.9 million
(18.5%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $28.6 million (26.3%) primarily due to the impact of Galaxy II
operations which began on November 9, 1998 ($35.8 million), partially offset by
lower average dayrates ($7.0 million). Revenues from 300-350 foot cantilever
jackups decreased $41.2 million (36.9%) primarily because of a 25.4% decrease in
average dayrates ($31.7 million) and decreased utilization of rigs in Egypt,
Indonesia and Malaysia ($15.9 million), partially offset by increased
utilization of the Parameswara ($1.7 million) and Compact Driller ($4.7
million). Revenues from 200-250 foot jackup rigs decreased $68.3 million
(59.2%), mainly due to lower utilization ($46.4 million) of rigs in Egypt, Qatar
and Venezuela and a 19.8% decrease in average dayrates ($21.9 million). The
retirement of the Rey del Lago and the reclassification of the Company's
platform rig to drilling related services led to decreased other marine revenues
of $9.9 million. Revenues from land rigs decreased $3.2 million (2.9%) primarily
due to decreased utilization ($21.2 million) and lower average dayrates earned
by rigs in Egypt, Oman, Qatar and Venezuela ($1.7 million), partially offset by
$16.2 million increased revenue from three new rigs placed in service in
Venezuela and Kuwait and $3.5 million increased average dayrates earned on rigs
placed in service in Venezuela in the third quarter of 1998. Revenues from
drilling related services decreased $17.1 million (25.7%) due to a $6.8 million
decrease in revenues from incentive contracts and decreased third party rig
operations revenues of $12.2 million, partially offset by $1.9 million in
revenues from the Company's platform rig that was transferred from other marine
rigs effective January 1, 1999. Incentive drilling revenues decreased because of
a decrease in the number of contracts containing incentive based provisions,
primarily in the North Sea, Egypt and Qatar. Third party operations revenues
decreased mainly due to fewer contracts in the North Sea and Venezuela,
partially offset by increased transportation operations in Kuwait.
OPERATING COSTS. Total operating costs decreased $43.3 million (13.9%).
Operating expenses from heavy duty harsh environment jackup rigs increased $9.0
million (24.7%) primarily due to the impact of Galaxy II operations.
Semisubmersible rig operating costs decreased $19.0 million (36.6%) primarily
due to non-recurring Rig 140 upgrade costs and lower amortization of
mobilization costs for Rig 135. Operating costs for the 300-350 foot cantilever
jackup rigs decreased $4.4 million (10.6%), primarily due to lower utilization.
Operating costs for the 200-250 foot jackup rigs decreased $13.1 million (26.5%)
primarily due to lower utilization of rigs in Egypt, Qatar and Venezuela,
partially offset by increased maintenance activity. The retirement of the
Company's lake barge and the reclassification of its platform rig to drilling
related services led to a decrease in other marine operating expenses of $7.1
million. Operating costs associated with land rigs decreased $1.6 million
(2.3%), primarily due to reduced utilization ($7.5 million) and lower personnel
costs, repairs and maintenance and other operating costs ($2.4 million),
partially offset by costs associated with the deployment of three new rigs in
Venezuela and Kuwait ($8.3 million). Operating expenses from drilling related
services decreased $13.4 million (27.4%) primarily due to a $4.6 million
decrease in expenses from incentive drilling activities and $10.5 decreased
expenses from third party rig operations, partially offset by $1.7 million in
expense from the Company's reclassified platform rig. Other operating expenses
increased $6.3 million, primarily due to increased provision for inventory
obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $2.1 million (12.6%), primarily due to decreased costs associated with
reduced staff and lower employee benefit costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $13.2 million (33.1%) for the nine months ended September 30, 1999 as
compared with the same period in the prior year. Depreciation of three land rigs
that were in service during the nine months ended September 30, 1999, but not in
the prior year same period, yielded increased expense of $3.7 million, while
depreciation of two land rigs placed in service during the third quarter of 1998
provided an additional $1.8 million expense. Addition of the new Galaxy II
increased depreciation expense by $4.8 million. The remainder of the increase
was due to depreciation of general capital additions to all other rigs and
equipment.
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OTHER INCOME (EXPENSE), NET. Other income increased $5.7 million for
the nine months ended September 30, 1999, mainly due to $2.1 million decreased
foreign exchange losses, primarily from operations in Indonesia and Venezuela,
and $3.0 million increased investment income, primarily due to higher invested
balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income for
the nine months ended September 30, 1999 decreased $2.2 million (7.9%),
primarily due to lower reportable earnings in Egypt and the North Sea. This
situation was partially offset by the initiation of Galaxy II operations in
Canada and Rig 135 operations in Trinidad. The Company's annualized effective
tax rate increased to 16.1% from 12.0% for the same period in 1998 due to
changes in the mix of reportable earnings generated within the various taxing
jurisdictions in which the Company operates.
NET INCOME. Net income for the nine months ended September 30, 1999
decreased $71.0 million (34.7%) to $133.5 million as compared to $204.5 million
for the same period in the prior year. This decrease resulted primarily from
$110.9 million decreased operating revenues and increased depreciation and
amortization expense of $13.2 million, partially offset by decreased operating
expense of $43.3 million, decreased general and administrative expense of $2.1
million, $5.7 million higher other income (expense), net and $2.2 million
decreased provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $183.4 million and $245.4
million for the nine months ended September 30, 1999 and 1998, respectively. The
decrease in cash flows from operations was primarily attributable to changes in
income before non-cash charges. Investing activities used cash of $188.8 million
and $207.7 million for the nine month periods ended September 30, 1999 and 1998,
respectively. The $18.9 million decreased usage for investing activities was
primarily due to lower capital spending and advance payments related to
construction of drilling rigs of $122.4 million and $18.5 million, respectively.
Partially offsetting these decreases were $115.2 million increased net purchases
and maturities of marketable securities and the non-recurring 1998 receipt of
$6.5 million insurance proceeds from the loss of Rig 162 in Saudi Arabia.
Capital expenditures totaled $82.3 million and $204.7 million for the nine
months ended September 30, 1999 and 1998, respectively, principally related to
rig expansion, upgrades and modernization. For the nine month periods, capital
expenditures on new land rigs decreased $47.6 million and spending on the heavy
duty harsh environment jackup rigs Galaxy II and Galaxy III decreased $37.9
million and $23.7 million, respectively. Investments in marketable securities
for the nine months ended September 30, 1999 were primarily for Eurodollar debt
instruments and commercial paper with original maturities of more than 90 but
less than 365 days. Cash used in financing activities was $9.1 million for the
nine months ended September 30, 1999, consisting of $11.2 million in dividends
paid, partially offset by $2.1 million generated by the January 1999 issuance of
shares under the Company's Employee Share Purchase Plan. For the nine months
ended September 30, 1998, the total cash used in financing activities was $11.2
million, consisting solely of dividends paid.
The capital spending program for 1999 is currently expected to require
approximately $131 million, a 22% decrease from the original budget of $167
million. Capital spending to meet contractual obligations for customers and for
rig upgrade, modernization and enhancement projects is expected to require
approximately $63 million representing numerous individual transactions spread
over the course of the year. Progress payments on the Galaxy III heavy duty
harsh environment jackup rig were originally budgeted to require approximately
$68 million in 1999, including $8 million for initial mobilization costs. Actual
1999 spending for the Galaxy III, which was delivered from the shipyard on
September 20, 1999 and is currently being mobilized to its initial work
location, will require approximately $60 million, including initial mobilization
costs of approximately $8 million. The final cost of the rig, excluding initial
mobilization costs, totaled approximately $179 million, which was approximately
3% over the original budget. Further during 1999, the Company completed the
assembly of Rig 180, a new heavy duty land rig that began work in Kuwait on June
22, 1999 incurring cost of approximately $8 million during 1999. It is
anticipated 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.
From time to time, the Company reviews opportunities for rig
acquisition, construction or upgrade. Once the Company undertakes a capital
project, factors outside the Company's control, such
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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. At any time, should plans for rig acquisition, construction or
upgrade not be completed, the Company would not have those rigs available to
compete in its markets.
On September 10, 1999, the Company's Board of Directors declared a
regular quarterly dividend of $0.0325 per Ordinary Share payable on October 15,
1999 to holders of record at the close of business September 30, 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, none of which was drawn or
subject to standby letters of credit at September 30, 1999.
CURRENCY RISK AND INFLATION
The Company conducts material business operations in foreign currency
environments. 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 RISKS
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.
IMPACT OF YEAR 2000
The Company has actively been pursuing solutions to the Millennium Date
Change Problem ("Y2K") for approximately three 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 have
implemented solutions to their Y2K issues with the support of the Y2K office in
Dallas, Texas. Continual review and monitoring of remediation and Y2K issues
will continue through the first quarter of 2000.
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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 Y2K problems have been considered in
three categories: IT; Field Equipment; and Third Party Relationships. To these
three categories, a common set of analyses was applied in order to evaluate the
potential for the disruption of business. Evaluation of operational significance
of all potentially Y2K sensitive functions or components was critical to
subsequent investigation.
Remediation of the Company's Y2K IT issues is substantially complete.
All major corporate software is Y2K compliant and has been modified, tested,
deployed and implemented. PC hardware and corporate supported software have been
tested appropriately and deemed compliant. Mainframe systems have received a
final operating system upgrade incorporating all outstanding Y2K patches. A
software application freeze has been imposed for the entire fourth quarter of
1999 during which all major systems and software will be tested to ensure
continued Y2K compliance.
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 has
shown that many items of equipment are Y2K compliant. Verification of operation
of critical items including independent validation is complete. With the
exception of non-critical monitoring systems from one manufacturer,
non-compliant equipment has been upgraded or replaced and tested with
independent validation in accordance with corporate policy. Deployment of
outstanding upgrades and testing of the non-critical monitoring systems has been
delayed and is expected to be completed during the fourth quarter of 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 have been surveyed and critical suppliers audited to determine
their preparedness for Y2K. This process is now complete. Where doubt exists,
alternative sources have been secured if available. Contingency plans have been
developed to accommodate such failure, reviewed at a corporate level and are
presently being put into place in the field.
The Company's operations are conducted internationally. In the event
that third party Y2K compliance is not timely met in certain areas, operating
and administrative management have developed and continue to test contingency
plans covering a wide range of issues that could adversely impact business.
Corporate guidance has been issued to the field establishing minimum
requirements for contingency plans regarding sensitive issues at the rollover
period including: air travel, operational shutdowns, banking and financial
control and material supply. All major contingency plans have been reviewed at
the corporate level. It must, however, be clearly recognized that contingency
planning will continue to the millennium rollover date as circumstances dictate.
Since full verification of Y2K compliance of field equipment is nearing
completion, the total cost estimate for the Company-wide Y2K initiative has been
revised to $3.1 million, which is a decrease of $2.0 million from the original
projection of $5.1 million. However, additional expenses may be incurred as a
result of unforeseen circumstances. Total costs incurred through September 30,
1999 were $2.8 million, comprised of $1.4 million in expenditures for the
calendar year ended December 31, 1998 and $1.4 million spent during the nine
months ended September 30, 1999. 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 that
results from a Y2K related incident.
Company management believes that an effective program is in place and
that the Y2K issue has been addressed in a timely manner. Since it is not
possible to anticipate all eventualities, particularly where third world
countries are concerned, circumstances that 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.
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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
international, U.S., state and local 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 a 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 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 5, 1999 SANTA FE INTERNATIONAL CORPORATION
By: /s/ D. G. Barber
-----------------------------------
D. G. Barber, Senior Vice President
and Chief Financial Officer
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