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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 June, 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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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO FORM 6-K
QUARTER ENDED JUNE 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 June 30, 1999 and 1998 and the Six Months ended June 30, 1999
and 1998 3
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows for the Six Months ended June 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 June 30, Six Months ended June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Operating revenues $ 160,002 $ 202,646 $ 345,518 $ 398,927
Operating costs 88,126 110,731 181,639 210,443
------------- ------------- ------------- -------------
Operating margin 71,876 91,915 163,879 188,484
Other operating costs and expenses:
Depreciation and amortization 17,810 13,655 35,468 26,647
General and administrative 5,330 5,957 10,519 11,593
Gain on sale of assets (181) (293) (381) (455)
------------- ------------- ------------- -------------
Operating income 48,917 72,596 118,273 150,699
Other income (expense):
Investment income 2,384 1,488 3,815 2,804
Other, net 176 (1,426) (938) (4,121)
------------- ------------- ------------- -------------
Income before provision for taxes on income 51,477 72,658 121,150 149,382
Provision for taxes on income (Note 4) 8,288 8,678 19,505 17,643
------------- ------------- ------------- -------------
Net income 43,189 63,980 101,645 131,739
============= ============= ============= =============
Retained earnings as of the beginning of the period 612,987 350,039 558,260 286,001
Dividends declared ($0.0325 per share per quarter) (3,728) (3,722) (7,457) (7,443)
------------- ------------- ------------- -------------
Retained earnings as of the end of the period $ 652,448 $ 410,297 $ 652,448 $ 410,297
============= ============= ============= =============
Income per Ordinary Share:
Basic $ 0.38 $ 0.56 $ 0.89 $ 1.15
============= ============= ============= =============
Diluted $ 0.37 $ 0.56 $ 0.88 $ 1.15
============= ============= ============= =============
Weighted average ordinary and ordinary equivalent
shares used in Income per Ordinary Share
computations:
Basic 114,728,946 114,500,300 114,728,720 114,500,151
============= ============= ============= =============
Effect of dilutive employee stock options 693,585 161,622 566,277 164,113
------------- ------------- ------------- -------------
Diluted 115,422,531 114,661,922 115,294,997 114,664,264
============= ============= ============= =============
</TABLE>
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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>
June 30, 1999 December 31, 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 153,518 $ 124,314
Marketable securities 50,294 --
Accounts receivable 139,877 161,728
Inventories 47,949 51,481
Prepaid expenses and other current assets 13,635 14,913
------------ ------------
Total current assets 405,273 352,436
------------ ------------
Property and equipment, at cost 2,095,609 2,030,756
Less accumulated depreciation and amortization (1,015,802) (981,555)
------------ ------------
Property and equipment, net 1,079,807 1,049,201
Other noncurrent assets 52,738 52,099
------------ ------------
Total assets $ 1,537,818 $ 1,453,736
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,743 $ 74,603
Accrued liabilities 116,042 107,057
------------ ------------
Total current liabilities 173,785 181,660
Other noncurrent liabilities 39,611 44,852
------------ ------------
Total liabilities 213,396 226,512
Commitments and contingencies (Note 3)
Shareholders' equity:
Ordinary shares par value $.01; 600,000,000 shares
authorized, 114,960,321 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 670,824 667,816
Retained earnings 652,448 558,260
------------ ------------
Total shareholders' equity 1,324,422 1,227,224
------------ ------------
Total liabilities and shareholders' equity $ 1,537,818 $ 1,453,736
============ ============
</TABLE>
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
Six Months ended June 30,
----------------------------
1999 1998
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<S> <C> <C>
Operating activities:
Net income $ 101,645 $ 131,739
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 35,468 26,647
Gain on sale of assets (381) (455)
Accretion of interest income and gains on sales (989) (127)
of marketable securities
Deferred income tax provision (benefit) (77) (103)
Changes in operating assets and liabilities:
Accounts receivable 21,851 (21,675)
Inventories 3,532 661
Prepaid expenses and other current assets (771) (1,190)
Accounts payable (16,860) (21,072)
Accrued liabilities 4,902 6,585
Other, net 830 7,991
---------- ----------
Net cash provided by operating activities 149,150 129,001
Investing activities:
Capital expenditures (65,803) (111,998)
Advance payments for drilling rigs -- (18,532)
Proceeds from sales of property and equipment 511 595
Maturities of marketable securities 22,094 8,220
Purchases of marketable securities (71,399) --
---------- ----------
Net cash used for investing activities (114,597) (121,715)
Financing activities:
Dividends paid (7,450) (7,443)
Issuance of shares under the Employee Share Purchase Plan 2,101 --
---------- ----------
Net cash used for financing activities (5,349) (7,443)
---------- ----------
Net change in cash and cash equivalents 29,204 (157)
Cash and cash equivalents at beginning of period 124,314 68,453
---------- ----------
Cash and cash equivalents at end of period $ 153,518 $ 68,296
========== ==========
Supplemental disclosures of cash flows information:
Income taxes paid $ 9,608 $ 6,421
========== ==========
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5
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SANTA FE INTERNATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1999, the Company had declared dividends that had not been
paid amounting to $3,729,000.
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 six month periods ended June 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 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
6
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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 June 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 six months ended June 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 six month periods ended June 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.
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 $177 million. The rig is expected to be delivered by the shipyard
during the third quarter of 1999 and mobilized to its initial work location on
approximately December 1, 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.
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 six month
periods ended June 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 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.
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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>
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 46,532 $ 37,310 $ 91,794 $ 70,615
Semisubmersible rigs 24,670 22,756 53,587 47,283
300-350 foot cantilever jackup rigs 22,163 32,803 56,230 70,702
200-250 foot jackup rigs 14,367 42,028 35,161 81,361
Other marine rigs -- 2,759 -- 6,686
------------- ------------- ------------- -------------
Total marine rigs 107,732 137,656 236,772 276,647
Land rigs 36,297 36,909 71,098 74,919
Drilling related services 15,558 27,626 36,931 46,601
Other 415 455 717 760
------------- ------------- ------------- -------------
Total operating revenues $ 160,002 $ 202,646 $ 345,518 $ 398,927
============= ============= ============= =============
SEGMENT INCOME
Heavy duty harsh environment jackup rigs $ 27,158 $ 21,691 $ 53,439 $ 41,732
Semisubmersible rigs 11,454 (413) 28,139 10,769
300-350 foot cantilever jackup rigs 6,819 16,729 24,969 38,228
200-250 foot jackup rigs (422) 23,110 5,834 45,151
Other marine rigs -- 752 -- 1,592
------------- ------------- ------------- -------------
Total marine rigs 45,009 61,869 112,381 137,472
Land rigs 7,800 9,338 13,279 18,313
Drilling related services 4,488 8,971 9,986 10,600
Other (3,050) (1,625) (6,854) (4,093)
------------- ------------- ------------- -------------
Total segment income 54,247 78,553 128,792 162,292
------------- ------------- ------------- -------------
Unallocated amount:
General and administrative 5,330 5,957 10,519 11,593
------------- ------------- ------------- -------------
Operating income 48,917 72,596 118,273 150,699
------------- ------------- ------------- -------------
Other income (expense) 2,560 62 2,877 (1,317)
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR TAXES ON INCOME $ 51,477 $ 72,658 $ 121,150 $ 149,382
============= ============= ============= =============
</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 offshore drilling rigs
and the risks of doing business in changing markets, changes in the dates the
Company's rigs undergoing conversion to drilling operations will commence
drilling, 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 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.
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. 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.
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. As a result, the Company has realized sequential
declines in rig utilization and lower overall average rig dayrates for the first
and second quarters of 1999 compared with the fourth quarter of 1998, leading to
decreased operating revenues and net income.
The Company presently has a number of rigs idle and expects to continue
to experience overall lower fleet utilization and declining dayrates throughout
the remainder of 1999. The Company has taken certain actions, 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 similar 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 by
approximately 70% from lows reached during the first quarter of 1999, it is too
early to evaluate the potential impact of this oil price increase on results of
operations, both as to amount and timing. The Company believes that higher oil
prices may result in increased demand for 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 JUNE 30, SIX MONTHS ENDED JUNE 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 $ 46,532 $ 37,310 $ 91,794 $ 70,615
Semisubmersible rigs 24,670 22,756 53,587 47,283
300-350 foot cantilever jackup rigs 22,163 32,803 56,230 70,702
200-250 foot jackup rigs 14,367 42,028 35,161 81,361
Other marine rigs (2) -- 2,759 -- 6,686
------------ ------------ ------------ ------------
Total marine rigs 107,732 137,656 236,772 276,647
Land rigs 36,297 36,909 71,098 74,919
Drilling related services (2) 15,558 27,626 36,931 46,601
Other 415 455 717 760
------------ ------------ ------------ ------------
Total operating revenues 160,002 202,646 345,518 398,927
------------ ------------ ------------ ------------
OPERATING COSTS (1)
Heavy duty harsh environment jackup rigs 14,746 12,843 29,183 23,322
Semisubmersible rigs 11,302 21,957 22,017 34,162
300-350 foot cantilever jackup rigs 12,697 13,604 25,935 27,677
200-250 foot jackup rigs 12,438 16,552 24,681 31,817
Other marine rigs (2) -- 1,952 -- 4,989
------------ ------------ ------------ ------------
Total marine rigs 51,183 66,908 101,816 121,967
Land rigs 23,088 23,628 46,694 48,688
Drilling related services (2) 10,844 18,582 26,477 35,850
Other 3,011 1,613 6,652 3,938
------------ ------------ ------------ ------------
Total operating costs 88,126 110,731 181,639 210,443
------------ ------------ ------------ ------------
OPERATING MARGIN 71,876 91,915 163,879 188,484
------------ ------------ ------------ ------------
Depreciation and amortization 17,810 13,655 35,468 26,647
General and administrative 5,330 5,957 10,519 11,593
Loss (gain) on sale of assets (181) (293) (381) (455)
------------ ------------ ------------ ------------
OPERATING INCOME $ 48,917 $ 72,596 $ 118,273 $ 150,699
============ ============ ============ ============
OPERATING INCOME AS A PERCENTAGE OF REVENUES 30.6% 35.8% 34.2% 37.8%
============ ============ ============ ============
RIG FLEET UTILIZATION (IN PERCENTAGES)
Heavy duty harsh environment jackup rigs 100.0% 100.0% 100.0% 96.5%
Semisubmersible rigs 100.0% 77.7% 100.0% 88.8%
300-350 foot cantilever jackup rigs 75.5% 83.7% 82.6% 90.5%
200-250 foot jackup rigs 45.9% 98.8% 50.0% 99.4%
Total marine rigs (2) 72.7% 91.2% 76.4% 94.6%
Land rigs 65.3% 88.5% 69.1% 90.1%
AVERAGE DAYRATES (IN WHOLE DOLLARS)
Heavy duty harsh environment jackup rigs $ 102,268 $ 102,500 $ 101,430 $ 101,023
Semisubmersible rigs 90,366 107,340 98,687 98,098
300-350 foot cantilever jackup rigs 40,296 53,864 47,015 53,971
200-250 foot jackup rigs 38,210 51,951 43,142 50,254
Total marine rigs (2) 65,134 67,753 68,451 65,684
Land rigs 19,024 15,800 17,752 16,043
</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 JUNE 30, 1999 AND 1998
OPERATING REVENUES. Total operating revenues decreased $42.6 million
(21.0%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $9.2 million (24.7%) primarily due to the inception of Galaxy II
operations on November 9, 1998. Operating revenues for the Company's three
semisubmersibles increased $1.9 million (8.4%) due to increased utilization of
Rig 140 in the North Sea ($4.3 million), partially offset by a 16.0% decrease in
average dayrates ($2.4 million). Revenues from 300-350 foot cantilever jackups
decreased $10.6 million (32.4%) primarily because of a 25.6% decrease in average
dayrates ($12.5 million) and decreased utilization of rigs in Egypt, Indonesia
and Malaysia ($6.2 million), partially offset by increased utilization of the
Parameswara in Vietnam ($4.5 million) and the Compact Driller in Thailand ($3.6
million). Revenues from 200-250 foot jackup rigs decreased $27.7 million
(65.8%), mainly due to lower utilization ($18.5 million) of rigs in Egypt (170
days), Qatar (182 days) and Venezuela (91 days) and a 26.4% decrease in average
dayrates ($9.2 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 June 30, 1999 compared to $2.8 million for the
same period of 1998. Revenues from drilling related services decreased $12.1
million (43.7%). Revenues from incentive drilling contracts and third party rig
operation decreased $9.1 million and $3.6 million, respectively, 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. Incentive drilling
revenues decreased because of a decrease in the number of contracts containing
incentive based provisions, primarily in the North Sea and Egypt. Third party
rig operations revenues decreased mainly due to fewer contracts in the North Sea
and Venezuela, partially offset by increased transportation operations in Kuwait
and increased activity in Azerbaijan.
OPERATING COSTS. Total operating costs decreased $22.6 million (20.4%).
Operating expenses from heavy duty harsh environment jackup rigs increased $1.9
million (14.8%) primarily due to inception of Galaxy II operations.
Semisubmersible rig operating costs decreased $10.7 million (48.5%) primarily
due to non-recurring Rig 140 upgrade costs incurred in 1998. Operating costs for
the 200-250 foot jackup rigs decreased $4.1 million (24.9%) primarily due to
lower utilization of rigs in Egypt, Qatar and Venezuela. 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 $2.0
million. Operating expenses from drilling related services decreased $7.7
million (41.6%) primarily due to a $4.7 million decrease in incentive drilling
expenses and a $3.5 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 $1.4 million, primarily due to increased
provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $0.6 million (10.5%) primarily due to decreased costs associated with
employee benefits.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.2 million (30.4%) for the quarter ended June 30, 1999 as compared
with the same period in the prior year. Depreciation of five land rigs that were
in service during the quarter ended June 30, 1999, but not in the prior year
same period, yielded increased expense of $1.7 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. This category improved $2.5 million for
the quarter ended June 30, 1999, mainly due to $1.9 million decreased foreign
exchange losses resulting from favorable exchange rate fluctuations, primarily
in Indonesia and Venezuela. Investment income increased $0.9 million, primarily
due to higher invested balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
decreased slightly ($0.4 million, or 4.5%) for the quarter ended June 30, 1999
as compared with the same quarter of 1998. However, primarily due to 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 11.9% in
1998.
NET INCOME. Net income for the quarter ended June 30, 1999 decreased
$20.8 million (32.5%) to $43.2 million as compared to $64.0 million for the same
period in the prior year. This decrease resulted primarily from $42.6 million
decreased operating revenues and increased depreciation and amortization expense
of $4.2 million, partially offset by decreased operating expense of $22.6
million, $2.5 million higher
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other income (expense), net, decreased general and administrative expense of
$0.6 million and $0.4 million decreased provision for income taxes.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
OPERATING REVENUES. Total operating revenues decreased $53.4 million
(13.4%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet increased $21.2 million (30.0%) primarily due to the inception of Galaxy
II operations on November 9, 1998. Operating revenues for the Company's three
semisubmersibles increased $6.3 million (13.3%) due to increased utilization of
Rig 140 in the North Sea ($3.7 million) and a 17.4% increase in average dayrates
for the two rigs working in the North Sea ($7.1 million), partially offset by
decreased average dayrates on the Aleutian Key working in West Africa ($4.5
million). Revenues from 300-350 foot cantilever jackups decreased $14.5 million
(20.5%) primarily because of a 12.9% decrease in average dayrates ($15.2
million) and decreased utilization of rigs in Egypt, Indonesia and Malaysia
($8.8 million), partially offset by increased utilization of the Parameswara
($5.7 million) and Compact Driller ($3.8 million). Revenues from 200-250 foot
jackup rigs decreased $46.2 million (56.8%), mainly due to lower utilization
($32.1 million) of rigs in Egypt, Qatar and Venezuela and a 14.2% decrease in
average dayrates ($14.1 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 $6.7 million. Revenues from land rigs
decreased $3.8 million (5.1%) primarily due to decreased utilization ($22.0
million) and lower average dayrates earned by rigs in Egypt, Oman, Qatar and
Venezuela ($1.6 million), partially offset by $19.8 million increased revenue
from five new rigs placed in service in Venezuela and Kuwait. Revenues from
drilling related services decreased $9.7 million (20.8%) due to a $6.6 million
decrease in revenues from incentive contracts and decreased third party rig
operations revenues of $4.4 million, partially offset by $1.3 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 and Venezuela. Third party operations revenues
decreased mainly due to fewer contracts in the North Sea and Venezuela,
partially offset by increased transportation operations in Kuwait and increased
activity in Azerbaijan.
OPERATING COSTS. Total operating costs decreased $28.8 million (13.7%).
Operating expenses from heavy duty harsh environment jackup rigs increased $5.9
million (25.1%) primarily due to inception of Galaxy II operations.
Semisubmersible rig operating costs decreased $12.1 million (35.6%) primarily
due to lower amortization of mobilization costs for Rig 135 and non-recurring
Rig 140 upgrade costs. Operating costs for the 300-350 foot cantilever jackup
rigs decreased $1.7 million (6.3%), primarily due to lower utilization of the
Galveston Key and Key Gibraltar and lower operating costs on the Parameswara
working in Vietnam rather than in Australia, partially offset by increased
utilization of the Parameswara and Compact Driller. Operating costs for the
200-250 foot jackup rigs decreased $7.1 million (22.4%) 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 $5.0 million. Operating costs
associated with land rigs decreased $2.0 million (4.1%), primarily due to
reduced utilization ($11.0 million) and lower personnel costs, repairs and
maintenance and other operating costs ($2.7 million), partially offset by costs
associated with the deployment of five new rigs in Venezuela and Kuwait ($11.7
million). Operating expenses from drilling related services decreased $9.4
million (26.1%) primarily due to a $4.5 million decrease in expenses from
incentive drilling activities and $6.0 decreased expenses from third party rig
operations, partially offset by $1.1 million in expense from the Company's
reclassified platform rig. Other operating expenses increased $2.7 million,
primarily due to increased provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $1.1 million (9.3%) primarily due to decreased costs associated with
employee benefits.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $8.8 million (33.1%) for the six months ended June 30, 1999 as
compared with the same period in the prior year. Depreciation of five land rigs
that were in service during the six months ended June 30, 1999, but not in the
prior year same period, yielded increased expense of $3.7 million. Addition of
the new Galaxy II increased depreciation expense by $3.2 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. This category improved $4.2 million for
the six months ended June 30, 1999, mainly due to $2.9 million decreased foreign
exchange losses, primarily in Indonesia, during the six months ended June 30,
1998, and $1.0 million increased investment income, primarily due to higher
invested balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income for
the six months ended June 30, 1999 increased $1.9 million (10.6%), primarily due
to 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
11.8% for the same period in 1998.
NET INCOME. Net income for the six months ended June 30, 1999 decreased
$30.1 million (22.8%) to $101.6 million as compared to $131.7 million for the
same period in the prior year. This decrease resulted primarily from $53.4
million decreased operating revenues, increased depreciation and amortization
expense of $8.8 million and $1.9 million increased provision for income taxes,
partially offset by decreased operating expense of $28.8 million, $4.2 million
higher other income (expense), net and decreased general and administrative
expense of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $149.1 million and $129.0
million for the six months ended June 30, 1999 and 1998, respectively. The
increase in cash flows from operations was primarily attributable to decreased
working capital requirements, partially offset by changes in income before
non-cash charges. Investing activities used cash of $114.6 million and $121.7
million for the six month periods ended June 30, 1999 and 1998, respectively.
The decreased usage in investing activities of $7.1 million was primarily due to
decreased capital spending and advance payments related to construction of
drilling rigs of $46.2 million and $18.5 million, respectively, partially offset
by $57.5 million increased purchases and decreased maturities of marketable
securities. Capital expenditures totaled $65.8 million and $112.0 million for
the six months ended June 30, 1999 and 1998, respectively, principally related
to rig expansion, upgrades and modernization. For the six month periods, capital
expenditures on new land rigs decreased $24.1 million and spending on the heavy
duty harsh environment jackup rig Galaxy II decreased $17.6 million while
spending on the new Galaxy III increased $3.5 million. Investments in marketable
securities for the six months ended June 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 $5.3 million for
the six months ended June 30, 1999, consisting of $7.4 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 six months
ended June 30, 1998, the total cash used in financing activities was $7.4
million, consisting solely of dividends paid.
The Company had budgeted approximately $167 million for capital
expenditures for the year ending December 31, 1999; however, the Company
currently estimates its full year capital spending program will total
approximately $130 million. Capital spending to meet contractual obligations for
customers and for rig upgrade, modernization and enhancement projects was
budgeted to require approximately $64 million representing numerous individual
transactions spread over the course of the year. The Company currently estimates
that spending for these items will approximate $56 million. Progress payments on
the Galaxy III heavy duty harsh environment jackup rig presently under
construction were budgeted to require approximately $60 million with initial
mobilization expected to require an additional $8 million. This estimate remains
valid as the rig is nearly complete. The rig will be delivered from the shipyard
and begin mobilization to the North Sea during the third quarter of 1999. The
Company had budgeted spending approximately $10 million to complete the assembly
of Rig 180, a new heavy duty land rig for work in Kuwait. The rig was completed
and began work on June 22, 1999. Final cost estimates indicate that current year
Rig 180 spending will be approximately $9 million. The Company budgeted $25
million intended for use in either constructing or acquiring a new heavy duty
land rig. Based on current market conditions, it is unlikely that customer
demand will warrant this addition; thus, it is unlikely these funds will be
expended. 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.
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 as changes in market
demand, may alter the project economics and the Company may be unable to fully
recoup the cost of
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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 June 8, 1999, the Company's Board of Directors declared a regular
quarterly dividend of $0.0325 per Ordinary Share payable on July 15, 1999 to
holders of record at the close of business June 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 June 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 two and one-half 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 in
the process of finalizing the implementation of the 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.
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
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disruption of business. Evaluation of operational significance of all
potentially Y2K sensitive functions or components is critical to subsequent
mitigation and remedial action.
Remediation of the Company's Y2K IT issues is substantially complete.
With the exception of one application, all major corporate software is Y2K
compliant and has been modified, tested, deployed and implemented. The remaining
application has been modified and is in the final stage of testing.
Implementation will be completed before the end of the third quarter of 1999. PC
hardware and corporate supported software have been tested appropriately and
deemed compliant. Also during the third quarter of 1999, mainframe systems will
receive a final operating system upgrade incorporating all outstanding Y2K
patches. A software application freeze will be 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 is
expected to be complete by the end of the third 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 substantially complete. Where
doubt exists, alternative sources are being 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.
In the event that 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 June 30, 1999
were $2.3 million, comprised of $1.4 million in expenditures for the calendar
year ended December 31, 1998 and $0.9 million spent during the six months ended
June 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: August 6, 1999 SANTA FE INTERNATIONAL CORPORATION
By: /s/ D. G. Barber
-----------------------------------
D. G. Barber, Senior Vice President
and Chief Financial Officer
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